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WORLD TELEVISION
National Grid
First Half Results Presentation 2012/'13
National Grid - First Half Results Presentation 2012/'13
Page 2
NATIONAL GRID
John Dawson, Head of Investor Relations
Steve Holliday, Chief Executive Officer
Andrew Bonfield, Chief Financial Officer
Nick Winser, Executive Director, UK
QUESTIONS FROM
Mark Freshney, Credit Suisse
Jonathan Constable, Nomura
Bobby Chada, Morgan Stanley
Dominic Ashley, Capital
Jamie Tunnicliffe, Redburn Partners
Iain Turner, Exane BNP Paribas
Analyst, CF Partners
John Musk, RBC
Peter Bisztyga, Barclays
National Grid - First Half Results Presentation 2012/'13
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Introduction
John Dawson, Head of Investor Relations
Good morning ladies and gentlemen, I am John Dawson, Head of Investor Relations at
National Grid and it's my pleasure to welcome you here today to National Grid's First
Half Results Presentation for 2012/'13.
Shortly I'll hand you over to Steve Holliday, who will kick off the presentation, but before
I do a few notices. Before we start can I please ask you as usual to turn off your mobile
phones? As usual we will have a question and answer session at the end, could I ask
you to use some microphones and please state your name and organisation.
In today's presentation Andrew and Steve will refer to various profit and other
measures, unless otherwise stated these will be adjusted for timing and storms and all
operating profit and interest costs are at constant currency.
Finally our presentation today may contain forward looking statements; I need to draw
your attention to the cautionary statements in the presentation and in your pack and at
the start of the online presentation for those dialling in. Please refer to these when you
consider our comments today.
Just a reminder, you will find all of the materials for today's presentation and additional
fact sheets on our website, and on our investor relations app. Without further ado let
me hand you over to Steve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Key Highlights
Steve Holliday, Chief Executive Officer
Thank you John and good morning everybody. The running order for today begins with
a few comments from me on the highlights from the first half, then Andrew will take you
through the details of our financial performance for the first six months and he'll share a
few thoughts about the general progress that we've made and the development of our
longer term financing strategy.
I'll then return to talk to about our progress against this year's priorities and the outlook
for the rest of this financial year. Nick Winser is with us today as usual, but Tom King is
not for a change, and I'm sure you'll all understand that Tom rightly has stayed in the
US this week.
We've delivered a good financial performance over the first six months, excluding last
year's impact from Hurricane Irene in the US and the normal swing in timing profits
before tax - up 15%. On a similar basis operating profit from the first six months is up
7%. As a result, after interest and tax, overall earnings increased by 14%. These are
pleasing results and while there's more we can do in the second half to build on this
progress, they clearly provide a strong platform for a good full year.
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I'm pleased to announce that the board has approved a 4% increase in the dividend to
14.49 pence per share, in line with our policy for this year.
As we've previously said, we expect to announce a long term dividend policy at the latest
with our full year results in May, of course subject to the UK RIIO process having
concluded.
This is an important year for our businesses, in both the UK and the US. Securing
appropriate regulatory arrangements and bedding down significant organisational
changes are key actions on both sides of the Atlantic. These are about ensuring that we
deliver the needs of our customers, as well as delivering our targeted returns and
securing long term financing for the important investment programme.
Here in the UK we continue to work with Ofgem on the RIIO price controls. While it's fair
to say that we've been surprised over the last five months by some of the aspects of the
process we've been working hard and constructively with the Ofgem team to bottom out
the differences and important gaps in understanding before we can finalise a new long
term price control.
Nevertheless, RIIO sets out some major changes to incentives and the sharing
mechanisms in particular. As a consequence we've already been making changes to our
UK businesses, to ensure we're well positioned to deliver the maximum benefits of RIIO,
both for UK consumers and for other stakeholders and I'll share some more details on
those changes later.
In the US we've continued to make substantial progress, building on last year's
restructuring and the cost reduction programme the business has continued to embed
important organisational and process changes. One key recommendation from the 2011
Liberty Audit was the need to integrate our IT infrastructure and financial systems,
whilst at the same time improving and simplifying many of our accounting processes,
and Andrew will talk about some of our progress in this area.
Tom's leadership team have also made significant progress, both across the business,
but critically in our focus - jurisdiction by jurisdiction. The evidence of which is now
starting to be seen in both our regulatory and broader stakeholder engagement,
particularly in moments of crisis, as we've seen recently with Hurricane Sandy.
Although Hurricane Sandy, rightly termed Super Storm Sandy has clearly occurred after
the first half of the year it would be totally inappropriate of me not to mention such a
monumental event. I am immensely proud of what's been achieved and so quickly. I
cannot express to you how fortunate we are to have such an amazing team of people, of
dedicated people, despite enormous damage, unprecedented damage, particularly on
Long Island, the strength of our team and its combined resources, those that came to
help, has worked very effectively.
In Massachusetts, Rhode Island and Upstate New York we connected 98% of those
disrupted electricity customers within four days. That quickly enabled us to dispatch
even more teams down to Long Island. But for Long Island electricity customers it's
been a very different story. At its peak over 1.1 million customers of LIPA were without
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power. Super Storm Sandy, followed up seven days later by the snow blizzard,
impacted just about their entire network, where we as you know are the contractor to
LIPA. And over the past two weeks we've mobilised 15,000 people, National Grid people
from all over our territories, contractors from across the US and from Canada on the
ground helping with restoration.
But the challenge, the combination of storm damage and flooding has made restoration
efforts very challenging. While service was restored to nearly 900,000 customers in the
first week, it's taken a lot longer to restore services in those areas with heavy flooding
and the most significant tree damage.
As of last night the LIPA distribution system was ready to supply energy to all but 8,000
homes and businesses which are in the very worst affected areas. But that only tells
part of the story, because there are another 30,000 homes and businesses that still
don't have power because it's not yet safe to turn that power on because of the flood
damage and the severe damage go those properties. And we have to work with local
officials and other services to make sure those customers can receive power as soon as
possible, but critically safely.
Our Down State gas business also sustained unprecedented damage from flooding.
We're fortunate, our employees who've worked for us for 45 years - some of them had
never seen flood damage in Brooklyn and on Long Island before. On the South Shores
of Long Island, Staten Island and Queens and Rockaway - while all those networks are
restored, that's little help to customers whose properties are severely damaged and in
some cases lost forever.
Clearly any service interruption is not good for customers, but our teams have made an
enormous contribution to limiting and mitigating the impact of this terrible disaster and
we'll continue to work with all the services to help so many people who are in desperate
need.
Turning to safety, as always a high priority for us at National Grid and very much at the
forefront during an event like Super Storm Sandy, but safety as I've said before, isn't
just about keeping our employees and contractors safe, we must also do the utmost to
ensure that no members of the public are impacted by our operations. After a
challenging 2011/'12 where we had a number of unacceptable safety incidents we
redoubled our efforts. And in this respect I'm pleased with our progress, in particular a
47% reduction in the severity of injuries to our employees in the first half of this year.
But as always there is more to do to delivering a best in class safety performance.
So overall a really good start to the year, solid performance and good progress towards
our strategic goals, let me hand over to Andrew to talk you through the financial results
in more detail. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
National Grid - First Half Results Presentation 2012/'13
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Financial Results
Andrew Bonfield, Chief Financial Officer
Thank you Steve and good morning everybody. I'm going to cover three areas today,
first to look back at our results for the first half of the year, and then I'll give you a brief
update on our technical guidance for the year, before finally giving you my perspectives
on some of our key finance priorities over the past couple of years.
First the results, we saw consistently strong performance from all of our main
businesses. Operating profit in our UK Transmission business was up £75m, or 12%.
This reflects increased revenue due to RPI and investment, partially offset by higher
depreciation and controllable costs.
Gas Distribution profits were up 6%, again reflecting RPI.
Profitability in our US operations grew by £79m or 19%, this was largely driven by
higher revenue, mostly including the deferral recoveries in Niagara Mohawk and lower
bad debts. These were partially offset by increases in controllable and other cost lines.
Other activities saw profits reduced by £63m as a result of the sale of Onstream and
costs related to our US systems and finance process changes which I'll talk about a little
more later on.
At a Group level operating profit increased to £1.6bn, which if you exclude timing and
the impact of last year's storms saw a healthy increase of around 7%.
So we've had another good six months of operating performance. We've grown
revenues, maintained really good controls over controllable costs and made selective
investments for the long term growth of the business.
Minimising controllable costs remains a priority. In the first half the absolute increase
was £33m or 1% in real terms. This movement is mostly due to the increased support
needed to support the capital investment programme here in the UK.
Depreciation was up as expected given the level of investment. Bad debts were down in
line with improved economic conditions in the US and lower commodity prices, whilst
pension costs increased ever so slightly. Other costs increased by £34m and profit in
our other businesses declined as I mentioned earlier.
Financing costs were down 6%, this improvement was down to continued lower interest
rates, which enabled us to finance at attractive coupons and lower interest accretions on
our RPI indexed debt. In the period we have raised about £1.2bn of new debt, taking
advantage of the competitive bond yields to prefund our investment programme.
Optimising our funding costs depends to a large degree on maintaining a stable A minus
credit ratings. This not only underpins our historic debt, but also improves our ability to
raise new debt needed to fund the investment programme.
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It is essential we retain access to a variety of international debt markets for funding. An
example of this is the 750m dollar Canadian bond issue issued in September, the largest
corporate Maple bond issued to date.
Our effective tax rate for the first half of the year increased by 80 basis point to 27.5%
due to the mix of profits between the UK and the US. We would expect, as per normal
that the full year rate will be slightly higher reflecting a higher mix of US profits in the
second half. However our guidance for the full year is a slight reduction in the tax rate
to around 29%.
All this meant the reported earnings were up £139m to £836m. After removing the
impact of timing and storms earnings were up by 14%.
Investment was up 23% versus the same period last year. Nearly 95% of that
investment occurred within our regulator operations, growing our asset base on which
our allowed regulated returns will be applied. This fuels the engine that drives our future
growth.
We've invested over £800m in the first six months in UK Transmission, a 34% increase
over the prior year. This included completing the final pressure reduction station on our
Milford Haven pipeline in gas, and continued spend on the London tunnels and Western
Link in the electricity business.
We have also invested more in the US, there was some phasing impact, but the increase
was from higher transmission investment in Niagara Mohawk and the replacement of gas
mains in Massachusetts. We still expect UK investment to remain in the £1bn to £1.2bn
a year range.
Cash flow from operations was up to £1.9bn, slightly higher than the prior year. Growth
due to increased operating profit was partially offset by an increase in the working
capital outflow.
In the first half of last year we saw an inflow from working capital as a result of the
higher levels of receivables at the end of 2011. However this year, because there was a
lower opening balance on receivables there is a lower - there actually was a net outflow.
That lower balance was due to the impact of commodity and lower volumes as a result of
the milder winter. Whilst we have decoupled revenues, receivables are more sensitive to
weather because of the impact of passed through costs.
Net debt was up to £20.4bn reflecting the increased investment I spoke about earlier,
but partially offset by a lower cash dividend. In August we saw a 48% uptake in the
script dividend. This is more than double the 21% average over the prior three years.
So overall in summary this represents a strong start to the year and a solid base for
another good year of financial and operating performance.
Now to our guidance for the year which is mostly unchanged, aside from some updates
regarding timing and storms. We returned about £90m of timing balances, mostly in the
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US in the first half, which is driven by weather and commodity pricing. We do expect a
partial recovery of this in the second half of the year.
Obviously Hurricane Sandy will have an impact on our IFRS earnings on EPS. Costs
associated with customer restorations in our own service territories are not expected to
exceed £100m on operating profit.
Finally on guidance I'd like to look forward to the impact of IAS 19 on pensions
accounting which will impact from 2013 and '14. This revision essentially equalises the
return on plan assets and the interest rate on plan liabilities that flow through the
financing charge in the income statement.
The impact of applying the standard in the current year would be to increase the interest
charge by around about £180m or decreased earnings by £130m. It's important to
remember this is a non-cash item and has no economic impact on the Group. We will
restate our results when we introduce the change, but it will not change any of our
guidance on the financing capacity of the group, nor will it change any of our credit
metrics.
I would now like to spend a couple of minutes on our key finance priorities. When I
joined Grid which was - now two years ago, Steve and I agreed a number of key
priorities for me around communication, the finance function effectiveness and long term
financial strategy. Since May 2011 I think we have made significant progress as a team,
providing better disclosure around our regulatory assets and returns, about the portfolio
and the benefits that we get from each of our businesses and the relative performance of
our operations in the UK and the US particularly in terms of comparative returns on
capital employed.
We do need to use these measures consistently and for a number of years, but based on
the feedback I have received I think we've made a good start.
In terms of improving the finance function effectiveness I am pleased with our
achievements, despite the significant external pressures on our workload. For example
in 2010 and 2011 our US finance teams struggled with the request for information
required to support the needs of the business. The resulting rate case outcomes and the
Liberty Audit set out some clear opportunities for improvement.
Since then we've made some significant investments to support our people and
processes. And earlier this month we actually went live with a new SAP system which is
the latest milestone in that journey. At the same time we continue to enhance
underlying finance processes, in part to meet the outcomes of Liberty.
Strong evidence of our progress has been the ability to support the rate filings in both
Rhode Island and New York this year, responding effectively to the myriad and number
of information requests we have received.
I'm really pleased with the progress the team has made and though we have not
completed our journey I am confident that we have a thriving finance team in the US
which will be better placed to drive the business forward.
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In the UK the finance function has been heavily involved in supporting the RIIO business
plan process. As we move forward they will also have a very important role to play in
helping the business deliver the efficiencies required under RIIO.
The third and probably the most important for you - priority was our longer term
financing strategy, which will be occupying a lot of mine and Steve's time and others on
the Exec Committee over the next few months. Particularly as we continue to work
through the final stages of RIIO, we evaluate our investment opportunities and make
appropriate decisions around financing and dividend policy.
As before we expect to provide a full update on this by at the latest - our full year results
in May next year. We still have a lot of work to do, not least finalising RIIO, but our
overall position is unchanged. It will be key to sustain the right balance between
financing at the single A rating I mentioned earlier, maintaining and appropriate dividend
policy and delivering growth in the equity value of our shares.
All three are critical to supporting our regulatory commitments and to delivering long
term shareholder value. With that I'll hand back to Steve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strategic Priorities and Outlook
Steve Holliday, Chief Executive Officer
Thanks Andrew. During the first half of this year our focus has been centred around, as
you'd expect, the main priorities that I laid out in May, each of which have important
implications, not only on the next six months, but on creating the platform for the future
and I just want to take you through each of those in turn.
On the UK regulatory process I've already shared a few thoughts about the process and
our progress to date and the approach we've been taking as we work towards an
appropriate conclusion early next year. The next key date is the publication of Ofgem's
final proposals on Monday the 17th of December.
Given the complexity of these covering six large regulated businesses, with current
assets in excess of £20bn we will need to study these very carefully, particularly against
the context of our extensive and thorough response in early October. And you shouldn't
expect to hear our conclusions until we've not only full assessed all of those details, but
we've also make ourselves comfortable with the significant amendments that are being
made to the licences. This will take some time.
In the US, our focus in the last six months has been to take our Niagara Mohawk and
Narragansett businesses through the rate filings, with the objective of securing outcomes
with a suitable focus on efficiency and customer service and allowing us to deliver
market tested returns. If we achieve this we'll be able to make further good progress
towards raising the overall returns across our US business.
With the Narragansett gas and electric case I'm pleased that we've reached a settlement
agreement, in fact hearings start today with the Commission, there are scheduled
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hearings today and tomorrow. Assuming a smooth process, this will result in a decision
in January with the new terms coming into effect on February the 1st 2013.
The agreement proposes a 9.5% return on a 49% equity portion, with the necessary
increases in cost allowances. They've even provided a scope for us to invest, invest in
improving infrastructure and service levels for the benefits of our customers on Rhode
Island, while permitting us to earn an allowed return, providing we manage that
operation efficiently, clearly getting that fairness, the balance right between consumers
and investors.
Turning to New York, Niagara Mohawk's electric and gas businesses constitute the
largest portion of US regulated activities, together they make up almost a third of our
revenues, a very important building block to delivering on our commitment to improve
overall US returns.
Similar to Rhode Island we've reached an important milestone with a tentative
agreement with the Commission staff on a settlement. A joint proposal from the staff
and ourselves will be filed early in December, they'll be hearings scheduled in January
and the final order we expect in time to put into effect the new rates from the 1st of
April 2013.
The agreement includes a 9.3% return on equity on a 48% equity portion. Various
inflation adjustments and property taxes have facilitated a three year deal. The deal
also allows for $1.6bn of important capital investment, investment in new infrastructure,
again with improving reliability and customer service.
The impact of this structure I'm pleased to say will keep the customer bills broadly
unchanged throughout the three years of the plan. If we perform well - what do I mean
by that? If we deliver the right customer service and do it efficiently we have a good
opportunity to earn those targeted returns that are set out in the settlement.
So overall those four settlements proposed would bring our allowed average return in
the US to around 9.8%. But critically they should enable us to make further
improvements on the actual returns we achieve.
Turning now to investment and efficiency, as Andrew has said we have just invested a
record amount in the first six months of this year, £1.825bn reflecting the expected
increase in our UK electricity transmission programme and as a result very much on
track to deliver an expected investment of £3.5bn to £3.8bn this year.
But in the UK the RIIO outcome will have a significant impact on our longer term capital
investment programme. And our focus will increasingly be on delivering the required
outputs at the lowest cash cost. That is capital and operating cost together, totex.
This enhanced focus, rightly enhanced focus, on totex means that the financial drivers in
the UK business are dramatically changing. Our focus needs to be on ensuring that
those outputs, connections, reliability and service standards are delivered at the lowest
cash cost. If we achieve that and we reduce our capex, it benefits customers, but
ultimately it will benefit investors through the achievement of higher returns.
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One thing in this process is certain, by April next year, we need to have an organisation
that's well positioned to deliver a good performance under RIIO, whatever the ultimate
deal is. And this will have to be achieved through a combination of financial discipline as
Andrew has just described and efficient execution. In order to drive that focus on
execution in the UK we've asked John Pettigrew to take on the role of UK Chief
Operating Officer. John reports to Nick Winser in this role. John had a record of
leadership in National Grid and has joined my Executive Team, that reflects that
importance on this role.
Our investments in the US are expected, as Andrew mentioned, to remain at a
reasonably steady level. They're aimed at replacing aging assets and growing our
transmission activities where appropriate.
We continue to look for opportunities where we can leverage those skills and capabilities.
Our US business continues to benefit from the annualised effect of the 2011 reductions
in costs and as I mentioned earlier the new model focused on jurisdictions.
The new systems investments and process changes that Andrew has talked about will
cement these benefits in future periods and importantly help us to identify more
opportunities.
Turning to the outlook for the full year, as Andrew said, notwithstanding the impacts of
Super Storm Sandy, our expectations for the full year are unchanged from those we
shared in May. We have made a good start to the year and combined with the benefits
of further revenue growth and the efficiency incentives and initiatives we're well
positioned to deliver a year of good operational and good financial performance.
Now with that Andrew and I will be very happy to take any questions you may have. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Questions and Answers
Mark Freshney, Credit Suisse
I just have two questions, firstly I have a question on - within the other activities line,
there seems to be a lot of spend on IT systems, could you please talk through the
process of actually recovering those costs from the individual regulated businesses, or is
it a Group cost?
And secondly when you talk about the long term financing strategy, would that also
include looking at ownership of the businesses, or potentially new ownership structures? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive Officer
I'll take a piece of that and then pass a piece on to Andrew because it is a good question
about these costs. The capital cost of the SAP system are in the US and indeed are
apportioned across rate base by rate base and the ongoing operating costs of that
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system are in those entities as well and they are part of our filings that we've been going
through during the course of this year.
The somewhat exceptional one off costs associated with all the training activity is the
cost that Andrew referred to that we've kept out, that is a one off cost to put in place the
processes that we as a company have decided we want in place.
Your second question on financing, you can pick it up Andrew but there isn't anything
that's changed here Mark about - you know the various different opportunities we have
to think about and consider on how we can finance the combination of continuing to
deliver yield for investors and grow the business. We've been pretty clear about - you
know we really need to understand RIIO, we've been through that and all the rate
processes, before we can be crystal clear about that strategy in May next year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Andrew Bonfield, Chief Financial Officer
I mean just on the IT systems costs that's about half of the £63m reduction in other.
That is principally training costs there are about 20,000 employees we're training, under
the accounting rules that is an expense rather than can be capitalised and the reason
why we put it in the corporate centre charge is because that won't be recoverable from
regulators as we move forward.
The regulated element as Steve said - or the recoverable element is in the regulated
business. So these are one off charges, you should expect the costs to be lower in the
second half and actually not to recur in future years, so they will almost disappear.
The second item - in the other items there obviously is Onstream, it's about £12m was
about there last year and not there this year, there was a small reduction in metering
and property which is lumpy as you can expect because it's dependent on transactions
and was down year on year.
As regards the financing strategy, as I said, I mean I think the thing we have to
maintain is the balance between the ratings, dividend policy and knowing how important
the dividend is to shareholders, obviously that is critical from a shareholder value
perspective. And growth - we will look at that in the context of options around value and
the best way we can actually finance it, be it from the debt markets, be it other financial
instruments, be it from ownership of entities and so forth. So that is all part of that
review.
At this point in time the portfolio actually benefits us by actually having the right mix
between cash consuming assets, such as our UK Transmission business and cash
generating businesses like our distribution businesses in the UK and the US. That
balance is important if we are going to maintain the right level of yield going forward.
So that's all part of the mix but we'll update you again as we said, probably no later than
May next year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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Mark Freshney, Credit Suisse
Okay thank you. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jonathan Constable, Nomura
Two questions, firstly on the storm costs relating to Long Island, please could you give
us a bit more of a steer on how we should think the scale of these costs and what would
the process look like to recover those costs, what kind of timescales might we be talking
about? If you could give us any insight into how that maybe breaks down into the
different ways that you recover those costs, or expect to recover the costs?
Secondly, just coming back onto the financing policy and just zooming in on the bit of
your statement about an appropriate dividend policy, I was just wondering if you might -
I know we're going to have to wait for the financial strategy, but it would be great if you
could give us a bit more of - I don't know maybe your guiding principles and how you
think about what an appropriate dividend would look like? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive Officer
No Johnny. And I'm not being facetious here, I think we've given more than enough
guidance and Andrew has just reiterated it in terms of - you know we know who are
investor base is, we understand how important the dividend is for an equity investor in
this business.
This is about getting the balance right between how much the dividend should move in
the future and how much opportunity we've got to invest in very attractive businesses,
of course to grow the equity value of the business and how those things are financed.
That's all post RIIO, we'll come back and make that very, very clear in May at the latest,
as I said. That's providing that the RIIO process of course is complete by then.
In terms of the storms, I mean I want to be very clear this morning, what we've been
worried about and the reason why Tom's not here again today is making sure that we're
helping people. And we are going way beyond helping people get the electric system
up; you know we have employees of ours whose homes are destroyed. We have over
40 of our employees whose homes are destroyed, and you know they're coming to work;
they've been working 16, 18 hour days helping with the storm response. So the
absolutely focus has been rightly and continues to be on restoration.
Now actually we're moving from restoration into repair now, because as you restore
power - some of those restorations are temporary. So now under LIPA's guidance we
will go back and put repairs in place. And there's a difference to what Andrew was
talking about earlier, of course, we own - our investors own the assets in Massachusetts,
Rhode Island, Upstate New York and those gas business down state, they are our
businesses and they are our costs and they get actually recovered through regulation as
you know.
We are a contractor on Long Island, the assets are owned by the Long Island Power
Authority LIPA and we're contracted to provide a service to LIPA and of course we lost
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that contract. So our focus is very much on a couple of things right now. First of all
getting from restoration to repair and doing more than our job, helping people who are
in serious trouble, who've lost of their possessions, all their homes, and that's working
with lots of other authorities.
And then we've got to get back to the day job as well of helping transfer that contract
during the course of 2013, because it actually ends as far as we're concerned at the end
of next year. And we've got to do a really good job during the course of next year in
transferring the contract so the ball is not dropped between us and PSEG who pick up
the contract.
Even your people Andrew have been involved. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Andrew Bonfield, Chief Financial Officer
Yeah, I mean at this stage it is far too early for us to put an estimate together. We are
still actually working out and through the process of restoration, we have people out in
the field, even the finance staff, so it's hard for us to do an estimate, we don't have
enough clarity around that to be able to give you a number today, or any confidence that
that number would be right. We've given you an indication in the release, the number of
crews onsite and the length of time, which indicates it will be a multiple of what we
incurred as a result of Hurricane Irene last year.
As far as recovery is concerned and those are mechanisms which we have in place with
LIPA and we don't expect any difference from prior periods relating to those. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive Officer
This is not the focus, the focus just has to be right now doing everything we can. It's
very hard, we're in London right now, you know this is a warzone almost on the South
Coast of Long Island and on the Jersey Shore as well, you know peoples' homes are
gone.
The stories that are going to come out over the coming weeks are just going to be heroic
stories actually of what many of our employees have been involved in, many of the
contractors who've been working for us, people who came down from Nova Scotia and
have been sleeping in tents on Long Island for two weeks and working 18 hour days, you
know it's just an incredible event it really is. And I'm very proud of what all the people
who've been helping us have been doing. 15,000 people on the Island, that's where the
focus is and needs to be at the moment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bobby Chada, Morgan Stanley
I have a couple of questions, the first one - I appreciate you don't want to get into this
cost issue in Long Island, but just so I understand the mechanism, clearly - you have a
contract with LIPA and therefore there are clear contractual clauses and mechanisms to
pass costs onto the owner of LIPA is that the right way we should understand it?
National Grid - First Half Results Presentation 2012/'13
Page 15
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive Officer
We are the contractor for LIPA, very clear; you know there was Hurricane Irene last year
you can see how those mechanisms work. But we just shouldn't be talking about this
right now frankly, I'm not trying to be awkward, I think it's important you know when
people have lost their homes and we've still got today - we've still got 8,000 who haven’t
got power back, we've got 30,000 homes and business that power's there and we've got
to work with lots of authorities, have people dry their homes out, dry their businesses
out so they can get back to normal and that's what we really need to think about today
Bobby I think. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bobby Chada, Morgan Stanley
Okay, so swapping back to the UK then. Can you talk us through in a bit more detail the
operational changes that the reorganisation is seeking to put in place and some of the
benefits that we should expect from that? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive Officer
I'm looking forward enormously to doing that and I think you know that is going to be
the subject of a seminar next year. What I wanted to do today was flag two things I
think. One is clearly this RIIO process is not finished, until we have the final proposals
there is still a lot of uncertainty. But the structure of RIIO the incentives and the way
that totex is treated is very clear, you know that principle is laid down and is clear. So
we've already begun to make some adjustments about how think about that in the
future, how the alignment of the organisation is on the future.
There's another piece in here, of course, is that our role as the system operator has
been evolving over recent years considerably, we no longer just operate the system for
England, Wales and Scotland, we operate the offshore as well and we have a design
authority role in terms of thinking about long term transmission strategy. So we've got
to think about how we get our focus organisationally on that. And then of course there's
EMR and we ensure that all the separate is appropriate in EMR.
So there are lots of threads that have come together to cause us to adjust the UK
organisation and we will come back, I assure you, during the course of early 2013 and
run people through a lot of detail about that. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bobby Chada, Morgan Stanley
So maybe I can try for a third time lucky then. If you get the settlements that you're
discussing in Rhode Island and New York the difference between your position and the
staffs' position in all of these cases does not appear to be anything like the difference
that we've seen in prior rate cases, you know where we were talking about hundreds of
millions of dollars of different on opex for example. So that means that if these
settlements were agreed and I appreciate that they haven't been agreed yet, you're
National Grid - First Half Results Presentation 2012/'13
Page 16
more confident - or you are either confident or more confident that you can deliver those
allowed returns? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive Officer
I think that's what I said in my remarks you know this is a settlement agreement that I
believe and Tom and the team believe has got the balance right between what we need
to invest for customers, the costs of running those businesses for customers and our
ability to deliver those allowed returns. So if we do all those things well you're exactly
right, that is what we expect. But they are settlement agreements at this stage; they
still have to go through the process of getting final approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dominic Ashley, Capital
Two questions please, firstly on RIIO, what would you like to see changed from the
interim proposals to the final proposals? And secondly on the debt rate on the £1.2bn
you raised this year what was the marginal cost of debt and is that a trend that we could
see continuing in the medium term as you refinance your existing debt and add new
debt in? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive Officer
I'll obviously let Andrew pick up the second part of that, although there's a very
important part of that of course that feeds into your first question. RIIO is eight years,
there's a huge implicit risk in eight years clearly about the ability anyone has to have a
crystal ball. So I'm not going to go through our October the 1st submission to the
consultation of the initial proposals. That would keep us here for the bulk of today
because there's an enormous amount of detail in there frankly, because there were a
number of areas that we felt very strongly we needed to ensure that Ofgem - we think
they've misinterpreted or perhaps we hadn't done as clear a job. And we drew out from
our - these were big complex plans weren't they, huge complexity on a number of areas
yet again on the 1st of October.
But they come under three big headings really, the first of those if financeability, so
that's the linkage in here. You know we need to finance these businesses so they can
deliver for customers and we can invest for customers.
Andrew's remark on the Maple bond was very important; you know that bond could not
be issued if those businesses weren't single A. So the financial strength of these
businesses through this eight year period is a huge part of our consultation response on
the 1st of October. There's a lot around the financing.
The second area is around some cost allowances that as we said in July and we said in
our response we found very hard to understand. We have been building gas
transmission pipe in the UK, we've build the Milford Haven pipeline, we've build the
pipeline across the Pennines; we know what it costs to build pipe in the UK. We know
where steel prices are, we know labour costs, etc, etc. And the complexity of some of
the requirements in the UK as well that are very stringent.
National Grid - First Half Results Presentation 2012/'13
Page 17
The allowance that Ofgem came back with in those initial proposals was 47% below our
experience. So there's a lot in the consultation therefore about evidence around the
world about the cost of building pipe. And there's a similar story actually around
compressor costs, to replace gas compressors on the system. So there's a particularly
area around the cost allowances. And then there are a whole bunch of things around
efficiency. In our original plans we proposed a series of initiatives and delivering
efficiency for customers, taking costs out of our businesses. And we believe - you know
we had some gaps in understanding I think of what was embedded in the base plan.
So those are the three major areas, I'm sure you've read our consultation, it was very
fulsome, there's a lot in there. We've been engaged with Ofgem, we now need to wait
for the final proposals. Financing Andrew? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Andrew Bonfield, Chief Financial Officer
Financing, I mean obviously financing; I mean the index that we're going to be given
under RIIO is broadly a ten year index. So it depends where you are on the curve
against that. So if you're issuing short term money today and you look on the spot on
that index you should do slightly better. But obviously you are then taking the risk that
over the ten year period, or the 12 year period you're going to have some catch up later
on and it's going to hurt you on the longer end.
We do a mix of financing so it's not comparable, but we do measure ourselves against a
spot and that's a focus for Malcolm and the treasury team to make sure that we're not in
a situation as we balance out the financing where we're above the spot on the index,
'cos that's obviously the critical strike point against the allowance. So that's the focus
we do. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dominic Ashley, Capital
And the absolute rate? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Andrew Bonfield, Chief Financial Officer
The absolute rate, the Canadian bond was an attractive - at the lower end of the scale
but that's a five year money so therefore it’s not directly comparable. So you know
we’re not comparing like for like. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jamie Tunnicliffe, Redburn Partners
I was interested in the comment about the surprises that you had seen during the RIIO
process. I think you said that Steve. Is that mainly related to those sort of cost
allowances where you’re just saying it doesn’t match up with your experience on the gas
pipeline costs and compressor costs and on efficiency? I was just interested in sort of
what those surprises during the RIIO experience have been for you? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
National Grid - First Half Results Presentation 2012/'13
Page 18
Steve Holliday, Chief Executive Officer
Yeah I think we were quite clear - weren’t we at the end of July. You know we were
surprised with the initial proposals. We recognise they were initial proposals but there
had been a dialogue. We were challenged by Ofgem with this expression well justified
business plan which I think is a great expression actually. And that required us to
consult extensively with consumers about what they wanted from the networks as well
the customers who directly pay the bills to us, you know or the other energy companies.
And we built our plan around their requirements and around a scenario of investment in
the UK. And Ofgem said very early on they were very good plans. So there was a
mismatch in some ways then with some of the differences in the initial proposals. So
that's why we were surprised.
I've touched on a couple of those areas and they’re good examples, there appeared to
be quite a gap there. That's clearly why we responded in the consultation in the way
that we did. And we’ve been working with Ofgem over recent months to try and bridge
those understandings and make sure we get to an answer that works.
This is about both of us getting to an answer that works isn’t it, it’s a long time eight
years, the investments we need to make are very important investments for all of us in
the UK. We have to finance this big investment programme as well and we’ve got to get
the balance right. And that's I think a duty that Ofgem and us share and take very
seriously. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Iain Turner, Exane BNP Paribas
You've more or less broken the back of the regulatory process I guess in as much - by
that I mean you've nearly finished it in New York and Rhode Island. And I just
wondered what’s on the regulatory agenda in the US after those two deals are
concluded? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive Officer
That's a great question. It’s a lovely expression because I don’t think we’ll ever have
broken the back actually and rightly so. We’ve got 14 entities in the US and I think
we’ve talked before haven’t we about getting ourselves onto a drumbeat almost where
there will inevitably be filings year on year on year on year. We had clearly a lot of
filings at the same time because we’d enter into ten year plans that all ended up ending
around the same 18 month period.
As Andrew says you know the challenge on his team, the challenge on the organisation
to go through those filings, is just enormous. So we want to get ourselves into a
position where we do have a couple each year when you've got 14.
Exactly what we do next is subject to our thinking during the course of the next six
months and subject to, you know, some pressures from the outside as well or some
challenges from the outside. Where do we feel people want to invest more? Particularly
National Grid - First Half Results Presentation 2012/'13
Page 19
in the gas businesses. You know there's a - we have clearly, got with low gas prices, a
lot of people who want to burn natural gas in their boilers at home today.
So one of the things that was announced yesterday actually was permission to build an
interconnector between Brooklyn and Queens which had to get federal authority, it
actually went through the Senate yesterday, put through by Senator Schumer, got its
final approval. That's a big investment to increase the capacity of gas to get into
Brooklyn and Queens. So when do we need to think about upping the investment level
in those businesses? It’s those sorts of things that will drive the priorities on filing in. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Analyst, CF Partners
Part of the drive of the capex in the UK is renewables build out and also new nuclear I
believe. At the moment it looks like renewables build out is a bit of question mark
because of planning permission, I've heard some comments recently. Also new nuclear
is not really sure if it comes because there's a big discussion about the prices the
companies get. Could that influence your capex and how do you look at it and how do
you deal with this uncertainty? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive Officer
Yeah you’re absolutely right in your comments. And of course it influences our capex.
But this is something that we’ve known about from the very beginning of RIIO which is
why the principles of RIIO, the principles when they were originally set out, were and
remain very good principles because it creates a base scenario around investment and
then the mechanisms to flex capital up and down, i.e. customers don’t pay for things
that they don’t need. Likewise if more capital is required to connect more in a short
time then investors also have the opportunity to make sure that they collect returns and
revenues for that. So those mechanisms that are part of RIIO, which will be detailed in
the licences actually so that's one of the things although we’ve looked at the principles of
those and agree with them, the detail will be in the licences, will work.
It is very clear if you sit here today and look at the scenario that we submitted in our
original plan that some of the investment in the early years has gone back a couple of
years, exactly right. But it will move again probably as well, you know this is a very
moving feast around when, and of course it goes back to EMR, when do people have the
incentives and build the nuclear, how much wind is onshore, how much wind is offshore.
What we do know is the government targets are very, very clear. We know what
shutting in this timeframe so we know there will be an enormous investment in
generation. We know we have to connect all of those. And we’re very clear through the
big transmission planning where the big pieces of reinforcement are required.
And as Andrew mentioned in his remarks the Western Link is one of those, the offshore
Western Link already. There's an Eastern Link in our plan as well and there are other
reinforcements that we will have to do in this timeframe, but RIIO does have the
mechanism there to protect everyone in terms of the flexibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
National Grid - First Half Results Presentation 2012/'13
Page 20
Analyst, CF Partners
So is there something like a minimum or maximum capex per annum that you can
envisage under different scenarios? Like you know if everything comes on stream that
needs a lot of investment and if a lot of the stuff is coming very late or it’s not coming in
at all. What’s the range of capex we can think about? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive Officer
That's actually on our website. We had, you know, the base scenario and we had a very
slow scenario and we had an accelerated scenario. I think the accelerated scenario looks
unlikely today but somewhere between our base and the slow is where we will be. And
we need to flex our capex on things like replacement as well.
You can’t work in a business like this with the supply chain in particular by taking it up
and down, up and down. That will increase the prices for customers over time. So we
need to make sure that we manage a programme here and we’re not smoothing things
literally but trying to make sure that we don’t get huge jumps up and jumps down.
That's the job that we already do and we’ll continue to do that in the future. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Analyst, CF Partners
Thank you. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
John Musk, RBC
Good morning. It’s just a very simple one. You signalled you’re going to take your time
on the RIIO response; can you just let me know the timetable and what the deadlines
are for when you have to respond? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive Officer
Yeah sure, which is a good question because I'm not sure everyone might be aware. We
tend to think don’t we, and I put myself as I'm saying that in that bracket as well, about
the old process, RPI minus X, the way the price control process worked.
Of course RIIO is very different, the process is fundamentally different. One of the
differences actually is at the end of the process. Both the time and also the appeal
mechanisms have changed as well. So in the old world 30 days, in the new world it’s 75
days. That's the precise answer to your question. And there's a reason for that quite
clearly and I think I've outlined why. You know there is a lot to us to look at, we’re
confident about before the board can be happy with those proposals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Peter Bisztyga, Barclays
There's going to be a lot of new incentive mechanisms under RIIO for you to sort of
either outperform or underperform on. Can you give us some indication of how different
National Grid - First Half Results Presentation 2012/'13
Page 21
layers of management within your business will be themselves incentivised to make sure
that you hit each of those metrics as best you can? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive Officer
You are getting way ahead of yourself here. But you’re right in terms of the things that
we will be thinking about and putting in place. You know as we think about how we
reward people inside the organisation like any business, those rewards need to be totally
aligned to things that are valued by the businesses' customers and indeed its investors.
And there will be some tweaks around those things and there are more incentives in
here. But the incentives are around outputs, it’s one of the good things about this
process. There are issues around the financing as I said, there are issues around some
details and some efficiency. But the philosophy of rewarding outputs that customers
value; reliability, connection, service and so on and so forth, are crystal clear. And so
they are already aligned in many of our plans but there is no question they’ll be even
more crystal clear in the future. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Jamie Tunicliffe, Redburn
Just a question on US capex. You mentioned how - you sort of repeated the 1.1 to 1.2
billion per annum, but when I hear the comments about the impact of lower gas prices
and what that does for demand, and also there's clearly a debate about serviceability of
these assets given everything that's going on and the shocks and what sort of level of, I
suppose, endurance and stability in the system do you want? So just is it right to still
talk about 1.1 to 1.2 or is it more likely that we’re going to have a debate do you think
in the US where sees that number going up from where we are? Is the risk more on the
upside from here? Just any sort of thoughts on that are interesting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive Officer
It is right to talk about 1.1 to 1.2 today. That's what we’ve signed up for, if you will,
through our rate plans. So the number that Andrew was referring to encompasses the
capital that's enshrined in the Narragansettt agreements and the Niagara Mohawk
agreements, which is a lot more capital than we used to invest in those businesses by
the way.
In the first half of this year US capex as Andrew said, is up 24%. That's all part of the
regulatory arrangements. We’re placing more gas pipe investing in those assets. And
there's nothing more than that today. You know you’re sort of into - do we believe that
in the future there is a need to invest more in those assets? I think National Grid has
been saying ever since it’s been in the US that there is a need to step up investment in
replacing assets.
We have been doing that progressively, but if you look at the engineering sense of the
lifecycle times and the investment, you know there is a period of investment in networks
across a lot of the older US, not so much the south but certainly in the northeast, to
replace assets. And that is a conversation we’ll continue to have with our customers and
National Grid - First Half Results Presentation 2012/'13
Page 22
our regulators and when that becomes part of a plan then that number will change. But
until that's part of a plan Jamie then 1.1 to 1.2 is what we can see for the next few
years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Andrew Bonfield, Chief Financial Officer
And just to add a comment, actually from a financeability perspective US capex is more
financeable than UK capex today because it’s nominal so therefore and you get a higher
cash return straight away than you do in the UK. So marginal investment in the US
actually will not be harmful to overall financeability and actually will be better than what
we’re currently seeing under the RIIO proposals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bobby Chada, Morgan Stanley
Have you given any input either from a regulatory perspective or a financing or treasury
perspective to the CPAC Committee and your views on the change in formula for RPI and
kind of try and narrow the RPI, CPI wedge? I'm just interested in generally how you
approach it because it could affect you in sort of many different ways. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Andrew Bonfield, Chief Financial Officer
Well first of all obviously one of the good things that Ofgem are doing is they are
consulting about the potential impact of any RPI index change and the impact on
revenues in particular. We obviously also have put in about what the implications are for
our RPI index bonds because in their financeability metrics they have used obviously the
assumption around the bonds and how those, obviously the accretions on those, how
that works, and if that changes as a result how does that impact our overall
financeability. So that's open.
As far as consulting, I think obviously we are a relatively small player in this area. We
are considering a response but to be honest with you Bobby I think there are other
people, like major holders of gilts, who are far in advance in the queue than we are. But
we will consider putting in something. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Steve Holliday, Chief Executive Officer
Okay any remaining questions? Good okay. Thank you very much for joining us this
morning. Appreciate your time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
END
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