1 / 34

Presentation to Bond Investors

Presentation to Bond Investors. March 2016. Mark Horsley – Chief Executive Officer David Waite – Finance Director Ian Clark – Head of Treasury. Contents. Page Background and Strategic Overview 3 Financial Performance 7 Progress in RIIO-GD1 13

umberto
Download Presentation

Presentation to Bond Investors

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Presentation to Bond Investors March 2016 • Mark Horsley – Chief Executive Officer • David Waite – Finance Director • Ian Clark – Head of Treasury

  2. Contents Page Background and Strategic Overview 3 Financial Performance 7 Progress in RIIO-GD1 13 Positioning Ourselves for RIIO-GD2 21 Funding, Hedging and Liquidity 27 Conclusions and Outlook 33

  3. Background and Strategic Overview 11

  4. A reminder of who we are • NGN transports natural gas to 2.7 million customers across the North East, North, East and West Yorkshire and Northern Cumbria. • 37,000km of gas pipelines transport 82,000 GWh of energy annually. • We have over 1,500 direct employees and a further 600+ employed through service providers. Core activities: • Replacement - 500km per annum. • New Connections - 8,000 per annum. • Emergency & Repair. • Maintenance. • Major Projects – rebuild/refurbish.

  5. Northern Gas Networks Limited Northern Gas Networks Operations Limited Northern Gas Networks Pensions Trustee Limited Northern Gas Networks Finance Plc SAS Trustee Corporation Our ownership • Our ownership is unchanged from previous updates. 41.3%* 47.1%* 11.6% * Shareholdings are held through wholly owned subsidiaries.

  6. Continued excellent support and relationship with shareholders • The Board comprises a strong combination of operational, management and financial experience, with impartiality and an external viewpoint provided by two independent directors. • CKI and PAH continue to seek out acquisition opportunities globally underlining their commitment to investing in NGN and other utility network companies on a long-term basis. • There is a strong emphasis on corporate governance and reputation with a robust internal control framework, underpinned by an extensive internal audit programme and audits from CKI and PAH to manage risk and ensure full data integrity. • The owners are highly rated with significant financial strength: • CKI rated A- (Stable) by Standard & Poor’s. • PAH rated A- (Stable) by Standard & Poor’s. • The completed reorganisation of Cheung Kong Holdings and Hutchison Whampoa in Hong Kong, creating CK Hutchison Holdings and Cheung Kong Property Holdings, has had no impact on NGN. • Similarly NGN remains unaffected by the non-completion of the attempted merger of CKI and PAH.

  7. Financial Performance

  8. Financial track record 1 From 1 April 2015 we are reporting under FRS102 under which Repex is capitalised (expensed under old UK GAAP). To enable comparison with previous years we have therefore deducted April-December 2015 Repex from EBITDA and profit. Early retirements provisions made in 2011, 2012, 2013 and 2015 have also been added back to EBITDA and profit to facilitiate comparison. These were for £11.9m, £3.4m, £6.0m and £6.6m respectively. 2 2015 finance charges exclude a £5.2m accounting credit relating to fair value movements in derivatives under FRS102. 3 Before Capex and interest. 4 Dividend reduced in 2009 to protect ratios in environment of low/negative RPI.

  9. Credit ratings • Annual review meetings were held with both Standard & Poor’s (S&P) and Moody’s in February 2016. No issues were raised are we are confident that the current ratings and stable outlook will be maintained. S&P BBB+ rating with stable outlook confirmed in April 2015. The S&P rating is supported by NGN’s “excellent competitive position and performance against regulatory targets” and a strong liquidity position. Credit is also given for NGN’s track record of reducing dividend payments to maintain ratios at adequate levels in periods of low inflation. Moody’s Baa1 rating with stable outlook confirmed in March 2015. The strength of the rating is driven in part by strong performance in relation to most regulatory outputs in the first year of RIIO-GD1 and strong financial results.

  10. Financial ratios

  11. NGN the most efficient network • Ofgem’s Totex benchmarking for 2014/15 saw NGN retain its position as the most efficient Gas Distribution Network (GDN):

  12. Return on Regulatory Equity (RoRE) One of Ofgem’s stated principles under RIIO-GD1 is that “well performing GDNs can earn post-tax real double-digit returns”. By outperforming allowances and taking advantage of the various incentive mechanisms available under RIIO, NGN is on track to deliver returns consistently above 10.0% as illustrated below:

  13. Progress in RIIO-GD1 11

  14. Relentless pursuit to offer the best service for customers • Customer satisfaction scores based on Ofgem monthly surveys placed NGN as the second top-performing GDN overall in 2014/15 and we continued to improve our Ofgem customer satisfaction scores in all areas, with a 0.44 improvement in our average score since 2013/14 (based on performance at June 2015). • . • NGN won 12 national customer satisfaction and colleague engagement awards in 2014/15 with an unprecedented six awards at the 2014 UK Customer Experience Awards including Overall Best Customer Experience. • In the same year we scooped a Customer Focus Award at the prestigious National Business Awardsand two further awards at the 2015 Institute of Customer Service UK Customer Satisfaction Awards. We also won in three categories at the 2015 UK Employee Experience Awards. • By empowering colleagues we have become an organisation that outperforms many of the UK’s top retailers and financial institutions in terms of customer service and employee engagement.

  15. Customer service – customer satisfaction, Emergency & Repair • We achieved outstanding Emergency & Repair scores in 2014/15 and earned the maximum incentive of £600k for this activity. • We expect to repeat this in the current year as scores so far have averaged 0.72 ahead of the Upper Quartile (UQ) target. For the first three quarters of 2015/16 we were the third best performing network, only marginally behind the top two.

  16. Customer service – customer satisfaction, Planned Work • We are already 0.87 ahead of the UQ target on average in the year to date Planned Work scores. • As such we currently expect to receive the maximum £600k under this incentive in 2015/16. We have outperformed all the other networks in the regulatory year to date.

  17. Customer service – customer satisfaction, Connections • We exceeded targets in 2014/15 achieving the maximum £600k incentive under this activity. • Scores in the year to date are already above prior year and 1.07 ahead of the UQ target. We therefore anticipate repeating this achievement in 2015/16. We are comfortably outperforming all the other networks in this area which has helped us to move to the top of the table for overall customer satisfaction in the nine months to December 2015.

  18. Customer service – complaints • Building on the success of our internal “60 in 60” target to agree a resolution to 60% of all complaints within 60 minutes in 2013 we are now challenging ourselves to agree a resolution of 90% within 60 minutes. • In 2014/15 we managed to achieve a resolution to 88% of complaints in 60 minutes. We are now pushing to make up that 2% and hit our 90% target for 2015/16. • The D+1 measure relates to our commitment to complete any actions required to fully resolve a complaint within one day. We are targeting 90% performance against this measure on average for 2015/16 and are close to achieving our target as the graph below shows. In order to support this objective we now hold complaints conference calls seven days a week. • In 2014/15 we began the process of measuring all customer interactions, not just those dictated by the Ofgem customer satisfaction survey, to improve our service in areas such as paid for disconnections and checks to test for a live gas supply.

  19. Safety performance • MOPs – injuries to members of the public • LTIs – lost time injuries to our employees and contractors • Cable Strikes – damage to power cables • RTCs – road traffic collisions • We continue to maintain lost time injuries and injuries to members of the public at market-leading historically low levels. • Only two injuries resulted in any lost time to our employees and contractors in 2015. • Safety incidents are now discussed on our daily (7 days a week) customer complaints call to give safety equal priority to customer service. This is paying dividends in terms of identifying safety issues that arise as part of a complaint. • A new EHS Safety Hub app is being rolled out across the network. This enables Connections and Emergency & Repair teams to send real-time records of a job from site to an operational hub. One expected benefit of the app is a marked reduction in the number of cable strikes.

  20. RIIO incentives & output targets • In regulatory year 2014/15 NGN earned £6.8m from RIIO incentives – £3.4m from customer / stakeholder / discretionary awards and £3.4m from reducing shrinkage and leakage volumes. Average incentive income in these categories among the GDNs was £5.0m. • A project to connect a compressed natural gas filling station has been awarded £0.7m under the Network Innovation Competition. • Following a detailed review of offtake capacity levels we have significantly reduced bookings resulting in additional Exit Capacity incentive income across RIIO-GD1 of £6m compared with previous forecasts. • In 2014/15 NGN delivered Totex costs £29.7m lower than Ofgem allowances and will be returning £10.7m/36% back to end consumers. • Performance against RIIO outputs so far in regulatory year 2015/16 is summarised below:

  21. Positioning Ourselves for RIIO-GD2 11

  22. Relentless pursuit for efficiency • In order to position ourselves to achieve a positive outcome from the RIIO-GD2 price control and in order to meet the challenges of low inflation we have a constant focus on becoming more efficient. We have ongoing initiatives throughout the business to support this ambition. • 21st Century Terms and Conditions continue to be introduced for new entrants, promotions, job moves etc. with over 60% of the workforce now on these terms; • Our over-55s programme has been extended, enabling colleagues on the old T&Cs to leave the business early with an unreduced pension; • We are constantly investing in our workforce to ensure we have the skills for the future. Our younger talent (age 40 or under) represents around 50% of our workforce today compared to just over a third in 2012; • The outsourced mechanical maintenance model implemented in 2015 is expected to deliver cost savings of 10% by 2021; • Our Construction Services model, providing Repex delivery through Direct Service Providers rather than Tier 1 contractors, continues to deliver value for the business and efficiency has improved by 10% since the model was introduced; • As we continue to invest in Repex, the percentage of plastic in our network increases, meaning fewer escapes and hence a declining operational workforce and support network; • We are realigning structures in several support functions to better serve the needs of the business, including the development of a Commercial Finance arm within Finance.

  23. Relentless pursuit for efficiency (continued) • In information services we have moved from large external contractors to small contractors and in-house solutions; • Capital IT project delivery has been brought in house and moved to an agile delivery model bringing project costs down whilst improving project output success; • A review of the end-to-end commercial process has resulted in a revised operating model and structure and identified areas where we can deliver annual savings of several million pounds, including: • Introduction of an e-sourcing catalogue to service spend requirements up to £50k; • Reduction of the threshold for formal procurement events from £50k to £10k to harness purchasing expertise within Commercial Services; • A renewed approach to investment with sourcing strategy, commercial strategy and risk/opportunity schedules created at project inception and investment planning stage; and • Overhaul of processes and systems to improve knowledge of programme outcomes and costs and support better forecasting; • We will be exploiting new technologies and driving innovation further into the business; • We are investing Ofgem Network Innovation Allowance funding to carry out a feasibility study to produce a design scenario for a hydrogen city in the North of England.

  24. Relentless pursuit for efficiency - Asset Strategy & Investment Planning • Investment decisions are now being based on a range of interdependent factors: Asset health & risk takes account of asset criticality, condition and reliability with compliance matters also considered. Our decision-making also includes an appraisal of the expected contribution towards meeting RIIO outputs including those related to customer and safety. Financial appraisal of investment alternatives encompasses unit cost and productivity efficiency as well as return on investment which in turn includes operational cost savings and incentive income. • The probability and consequences of the failure of an asset are used to derive a monetary risk score to support decision-making. • A link has now been created between long-term asset strategy and near-term investment planning so that conscious, balanced, value-based asset decisions can be made that deliver our Strategic Objectives. • Investment Planning, Major Projects and Asset Integrity teams are being moved into a shared office to enable them to work more closely together and make more rounded investment decisions. • Our approach to asset investment has undergone a comprehensive strategic review and our ambitions for RIIO-GD2 require the development of a Strategic Asset Management Plan.

  25. Customer Operations update – operating model • The model incorporates an integrated Totex organisation enabling high performance with a support organisation focused around four Capability Hubs: • Design & Long Cycle Hub; • Short Cycle Work Management Hub; • Performance and Assurance Hub; • Colleague Care (IS support). • A new operating model is emerging built around self-managed teams with decision making close to customers and the asset. Self Managed Teams Enabling Hubs Technology enabled Site Management Totex Area Management • A range of technology to support self-managed teams and site management is being explored; • Connections and E&R Regional and Area Management will merge and a move to a 6 patch model will be delivered in 2016/17; • Appropriate new incentive models are being developed.

  26. “Future Ready” – colleague involvement • To ensure the sustainability of our great safety and customer satisfaction performance, our efficiency position and our continued drive for business integrity, we have an ambition to turn “good” into “great”. • We can only achieve this with the commitment of our people and there are several initiatives in place to make this happen: • Colleagues will have more involvement in identifying problems and working together to come up with the right solutions while the leadership team will do everything possible to make NGN an increasingly attractive place to work; • Staff will be provided with clarity on roles and responsibilities and will be set clear objectives; • Colleague communications are being greatly improved and now include a monthly live business call by the CEO, a refreshed in-house magazine and the introduction of a digital news portal, increased visibility of leaders and various staff-focused events; • A UX (user experience) team has been created to lead IT projects, putting user needs at the forefront of each product or service.

  27. Funding, Hedging and Liquidity

  28. Financing strategy NGN remains committed to maintaining debt at a level where leverage and other credit metrics continue to support a stable BBB+/Baa1 credit rating. Our strong liquidity position is supported by £90.0m of undrawn committed funding from the European Investment Bank (EIB) and a £160.0m syndicated credit facility renewed in 2015 and maturing in October 2020 (with options to extend the maturity for up to a further two years). At 29 February 2016 there were no drawings under the syndicated facility. Despite not issuing bonds since 2010 we continue to regard the UK bond markets as a key source of funding. In 2018 we will start to explore options for the refinancing of the £200.0m bond maturing in July 2019. The existing EIB facility will cover NGN’s core funding needs until December 2017.

  29. Debt mix and maturity 29 February 2016 • £760.0m of a total of £1.25bn of debt is now included in NGN’s RIIO hedging strategy (see following slides). • The 2019 and 2040 bonds and a £40.0m fixed rate EIB loan maturing in 2024 remain fixed to maturity. A further £50.0m EIB loan was previously swapped to fixed rate until 2020. • Debt maturities are well spread and avoid regulatory reset dates where possible. • The existing maturity profile and the maturity of the bonds underlying the indexed regulatory cost of debt allowance suggest that future issuance may target maturity between 2030 and 2033 (subject to demand).

  30. RIIO hedging strategy NGN’s interest rate hedging strategy for RIIO has been designed to deliver protection against underperformance of the regulatory cost of debt allowance by constructing a rate fixing profile that mimics the 10-year trailing average characteristic of the allowance. With £700.0m of NGN debt reverting to floating rate at the start of RIIO-GD1 we have been able to deliver strong outperformance of the allowance in the early years of the price control given the environment of low interest rates. Under phase 1 of the strategy the floating rate debt was fixed in equal tranches of £17.5m for periods from three months to ten years. Under phase two, as each tranche of the hedge matures, it is re-fixed for 10 years (see graphical representation below). New term debt (EIB loans) has also been fixed for 10 years, so that up to 10% of total debt is re-fixed annually. Over time NGN will have created a rate re-fixing and debt age profile that mimics the ten-year trailing average characteristic of the regulatory allowancewhilst retaining the agility to amend the strategy if required.

  31. RIIO hedging strategy (continued) Execution of the RIIO hedging strategy is progressing well One of the limitations of the allowance mechanism is that the allowance is based on daily observations of bond yields. To keep the strategy practical NGN only re-fixes debt on a quarterly basis but with some flexibility around the exact timing of trades. The inherent timing risk has been managed successfully as the average rate on the ten-year swaps executed in each year has been lower than the market average for that year. NGN has no RPI-linked debt or swaps and the low RPI environment in 2015 resulted in marginal underperformance of the allowance in the calendar year. Nevertheless the RIIO hedging strategy continues to deliver correlation with the regulatory cost of debt allowance and is expected to deliver significant outperformance over the price control period as a whole.

  32. Pensions liabilities • The Northern Gas Networks Pension Scheme (the “NGNPS”) is a final salary scheme set up for former employees of National Grid at network sale. It is closed to new entrants • The last formal actuarial valuation at 31 March 2013 showed a deficit of £91.0m. The company agreed to fund the deficit over a 15 year period with deficit contributions payable aligned with RIIO-GD1 deficit allowances. • The next valuation will be as at 31 March 2016 and negotiations between NGN and the trustees are underway. • Ofgem will fund any deficit in relation to pre 31 March 2013 benefits subject to an efficiency test. Investment risks are therefore being reduced in order to eliminate the need for material funding after 2028. • The de-risking includes both diversification of growth assets and the introduction of liability-driven investment.

  33. Conclusions and Outlook

  34. Conclusions and outlook Operational Performance • Restructuring the business to ensure readiness for RIIO-GD2. • Developing smarter ways of investing in the network and managing the supply chain. • Class-leading safety performance in limiting injuries to members of the public and our employees / contractors. • Continued commitment to putting customers at the heart of everything we do. • Increasing colleague involvement to develop a “future-ready” organisation. • Driving innovation further into the business and looking to create a future-proof network. Financial Performance • Excellent financial performance in 2015 in terms of profitability and cash generation. • Gearing levels prudent, other credit metrics demonstrate financial stability. • Ample headroom against loan facility covenants. • Most efficient network and continued outperformance of allowances. • Core revenues supported by strong performance against incentives. • Drive for efficiency stepped up to meet the challenges of low RPI inflation. • Strong liquidity position

More Related