Good morning, everyone, and welcome to the National Grid Full Year Results Presentation. I'm Nick Ashworth, Director of Investor Relations, and I'm here with our Chief Executive, John Pettigrew and CFO, Andy Ag. I'm pleased that we're able to join you this morning by video and that we'll be able to see you ask questions by video. Instructions are on your webcast screen. So before we start, I'd like to draw your attention to the cautionary statement that you'll find at the top of the presentation.
And after the presentation, as usual, the IR team will be available by phone to help if you have any further questions. And so with that, I'll hand over to our CEO, John Pettigrew. John?
Thank you, Nick, and good morning, everyone, and welcome to the call. As usual, I'm joined by Andy Ag, our CFO. And following the presentation, we'll both be happy to take your questions. A lot has happened over the past year. We performed strongly during the pandemic and delivered solid financial performance, testament to the resilience of our businesses and the commitment of our people.
It's from this position of strength that we announced our acquisition of WPD in March. This is a transformational development for National Grid, increasing our focus on electricity, putting us firmly at the heart of the energy transition on enhancing the long term growth profile of the group. This transaction alongside our decision to sell a majority stake in our U. K. Gas transmission business combined with a greater level of regulatory certainty, underpins the new 5 year outlook that we're announcing today.
But first, let me start with the financial performance for the year. On an underlying basis, that is excluding the impact of timing, major storms and exceptional items. Operating profit of £3,300,000,000 was 3% below last year at constant currency driven by the financial impact of COVID. Consequently, underlying earnings per share was down 7% to 54.2p And group return on equity was 10.6%. Excluding the increase in costs due to COVID, financial performance across our regulated businesses who's in line with last year.
Andy will cover the impact of COVID in more detail shortly. But as I've said previously, we expect to recover the majority of these costs over the medium term. And despite the challenges brought about by COVID, we've delivered another strong year of investment in Critical Infrastructure. Capital expenditure was in line with guidance at £5,000,000,000 similar to the prior year at constant currency and adjusting for the Geronimo acquisition. This has driven group asset growth of 6%.
In line with our policy, the Board has proposed a final dividend of 32.16p per share. This takes the total dividend for the year to 49.16p an increase of 1.21 percent in line with U. K. RPI. Looking forward and reflecting the move from RPI to CPIH in our U.
K. Regulated businesses, The Board announced in March our aim to grow the annual dividend per share in line with U. K. CPIH. Turning next to our safety and reliability performance.
Safety is at the heart of performance across our businesses. FY 'twenty one saw our lost time injury frequency rates reduce with the U. K. Delivering the best of the year of safety. In the U.
S, we also saw a fall in our lost time injury frequency rates, whilst in National Adventures, we've seen a small rise in minor incidents and are redoubling our efforts to reverse this trend. Turning to reliability. Performance has remained Past 12 months. In the U. K, the electricity system operator developed new innovative services to manage periods of very low levels of demand coupled with high levels of renewable generation.
And we implemented learnings from the storms in 2018 to manage the highest gas demand seen in a decade without incident or disruption to our customers. In the U. S, Electricity network reliability remained excellent at over 99.9%. However, the significant number of severe storms we experienced throughout the year, particularly in Massachusetts, led us to incur a service quality penalty of $14,000,000 We're continuing to take action to improve performance during storms as well as to realign our regulatory frameworks, which I'll talk about shortly. Overall, I'm pleased to say we We delivered another good year of safety and reliability against a challenging backdrop.
And this outcome underpinned our resilient operational performance, which I'll cover So starting with the U. S, where we've made good operational progress against our targets. Our financial performance has been impacted by the additional cost of COVID and a greater number of storms with our achieved return on equity decreasing by 210 basis points to 7.2%. Adjusting for these headwinds and the impact of rate case delays shows our return on equity at 8.6% or 92% of our loan return. As we highlighted at our half year results and as the slide shows, We've seen a greater number of storms across our regions in the past year.
However, we've made strong progress to minimize their impact through upgrading our infrastructure, undertaking weather impact studies as well as introducing new digital technologies in areas such as vegetation management. Our success of reducing their impact means more storms are being categorized as minor, which do not qualify for cost deferral and recovery. We're therefore developing new mechanisms for future rate cases that will both incentivize improved storm performance and provide a greater level of upfront cost recovery. During the year, we increased investment in Critical Infrastructure by $200,000,000 to 4,300,000,000 with our single largest area of investment continuing to be our gas pipe replacement program. Despite challenges due to COVID, We managed to deliver over 3 50 miles of mains replacement, exceeding our initial target of 300 miles.
This means we're now well over halfway through the 20,000 miles we've identified that we need to replace. This enabled us to continue to deliver strong rate base growth of 8% in FY 2021. On the regulatory front, we made significant progress this year. We've reached a joint proposal with the New York Public Service Commission staff for Kedney and Kedley in Downstate New York. The 3 year settlement, which includes an allowable ROE of 8.8 percent, will see us invest $3,300,000,000 to modernize gas structure and enhance network safety and support a sustainable and affordable path towards a low carbon energy future.
In Upstate New York, the new filings for our Niagara Mohawk business are in settlement discussions, and we expect an outcome sometime this summer. And in November, we filed a 5 year rate plan for our Massachusetts Gas business. Hearings are underway, And we expect the new rates to be effective from October this year. Finally, it's also been a good year for our electricity transmission business With increasing focus on delivering greater levels of renewable energy, the New York Power Authority has selected National Grid as its partner in the Northern New York Priority Transmission Project. This project will see us invest an estimated $500,000,000 over 4 years to rebuild a 100 mile transmission line supporting the state in meeting its clean energy goals.
So moving to the U. K, where FY 'twenty one marked the end of a very successful RIIO T1 period. Through the 8 years, our total investment reached over £12,500,000,000 and generated over £850,000,000 of savings for customers. In our last year of T1, we achieved a return on equity of 12.6% within our target range of 200 to 300 basis points of out And I'm really pleased to say that this year in both our electricity and gas transmission businesses, we saw our highest customer and stakeholder satisfaction scores of the T1 period. We continued our capital program with GBP 1,200,000,000 of investment, leading to 2.2 percent asset growth.
Spend was driven by significant progress on our Hinkley C band connection and the 2nd phase of our London Power Tunnels project. This was partly offset by lower spending gas transmission from the completion of the Feeder 9 project. But we're also investing in new technology that's helping support connecting increasing levels of renewable generation on our electricity transmission system. Working with a Californian company called SmartWires, we're installing smart power flow control devices that increase our network capacity without the need to build new lines. This is the first time this solution has been used at transmission voltages and we've already commissioned 3 circuits with a further 2 expected this summer.
On the gas side, we've made significant advances with hydrogen. For example, our ambitious FutureGrid project, which is the largest of its kind in the world, will test the options for repurposing the existing transmission network to hydrogen. And finally, our focus in the U. K. Over the last 12 months has very much been in reaching a successful outcome for RIIO T2.
Over the 5 year price control, we expect substantially higher investment levels than INRIO T1, particularly in electricity transmission, where we expect to spend around £8,000,000,000 on asset health, system reinforcement to connect offshore renewable generation and other new onshore system connections. However, whilst we were pleased with the improved package around investment levels in the final determination, We still believe there's a strong technical argument for a higher overall cost of equity and view the outperformance wedge as conceptually flawed. The CMA has recently granted permission for our appeal, and we'll work closely with them as this process moves forward through the summer. Looking now at National Grid Ventures and our other businesses. Investment of £576,000,000 who's primarily focused on delivery of our interconnectors.
IFA2 was commissioned in January and the North Sea link with Norway and the Viking link with Denmark are on track come online in 2021 2024. Working in collaboration with Elia and Tennant, we're continuing to assess the feasibility of offshore multipurpose interconnectors and believe they can play a key role in enabling the U. K. Government's ambition for 40 gigawatts of offshore wind. We've been successful in our Humber carbon capture project, receiving a contribution of £56,000,000 from government to develop a system to capture, transport and store carbon emissions from industries in the Humber and Teesside areas in partnership with a number of oil and gas majors.
But moving to the U. S, our onshore renewables business continues to grow following the Completion of our acquisition of Geronimo last year, now named National Grid Renewables. The business operates over 400 Megawatts of renewable generation with another 600 megawatts currently under construction, including Noble, our solar and battery project in Texas, which we expect to begin operations in the first half of twenty twenty two. With regards to our other businesses, year on year profitability was lower as a result of fewer land development sales in our Property division. So to summarize, we've delivered strong performance across our operations in a very challenging year.
And with our announced transaction in March, we further strengthened the resilience of our business as we look to the future. So having spent some time reviewing the year just gone and before moving on to talk about our new 5 year outlook, I'd like to spend a moment talking about why I think our portfolio mix is the right one. National Grid is one of the handful of FTSE 100 Companies to have consistently grown its dividend for over 20 years, helped by the balance between different regulatory regimes in the U. S. And the U.
K. And the ebb and flow of CapEx requirements as we've seen growth rise and fall at different times in different jurisdictions. The geographic and regulatory diversity has been key to delivering strong returns with an annualized total shareholder return of nearly 10% over the past 10 years versus the FTSE 100 delivering just under 6. And following the completion of our transactions, I'm confident that this diversity continue to underpin our performance in the years ahead given the exciting opportunities we see, including the connection of offshore wind, The infrastructure requirements for EV charging, the critical investment in safety and clean gas growth and in our National Grid Ventures business, the opportunities with interconnectors and Renewables. As you can see, our portfolio places us firmly at the heart of the energy transition.
And so it's against this backdrop that today for the first time we're setting out our longer term expectations for the group. The next 5 years will see us increase our CapEx to between £30,000,000,000 £35,000,000,000 the highest ever level of investment for National Grid. And as we finalize the purchase of WPD and crystallize our planned asset sales, together with this higher level of investment, We expect to deliver group asset growth of 6% to 8% per annum on average to 2026. We'll deliver this growth whilst maintaining a strong balance sheet with comfortable headroom at our current credit rating level throughout the period. Growth in our assets drives growth in our earnings with group underlying EPS expected to grow by 5% to 7% per annum on average through to 2026 and to be at or above the top end of our range in the early years of this period.
And this will continue to support our policy of growing the dividend in line with CPIH. So with that, I'll now hand over to Andy to go through our full year results as well as providing a little more detail on our 5 year plan. I'll then come back and talk about our priorities and outlook for the coming year.
Thank you, John, And good morning, everyone. Before covering the group's full year performance, I'd like to provide the details of the COVID financial impacts we've experienced during this year. Firstly, I'd like to start by saying that I'm really pleased with the performance we've delivered. Our teams have done a great job in mitigating direct COVID costs against the tough operating backdrop whilst continuing to deliver the service our customers expect. Against our guidance The £400,000,000 underlying operating profit impact from COVID, we've seen an impact of £355,000,000 Additionally, in the last few weeks, we've recognized £59,000,000 revenue recovery in FY 'twenty one for the commodity portion of some of our COVID bad debts.
Therefore, our year end underlying operating profit impact from COVID is £296,000,000 This is made up of a residual bad debt cost of £120,000,000 a shortfall of revenue under existing rate plans of £78,000,000 Net direct COVID costs of £28,000,000 and a £70,000,000 impact from delays to new rates being approved in KED NE and Ked Lee. We also guided to a cash flow impact from COVID of up to £1,000,000,000 for the full year, with our final cash impact being around £600,000,000 with some elements ultimately being smaller than initially estimated. As our regions emerge from COVID during FY 'twenty two, we continue to expect an impact to be felt from weaker demand and reduce cash collection from our U. S. Customers.
But as I said before, in the U. S, we remain confident that we'll be able to recover the majority of these COVID related either through the usual regulatory mechanisms or through separate filings. Turning now to the overall group performance for the year, which was resilient in the face of COVID, delivering a solid financial performance. As John has mentioned, underlying operating profit was £3,300,000,000 down 3% at constant currency versus last year, mainly reflecting The impact of favorable net income from rate case increases across our U. S.
Regulated businesses lower controllable costs in our U. K. Regulated businesses, which altogether were more than offset by higher depreciation in U. K. Electricity transmission and the impact of COVID, including the bad debts in our U.
S. Business. EPS was down 7% at 54.2p reflecting COVID related costs, a weaker U. S. Dollar and lower property sales, all partly offset by lower financing costs.
Our resilient operational performance was also reflected in a 10.6% group return on equity, and our value added per share was 51.3p. Our asset base grew by 5.6%, reflecting capital investment of £5,000,000,000 in line with our guidance. The full year dividend of 49.16p per share is up 1.2%, in line with our policy, and the Board has recommended a final dividend of 32.16p Now looking at the performance of each of our segments in detail. UK Electricity Transmission delivered another year of strong operational performance, achieving a 13.9% return on equity, 370 basis points above the allowed. Totex incentives contributed 240 basis points from our streamlined capital delivery processes in load and non load projects, savings.
Other incentives and legacy allowances contributed 130 basis points, 50 basis points above last year. Underlying operating profit of £1,100,000,000 was down 4 Largely due to the impact of COVID and higher depreciation. The U. K. Efficiency program continued to deliver savings with a further £34,000,000 was 3% higher than last year, primarily due to continued spend on the 2nd phase of the London Power Tunnels project and the Hinkley Sea Bank project.
This investment, along with the inflation linked growth in the RAV, increased our year end regulated asset value by 3.1 percent to £14,600,000,000 U. K. Gas Transmission delivered a return on our other incentive performance at 90 basis points was below last year due to lower shrinkage performance. Underlying operating profit of £438,000,000 was up £36,000,000 or 9% compared to FY 'twenty. This is primarily due to higher revenues, year on year RPI uplift and lower controllable costs.
Capital Investment was £176,000,000 £73,000,000 lower than last year due to the completion of several large projects and lower spend on compressor projects and IT infrastructure. And including inflation, the regulated asset value was flat year on year at £6,300,000,000 Turning now to our U. S. Business. The return on equity, excluding COVID, High levels of non deferrable storm costs and the impact of rate case delays that John mentioned was 8.6%, 92% of the allowed level.
After taking account of storms and incremental COVID costs, the return on equity was 7.2%. Underlying operating profit was £1,500,000,000 driven by an increase in net revenues of £216,000,000 at constant currency, reflecting rate increases and capital trackers, more than offset by an increase in controllable costs due to higher IT costs and inflation, High depreciation due to growth in the rate base and a year on year increase in COVID costs. We've increased investment in our U. S. Networks to $4,300,000,000 driving strong rate base growth of 8% to $27,600,000,000 Assets outside rate base, excluding working capital, grew year on year to $3,200,000,000 reflecting our investment in several multiyear projects that we expect to be coming into service in future years.
National Grid Ventures contributed £354,000,000 an increase of 5% on last year, including the first period of operation for IFA2, our 2nd interconnector to France. Grain LNG profits were higher than last year due to the extension of asset lives in line with our new contracts. And metering profits fell less than expected, reflecting a slower decline in our legacy meter population. Capital investment decreased significantly to £509,000,000 mainly driven by the non recurrence of the acquisition of Geronimo and lower investment in our interconnected projects as they progress towards completion. Our other activities had a net charge of £61,000,000 £34,000,000 higher than prior year, reflecting fewer property sales and slightly higher insurance costs.
Our venture capital business, National Grid Partners, invested £38,000,000 £21,000,000 lower than FY 'twenty at constant currency due to reduced activity at the start of the year in the early months of COVID. Financing costs decreased by 8% at constant currency to £942,000,000 mostly due to lower RPI and favorable borrowing rates. The effective interest rate for the year decreased from 4.1% to 3.2%. The underlying effective tax rate was 21.2%, 130 basis points higher than FY 'twenty, primarily as a result of a smaller impact in tax credits relating to prior years. Underlying earnings were down 5% at £1,900,000,000 And underlying earnings per share decreased 7% to 54.2p.
Operating cash flow was £4,600,000,000 £300,000,000 lower than last year, driven by increased storm costs, lower U. S. Customer collections and reduced U. K. Revenues.
During the year, we raised over £5,600,000,000 of senior debt, And the year end closing net debt was £29,700,000,000 including a £1,600,000,000 favorable movement from exchange rates. After adjusting for Rhode Island as an asset held for sale, the revised closing net debt was £28,600,000,000 Our regulatory gearing for the year was at 65%, and the RCF to debt and FFO debt metrics was 6.6% and 11.7%, respectively. These both reflect lower revenues and COVID costs. And as we have previously said, The credit agencies have signaled they are willing to look through any short term COVID related weakness. Going forward, we expect to be comfortably positioned in our new rating band.
And this rating position, coupled with our regulatory frameworks, means we're well placed as we look to the future. So turning to our guidance and starting with the current year. As usual, business by business detail is given in our forward guidance section in the results statement. This forward guidance is based on our existing businesses for the entire year. Given this scenario, we expect FY 'twenty to underlying EPS growth to be towards or above the top end of the 0.5 percent to 0.7% growth range as set out in our 5 year guidance.
Our earnings outlook will change as the transactions move forward through the course of the year. We expect to provide guidance on WPD by half year results, and WPD's earnings will be included in group results from the point of deal completion. We expect to commence the sale process for a majority stake in Gas Transmission in the second half of this financial year. And therefore, under accounting rules, we expect this business to be classified as a discontinued operation. This means we'll have to remove all of its contribution the group results when this change in disclosure is made.
For Rhode Island, we would expect to include it in earnings in our FY 'twenty two results up to the point of sale completion. So putting this together, we still expect to deliver FY 'twenty two underlying EPS at or above the top end of the 5% to 7% growth range as set out in our 5 year guidance. Turning now to that longer term guidance. As you'll have seen earlier, our 5 year financial framework is presented based on WPD being a full member of our group, the sale of Rhode Island completing by the end of the financial year and the sale of a majority stake of gas transmission completing during FY 'twenty three. We We're confident in the visibility that the £30,000,000,000 to £35,000,000,000 group investment levels to FY 'twenty six gives us.
And I'd like to give a little more detail about this. In the U. K, we expect investment levels of around £8,000,000,000 in electricity transmission will be needed during the RIIO T2 period. As we explained when we accepted the majority of the T2 package, this will cover asset health, anticipatory and system reinforcement to facilitate offshore generation and other new onshore system connections. We expect the WPD Networks to be investing £4,000,000,000 to £5,000,000,000 over the next 5 years in asset maintenance, facilitating the infrastructure for electric vehicles and directly Connected Generation.
In our U. S. Businesses, we expect investment of around £17,000,000,000 over the years to FY 'twenty six. And as we've previously explained, this includes safety related projects in our gas networks, storm hardening and other net In our electricity distribution networks as well as incremental investments in electricity transmission projects. Lastly, we expect that National Grid Ventures will invest £2,000,000,000 to £3,000,000,000 over 5 years, focusing on our interconnector program and continued investment in U.
S. Renewable generation. As we complete the WPD purchase, subsequent asset sales and deliver the capital investment program whilst taking into account the broad economic protection our businesses have against rising macro variables such as inflation. Group asset growth is expected to be 6% to 8% per year on average to FY 'twenty 6. I've said previously that while we settle the WPD, Rhode Island and gas transmission transactions, group gearing levels will be above current levels.
Over the 5 years to FY 'twenty six, under our central assumption of CPI of 2%, We expect regulatory gearing to increase through the transactions and then to settle above 70% once all three transactions are completed. However, throughout the period, we expect our long run gearing levels and the other standard metrics we monitor to sit comfortably within our current BBB plus BAA1 corporate rating band from S and P and Moody's. And as a result, we do not expect any further rating action at a group level. The changing mix of the group, coupled with the strong growth opportunities we see across our businesses in the coming years, is expected to deliver compound annual growth in underlying earnings per share in the 5% to 7% range through to FY 'twenty six, including our long run average script take up assumption of 25 As we work through the transactions, together with recovery from the impact of COVID, we would expect earnings growth to be at or above the top end of our range in the early years. This will continue to underpin our sustainable dividend policy into the future.
So to summarize, we performed strongly in mitigating the direct cost of COVID and continue to work with regulators on cost recovery mechanisms. We've delivered £5,000,000,000 investment in critical infrastructure and achieved a solid underlying financial performance. The recent acquisitions have enhanced the long term growth profile of the group, and our confidence is reflected in the new 5 year financial framework we have set out today. Now John will take you through the priorities and outlook for the coming
year. Thank you, Andy. So hopefully, you can appreciate from what Andy and I have covered this morning. It's been a very busy year for the group, And I'm pleased with the significant progress that we've made. Within the 5 year framework we've outlined today, in the coming year, our priorities are to complete our proposed transactions, Maintain our regulatory progress, build momentum through stakeholder engagement and continue to lead the debate on climate action.
So turning first to our transactions. Our first priority will be to complete the WPD purchase this summer and then file the final business plan for RIIO ED2 by the end of the year. Preparations for the sale of gas transmission business are well underway, and we still expect to launch the process in the second half of this year. And regulatory clearances regarding our Rhode Island business are also anticipated for the end of our financial year. Our intention is to host a capital markets event in Q4, where we'll provide more detail on our longer term plans and the growth opportunities we see across our businesses.
Alongside this, we'll continue to progress our regulatory agenda. In the U. K, with regards to our RIIO T2 appeal to the CMA, we expect a final determination at the end of October. And whilst not a direct read across, we were encouraged by the CMA's recent decision on the water PR19 review And continue to believe our strong technical argument should lead to a higher level of return. In the U.
S, in our upstate New York filings, We're working on agreeing a multiyear settlement, which will include investment to support decarbonize heat, whilst maintaining a focus on managing customer affordability. New rates are expected to become effective in July 2021. And in Massachusetts Gas distribution filing that we made in June, It proposed a new performance based rate mechanism that will link annual revenue increases to inflation. It also proposes funding for projects that decarbonize the gas network, including hydrogen renewables, natural gas and demand side measures. We expect new rates to become effective from October 2021.
Whilst working with regulators on these filings, We're also excited to see greater levels of political and stakeholder engagement across all aspects of the energy transition. In New York, we recently published A joint report with Con Edison and the Mayor's office on pathways to a carbon neutral New York City. This study highlights the critical need for Continued investment in gas networks to maintain system safety, reliability and affordability as we continue the energy transition. For the gas distribution companies that will help the state to achieve 2,050 net zero targets. We'll use our experience in developing scenarios for the energy transition in the U.
K. As well as our recent study in New York to develop these pathways that can meet these targets in an efficient way for our customers. 2021 will also be a very busy year with U. K. Political engagement.
We're expecting to see a Transport to Carbonization Bureau of Governance and further thoughts on the offshore transmission review. And we'll be engaging across all of these topics and more. And as you've heard me say many times, our ambition is to enable the energy transition for all, and we'll continue to lead the debate on this. This November's UN COP26 Conference in Glasgow provides us with a perfect platform to do just that. And I'm proud that National Grid is the principal partner of this event, something that is vital to meet the ambitious net zero targets set by governments, regulators and businesses.
This summer, we'll see the first publication of our Responsible Business Report alongside our annual report. This will showcase the priorities we've set and the actions we're taking in delivering our Climate and Responsible Business goals. It'll enable people to track our progress, bringing all our sustainability reporting into one place. And I'm pleased to announce that this report will include our new Scope 3 reduction emission targets aligned to the science based target initiative to reduce carbon emissions by 37.5 percent by 2,034 from our 2019 baseline. In the years ahead, we'll invest to accelerate the energy transition for all of our customers in regulated electricity and gas networks an adjacent infrastructure that supports the goal of energy decarbonization.
So to summarize, this is shaping up to be a defining year ahead As we make a significant strategic pivot towards electricity with the integration of WPD, reach an outcome on the CMA appeal on RIIO T2 And agree new rates for Upstate New York and Massachusetts Gas. Work on defining net zero roadmaps across both the U. K. And the U. S, who's also using our voice to influence climate change action in the run up to COP26.
And we're in a strong position to enact this change. Our geographic and regulatory diversification will continue to underpin the stability of the business as it's done over the course of the past 20 years, And it provides the platform to build on the huge number of opportunities that we see ahead. This attractive asset growth will drive sustainable long term earnings growth, maintaining and underpinning our dividend policy. I'm very excited about delivering the ambitious 5 year plans we set out and the increasingly important role that NashGrid is playing in the energy transition. Now before we come to questions, I'd just like to take a moment to thank Nicola Shaw, who is stepping down from her role later this year.
Nicola has helped to drive the U. K. Business forward in her 5 years with the company, and we wish her very well for the future. And after over 9 years as Chairman, Sir Peter Gershen will be retiring from the Board at the end of the month. Sir Peter has made an outstanding contribution to National Grid during his tenure.
Thanks, John. Now it's time for our Q and A. As a reminder, the instructions to ask a question are on your webcast screen and on the Q and A slide that you can see in front of you. We're going to hand back over to John now, who will start with the video questions. John, over to you.
Okay. Thanks, Nick. So I can see there's lots of hands up. So should we start with Dominic and then go to Chris Laybutt. So Dominic?
Within that, you've obviously given us quite a tight range for ED, electricity The draft, can you just give us a little bit of color there? Is the draft business plan being submitted before Completion of WPD. And how involved have you been on developing that plan? And do you think Ofgem will adopt a number of scenarios similar to the RIIO 2 transmission program. So basically the question leading into is how much?
Thank you.
Yeah. So thanks, Dominic. So let me just pick up on the CapEx question first. So as you hear today, what we try to set out is a range of €30,000,000,000 to €35,000,000,000 I think to reflect the confidence that we have in the transparency of the regulatory frameworks that we now see. So as you know, in electricity transmission, we accepted the vast Majority of the RIIO T2 price control.
And therefore, we've got good visibility of what we expect the investment to be. We just agreed Kedley and Kedney, dollars 3,300,000,000 over the next 3 years with potential extension for a 4th year. With regards to WPD, obviously, they've submitted their 1st drop Business plan, they received feedback from their stakeholders. They're about to submit their 2nd draft business plan at the end of July. That will go through the usual iteration that you'd These types of price controls and they'll make a final business plan submission in December.
We've set out In our outlook that we expect it to be £4,000,000,000 to £5,000,000,000 I think we're reasonably confident with that level of investment. Ofgem usually We'll look at various scenarios. But when we look at the fundamentals in terms of asset replacement connections for distributor generation and new customers and then supporting EVs, I think the range that we set out for the group of 30 to 35 looks very sensible and we're very comfortable with that. With regards to RWE and the announcement on that. So as you know, over the last few years, we've always looked to use the capabilities We have in National Grid to look to adjacent markets.
More recently over the last 3 or 4 years, that's been in our interconnectors business As well as onshore solar renewables with the acquisition of Geronimo, which is now National Grid Renewables. So over the last few years, we've built a fantastic capability Being able to develop these offshore cables, add to that the local knowledge we have in the Northeast And the RWE is a disciplined approach to any investments that we take. We're not expecting there to be significant CapEx in the short term. As you know, development of offshore wind has a long lead time, both in terms of the seabed lease process and then ultimately the So modest CapEx in the next 3 to 4 years, but we do see it as a natural extension of our NASH Grid Ventures business.
Following on from that, is it a JV that covers RWE for all offshore
in North America?
Or is it just
We take that forward, Dominic. So it's not just a single project. It is a relationship for offshore wind in the Northeast of the U. S.
Thank you.
Okay. Should we take Chris' question then turn to Jenny?
Good morning. Thank you very much. And I guess, thank you for me also for providing 5 year guidance at EPS. That's That's very useful for us. In terms of that guidance, our immediate thoughts this morning went to the impact of COVID on 'twenty one, Which was 0.6 to 0.7p at EPS on our calculations.
Reflecting on your recent experience with the PSC, do Do you think that might be a little bit more challenging than previously thought to recover that amount? And how long do you think that might take to recover that lost ground? Lee, just on storms, it looks like nondeferable storm costs have increased fairly significantly in the period. Do you think that's a trend which will be ongoing? And if so, how long do you think it will take for your proposed mechanisms to be in place to recover these costs?
Are they in specific areas under the mandate of specific regulators? Or is it quite widespread? Just some more detail, it would be very helpful. Thank you.
Yes. Thanks, Chris. Why don't I take the second and Andy, if you want to pick up the first. So in terms of the non deferrable storms, I mean, What we actually saw in the last 12 months, Chris, is probably doubling of the level of storms that we normally see at this time of year. And at one level, we're sort of victim of our own success, which is the storms when they do happen are having a lower impact on our customer base.
And therefore, Rather than being classed as major storms, which we can then defer and get recovery on, they're being captured as minor storms. So we've recognized that Issue in terms of our improved performance when we have storms and we've started to engage with regulators in Massachusetts, Rhode Island and New York About how we can assure that the rate filings that we do going forward capture fairly the actual cost of minor storms as they come along. I think it's too early to assume that we're actually seeing more storms every year going forward. We are doing some work looking at the weather and whether there is an impact that's more Sort of permanent. But at the moment, we're engaging with our regulators to make sure that when we do our rate filings, we get some upfront recovery as well as being incentivized on the performance of
Andy? Yes. Thanks, John. So in terms of the recovery, I think as we've said previously, the recovery of The COVID costs, particularly the bad debts that we've incurred to date, we still expect to recover the majority of those. But as we've previously said, that we expect it to be over a period of time, So into the medium term, years rather than months.
The element that we reported today, the €59,000,000 of commodity recovery is, if you like, the 1st installment, but we expect that to come back in over a period of time. I think in terms of FY 'twenty two, absolutely, we expect a much smaller impact COVID, as you mentioned this morning, some ongoing minor impacts in terms of U. S. Collections and bad debts. But in terms of the overall guidance for FY 'twenty two as well as COVID.
You also need to look at the impacts of the electricity transmission business moving into T2 and also the higher interest costs that we guided to this morning as well.
So Andy, in terms of that COVID impact, which gets a little bit I guess, You're pairing it back in 'twenty two, but 5 years, you've recovered all that lost ground, and so that sort of 0.6 to 0.7p Comes back to you in the form of earnings. Is that the assumption underpinning the guidance?
Yes. I mean, it's hard to be precise until we've agreed all of those But I think it's fair to say that over the period of 5 years, we would anticipate recovering the majority of it. But We'll be able to firm that out once we get the specific mechanisms in place.
From Dominic's Question in terms of the RWE JV, is this a venture for Geronimo that's specifically focused on the Northeast Of U. S. Or are you thinking of going offshore wind more globally, really making a ground in entering that market? First question. And then secondly, just on your Ventures business, you talk about a CapEx of £2,000,000,000 to £3,000,000,000 predominantly linked to the interconnectors The $23,000,000,000 to $29,000,000,000 that the U.
K. Government is talking about to connect the 30 gigawatts and More specifically, beyond the €2,000,000,000 to €3,000,000,000 CapEx that you've highlighted, what is the potential scope and also time lines Of one way we can hear from the government on this. And then linked to that, I guess, is you're talking about 70% debt to wrap. Does that mean you need to raise additional equity? Or is the hybrid possibility we'll cover that?
Okay. Thanks, John. He's got a few questions there. So let me just work through all of that. So in terms of the JV with RWE and our thinking about involvement in offshore wind.
This is very much around the Northeast of the U. S. So as I've said previously, We look for opportunities where we've got capabilities and that we can create value for our shareholders. We have Fantastic expertise in offshore cables and we have fantastic expertise in understanding onshore transmission and distribution in the Northeast. So that capability means that we're a strong partner with RWE in that region, but we're not looking to expand beyond that.
We will focus on the regions that we know best. In terms of the National Grid Ventures and the €2,000,000,000 to €3,000,000,000 so we have a great pipeline of Investment opportunities, as Andy and I have said many times, we'll be disciplined around that. So those opportunities include potentially things like MPIs, multiple purpose interconnectors, as well as onshore transmission sorry, onshore solar and wind in the U. S. With regards to NPIs, At the moment, it's a relatively early concept.
We think that it has potential in terms of mitigating some of the cost impacts of Connecting offshore wind whilst taking advantage of the benefits of connecting the U. K. With the rest of Europe. So hence why we're working with Tennant and Elia to think through that. In terms of the broader sort of CapEx to connect the 30 gigawatts to offshore wind, then I think the current review that's going on with BEIS On the offshore transmission review is incredibly important.
I think everybody recognizes that the concept of every single individual offshore wind From connecting to the East Coast is going to be problematic from a planning perspective and therefore a degree of coordination is needed. From our perspective, clearly, when we understand exactly the timing of that investment, then we'll be able to have a better view. One of the things that National Grid has been advocating for and others in the industry are is to have a clearer blueprint of what the networks look like Both offshore and onshore by 2,030 and we'll continue to advocate that. And I know that Ofgem have recently started to engage in this issue to try and get a better What infrastructure investment is needed. Andy, do you want to pick up the second point?
Yes. So just Jenny, in terms of the, I guess, investments, I think as John said, the timescales may be slightly further out given sort of the elements that need to be worked through. So we're comfortable in terms of funding the range of investments we've put out. And as we've always said, to make disciplined decision About investing in additional projects, we want to make sure we have the right regulatory or other frameworks to ensure appropriate funding for those and recovery of those investments as well. So we'd make those decisions down the track.
But at this point, we're very comfortable with the framework we've set out this morning.
Okay. Thanks. Should we take Mark? And then should we go to John Musk after that?
Hello. Mark Freshney from Credit Suisse. Thank you for taking my questions. I have 2 major questions. The first one is on the Ofgem report on system operator independence that they have sent to base.
We've heard very little on that since then. When you meet with Bay's ministers, Yes. What are they saying? And how likely is it that you may be forced to look at independent ownership there? And just secondly, On the gas transmission business, returns, we know the RIIO-one price control was just Inappropriate for that business 8 years ago.
We know that. And in the final year of RIIO 1, the ROEs were Almost unacceptable. The outperformance was almost unacceptable. But in terms of RIIO2, How is that review looking for that business? And what steps have you and Niccolo and the MD of that business made to turnaround performance ahead of sale.
In terms of the electricity system operator, you're quite right. So the last Key piece of news was Ofgem's consultation that looked at its thoughts on the future of the ESO. Since then, things haven't hugely progressed. The next step in the process is that these I'll do to issue a broader consultation around the institutional arrangements that will support the energy transition and net 0 for the UK. National Grid's position hasn't changed either in that we continue to work with Ofgem and BEYs.
We believe it is important to look at the institutional arrangements. And inevitably as part of that you get into the role of the ESO. Until you do that broader piece looking right across the industry, it's difficult to decide whether It's right that the ESR should be further separated from National Grid. So we're participating in that. The exact timing for Beige to do that consultation, I think it's slightly unclear.
I know it's due this year, but whether it's before the summer recess or after I'm not yet clear, Mark, as we said at the half year results. In terms of gas transmission, so in terms of as you know, as part of the Price control for RIIO T2, we accepted the vast majority of the price control, both for electricity transmission And Gas Transmission. You'll recall that when we had the session on that, we talked about £10,000,000,000 of investment Across the UK, 8 of that relates to GRID as part of RIIO T2 compared to T1 for gas transmission. And we were comfortable that that base level of CapEx, Together with the uncertainty mechanisms that were put in place to deal with things like compressor replacement for environmental issues was Sufficient for us to be able to agree to those levels. So given that, we remain confident that we've got the right levels of CapEx to support the business going forward.
In terms of the sale process itself, we believe it will be a competitive process. The gas transmission business is a strong business. It's got a great reputation. And with the clarity of regulation that we now have, we expect that that will be a competitive process. Thanks, Mark.
Should we go to John, and then we'll go to A. J. After that.
Yes. Good morning. Two questions from me. Firstly, on the CMA process. Just wanted to understand what sort of input you've had into that Very much that you've submitted your files, and you're just waiting to hear back.
And then secondly, I did have a question on ESO as well, but Yes, Mark took that. But can you just give the numbers for the system operator this year or sorry, in FY 'twenty one? What did that contribute at EBIT and what is it as a share of RCB or a number for the RCB?
Yes. Thanks, John. I'll let Andy pick up the numbers on the ESO. And then in terms of the CMA probe cost of equity and the outperformance wedge was agreed. Actually this week, there were clarification sessions with the commission.
So Nicola, Sean and the team were actually in front of the commission this week But it was very much around clarification and understanding of the submission that we've made. The next steps is there will be sessions around cost of equity outperformance wedge. And for the other networks, of course, they've referred to other aspects. And the timing is, I think, August for draft decision and then a so we are engaged with the commission, and this week really has been the first step when we've been in front of the commission to be able to make some points.
Andy? Yes. John, just in terms of the ESO. So its operating profit for FY 'twenty one was £70,000,000 so that's significantly down on last year because we had some specific one off Recovery amounts last year around some of the data center work, in particular. So £70,000,000 this year, and I think that's consistent with what we've said for many years, which is
I think, good morning, and thank you very much for the presentation. So I have two questions. Firstly, the one on the earnings growth and over the next 5 years. Is there any chance we could unpack that a little bit? So What proportion is is there synergies in there from the WPD deal?
Or Is that not yet included or any sort of broad proportion of the U. S, maybe another way of looking is what Cumulative bill increases do you think you need over the 5 years to attain that earnings target to give us a sense of what may be required in rate cases? And then on the sort of more strategically, there has been a sizable change here away from gas and towards electricity as a function of the announced Deals that we've made. And I was just wondering, is the journey finished or
As we settled in March, The opportunity for us to participate at scale in the U. K. Came along with the WPD transaction. It did allow us to shift the overall group to around about 70% electric, 30% gas. And we feel That gives us the right sort of geographic and regulatory diversity that actually has delivered the sustainable returns that I talked about in my remarks this morning.
So If you look over the last 10 years, then we've been able to deliver total shareholder returns of just under 10% against the FTSE of 6%. And over the 20 years, we've been able to deliver sustainable increases in the dividend. So I think when we look at the overall shape of the group in terms of diversity and regulation, we feel very comfortable. And then And then added to that, it really reflects I think sort of broader view we have about how we see the energy transition. So there is no doubt we're going to see significant growth in electricity to Important role in this energy transition.
So when we put all that together, I think we're very comfortable that the shape that we've got in the group is the right one. Andy?
Yes. Thanks, John. So A. J, it's just in relation to the 5 year guidance. As you can imagine, a group of this size over a period of that time, but there's many Different parameters involved in that.
And what we've set out this morning is a range that we're very comfortable with in terms of the set of balanced assumptions, allowing for the fact that some of those will change. You called out and so forth. I think what I'd say is we're comfortable that we've made a sensible set of assumptions based on the regulatory frameworks we have and that it converts into a sensible bill profile. As you've seen just in the KEDNY KEDLI joint proposal this week, we've been very focused on that with our regulators in New York, For example, agreeing the 0 and then 22 for the outer years. And we're comfortable that with our focus on driving cost efficiency, as we always do, that, that is something that we can convert through to the appropriate level of earnings growth.
So we know that these are incremental to come? Or is some quantity already in the numbers? It's just so that we have a reference point, to start with.
Again, I'd be not going to get drawn into specifics. I think as we said back in March when we announced the transactions, when we think about the opportunities going forward, we're confident there are opportunity to continue to deliver value for our customers through the WPD transaction and for all our stakeholders, and I think as we go ahead. But we'll have to continue to work on those. I think I'd say again, we're as confident we've set out the right range to allow for many different outcomes in those parameters at this point.
Okay. All right. Fair enough. Thank you very much.
Okay. Should we go to Sam and then go to Martin after that?
Hi. Thank you. Good morning, everybody. I have a question for Andy on the guidance and then maybe a bigger picture one for you, John. But Andy, let me start with the Guidance question, I'm always a bit nervous when I'm kind of way down the line of questions and nobody's asked my question yet, which makes me worry perhaps I misunderstand something, but this seems to me something very important changed on gas today.
So can I just check your You've given us a 5 year guidance now, which is working back from a 25%, 26% number? That includes zero contribution from gas at all. So you're confirming, I guess, that Not just the 51% sale, but 100% of the gas is out of the result by 'twenty five, 'twenty six. And then if I heard your comments correctly Earlier on in the voiceover, you might be taking 100% of gas out of the result from the second half of this year. So not even keeping a 49% associate holding, and yet you still think in the early years of the 5 years, You'll beat the 5% to 7% EPS range.
I mean, that sounds quite bullish and good to me, but can I just confirm, Andy, that I've understood that correctly?
So not quite. But let me just take you through the 2 bits quickly. In terms of the 5 year guidance, as you said, The CapEx that we've set out, the €30,000,000 to €35,000,000,000 you're absolutely right that, that doesn't include an element in relation to gas transmission. Effectively, that because that is relating to how we will be reporting our CapEx when we have a minority ongoing stake in that business. That will not show up, if you like, in our CapEx.
That will be included within our minority interest. That will be reported through the dividend stream that we would expect to retain. So it's not in the 30% to 35%, but it is included in the earnings trajectory and the ultimately asset growth, obviously, our retained share in that business through to FY 'twenty six. The point that I made this morning in my comments around the accounting rules is you are right that effectively, as soon as we get to the point of The sale becoming highly probable, which we would expect to happen once we've launched the process and work through some of the separation work that we need to get stepped through. Absolutely, we will have to report the whole income of gas transmission as discontinued through this period, even though ultimately we expect to retain, as we said, a significant minority stake.
That's just unfortunately how the accounting rules require us to report it.
Okay. But can I just confirm, in the 5% to 7% EPS growth, that's including A 49% gas minority then in the 'twenty five, 'twenty six year or it's including nothing from GAAP?
In terms of the EPS guidance we've given this morning, it continues to assume a retained minority stake. Yes, we haven't been to speak about the size.
Okay. Well, that kind of triggers a follow on question. Apologies, but I suppose and I think it was a great package that you put out today, the And a really good presentation. The only thing that we thought there might be questions on is the sort of implication. You said 5% to 7% earnings growth over 5 years, But you might be at the top of that range or slightly above in the earlier years.
If I just look at where consensus is for this coming year, Our consensus is looking for nearly 62p, which is, what, 14p, including basically half the gas at the bottom line. So I wonder if maybe that means consensus is over cooking a little bit the WPD Contribution for this year? Or could there be some other explanation? I'm assuming, I guess, Andy, that 14% would be Not within what you're saying about early years EPS growth being above the 5% to 7% range,
analyst. I think as we said out this morning, it is a complicated story, I understand that. And obviously, over the next few days, I'm sure the team will be very happy to help you through that. What we've been clear on this morning is, as we said, in the early years of the 5, we do expect to be at or potentially above the top end. We do have to take account of the discontinued operations, but we're as I said this morning, we're comfortable with that range even without even with including that accounting impact that we
Very good. Thanks for your help on that. And John, if I can maybe turn to you with just my bigger picture question, but I can't resist asking because you did mention the Climate Conference at the end of the year, And I know you're very close to the powers that be organizing that conference this year. Can you just share with us any Sense that you have of what actually might be achieved at that conference, I suppose. Madrid was the last one, and that was a great disappointment that nothing was actually signed.
What do you think might actually happen?
An increasingly ambitious target is being set from various countries, including the U. S. So I think there is a sense of optimism that something significant can be achieved at COP26. I know that the UK government is very keen to be able to lay out Roadmaps by sector for what net zero will look like going forward as one of their objectives. So I'm pretty optimistic.
I think it's a fantastic opportunity for and so I'm pretty optimistic actually that it could be a very significant UN conference given what I've seen in the run up over the last 6 to 9 months. Okay. Thanks, Sam. I'm going to go to Martin, I think, and then I'm going to go to Deepa.
Yes. Good morning to everybody. I've got a Couple of questions, if I can, please. The first relates to sort of the high level thinking about this morning. Don't think there's any validity whatsoever to the idea of the outperformance wedge.
So let's assume that goes and transmission returns get positioned higher. But if you step back and think about where the action really is likely to be over the next 5, 6, 7, 8 years plus, It's going to be in electricity distribution. We have heat pump deployment, EV charging deployment, etcetera. Given the CMA comments around the distribution and rate of return Should be higher than what ultimately gets awarded for transmission. The second question gets back to the 5 year guidance.
I note You've based that on an exchange rate of $1.3 to the pound. Obviously, we're above that level at this juncture. If we were to mark to market at €1,400,000,000 a little above €1,400,000,000 what would that do to the guidance that you set out this morning? Thanks.
Okay. Thank you, Martin. I'll take the first question and I'll ask Andy to take the second. So in terms of distribution returns, I'll start with just reflecting on where we are with the CMA process for gas distribution and the electricity transmission companies. I think we took some heart from the PR19 process in that there was an awful lot in there that I think reinforced our view that it was right To make the technical referral that we did.
And I think, although as I said in my remarks, you can't do a direct read across. I think if you just apply some of the logic that they've taken for the water companies to the energy companies, you will end up with a higher return We're off to him. We're in their final determination. I think added to that, I sort of concur with your thoughts in terms of electricity distribution. Clearly, over the next 5 years, there's going to be a significant need for investment to support EVs given acceleration of the government's target, together with the need to continue to connect distributor generation.
And therefore, it does need to be an environment that Atrax Investment. I think Ofgem themselves about 12 months ago talked about the fact that they felt that electricity distribution was where the action would be over the next 5 years. And therefore, if you take that logic, you would suggest that you would want to see a higher return for transmission. Having said all that, it's early days. WPD will be putting its draft business planning at the end of July, and then it will listen to its stakeholders before putting its final plan in at the end of December.
But I definitely agree there is an awful lot to be done, and we want to create the right environment if we're going to meet these targets that the government has set.
Andy? Yes. Thanks, Martin. In terms of FX, as you will know, we continue to run a significant hedge of our dollar balance sheet and our dollar assets. And that continues to give us a significant level of protection in terms of earnings volatility as well.
So broadly, As we've seen this year, around a $0.05 swing in the average rate was just over $0.05 So it's that sort of range if you wanted to do something for your modeling.
Thanks. Okay.
Thank you. I'm going to go to Deepa, and then I'll go to Ahmed. So Deepa.
Thanks. I have a few questions. So the first one is on the U. S. Business.
So next year, you've guided to a 100 basis points improvement in ROE, which would still only get you to 8 So I was wondering whether what is the medium term objective? Do we still aim for 95% Of the allowed ROE, so towards that 9% number. So any guidance on that? And then long term, how should we think about the EBIT trajectory of this event? But I think that's one area which is a bit unclear for me.
2nd question just on the gas transmission sale process. When do you think the market will have an idea of what valuation that asset will get? I mean, are we talking about Q3 Of calendar 'twenty two? Or will you already have some indication before that? And just a clarification on Andy, when you gave the guide When you've said that you expect it to be more than at the top end of the range for this net zero pathway report, so I was just wondering if you had any reflections, particularly on the mammoth task of 4x scale up in renewables in just 10 years.
Any thoughts on that will be greatly appreciated.
Thanks, Deepa. So I think I captured 5 questions there. So let me have a go at the first, the third and the 5th, And then I'll let Andy do the second of the call. Hopefully, he captured it. So in terms of U.
S. Returns, our position on U. S. My position has always been the same, which is our aim is to get as close to the allowed return as possible. And that will be the focus of the business going forward.
We are pleased that we've now got a settlement in Kedli and Kedni, a 3 year settlement with an agreed CapEx of 3,300,000,000 Dollars and an 8.8 percent ROE. And as you know, we've got a filing in Niagara Moor Hawk to complete this summer and then Massachusetts Gas later on this year. So our focus will continue to be to terms as possible. In terms of the gas transmission sales, so Just in terms of the process, so we are still in the position where we're likely to launch the process in the second half of this year. As I've said previously, we've got quite a bit of work to do to Gas Transmission from the U.
K. Business. But our base plan is that we will launch in the second half. In terms of valuations, If it follows a similar drumbeat of timings to the gas distribution sale, then it's likely to be around the turn of the year and would be around about then. And in terms of the report you mentioned, I think from our perspective, we believe a lot of the targets that are being set Achievable, but hugely ambitious.
What we said consistently is that we need to get the right policies and the right regulation in place. But really 2021 2022
needs to
be the year when we start to really see execution if we're going to deliver the levels of renewables and the levels of decarbonization that have been set out last 6 months or so. Andy?
Yes. Thanks. So deeper on the 2. I think First one was around how does the sort of the returns and expectations in the U. S.
Flow through into earnings and operating profit of that business. And I think as we said previously, we on the basis that we are continuing to target maintaining and delivering a good returns performance, over time, we would anticipate that the CapEx growth and the asset growth that we're driving will then effectively get delivered through the earnings trajectory for that business as well. As we've seen in the most recent rate case that we talked about this morning with KEDLI and KEDLI, in the short term, clearly, there's a focus on customer bills. But we again, we've maintained a balanced set of assumptions looking forward. And with that, we would expect the earnings and the operating profits of the U.
S. Business to go on an upward trajectory in line with the asset growth. In terms of GT, yes, I think is the short answer. So as we said, for next year, The discontinued treatment means that we effectively have to report the whole earnings of Gas Transmission out of our FY 'twenty two numbers. That's what we've mentioned in terms of the next year with the flow through of the transactions in FY 'twenty two.
But you're right, then in FY 'twenty six, the 5 year frame continues to assume that we earn our share from the retained minority interest in that business going forward.
Okay. Thanks, Andy. So should we go to Ahmed and then go to Alchin? So Ahmed?
This morning. Thank you for taking my questions. A few from my side. I think when you originally provided us the guidance for March 21, you talked about a €1,000,000,000 cash impact from various sort of COVID related issues, and you've sort of Coming at €600,000,000 So I just wanted to understand a little bit better the variation there. And then if you could also just talk a little bit about Cash collection trends in the U.
S. And what at your end you can do to sort of improve those, that would be helpful. And just just finally on the transaction effects that you outlined on Page 21. And I'm just sort of really thinking here about the EPS bridge between 'twenty one 'twenty two, are you able to sort of give us a little bit of sort of granularity as to what These mean as we're at the EPS level on a net basis year on year impact, that would be very helpful. Thank you.
Thanks, Barry.
Andy? Okay. Yes, sure. So on the first one, I think a few points in terms of what's driving that. I think, clearly, in In terms of the original guidance, we were deliberately, at the time, estimating how significant it could be.
And what we've seen as we've gone through the year is there's a number of elements of that which have actually come in slightly inside our expectations. So the impact, for example, on U. K. Demand flowing through into the revenues of the transmission business. Also, some of the volume reductions in the U.
S. Business as well have been slightly less. We've still seen, as you imagine in terms of the bad debt impact, we've still seen some lower U. S. Customer collections and therefore, larger outstanding receivables in the U.
S. That's still feeding through into that GBP 600,000,000 But all in all, some of just some of our estimation has come in slightly inside what we were expecting when we set that guidance a year ago. In terms of cash collections, I think Variety of things. To be clear, all the 3 states that we're in still have restrictions on ability to enact Some of the specific measures around customer collections and termination for defaults, etcetera, a lot of that is still being pushed out because of COVID, quite rightly. But we are working very closely with our customers, a range of measures in terms of, obviously, there's federal support for low income households and other measures like that, which enable us to continue to collect revenues across our customer base.
So we're doing what we can, and we'd expect some of those measures to either be taken away or potentially extended depending on each legislature in the 3 states that we operate in. And then in terms of FY 'twenty two, I'll see there's a detail in the result statement. I think what I'd call out in terms of the bridge from 'twenty one to 'twenty two is we don't expect, as we said earlier, such a significant impact from COVID next year. There's a small amount still potentially in U. S.
Bad debt that we anticipate. So the bulk of that will come back from an earnings perspective. We've guided to the impact of moving into T2, particularly in electricity transmission. And then we've also mentioned the fact here that the interest rates and the interest Charge is likely to increase year on year. So those are the 3 things I'd call out.
But as I say, the detail is set out in the results statement.
Okay. Thank you, Andy. Should we go to Elcin and then to Bartek?
Hi, everyone. I have 2 questions, well, about 2 topics. The first one is on rising yield and rates. Are you expecting any upward pressure on your ROE in the U. S.
Business particularly? So any benefit from that given your upcoming R and D case review? And similarly, are you expecting any Following the divestments of UK GT and Rhode Island, you mentioned that the share of gas will fall to 30% of the assets. Are there any plans to divest the remaining gas business to further improve your ESG metrics, maybe that remaining minority stake possibly? And the second part of the ESG metrics question that is not unclear to me is on your CCS projects.
Does that have any impact on your emission reporting? I don't know how CCS counts when it comes to emissions. So If you can give us a bit more color on that, that will be great.
So if I answer I'll go to the second question and ask Andy to pick up the So with regards to the SG and A metrics, I mean, I think the key message I want to get across today is the new target that we set for our Scope 3 emissions a 37.5% reduction. In terms of the vast majority of our emissions in that area are through the sale of gas to our customers in the U. S. We don't have any intention of further divestment for The reasons I said earlier, which is that we're very comfortable with the overall shape of the portfolio. We think it's important that we work with our key stakeholders to work through the energy transition.
And that includes really important opportunities, both in terms of renewable natural gas as well as things like repurposing the networks for hydrogen. So our focus is very much in those areas in terms of the actions that we can take to help with climate change and with our ESG targets. In terms of CCUS, CCUS is a partnership that we're working on. As I said earlier in my remarks, we've got support from the UK government to look at these 0 carbon clusters in the To look at these 0 carbon clusters in the Northeast, our role is to be carbon dioxide that would be captured as part of that process. So in terms of the target itself, it's not going to impact on the targets that we've set out.
But clearly, it is an important role As we think about the broader agenda in the U. K. About how we decarbonize gas. So what we're looking at there is a cluster whereby industry can potentially use hydrogen rather than Natural gas generation is using hydrogen either directly to create electricity or that it's being captured at the back end through carbon capture and storage. And then we transport the carbon dioxide that is captured back to all gas fields in the North Sea.
So I think it's a really positive project. It's got Significant government support, as you would have seen, as part of the Prime Minister's 10 point plan. And we're working with our partners on that on the sort of the early engineering feasibility of it. Andy?
Yes. Thanks, John. So I think in terms of the two areas, in terms of the U. S. ROEs, So as you're probably aware, the methodology for setting U.
S. Cost of equity is well established. It's a very mathematical calculation and subject to sort of reviews through the litigation process as well. There could potentially be upside if those rates stay high for longer as we'll have to wait and see. It's not something that we're anticipating, and it's certainly not something we've In the guidance we've set out this morning, but one thing I would say is that actually cost of equity has held up very resiliently when we've been through such an elongated low rate period.
But yes, there is potential upside in the future, but we're not banking on that today. In terms of Gas Transmission, I think 2 things. Obviously, the debt book within the Gas Transmission business is a long term portfolio. It has a good A portion of both index linked debt and also fixed rate debt as well. So we don't have a significant exposure to short term rate movements.
Obviously, we have the debt tracker mechanism in that business as well, which has served us well. And I think going into T2 and beyond, obviously, we've agreed the indexation of the cost of equity as part of the new price control as well. So with all of those, I'm comfortable that we have a lot of protection against any concerns in the macro rate environment.
Thank you. Thanks.
I'm going to make this unfortunately, we've run out of time. So I'll make this the last question. So Bartek, do you want to ask your question?
Sure. Good morning. Thank you, Thomas. A few questions. Firstly, I would like to ask you about this FY 'twenty two guidance For U.
K, you are talking about the very decent revenues increase in both MG GT and MGET. But on the other hand, There's also a guidance for quite significant costs increase, which could offset the revenues. Consequently, I would like to ask you whether you can elaborate a little bit what He's the key driver of those costs apart from depreciation, of course, and whether this could be somehow compensated through regulatory mechanisms. And secondly, I would like to ask you about the inflation protection in the U. S.
Of course, in the U. K, it's clear everything is inflation index. But if we are facing rising inflation in the U. S, how are you protected in the from the regulatory point of view And from that and whether this would squeeze your future ROEs. And thirdly, if you don't mind, on WPD, It has quite a lot of high coupon bonds in its portfolio.
So I just wonder once you buy it, what are you going to do with this? Are you going to somehow refinance? Or Will you keep their bonds on your balance sheet? Thank
you. Yes. So thanks, Bartek. Why don't I take the second one on inflation? I'll ask Andy to pick 1st and the 3rd.
So if you look across the group for National Grid, actually we have reasonable protection against higher inflation. So in the U. K, Obviously, we get indexation of our regulated asset base. And as a consequence that our revenues will follow it. In the U.
S, We have the ability to pass through the costs in our transmission FERC regulated businesses. You'll probably be aware that Last year, we agreed a new regulatory form in Massachusetts for Massachusetts Electric, which is effectively an RPI minus X type former regulation. So again, we get indexation there. And we have as part of our rate filing on the gas side done exactly the same. And with regards to New York, then we're able to project cost increases as part of any multiyear settlement, which of course we would have done as part of Ketterle and Kenney and we will do with Niagara Mohawk.
If we see significant inflation, you've always got the ability in the U. S. To be able to go back in and do a subsequent rate filing. So A little bit of exposure when you've got a multiyear settlement in New York. But across the vast majority of the group, we've got reasonable protection against higher inflation.
Andy? Yes. Thanks. So in terms of the question around U. K.
Costs as we look into FY 'twenty two, and you mentioned depreciation, That is one of the drivers of the continued growth in the asset base. I think remember that the U. K. Also includes the system operator and exceeded their price control. There is a significant level of investment in new technology in terms of delivering their program of work over the next 5 years as Part of their price control.
So a lot of that is passed through. So the recovery is assured, but it does flow through our numbers as OpEx costs, which is one of the drivers. And then just secondly, across the rest of the transmission business, as we deliver our increased work programs we've talked about this morning, stepping up towards the £10,000,000,000 of investment over the 5 years. That clearly comes with some associated OpEx. But the important thing again, those are included in the allowances That have been agreed for T2.
And then on the WPD point, I think I mentioned this when we announced the transaction back in March. Yes, conscious that The debt book does have some high coupon debt in its day. We don't have any immediate plans for sort of any focused effort on that. We would expect it to the debt book to churn, obviously, as we go through the next few years and we refinance. And therefore, I'd expect some opportunities as we go through that, but nothing sort of specific beyond that at this point.
Thank you. Thank you, Andy. So as I said, unfortunately, we've run out of time. Can I just say thank you, everybody, for joining us on the results call today? As you hopefully have got a true sense, we're very excited about what we set out in terms of our 5 year plans to deliver £30,000,000,000 to £35,000,000,000 over the next 5 years.
We look forward to seeing you all where we share a lot more detail with you on each of the businesses at our Capital Markets event later in the year. So thank you for joining us.