National Grid CFO on creating value at the energy giant

When Andrew Bonfield became CFO of National Grid in 2010, the company responsible for gas and electricity transmission and distribution faced challenging times ahead.

The heavily indebted group had just undertaken a £3.2bn rights issue in order to maintain its credit rating. At the same time, shareholders of the top 20 company pondered the implications of energy regulator Ofgem’s RIIO framework (Revenue=Incentives+Innovation+Outputs), which offers network companies incentives for securing investment and driving innovation.

If that wasn’t enough, the group’s US business, concentrated in the north-eastern states, was hit by a regulatory investigation into how it accounted for expenses. The overall effect impact was the danger of its share price going south.

Bonfield realised a major challenge lay ahead in communicating effectively with investors as to the group’s prospects. “Shareholders were nervous about how could the company finance itself and continue to pay the dividend,” he says.

The answer was a comms campaign designed to allay investor fears. “We had to simplify the way we talked about the business, and also make sure that people understood how we created value, which in a regulated utility should be growth and yield,” he says.

Experience is everything

For many finance leaders, addressing the outside world can seem a huge challenge. But for UK-born Bonfield, who spent his early career in South Africa, a lifetime of plunging himself into the deep end has given him a natural confidence when dealing with external parties, be it shareholders, analysts or media.

As a result, Bonfield has become one of the UK’s most high profile CFOs- chairing the 100 Group (FDs of the UK’s largest companies).

After qualifying at Price Waterhouse in South Africa, Bonfield continued for a couple of years in the firm’s London office before joining pharma giant SmithKline that was in the throes of merging with rival Beecham.

In a series of roles from chief accountant to financial controller, and finally CFO, Bonfield’s career developed rapidly until SmithKline Beecham’s mega-merger with Glaxo in 2000, when he was effectively phased out.

As finance director of gas player BG Group, Bonfield familiarised himself with the metric Return On Invested Capital (ROIC) that he employed to great effect when hired as CFO by US pharma giant Bristol-Myers Squibb.

Bonfield says he enjoyed the intensely competitive space that is the US pharma market and the requirement for quarterly reporting that he says compared to twice a year “just requires better communication.”

From Bristol-Myers Squibb, where a previous accounting scandal at the group required his work to be monitored by retired judge Frederidk B. Lacey- a legendary prosecutor of mobsters- Bonfield left when a new CEO joined.

What happened next proved to be even more extraordinary. No sooner had he joined UK confectionary group Cadbury’s in April 2009 than it came under siege from American consumer giant Kraft- a company he had come close to joining.

The takeover bid launched four months later became a cause célèbre for politicians, trade unionists and others that believed an iconic British company with social values was being eaten up by a predator with no such interests.

Bonfield dismisses the anger that was felt when Cadbury’s sold out at £8.50 a share. “It was the biggest load of nonsense ever,” he suggests. “Cadbury was 48% owned by the US shareholders before the takeover bid,” he stresses.

Referencing the national upset felt over the closing of the company’s Bristol factory, he is keen to put the record straight. “Cadbury had already closed that factory. Kraft were trying to gain some kudos by keeping it open. We told them you can’t keep it open as it’s already shutting,” he informs.

Despite talk of counter bids from rivals Hershey and Ferrero, Cadbury’s was sold, leaving Bonfield with memories of months in the media spotlight. “I’ve got a lot of press cuttings associated with it. It may have been the smallest company I’ve ever worked for, but the one that created the most news,” he says.

New challenge

From the cauldron that was the Cadbury’s bid, Bonfield arrived at National Grid- a lower profile company but in many respects a far more important national asset.

The group was formed after the privatisation in the 1990s of the generation and transmission activities run by the Central Electricity Generating Board. It’s now a highly geared company- one of the largest issuers of corporate bonds in the UK. However net debt fell from £28.6bn to £26.bn in its 2017 results in which underlying pre-tax profits rose 4% to £2.7bn.

As a natural monopoly operator, National Grid is limited to how it can set rates- thus requiring a tightrope act of value creation in the different regulatory frameworks of the UK and the US. “In the UK, customers defer a portion of their bill by effectively giving us an inflation true-up- RPI indexation of our asset base. In the US you have what they call nominal regulations- where you get a lower gearing ratio- that gives you more money,” he says.

Bonfield says a key aspect of his role is maintaining credit ratings, currently A- for Standard & Poor’s across its UK businesses, that ensures it can raise new money for investment on top of its existing debt mountain. “That allows us to raise the asset base by 5 to 7% a year, giving a yield of 5% and shareholders then get 3-5% growth,” he says.

“If you can yield enough and create enough cash flow, you can pay the dividend. At the same time you can grow- as long as you stay within the constraints of your credit metrics. It’s an interesting process making sure you can create shareholder value,” he adds.

Bonfield says it is this esoteric challenge that drew him to the role. Although there are some elements of how IFRS rules relate to a rate-based regulated utility that he finds frustrating.

“Last year we recognised £45m of revenue relating to a pipeline project at Avonmouth- we had to recognise that as profit in our gas transmission business. But next year I’m giving back £85m of allowance relating to the same project that I must recognise as a cost. Tell me, how that is proper accounting?” he asks.

Changing model

National Grid is at the forefront of innovation when it comes to renewable energy sources with pricing of carbon in capital decisions, although as a natural monopoly, Bonfield concedes that “you have to connect anyone who wants a connection so you don’t have a lot of choice about what the mix is.”

In the UK, National Grid operates as a Business-to-Business (B2B) provider, but in the US it is a more consumer oriented business that is attuned to customer demand. “We operate in ‘very blue states’ that are not impacted by the Trump agenda, therefore we are focused on decarbonisation,” he says.

Bonfield says there is a strong sense of purpose in the company about the need for sustainability and decarbonisation, an issue he has championed in work for Prince Charles’s Accounting4Surtainability (A4S) initiative. “Customers do want cleaner sources of energy, so we do have to generally be as proactive in that area as we can,” he says.

In seeking to determine what the best energy mix can be for affordability, sustainability and security of supply, National Grid has explored the use of Artificial Intelligence (AI), but Bonfield insists developments are at an early stage.“ Over time I think there will be greater computing power placed on logarithms for how the system manages a changing energy mix,” he says.

Factoring risk

In recent months, National Grid’s share price has come off due to the potential impact of a new regulatory round dubbed RIIO2, the effect of interest rate fluctuations and political risk. The latter is based on the perception that the company would be nationalised in the event of Labour winning the next election.

It’s a scenario that Bonfield is keen to dismiss, despite a leak of Labour’s manifesto that revealed such a plan. He insists the leaked reference was to the wider energy system, rather than specifically National Grid plc.

But in any case, he asserts that it would not be possible to nationalise the company without significant costs. “You can’t reduce bills and not cost the taxpayers anything and increase investment without someone somewhere paying something along the line.

“Effectively our increase in debt every year is greater than the dividend we pay, so the idea you can save the dividends and there will be this amount of money which will pay the interest costs of the government bonds you have to issue, and reduce customer bills, won’t work,” he says.

Is this a message that Bonfield and his team have taken to the Labour party leadership? “We try to get them to understand that,” says Bonfield. “But that would not be a conversation to have with an ideologically driven person, it would be a conversation you would have with Treasury, and the Treasury would understand how that works,” he says.

Running finance at National Grid is a role that Bonfield has clearly enjoyed over the last eight years- one that he will pass on when he leaves shortly to become CFO of American engineering group Caterpillar. Given its status as a bellwether stock he is sure to be plunged back into the limelight soon enough- a challenge he will relish.

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