western power distribution riio ed2 business plan

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National Grid plc

Gb00bdr05c01, multiline utilities.

• National Grid : WPD RIIO-ED2 final business plan - Dec 2021

Western Power

Distribution

RIIO-ED2 final business plan

Investor Relations | December 2021

"Our commitment to customers for RIIO-ED2:

A transformed energy network to drive net zero by as early as 2028 across our region. This is what WPD's highly ambitious Business Plan for 2023-2028(RIIO-ED2) will deliver. It has been co- created with more than 25,000 stakeholders and future customers and has received significant levels of acceptability from wider consumers"

Highlights from our business plan

Investment of £6.7bn during 2023-2028 with embedded efficiency savings of £723m

• A 27% increase on annual average expenditure in RIIO-ED1
• Capex of £6.1bn across the regulatory period
• The average customers' bill to remain broadly flat in real terms
• 96% of customers found the plan fully acceptable

Large expenditure in network resiliency, customer service support and new infrastructure

• The business and its regions to be net zero by as early as 2028, the fastest commitment in the UK
• To be ready for 1.5m EV's and 600,000 heat pumps, by providing timely, affordable low carbon technology connections, a 279% increase in our EV commitment compared to RIIO-ED1
• 1.2m vulnerable customers to be offered a smart energy advice plan every two years
• The average customer power cut will only last 22 minutes by end of RIIO-ED2, every two years
• A target of 93% for customer satisfaction

• Sustainability - leading the drive to net zero as early as possible
• Connectability - enabling customers to connect when they want to
• Vulnerability - first class customer support where everyone benefits

• Affordability - maintaining excellent customer service, safety and network performance and transforming the energy grid, while keeping bills broadly flat

RIIO-ED2 Timeline

Vulnerability Affordability

• Responsible for distributing electricity to 8m customers
• Operating a network of assets across the Midlands, South West and Wales, serving homes and businesses
• The top performing DNO for overall customer satisfaction since 2015, with an average score of 90%
• Helped 92,000 fuel poor customers save more than £37m on their energy bills since 2015
• Delivered a 38% reduction in power cuts and a 48% reduction in power cut duration since 2015
• Reduced our business carbon footprint by 36% since 2015
• Over and above our plan, we spearhead the UK's largest rollout of flexibility services and are increasing available network capacity for demand growth by 709MW

Further highlights of WPD's final

RIIO-ED2 business plan

• Targeting additional savings of £95m through innovation and digitalisation
• Maximising efficiency of the existing network, will save money for customers by avoiding £94m in conventional reinforcement
• A new same day connections response for low carbon technologies to enable a significant increase in renewable generation
• Increase the resilience of the network to environmental factors and to cyber and physical attacks
• £1m 'Community Matters' Support Fund plus £540k to install solar PV at 45 schools per year funded by shareholders

WPD's RIIO-ED2 baseline totex

Engineering Management

Changes to our draft business plan

• Our plan is now based on expenditure to achieve WPD's Best View, which represents the most realistic uptake of low carbon technologies and demand growth
• Clearer quantification of efficiencies
• Six final Consumer Value Propositions
• An updated expenditure total and financing parameters including cost of equity: 4.96%

Important notice

Our proposed financial package

Note: CPIH real, RIIO-2 average

• Assumed dividend yield: 5%
• Totex capitalisation rate: 75%
• 45-year straight line depreciation for new assets

This document contains certain statements that are neither reported financial results nor other historical information. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include information with respect to National Grid's financial condition, its results of operations and businesses, strategy, plans and objectives. Words such as 'aims', 'anticipates', 'expects', 'should', 'intends', 'plans', 'believes', 'outlook', 'seeks', 'estimates', 'targets', 'may', 'will', 'continue', 'project' and similar expressions, as well as statements in the future tense, identify forward-looking statements. Furthermore, this document, which is provided for information only, does not constitute summary financial statements and does not contain sufficient information to allow for as full an understanding of the results and state of affairs of National Grid, including the principal risks and uncertainties facing National Grid, as would be provided by the full Annual Report and Accounts, including in particular the Strategic Report section and the 'Internal control and risk factors' section on pages 236 to 239 of National Grid's most recent Annual Report and Accounts for the year ended 31 March 2021, as updated by National Grid's unaudited half-year financial information for the six months ended 30 September 2021, published on 18 November 2021. Copies of the most recent Annual Report and Accounts are available online at www.nationalgrid.com or from Equiniti Limited. Except as may be required by law or regulation, National Grid undertakes no obligation to update any of its forward-looking statements, which speak only as of the date of this document. The content of any website references herein do not form part of this document.

Further information

Nicholas Ashworth

Director of Investor Relations

• +44 (0) 7814 355590 [email protected]

James Flanagan

Investor Relations Manager (US)

• +44 (0) 7970 778952 [email protected]

National Grid plc 1-3 Strand London WC2N 5EH United Kingdom

Angela Broad

Senior Investor Relations Manager

• +44 (0) 7825 351918 [email protected]

Caroline Dawson

Investor Relations Manager

• +44 (0) 7789 273241 [email protected]

Peter Kennedy

• +44 (0) 7966 200094 [email protected]

Investor Relations Officer

• +44 (0) 7899 928247 [email protected]

@Grid_Media

nationalgrid.com/investors

Attachments

• Original Link
• Original Document

National Grid plc published this content on 02 December 2021 and is solely responsible for the information contained therein. Distributed by Public , unedited and unaltered, on 02 December 2021 11:40:07 UTC .

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May 27, 2024 at 11:33 am EDT

NATIONAL GRID : Model update after a £7bn rights issue

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National Grid's Western Power finalises RIIO-ED2 business plan

Wed, 01st Dec 2021 10:07

(Alliance News) - National Grid PLC on Wednesday said its UK electricity distribution business, Western Power Distribution will submit its final business plan to energy regulator Ofgem for the RIIO-ED2 price control period, which runs over five years from 2023 to 2028.

Shares in the FTSE 100 gas and electric utility were down 1.0% at 996.70 pence on Wednesday in London.

Western Power's plan has a baseline capital expenditure and operational expenditure spend of GBP6.7 billion over the period, reflecting a 30% rise from the levels seen in the ED1 period.

This investment is expected to fund Western Power's commitments to provide a further 1.5 million electric vehicles and 600,000 heat pumps.

The price controls of Ofgem set the revenue monopoly electricity network owners can earn from charges on consumers' energy bills.

"The plans include a financial framework that takes account of recent regulatory precedent as well as the uncertainty around the pace of the energy transition and the impact it will have on electricity distribution investment. Given this, it is critical for all stakeholders that we have the right incentives, and an appropriate level of return, to attract the investment required to enable net zero goals," National Grid stated.

By Dayo Laniyan; [email protected]

Copyright 2021 Alliance News Limited. All Rights Reserved.

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National Grid: Rights Issue Highlights Lack Of Compounding

• A couple of years after the step down of baseline compensation for the transmission network, the distribution concession is now also seeing lower baseline comp.
• Transmission is growing because RAB gets indexed to inflation, but a lot of the growth was non-recurring and otherwise has to be financed by large basically obligatory CAPEX.
• The compensation at fair values by Ofgem means that there's no outstanding compounding engine here. It's why they needed to do a rights issue equity raise.
• The absolute forward P/E at around 14x barely competes with risk free rates, which might be fair, but it's not compelling.
• At least it's a better profile and valuation than Redeia.
• Looking for a helping hand in the market? Members of The Value Lab get exclusive ideas and guidance to navigate any climate. Learn More »

National Grid Plc ( NYSE: NGG )( OTCPK:NGGTF ) is past the RIIO-ED1 compensation regime as of March 2023 and is now in ED2, and it's been working on the RIIO-T2 regime since 2021 for the transmission networks. ED2 was appealed and contested by operators, as always, over the fact that its compensation may not be sufficient for the operators of the transmission and distribution concessions. Not just now but also in 2021 , lowered regulated cost of equity brings down compensation rates to the point where National Grid has actually done a rights issue in order to expand its coffers, possibly to deal with grid improvements in order to handle the electrification trend, already having maximised their comfortable debt capacity. We addressed this as the primary issue in our last coverage . Still, their major RAB growth and capital investments are allowing for growth on a constant currency (C.C.) basis. While it's not a business we're interested in due to a moderate absolute valuation and relatively poor economics, we do note that it's valued better than other regulated utilities that might be considered in a business-unfriendly environment.

Earnings Breakdown

The C.C. figures pan out as follows for the full year :

FY IS Highlights (FY PR)

Distribution fell on account of lower baseline compensation from the RIIO-ED2 regime which was not offset by investments and higher RAB. Additionally, there was cost inflation in operating the distribution network for electricity. This is the ED2 regime. It is still benefiting from a RAB that is indexed to inflation, but the lower baseline is the issue, even after revisions up from the first draft, which was rough.

Distribution Concession (FY Pres)

The RIIO-T2 regime was also complained about by the operators , but at least it has indexation in it which has allowed for higher costs of capital, indexed to the prevailing rate environment, to up the compensation accordingly over the last couple of years since the regime came into effect in 2021. Half the growth in the segment was due to liquidated damages from Western Link, which is a major project among UK regulated utilities to allow for export of clean energy from Scotland to the English and Welsh grids. This is a non-recurring positive effect and related to investigations around the timely delivery of the project.

UK Transmission Concession (FY Pres)

In terms of regulatory pressure, the later adoption of electrification in the US means that it's less intense, and NG has been able to negotiate rate increases with the public utility authorities, getting pretty substantial raises to its rates in New England and in New York . In general, these US concessions, which are around 40% of operating profit, are attractive from a regulatory point of view.

US Concessions (FY Pres)

Bottom Line

Ofgem lowering cost of equity to levels that are notionally in line with a lower-beta equity return, around a 5.23% total at low assumed interest rates , has been a blow to the distribution business. The RIIO-T1 used to be unusually attractive for the transmission concessions before, but the change to T2 had brought things back to Earth in 2021. Together, the last few years have been a period of greater regulatory pressure and virtually no excess returns on the infrastructural investments. Of course, NG receives in exchange a less volatile cash flow, but things aren't that great in the UK concessions, particularly in a rather inflationary environment where one will be concerned whether broad indexation fully does the job of compensating the operators who have to take the risk of operating the network at inflating costs. The US concessions don't have that issue and are close to 50% of the business on a normalised basis.

It is still technically a growth business, as there is a lot to do in terms of growing RAB and meeting demand from the grid from consumers, but when that incremental investment is done at more or less fair value, there is no scope for outstanding value creation in the economic set up of the UK concessions. Again, the US concessions offer more latitude.

Highlighting the issues is the rights issue, which is increasing share counts by about 30%. This is of course dilutive, and also reflects perhaps a peaking debt capacity, with net debt at around 10x underlying operating profits and cash flows. The need for this outside financing at peak debt capacity reflects the lack of a compounding engine, so some negative market reaction was unsurprising. The return will be lower than the cost on those funds incrementally, but NGG is basically obligated to make improvements. This is all on top of the high pace of asset growth they are currently sustaining, skewed almost entirely to the UK and not the US concession.

CAPEX Mounting (FY 2023 Pres)

These are all negative considerations, and it's why we aren't really interested in it at a 13x multiple due to the relatively weak absolute earnings yield, even in the face of guided 6-8% EPS growth even after the rights issue. However, we note that on average, it's in a much better place than a peer like Redeia ( OTCPK:RDEIY ). The CNMC in Spain is perennially more difficult than the UK regulators around compensation, and NGG has its US concessions. Yet, Redeia trades at around a 17x PE on a forward basis.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

If you thought our angle on this company was interesting, you may want to check out our idea room, The Value Lab . We focus on long-only value ideas of interest to us, where we try to find international mispriced equities and target a portfolio yield of about 4% . We've done really well for ourselves over the last 5 years, but it took getting our hands dirty in international markets. If you are a value-investor, serious about protecting your wealth, our gang could help broaden your horizons and give some inspiration.

This article was written by

The Valkyrie Trading Society is a team of analysts sharing high conviction and obscure developed market ideas that are downside limited and likely to generate non-correlated and outsized returns in the context of the current economic environment and forces. They are long-only investors.

They lead the investing group The Value Lab where they offer members a portfolio with real time updates, chat to answer questions 24/7, regular global market news reports, feedback on member stock ideas, new trades monthly, quarterly earnings write-ups, and daily macro opinions.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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