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Edited Transcript of NG.L earnings conference call or presentation 18-Jun-20 10:59am GMT

Full Year 2020 National Grid PLC Debt Investor Update Call

London Aug 28, 2020 (Thomson StreetEvents) -- Edited Transcript of National Grid PLC earnings conference call or presentation Thursday, June 18, 2020 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alexandra Lewis

National Grid Gas plc - Group Treasurer & Director

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Conference Call Participants

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* Andrew Moulder

CreditSights Ltd. - European Head of Research & Senior Analyst of European Utilities

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Presentation

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [1]

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Morning, and good afternoon, everyone. I'm Alexandra Lewis, Group Treasurer for the National Grid. And this afternoon's call is to provide an update to debt investors on our 2019/'20 full year results. I'll give a summary of this morning's presentation, including how our businesses have performed, our priorities going forward as well as additional commentary on future debt financing.

The update, I anticipate, will last for about 30 minutes, followed by some dedicated time, during which you'll have the opportunity to ask questions. And the presentation is available to download from the Results centre section of our investor website.

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.

So turning to Slide 3. 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 and on the way in which we work, I'm pleased to say that we've maintained excellent levels of reliability across our networks, and we've continued to deliver on our significant capital program. As the crisis evolved, we took action to change working practices quickly and safely. And despite these changes, we've continued to deliver strong operational performance.

Turning to Slide 4 and 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're not pursuing debt collections or disconnecting customers at the present time. We've also deferred proposed rate increases in New York. In the U.K., we'll continue to work with other network companies and Ofgem to help suppliers address financial challenges that COVID has brought, without imposing additional burdens on customers. And a good example is the deferral of network charges for eligible suppliers. This will help the most vulnerable suppliers with the 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. And 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.

Turning on to Slide 5. Of course, as well as ensuring the support of our staff, customers and communities, we also need to manage the financial impact of COVID. Like all companies, National Grid is not immune to COVID. However, as a regulated utility, for the most part, there are either mechanisms in place or regulatory precedence for recovering additional costs arising from COVID. In addition to regulatory recovery, we are also maintaining our focus on cost efficiency to help offset additional costs where 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, the current financial year, working with our assumption of a gradual easing of lockdowns, we currently forecast the impact of COVID on underlying operating profit to be around GBP 400 million. Whilst we'd expect to see some additional costs arising in the U.K. and a limited impact in our NGV business, the majority of the GBP 400 million impact is forecast to come from our U.S. business, driven by 3 broadly similar impacts. That is the deferral of rate increases in New York, incremental COVID-related costs and higher bad debt charges.

So 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're discussing new rate agreements. As is normal, we'll work with our regulators to agree the appropriate framework for recovery. Secondly, we're also seeing higher levels of COVID-related costs such as sequestering critical staff on site and increased IT costs as well as higher OpEx from lower capitalization of our 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 are likely to see levels of bad debt increase. For FY '20, we've taken an additional GBP 117 million provision for bad debt, over and above our normal run rate against our receivables balance at the year-end. Looking forward to FY '21, we again expect to see a similar elevated level of bad debt expense, although the final bad debt levels will ultimately depend on how each of the states we operate in exit 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 collections from our U.S. customers and timing of collections of network charges and system costs in the U.K. So 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 this year to around GBP 31.5 billion at the end of March 2021. 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.

So having provided that context on Slide 5 now, I'd like to turn to the strong results we've delivered in the past year. Underlying operating profit of GBP 3.5 billion was broadly in line with the prior year, and 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 debt, as we discussed. Underpinning this performance was a record year of investments 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 progress major projects like Hinkley; higher U.S. CapEx, much of it mandated on safety spend; and higher CapEx in National Grid Ventures and continued interconnector investments; as well as the acquisition of Geronimo Energy. This delivered organic asset growth of 9%, above our stated target of 5% to 7%. We have achieved a group ROE 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% on last year, in line with U.K. inflation. So as you can see, it's been a strong year for financial performance across the group.

I'll now turn to progress on our operational priorities last year, starting with the U.S. on Slide 7. The financial performance of each business segment is included in the appendix. During the year, we achieved an ROE 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 network. 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 are 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. And we've made good progress on our cost efficiency program, where we've 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 downstate New York. 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 filed a report outlining options for meeting long-term customer demand. This was followed by a series of public and virtual meetings that were attended by over 800 people. From these meetings, feedback was included in a supplementary report that we 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 Slide 8 on the U.K. It's been an important year as we head towards the end of RIIO-T1. Operationally, both our electricity and gas transmission businesses continue to deliver good levels of performance. During the year, we achieved an ROE of 12.4%, within our target range of 200 to 300 basis points of outperformance. And we continued our capital program with investments of GBP 1.3 billion, which was up 5% on the prior year, giving asset growth of 3.8%. This takes our total investment in RIIO-1 to 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. And of course, we have significant focus on RIIO-T2, with draft business plans submitted in December. And finally, during the year, we've remained focused on our efficiency programs and exceeded our savings target of GBP 50 million.

Moving now to National Grid Ventures and our other businesses on Slide 9. 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 investments in Geronimo. Progress on our new interconnectors remains on track. On IFA2, the subsea cable connection has been completed and successfully tested, and commissioning of the link is on course to the end of this year. On our North Sea Link and Viking interconnectors, we've managed the disruption caused by COVID and commissioning remains on track. And last July, 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.

Turning next to Slide 10 and interest, tax and earnings. 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. Underlying earnings were broadly flat at GBP 2 billion.

Next, on Slide 11. 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. Closing net debt was GBP 28.6 billion, an underlying increase of GBP 2.7 billion after allowing for an GBP 800 million adverse movement in exchange rates, the impact of adopting IFRS 16 and receipt of the final Cadent proceeds of almost GBP 2 billion, which were retained in the business.

Turning to our credit metrics, where Moody's RCF-to-debt ratio was 9.2%, and S&P's FFO-to-debt metric was at 12.3%. These both reflect higher tax and pension costs and adverse timing, partly offset by lower exceptional cash payments, and in the case of the RCF ratios, a higher scrip uptake. We've also guided previously for our regulatory gearing levels to remain around 65%. And at the year-end, it stood at 63%, which remains consistent with the group's credit ratings. 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 a slightly lower hedge range gives 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.

Next, on Slide 12. Group capital investment at FY '20 was GBP 5.4 billion. Of this, approximately GBP 4.5 billion relates to our investment in critical infrastructure across both 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've now passed peak investments for this program. Finally, we 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 with respect to debt funding, which I'll touch on further towards the end of the presentation as well as regular bond issuance, we used our green financing framework to issue our inaugural green bond in January and for an ECA-backed loan to fund our Viking interconnector in April.

On to the outlook for the current year on Slide 13. In the U.S., we expect to see net revenue increases more than offset by bad debt and higher COVID-related costs, as described previously. We forecast depreciation to be around GBP 100 million higher, given higher levels of investment in the 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 interest charge is expected to be a little below FY '20, reflecting lower RPI inflation 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, and this has enabled the Board to confirm the dividend policy. And as previously announced, due to the current level of investments, we do not expect to buy back the scrip issued during FY '21.

Next on Slide 15, I'll discuss 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.

Let me talk you through each of our focus areas in more detail before I come back to our clean energy ambitions.

Starting with our U.S. rate plans on Slide 16. Plans for long-term investment requirements across our jurisdictions have not changed. The current backdrop is we'll have to adjust our short-term priorities. As I set out earlier, we'll see revenue and cost impacts from COVID in the near term. This means that our immediate focus will be on working with our regulators to agree the appropriate rate plans for the medium term and to achieve the timely recovery of increased costs. 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. Whether we agree on 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 downstate New York, as I mentioned earlier, we'll continue to work on delivering the solutions required to address gas supply constraints. In our upstate business, Niagara Mohawk, we were due to file for new rates this spring for the period starting April 2021. However, we've delayed the filing and are exploring options, including an extension of the current rate plan or a 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 rates are increasingly forward-looking, incentive-based and multiyear.

Our second area of focus in the U.S. is efficient investments, on Slide 17. 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 as efficiently as possible, 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. And on digitalization, we've recently launched a new system that automates our dispatch processes for our electricity distribution workforce. These examples, together with others, will help us to deliver our investment plans efficiently while minimizing bill impact to customers.

Turning to the U.K. I'll start with regulation on Slide 18, where in our business plan submitted in December, we're proposing investments to maintain reliable and resilient networks that can support the 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 they published in January. We were pleased that our greater level of stakeholder engagement was recognized by the challenge group, but we also recognize that we've got work to do to provide more evidence around our asset health investment plan. 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 the energy network for the future and provide the financial package that allows a fair return for our investors.

Turning to Slide 19. On delivering innovation and efficiency for our customers, we are on track to meet our cost reduction target of GBP 100 million for 2020/'21. This year, our efficiency focus will be on 3 key areas: Streamlining our maintenance operating procedures, further digital innovation to increase the productivity of our field force and making step-change improvements to 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, which will help customers with reduced connection costs and reduce the time it takes to connect to our network.

Finally, on National Grid Ventures on Slide 20. The major focus will be continued investment in the 3 new interconnector projects: the North Sea Link, IFA2 and Viking. 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 less to invest through to 2023. And when all online, we will expect these interconnectors, together with Nemo, the Belgium link that is already operating, to contribute GBP 250 million of EBITDA from the mid-2020s.

With regards to our U.S. renewable energy business, it's been a successful first year after our acquisition of Geronimo. And looking forward, our pipeline of future investment opportunities continues to strengthen. In recent months, we've 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 likely in the months ahead.

On Slide 21, I'll now return to our clean energy ambition, which sits at the heart of our vision for National Grid. Today, we're strengthening the commitment we made in November to reach net 0 for our own emissions by 2050 by setting ourselves a more ambitious interim target. That target is to achieve 80% carbon reduction on our 1990 baseline by 2030, a 90% reduction by 2040. In the U.K., in our RIIO-T2 business plan, we've committed to replace over 50% of our internal fleet with alternative fuel vehicles by 2026. And we're continuing to lead -- sorry, and we're continuing to lead in developing alternatives to the insulating gas, SF6, so that from 2026, we will 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.

This morning, we were pleased to announce that we'll be holding an investor event in October on our environmental, social and governance objectives. The event will allow us to talk in more detail about how we'll achieve our own targets, but also, and perhaps more importantly, how we're playing a key role in enabling the wider transition to a low-carbon future.

Finally, turning to our recent debt issuance activity and expectations for the rest of the current year on Slide 23. Over the past financial year to 31 March, we raised around GBP 2.9 billion of new senior long-term debt, including 13 bond issues. The majority of this was raised by our U.K. operating companies National Grid Electricity Transmission, NGET, and National Grid Gas, NGG. This included new issues in sterling, including NGG's first public bonds since 2008, a EUR 500 million green bond for NGET, the first from our group-wide Green Financing Framework that was established last November and also a number of EMTN private placements to diversify our funding sources. Issuance from our U.S. entities was lower than recent years, as we injected $2.5 billion of equity into NGNA with the proceeds from the sale of our final stake in Cadent. And as you know, we refinanced our hybrid debt that was due for a first call in June 2020. Thank you for your continued support across these transactions.

So far this financial year, we've already been active in securing new financing. In early April, following a more challenging period to market, we took advantage of an improvement in tone to issue new bonds in the U.S. for Narragansett Electric Company and in the U.K. for NGET, raising around GBP 900 million in total at attractive rates. Outside of the capital markets, we closed around GBP 600 million of new export credit agency financing for the Viking link interconnector, which will be drawn over time. This transaction is the first ever green loan covered by multi-export credit agencies. For the rest of the current financial year, we expect further issuance from NGET as well as issuance from our U.S. operating companies. National Grid North America made also a few in the second half of the financial year.

In terms of available facilities across the group, we continue to maintain significant levels of committed bank lines to ensure sufficient liquidity. We currently have undrawn committed general liquidity lines throughout the group of around GBP 5.5 billion from our group of core relationship banks. In addition to this, our U.K. Electricity System Operator also has GBP 550 million of committed facilities. All of these facilities remained undrawn throughout recent months.

Finally, drawing attention to our strong credit ratings. With respect to National Grid plc, Moody's, S&P and Fitch have all maintained their ratings on stable outlook, while ratings remain in the single A range for our U.K. operating companies and the majority of our U.S. operating companies.

So turning finally to the summary on Slide 24. National Grid has had a strong year. We've managed the challenges that 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 upcoming regulatory negotiations in both the U.S. and the U.K. and our interconnected delivery in NGV, 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 assets within our 5% to 7% target range. I believe our disciplined approach, coupled with a focus on delivering efficiently for our customers, will enable us to continue to create long-term value for our shareholders and debt holders.

And with that, I'd like to thank you all for listening. I'll now hand over to the operator for questions. If you have any outstanding questions at the end of the call, please send them to our dedicated debt investor e-mail address, which is debtinvestors@nationalgrid.com. Operator, please continue.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from Andrew Moulder from CreditSights.

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Andrew Moulder, CreditSights Ltd. - European Head of Research & Senior Analyst of European Utilities [2]

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I have quite a few questions, but maybe I'll start with -- maybe it's a bit unfair, this one. Just on your presentation this morning, there was a slide in the appendix, it's Slide 57. I don't know if you have it in front of you, and I apologize to anyone on the call who doesn't.

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [3]

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I don't, sorry. But carry on, anyway.

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Andrew Moulder, CreditSights Ltd. - European Head of Research & Senior Analyst of European Utilities [4]

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Okay. No, I was just going to say, it shows volumes for the various businesses. And I think it's trying to show how much of the volumes are dependent or independent of revenues. But I'm just not sure exactly what it shows in that slide. So maybe I can actually come back to you afterwards on that and just get that clarified, if you don't mind.

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [5]

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Yes. That's probably the easiest thing.

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Andrew Moulder, CreditSights Ltd. - European Head of Research & Senior Analyst of European Utilities [6]

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Okay. Secondly, there were a lot of questions on the call this morning about precedents and recovering sort of COVID impacts in the U.S. Some of it seems to be through a regulatory mechanism, which is already within the regulation and the rate bases. And some of it seems to be relying on some kind of regulatory precedent, where you believe there are examples of recoveries being made in the past. I wonder, could you just perhaps outline for me, which of the U.S. OpCos actually have a clear regulatory mechanism in place that enables you to recover these costs and which ones are relying on precedents to be able to recover those costs? And is that different depending on what type of cost it is? I mean, if it's lower revenues because of low demand? Is it in the regulation? And if it's because of bad debt? Is it some kind of precedent? Could you perhaps just give a bit more clarity on that? I have another -- go on.

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [7]

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Sorry, do you want me to answer that and then move to the next question?

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Andrew Moulder, CreditSights Ltd. - European Head of Research & Senior Analyst of European Utilities [8]

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Yes. Okay. That's fine. Yes.

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [9]

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Okay. So each of the OpCos is a mix of the 2. So each of the states has raised an order about the impact of COVID to understand how that will work and how that's impacting us as utilities within the state. Some of the increase over the bad debt, for example, are already recoverable under existing mechanisms. But some of it, where we're going, if you like, above that, would need to be recovered via new rate plans. And that's where we will go in with new filings. An appropriate point is, as we set out earlier, in terms of the planned time table over the next few years and then seek to recover at that point. And it's there, I guess, that conversations with regulators will occur around the precedent for that. But it does give us confidence in the fact that there will be, if you like, a short-term impact from COVID but not a long-term economic impact for the group.

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Andrew Moulder, CreditSights Ltd. - European Head of Research & Senior Analyst of European Utilities [10]

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Right. I mean, is it possible in any way to quantify within the -- I think you said it was something like GBP 400 million you were expecting with the main sort of impact -- the impact next year, and a lot of that is in the U.S. So the part that is in the U.S., I mean, is it possible to quantify, I guess, how much is that GBP 400 million in the U.S.? And further, how much of what's in the U.S. is actually recoverable through existing mechanisms? And how much is still reliant on these precedents?

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [11]

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Well, so look, the vast majority of that is in the U.S. I mean, as we said, there is some impact in the U.K., and there is some limited impact in National Grid Ventures. But the vast majority of that GBP 400 million is within the U.S. regulated business. I think there is quite a lot of uncertainty around it. So this is a forecast for us, but it obviously does depend on how we're seeing customers paying and where we're allowed to be charging, where we're filing and what the filing outcomes to KEDNY, KEDLI and NIMO deliver. And there's also uncertainty on what impact that would be through the impacts in the U.K. as well. So I think it's quite hard to give you a state-by-state, OpCo-by-OpCo split. But as I say, the vast majority of it is a U.S. impact.

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Andrew Moulder, CreditSights Ltd. - European Head of Research & Senior Analyst of European Utilities [12]

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Right. Okay. All right. Next question then, I think these are probably a bit more direct. On Nat Grid Electricity Transmission, you mentioned that they'd probably be coming back to the market. Would you be looking to issue green bonds there again or issue sort of brown bonds?

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [13]

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So as we said at the time we issued our green bond back in January, looking ahead and looking at the forecast CapEx at that time, we anticipate broadly 1/3 of our CapEx would fall into the different criteria we set up within the Green Financing Framework. So that would kind of -- should give you an idea of whether we might be coming back with NGET green bond or brown bonds. But it will certainly be a mix. And as I say, broadly 1/3 of future CapEx, we think, falls within the Green Financing Framework criteria.

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Andrew Moulder, CreditSights Ltd. - European Head of Research & Senior Analyst of European Utilities [14]

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Okay. Okay. Next sort of simple one. You mentioned that the electricity system operator has a GBP 550 million facility. Is that purely for the ESO's use? Or is that also available for Nat Grid plc use if it's needed?

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [15]

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That's purely for the ESO.

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Andrew Moulder, CreditSights Ltd. - European Head of Research & Senior Analyst of European Utilities [16]

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Okay. Right. And finally, just on the rating. I mean, obviously, you mentioned that metrics are going to be weaker next year because of the COVID impacts. Do you still see your A3, A- rating at the U.K. OpCos as safe? Or do you think that there will need to be some consideration of the new RIIO-T2 framework within the assumption of the ratings?

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [17]

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So obviously, the rating agencies are looking ahead. And following Ofgem, they'll be looking at the draft determinations that come out. But they'll be aware that it's not just the headline numbers that come out from that, that are important, but the overall broad financial package. So we remain confident that we will get to a position with Ofgem that we can accept the final determinations that they come out with at the end of this calendar year. And that will enable us to continue with our rating as it currently is. Clearly, we'll look to see where they come out within their draft determinations as will the agencies. And indeed, at the final determination, if we do find that it's a package that we can't live with, for whatever reason, we are then able to go to the Competition and Markets Authority, sorry, on any aspect of that package, if we find it's something that we cannot live with.

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Andrew Moulder, CreditSights Ltd. - European Head of Research & Senior Analyst of European Utilities [18]

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Right. Okay. And maybe just one more quick question. The gas constraints in New York, I mean, they were obviously a big issue when the -- when it originally arose. But you said in the presentation that you expect an outcome of the discussions that you're having sometime this summer. I mean, we've kind of already started this summer. You've also got New York having to deal with the COVID impacts. Do you really think it's realistic that you'll get some sort of settlement in that this summer?

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [19]

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So we currently expect so. But obviously, we are talking to the state. We're talking to the regulator. And that's the current, if you like, expected time line that we're all working through.

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Operator [20]

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(Operator Instructions) We have a question from [Derek Karr] from [SMS].

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Unidentified Analyst, [21]

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Just in relation to the U.K. business and the final determination on RIIO-T2. I think from the material that I've seen already, it's going to be quite challenging. I'm just wondering how you foresee COVID impact on that and the likelihood of maybe it getting more challenging, given that consumers will probably need to be protected even more in the post-COVID world from any increases in charges. I was just wondering how you saw that going.

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [22]

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Yes. Absolutely. So you'll have seen the business plans that we've submitted for both gas and electricity transmission back in December last year. They actually were already looking at customers and the impact on customers from our proposals, and we were able to contain the impact on bills within those business plans. So we're not expecting a particular impact as a result of COVID. We understand that Ofgem are keen to stick to the time table that they've set out, and we're keen to do that as well and also keen to think about the future and think about how we need to transition the transmission lines and think about the energy transition going forward. They have that in their sites as well. So we're not particularly expecting any impact from COVID as a result of that.

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Unidentified Analyst, [23]

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Okay. And just on -- you mentioned material bad debt increases in the U.S. business. Is there no similar phenomenon expected in the U.K.? Or is it a different type of structure that you wouldn't see in the U.K. as well?

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [24]

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You're talking about the impact of COVID on cash flows?

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Unidentified Analyst, [25]

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On bad debt. Sorry, bad debt.

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [26]

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Yes. Understood. So in the U.S., we are a business-to-customer, B2C, business. So we are charging individual consumers, and that's where we see the greater impact on bad debt. In the U.K., we're business-to-business. So our customers, the people that pay our revenues, are the supplier businesses. And therefore, there's a more muted impact from that, albeit that there are some regulatory discussions going on at the moment as to how perhaps we can give some more support to the suppliers as an industry with other network companies.

Operator, are there any other questions?

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Operator [27]

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We have a question from [Trent Black] from [Michelin].

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Unidentified Analyst, [28]

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Just a couple of quick questions. On the forecasted impact to cash flows, you mentioned on Slide 5 the $3 billion increase in net debt. How much of that related to kind of the COVID-19?

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [29]

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So we anticipate that -- of that forecast increase to GBP 31.5 billion of net debt at the end of March 2021, around GBP 1 billion of that is relating to COVID-19. That obviously encompasses the GBP 400 million impact on operating profit plus other working capital impacts around cash collections both in the U.K. and the U.S., so about GBP 1 billion.

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Unidentified Analyst, [30]

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Okay. And most of that considering that the GBP 400 million earnings impact is basically the U.S. Is it safe to assume that, that GBP 1 billion is mostly going to be U.S.-related?

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [31]

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So a lot of it will. It slightly depends on the conversations, as I just referenced now, that we're having in the U.K. with Ofgem, the regulator, along with other network companies about how we support some of the supplier companies in the U.K. That may impact us over the year-end. It depends where Ofgem come out on that. But again, it would be a working capital item that would impact the electricity system operator, in particular.

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Unidentified Analyst, [32]

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Okay. And for the U.S.-based OpCos, would that sort of reverse out over the next couple of years, that GBP 1 billion or so of cash flow, as you kind of recover over the next couple of years?

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [33]

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So it's hard to put a time line on it because it depends OpCo by OpCo, where we are in each of our regulatory filing plans and the time lines around that. But it's certainly something that we do expect to be able to reverse out over a period as we start to make our filings in order to get our recoveries.

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Unidentified Analyst, [34]

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Okay. So kind of a final question, sort of jumping on Andrew's question for the U.K. OpCos. What about the U.S. OpCos, given that a number of them are already at Moody's on a negative outlook? We have this cash flow hit that's going to weaken metrics even more. Is the -- do you guys anticipate being able to keep A3, A- at the U.S. OpCos in the near term?

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [35]

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So we do expect the rating agencies to take the -- what I might call, their normal approach with COVID, i.e., to look across a longer time frame rather than focus on short-term timing impacts. The agencies are well aware of the regulatory mechanisms that we have in order to recover. And obviously, we're in contact with them, talking them through how we see this playing out. So we expect them to take a longer-term view, if you like, of what those impacts might be.

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Unidentified Analyst, [36]

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Would you take any steps to try to keep them if -- from a regulatory standpoint, if that doesn't play out? Is the intent to keep them there or just let the chips fall where they may from a rating standpoint?

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [37]

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So I think we would be very surprised if the agencies would look at this negatively from a COVID impact. Clearly, as you say, some of the ratings are on negative outlook for the New York operating companies, and those are the ones that we are sort of going back into rate filings on this year. We've talked about KEDNY and KEDLI and how that might play out and in the Niagara Mohawk. So I think we would be talking with the agencies very clearly after the outcomes of those settlements. And we obviously have an eye to the credit metrics, and we're talking to regulators to give us the best outcome that we can.

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Operator [38]

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We have a question from [Matt McMunny] from [AGE].

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Unidentified Analyst, [39]

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Just to piggyback on some earlier ones. I guess so you talk about these regulatory recovery-type mechanisms in place for the U.S. OpCos. And I guess just the question is, particularly in New York, I mean, you've seen other states kind of announce these deferral accounting orders for incremental kind of COVID costs. New York has yet to do so. I mean, is there specific comments or language that they're telling you that kind of gives you more confidence that you're able to recover these in future rate cases? Or do you see that maybe potentially them issuing an order? Or just kind of more clarity there would be helpful.

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [40]

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So we're obviously in contact with the New York regulator on a regular basis, lots of dialogue recently around COVID. And part of the conversations for NiMo and KEDNY and KEDLI in New York will obviously focus when we get to our decisions around what we're doing on the rate filings. We're obviously in settlement discussions at the moment with KEDNY and KEDLI and hoping that, that will play out and also talking to them about Niagara Mohawk, whether we go for the 1-year extension or indeed sort of file a rate plan, as had been in recent plans. So we've obviously got lots of dialogue going on with them, including around COVID.

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Unidentified Analyst, [41]

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Okay. That's helpful. And then just kind of one more clarification-type question. So you talked about with the New York gas constraints, expecting some sort of resolution this summer or announcement this summer. If I'm not mistaken, I think back in November when you announced the lift on the moratorium, there was some sort of June deadline. Was that an internal constraint just -- or internal deadline just to be sure to have something in place by the time the short-term agreement was looked at? Or is that a regulatory-type deadline?

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [42]

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That was something that was agreed with the governor and something that's been in place, and we've met these intervening deadlines that we were also discussing at that time as well.

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Unidentified Analyst, [43]

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Okay. So something later this summer, we could chalk that up more to kind of COVID-type delay and not some sort of penalty-type things, right?

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [44]

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Sorry, I didn't understand the question.

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Unidentified Analyst, [45]

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Just I mean, the initial deadline you stated was in June. Now you're saying sometime in the summer. So maybe indicate if it's maybe late August or -- I'm just making sure there's no (inaudible) deadline.

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [46]

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No, no, no.

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Operator [47]

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We have a question from [Christian Schwartz] from [PIMCO].

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Unidentified Analyst, [48]

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I would like to understand this bridge a bit better. So from GBP 400 million to GBP 1 billion to GBP 3 billion, is the GBP 400 million to GBP 1 billion, is that essentially working capital? And the GBP 1 billion to GBP 3 billion net debt effect, is that a function of CapEx continuing but rate cases not following through? How do I get the cash flow to net debt effects from COVID?

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [49]

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Okay. Yes, absolutely. So I guess let's split it into COVID and non-COVID. So GBP 2 billion would be the normal non-COVID impact on net debt. It's a function of the fact that, obviously, we've got cash -- operating cash inflows, but we are growing, spending about GBP 5 billion on CapEx. And then the additional GBP 1 billion comes from COVID. Of that, GBP 400 million of that is an operating profit impact, which obviously flows through operating cash flows into net debt, and the remainder is working capital type movements. So we're still charging revenues, but we've got a delay in cash collections, for example. So more debt is sitting on the balance sheet.

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Unidentified Analyst, [50]

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And is there any very natural reaction function? Is there -- with an expectation of more time needed to get done through to rate filings, does that mean additional hybrid issuance to bridge a bit further? Is there anything more in the toolkit that you can do to preserve senior unsecured credit quality?

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [51]

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Sorry, you were fading in and out of my phone as you were asking that second question. Could you repeat that question?

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Unidentified Analyst, [52]

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Yes. Sorry. Trying again. In terms of reaction functions, and it seems that you need to bridge something from a credit metrics perspective. Do you have any tools at hand? Are you looking into an additional hybrid for a 5-year tenor? Or is that something that could solve that issue? Or are there any others? On the call this morning, asset disposals have been clearly ruled out. I'm trying to understand whether there is anything left in the -- in what you could pull off in order to maintain metrics where the agencies want them to be?

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [53]

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Yes. So I mean, as I just reflected, I think the agencies, yes, they're never looking at individual years. They're always looking at over a period of years. The -- yes, we wouldn't necessarily expect them to take an action as a result of what we would say would be a short-term timing impact, but rather take a longer-term time frame. I guess in relation to hybrids, I mean, it is a tool for us. As you know, you've seen us issue hybrids in the past when we perhaps have had high levels of investment that we needed to cover, but not something we're planning at the moment.

Any further questions, operator?

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Operator [54]

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Yes. So we have a question from Andrew Moulder from CreditSights.

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Andrew Moulder, CreditSights Ltd. - European Head of Research & Senior Analyst of European Utilities [55]

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Yes. Sorry, Alex. I just wanted to follow up on [Christian's] question there. So just to be clear, you're saying that you don't need to do anything sort of out of the ordinary in terms of hybrid assurance or asset sales or anything like that in order to protect your ratings through the COVID trough that we're going to see next year? At least that's your expectation with the way the rating agencies act.

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [56]

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So I would never presume to say that to you from the point of view of the rating agencies. You need to ask them that. Our understanding is that, yes, we -- they will look through and think about this as a short-term timing impact where we can demonstrate that we have regulatory mechanisms, we will be able to recover these costs. So I don't think it's any different from a normal timing swing in that respect in a sense that they will always look out for a trend of metrics over a period of years rather than at any particular year's metric.

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Andrew Moulder, CreditSights Ltd. - European Head of Research & Senior Analyst of European Utilities [57]

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Okay. That's fair. I agree with you, but I just wanted to be sure what your thinking was.

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [58]

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Okay. Well, I'm conscious of time. Sorry, did we have another question on the call?

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Operator [59]

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It appears we have no further questions.

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Alexandra Lewis, National Grid Gas plc - Group Treasurer & Director [60]

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No. Okay. Well, just to remind you then of that e-mail address that I read out, debtinvestors@nationalgrid.com. If you do have any outstanding questions, please shoot them through via e-mail. But thank you very much again for joining us on this call. Thank you for your support over the past year. And as I say, any further questions, do shoot them across to us. Thank you. Goodbye.