National Grid Plc Q2 FY2027 earnings call

• Strategic Framework Execution: CEO Zoe Yujnovich outlined three core pillars: 'Brilliant Basics' (simplifying organization, enhancing accountability), 'Big Shifts' (scaling AI/technology like Exogeo mapping and GridCare to improve productivity and cyber defense), and 'Disciplined Growth' (focusing on regulated networks while exploring adjacencies).
• Capital Investment Acceleration: First-half capital investment reached a record £6.7 billion (up 32%), with UK electricity transmission investment surging 71% to £2.9 billion. The company is on track to deliver at least £70 billion by FY31, supported by 100% primary supply chain de-risking for ASTI projects and 80% for the broader program.
• Project Milestones & Technology: Key achievements include the completion of the Thames Crossing tunnel 49 days ahead of schedule and the energization of a 1.4 GW offshore wind farm. Six Wave 1 ASTI projects are in construction, with majority completion expected by March 2031. Technology deployments include Sensat’s visualisation mapping to reduce overheads and Envelio’s analytics to speed up customer connections.
• US Growth Drivers: The US rate base has grown over 70% since 2020, driven by industrial demand (e.g., Micron’s $100 billion investment in central NY) and data centers. The company is actively shaping policy outcomes to support affordability and resilience, including submitting one-year rate stabilization plans in NY to keep bills flat.
• Joulent JV Progress: An initial £941 million was invested in the first half toward Project Kilby, a 2.7 GW co-located data center power facility in West Texas. A 50-50 JV with Chevron is established, with a 20-year PPA signed with Microsoft (AAA-rated). First power is targeted for 2028.
• Interconnector Performance: Interconnectors generated £400 million in payments and are forecast to pay a further £300 million over the next two-and-a-half years, subject to Ofgem approval, directly benefiting consumers through regulatory mechanisms.

UK Electricity Transmission: Underlying operating profit increased 45% to £1.2 billion, driven by higher allowed revenues under the RIIO-T3 framework, partially offset by higher depreciation from increased capital investment (£2.9 billion, up 71%). UK Electricity Distribution: Underlying operating profit was £550 million, broadly flat year-on-year; higher indexation-driven revenues were offset by increased maintenance costs due to extreme heat and higher depreciation. Capital investment rose 10% to £834 million. US New York: Underlying operating profit grew 9% to £487 million, supported by asset-based growth and cost recovery, though partially offset by higher depreciation and property taxes. Capital investment increased 11% to £1.8 billion. US New England: Underlying operating profit declined 10% to £266 million, as higher net revenues from asset growth and capital trackers were more than offset by a one-off provision, higher depreciation, and other investment-related costs. Capital investment rose 14% to £1.1 billion. National Grid Ventures: Underlying contribution decreased by £53 million to £174 million, primarily due to the prior-year disposal of Grain LNG, partially offset by stronger interconnector performance.

• EPS Growth Guidance: Slightly upgraded full-year underlying EPS growth guidance to 15-16%, previously lower, supported by strong first-half results and one-off fair value gains.
• Capital Investment Guidance: Upgraded full-year capital investment expectation to approximately £13.5 billion (from previous estimates), reflecting faster supply chain delivery and ramp-up of RIIO-T3 investments. This maintains the trajectory for a minimum £70 billion cumulative investment by FY31.
• Net Debt Trajectory: Net debt is expected to increase by a further £4 billion in the second half of 2027, bringing total net debt to around £52.6 billion, largely driven by the remaining Joulent funding and higher interest charges.
• Long-term Financial Framework: Maintained five-year outlook of 8-10% annual underlying EPS growth from the FY26 baseline, alongside double-digit investor returns and an inflation-protected progressive dividend policy.
• Operating Cash Flow: Updated guidance reflects a 15% year-on-year growth in operating cash flow (down from a previous 20% expectation), attributed to higher working capital movements, increased interest charges, and elevated capex levels rather than operational deterioration.

• Political and Regulatory Uncertainty: Potential impacts from US midterm elections on the Joulent project timeline, though management notes stability in Northeast jurisdictions and focuses on contractual protections. In the UK, government focus on affordability may influence future price controls.
• Project Execution Delays: Acknowledgment that not all projects proceed as planned, citing the Eagle One delay event. However, management highlights specific mitigations such as generative scheduling to recover 100 days on the schedule.
• Supply Chain and Inflation Pressures: While 80% of the $70 billion program is under procurement mechanisms, residual unit price pressures and inflation remain risks. Management asserts sufficient allowances have been made within the five-year framework.
• Connection Reform Challenges: Customers face frustration with grid connection reforms. Management acknowledges these challenges but advocates for whole-system change to reduce costs and improve speed, noting that long-term solutions require regulatory evolution.
• Macroeconomic Volatility: Exposure to geopolitical conflicts (Middle East) affecting consumer energy bills and macroeconomic complexity. However, the regulated business model offers significant insulation via inflation protection, revenue indexation, and hedged currency exposure (~70% of US assets hedged with dollar-denominated debt).

Q: Analyst asked about the impact of US election changes on Joulent and protections for the investment, plus concerns over Community Offshore Wind impairments and interconnector return timelines. / A: Management clarified that Joulent faces minimal near-term political risk in its target regions, emphasizing strong contractual protections including preferred distributions and equipment rights. Regarding Community Offshore Wind, the impairment was due to legislative uncertainty under the previous administration, and the exit allows redeployment of funds. On interconnectors, returns are set by regulators (Ofgem) to benefit consumers, with future investment decisions dependent on achieving appropriate project economics and partner alignment.

Q: Analyst queried if Joulent can expand beyond Project Kilby given criteria like 'behind-the-meter' status and social license, and whether US rate cases will allow higher nominal ROEs. / A: CEO confirmed a pipeline exists behind Kilby but new projects must meet strict financial hurdles and secure local community social license before maturing. CFO noted that while they will file for incremental steps in rate cases to reflect current bond markets, they aim to balance required investment funding with affordability challenges, keeping expected ROEs in the mid-nines, consistent with their five-year guidance.

Q: Analyst questioned the downgrade in operating cash flow growth guidance (from 20% to 15%) and potential affordability pressures on UK distribution (ED3) compared to transmission (T3). / A: CFO explained the cash flow adjustment stems from higher interest charges, working capital movements, and increased capex, not operational weakness. CEO stated ED3 negotiations with Ofgem are constructive, using T3 methodology as a starting point, and emphasized that network build-out inherently aids affordability by reducing constraint costs, maintaining confidence in the investment outlook despite political focus on consumer bills.

Q: Analyst asked about the composition of non-regulated portfolio size, hurdle rates for returns, and cost recovery mechanisms for Micron’s network investments in NY. / A: Management reiterated that the primary focus remains the organic $70 billion regulated program. Non-regulated investments (like Joulent) require risk-adjusted returns higher than regulated business, with no single fixed hurdle rate. For Micron, some costs are recovered via connection charges (KAYAK), while upstream reinforcement uses normal recovery mechanisms, which may evolve as states review large-load cost structures.

Q: Analyst sought details on accelerated capex drivers and how inflation is managed within the $70 billion program. / A: CEO attributed the capex uplift primarily to faster de-risking and cable securing on the Eagle 2 project, noting 100% primary supply chain visibility for ASTI. CFO confirmed that 80% of the $70 billion is procured, providing visibility against inflation. While some unit price pressure remains, efficient delivery and pre-locked contracts mitigate risks, and no deviation from the £70 billion target is anticipated.