National Grid Regulatory News (NG.)

Report for the period ended

30 September 2019

John Pettigrew

Chief Executive 

"In the first half of this year we have delivered solid financial performance and continued to deliver strong organic growth at the top end of the 5 to 7% range. We also made good progress on our strategic priorities, including agreeing a multi-year, forward rate case in Massachusetts Electric, submitting our draft business plans for RIIO-2 in the UK and completed our acquisition of Geronimo. In the second half, we are progressing our priorities across the Group including addressing the gas supply constraint in downstate New York.

Today's announcement that we are increasing the Group's own emissions reduction target from 80% to net zero by 2050 underlines our commitment to lead the industry towards a cleaner energy future. This objective will be supported by work in other areas, such as offering further energy efficiency programmes for our US customers, proposals for renewable natural gas and hydrogen blending programmes."

Contacts

Use of Alternative Performance Measures

Throughout this release, we use a number of alternative (or non-IFRS) and regulatory performance measures to provide users with a clearer picture of the regulated performance of the business. This is in line with how management monitor and manage the business day-to-day. Further detail and definitions for all alternative performance measures are provided on page 48.

OVERVIEW

National Grid has reported solid financial performance for the first six months of the year, underpinned by good operational progress in both the UK and US.

We have continued to focus on safety campaigns to reduce injury rates with a Group overall injury frequency rate of 0.12. Tragically one of our US employees lost his life earlier this year whilst carrying out road-side maintenance. We are conducting a comprehensive review and will learn lessons from this. Safety is paramount and we will always focus on improving ways to ensure our employees, our contractors and the public are safe.

Capital investment (including the Geronimo acquisition) increased by £592 million at actual exchange rates to £2,722 million. This reflects significant investment in developing and maintaining gas and electricity infrastructure that provides critical services for millions of customers in the UK and US.

National Grid is fully committed to its role in tackling climate change and has a critical position to help accelerate towards a cleaner future. Whilst not all of the regions in which we operate have committed to a net zero future, we want to take a leading role in ensuring a cleaner energy future everywhere we operate, alongside maintaining energy security at the lowest possible cost for consumers. To this end, we are taking multiple actions across the business to support our new target of achieving net zero by 2050 for our own emissions. Today, in line with our commitment to our role in tackling climate change, we have published a Green Financing Framework which will support sustainable financing across the Group. Alongside these internal actions, we will also increase our influence to support the overall industry wide transition to a low carbon future.

Solid financial performance

Underlying operating profit at actual exchange rates increased £16 million (1%) versus the prior period to £1,301 million. This mainly reflects the impact of new US rate case revenues, lower storm costs partially offset by the non-recurrence of £94 million favourable legal settlements in 2018.

'Underlying results' and a number of other terms and performance measures are not defined within accounting standards and may be applied differently by other organisations. For clarity, we have provided definitions of these terms and, where relevant, reconciliations on pages 48 to 51.

US business continues to efficiently deliver growth

We continue to make progress on regulatory rate filings. We successfully completed the rate filing for Massachusetts Electric with new rates in effect on 1 October. We have invested £1.6 billion in our US networks, a step-up from £1.2 billion in the first six months of last year. Around 80% of this capital investment is driven by the need to maintain the safety and reliability of our networks, with our significant gas pipeline replacement programme continuing to progress alongside the ongoing modernisation of our electric networks. This growing investment has been supported by new rate plans across our US distribution businesses, and the resultant increasing scale of our US operations is evident in the first half results.

Addressing the gas constraints in downstate New York

In downstate New York, we continue to work with all parties to find solutions to the gas supply constraints faced by the region. A decade ago National Grid identified the need for incremental gas supplies to serve load growth in the region. Since then, we have been executing a long-term and comprehensive supply plan and delivering on a number of upgrades and new projects.

A pipeline being developed by Williams Companies Inc., called Northeast Supply Enhancement Project, (otherwise known as the "NESE" pipeline), is the final piece of this series of projects. In May this year, following further delays to permits for this project, we took the difficult decision to stop processing applications for new or expanded gas service in our service territories. This was to ensure the safety and integrity of the system and to enable us to continue to serve our existing 1.8 million customers in New York City and Long Island.

Following an order issued by the New York Public Service Commission (PSC) requiring us to connect approximately 1,100 customer accounts, we have implemented an innovative plan to expand demand response and energy efficiency programmes, alongside sourcing incremental compressed natural gas. This will enable us to safely connect these customer accounts.

We recognise the hardship the moratorium has caused and we continue to work hard with all parties to find a long term solution. We also recognise the importance of re-establishing a trusting relationship with all our key stakeholders. We are confident that we will be able to address satisfactorily the issues raised by the Governor of New York in his recent letter to National Grid.

Focused on delivering US regulatory priorities

We now have all our distribution companies under refreshed rates, and this is enabling the strong organic growth that we are seeing in the US. Safety, reliability and modernisation of our networks represents around 80% of the future investment in our gas and electric businesses. And in the second half we will continue to focus on progressing the KEDNY/KEDLI rate filing alongside Grid modernisation, Electric Vehicle and Advanced Meter Infrastructure plans across our jurisdictions.

With the KEDNY and KEDLI rate case, we provided data to support a four-year settlement with a proposed base Return on Equity of 9.65%. We also requested annual capex allowances of $1.5 billion, the majority of which is going towards improving the safety and reliability of networks.

The next stage in the process is for hearings to be held later this winter although, for now, settlement discussions for this rate case are on hold. This means we may need to progress with the alternative route, that is to litigate the case, which would result in a one year settlement. Litigated rate cases are a common feature in US regulatory settlements; for example, all our Massachusetts rate cases are litigated.

UK businesses focused on efficient delivery

Operationally both our UK electricity and gas transmission businesses have continued to deliver good levels of performance and our capital investment programme has continued as expected. A particular highlight has been the completion of the tunnelling for Feeder 9 under the Humber estuary, a critical reinforcement of the gas network. We will shortly award contracts for our London Power Tunnels 2 project, a 33km, £1 billion link from Wimbledon to Crayford which will provide significant resilience across south London when completed in 2028.

In September, we published the technical report into the loss of power event on 9 August and we continue to work closely with Ofgem and BEIS on their investigations. Whilst we believe that both the electricity system operator and transmission network operated as expected and in accordance with our licence obligations, we do not underestimate the disruption and inconvenience this caused. The report provides a comprehensive assessment of communication processes and protocols in particular during the first hour of the event, as well as a review of critical infrastructure to mitigate risk of inadvertent disconnection. The report also goes on to look at areas where we believe a wider review of policy may be appropriate.

Our cost efficiency programme has continued on track. This has been driven by efficiencies across both Electricity and Gas Transmission and a range of initiatives to become a more agile organisation, including better IT infrastructure and the simplification and standardisation of back office processes. Overall, we remain on course to achieve £50 million of opex savings in 2019/20 and £100 million in 2020/21 as part of delivering RoE outperformance of 200-300 basis points.

In October, we welcomed Ofgem's "minded-to" position on the Hinkley-Seabank connection to use the existing strategic wider works mechanism for this vital project. We will continue to work with Ofgem to support our view of the efficient costs we believe are needed to complete this project. The project remains on target to be ready for connection in 2025.

Helpful stakeholder feedback for RIIO-2 draft business plans

Ofgem has continued to progress its consultation on the framework for the RIIO-2 price control and published its RIIO-2 sector specific consultation decision in May. Achieving the right regulatory framework is also critical to ensure the continued rapid decarbonisation of the UK energy system and to ensure that ongoing investment in innovation to benefit consumers in the long term is encouraged.

In July and October, we submitted drafts of our RIIO-2 business plans for Electricity Transmission, Gas Transmission and the Electricity System Operator (ESO) to our independent User Groups and Ofgem's RIIO-2 Challenge Group. These were initial plans to invite feedback from a range of stakeholders on the possible investments that could be made in the five years commencing April 2021. The feedback on these plans has been helpful and we are in the process of refining them before submitting the final versions to Ofgem on 9 December 2019.

As communicated previously, we have provided feedback on three key areas of the financial package: the level of allowed equity return; the outperformance wedge; and the approach to incentivisation. Correcting for the errors in the calculations that we see and taking a balanced approach to risk, our evidence points to a real CPI return on equity (RoE) for RIIO-2 of 6.5%.

We expect Ofgem to publish its draft determinations in the summer of 2020, ahead of final determinations in December 2020. We will continue to work constructively with Ofgem to seek a framework for RIIO-2 that puts consumers at the centre of the price control, while enabling the energy networks of the future and allowing a fair return for shareholders.

Further growth for NG Ventures and other activities

We continue to make good progress on the three interconnector projects under development in the period. For IFA2, the large majority of the cabling has been laid over the summer and good progress is being made on the converter stations. For North Sea Link, we have successfully laid over 650km of cable as planned and the project remains on track for completion by 2021/22.

On the Viking Link to Denmark, we have awarded contracts and pre-construction work is underway. In total, including the investment already made in Nemo Link, we are investing around £2 billion in new interconnectors that we expect to bring cleaner sources of energy to the UK and create value for our shareholders. The new interconnector links are expected to contribute approximately £250 million annual EBITDA when fully operational by the mid-2020s.

In July 2019, National Grid completed the acquisition of Geronimo, a leading developer of wind and solar generation based in Minneapolis in the US. National Grid also entered into a partnership with Washington State Investment Board to own 379MW of solar and wind generation projects developed by Geronimo, which have long-term power purchase agreements in place. These investments represent another step in National Grid's commitment to decarbonisation, bringing an exciting pipeline of solar and wind generation projects to the Group.

We are also pleased to report the first profits from our St William property joint venture following the sale of homes at Rickmansworth and Prince of Wales Drive in the first six months of the year.

Board changes

On 5 November we announced that, for personal reasons, Dean Seavers, US Executive Director, would step down with immediate effect from his position as a member of the Board and as President of the US business. Dean has agreed to stay with the business until 31 December 2019 in order to ensure a smooth leadership transition and handover.

The Board has initiated a thorough process to identify a permanent successor for Dean which will include both internal and external candidates.

GROWTH

Balanced portfolio to deliver asset growth and sustainable dividend

National Grid aims to deliver value to shareholders through maintaining a portfolio of businesses with strong operational performance alongside attractive annual asset growth of around 5 to 7% assuming long-run average UK RPI inflation of 3%. The Group aims to deliver this growth while maintaining an efficient balance sheet that allows continued funding of its investment programme, and maintaining the policy of aiming to increase dividend per share by at least RPI for the foreseeable future.

£2.7 billion of capital investment across the Group

We continued to make significant investment in energy infrastructure in the first six months of the year. Capital investment across the Group was £2,722 million, an increase of £592 million (28%) compared to the first half of 2018/19, including £209 million for the Geronimo acquisition.

* NG Ventures and other activities capital investment includes equity and financing in joint ventures and associates, investment in National Grid Partners and the Geronimo acquisition but excludes £15 million and £20 million equity contributions to the St William property joint venture for 2019 and 2018, respectively.

Investment in the US Regulated business was £1,588 million for the first six months of this year, an increase of £411 million over the prior period at actual currency. This was driven by significant investment in gas pipeline replacement, and reinforcing the electricity system to improve the safety and reliability of our networks. This increasing level of investment is a key feature of the regulatory filings we have made in KEDNY and KEDLI, and is expected to continue in future filings, supporting strong levels of rate base growth over the medium term.

The UK regulated businesses invested £638 million, with UK Electricity Transmission and UK Gas Transmission both investing in asset health to meet their respective Network Output Measures.

Investment in NG Ventures during the period was £220 million higher than prior year principally reflecting the total investment in Geronimo and investments in NSL and IFA2 (£42 million and £22 million higher respectively). These were offset by lower investments in the Millennium pipeline joint venture and Nemo interconnector spend.

OUTLOOK

For 2019/20, we continue to expect to deliver good financial performance in our US business following the agreement of a number of regulatory filings. As expected, the UK business remains on track to deliver

continued outperformance. The contribution from NG Ventures and other activities is expected to reduce this year, reflecting the non-recurrence of proceeds from the Fulham property sale and the favourable legal settlements in 2018/19.

Looking ahead, National Grid expects to deliver asset growth of around 7% in the near term with annual capital investment of around £5 billion. We will continue to contribute to the important regulatory and political debate in the UK and the US recognising the continued focus on customer affordability, decarbonisation and safety across our networks. With an efficient balance sheet that underpins asset and dividend growth, the Group is well positioned to create value for shareholders.

2019/20 TECHNICAL GUIDANCE

The outlook and technical guidance contained in this statement should be reviewed, together with the forward-looking statements set out in this release, in the context of the cautionary statement.

UK Electricity Transmission

Operating Profit (excluding timing) for the second half of the year is expected to be slightly higher than the first half.

Totex outperformance is expected to increase slightly and Incentive and Other performance is expected to be slightly down compared to last year. Overall Return on Equity outperformance is expected to be slightly above the 200-300 bps range.

UK Gas Transmission

Net Revenue (excluding timing) is expected to increase by approximately £30 million compared to 2018/19, reflecting the return of Avonmouth revenues in the prior year. Underlying operating profit in UK Gas Transmission will also benefit from lower costs reflecting its share of the expected £50 million of costs savings from the UK cost efficiency programme.

Totex performance is expected to improve compared to 2018/19 and Incentive and Other performance is expected to be broadly in line with last year. As a result, Return on Equity is expected to be around the allowed level in 2019/20.

UK Timing

Revenues will be impacted by timing of recoveries including impacts from prior years. Electricity Transmission is expected to over-recover by around £70 million. Gas Transmission is expected to under-recover at a lower level than 2018/19.

US Regulated operations

Net Revenue (excluding timing) is expected to increase by around £200 million, reflecting revenue increases from rate filings and capex trackers, partially offset by a further impact of tax reform. Costs are expected to be broadly in line with last year, reflecting non-recurring costs in 2018/19, and the benefit of efficiency savings, offsetting the projected combined impact of inflation on the cost base and increased depreciation resulting from the capital programme.

Return on Equity for overall US Regulated operations is expected to increase to at least 95% of the allowed return, reflecting the completion of the refresh of distribution rates with a first full year of new rates in Rhode Island and Massachusetts Gas.

NG Ventures and Other activities

Revenue is expected to decrease year-on-year, mainly due to a reduction in property sales. Last year's legal settlements of £94 million are not expected to be repeated in 2019/20.

Joint Ventures and Associates

Our share of the profit after tax of joint ventures and associates is expected to benefit from a first full year of revenues from the Nemo Link and the first profits from the St William property joint venture.

Investment, Growth and Net Debt

Overall Group capital investment for 2019/20 is expected to increase to around £5 billion. In our UK transmission businesses, we expect to invest around £1.3 billion; in our US Regulated business, capex is expected to be similar to the 2018/19 level of $3.5 billion. Investment in our NG Ventures and Other businesses is expected to increase significantly reflecting increased investment in our IFA2, NSL and Viking interconnector projects and the completion of the Geronimo acquisition.

Depreciation is expected to increase, reflecting the impact of continued high levels of capital investment.

Operating cashflow generated from continuing operations is expected to increase compared to FY19, with lower cash outflows related to exceptional items than last year.

Net debt is expected to increase (excluding the impact of foreign exchange) by a further £1 billion in the second half of the year.

Weighted average number of shares is expected to increase from 3,386 million last year to approximately 3,460 million in 2019/20 reflecting in particular the additional shares from the August scrip dividend.

Interest and Tax

Net finance costs in the second half of the year are expected to increase slightly compared to the first half at constant currency.

For the full year 2019/20, the underlying effective tax rate, excluding the share of joint venture and associate post-tax profits, is expected to be around 20%, reflecting the favourable tax settlement.

Changes to accounting standards

No material impact on EPS is expected following the adoption of IFRS 16 'Leases'. Net debt and property, plant and equipment increased at the start of the year by £0.5 billion as a result of IFRS 16.

FINANCIAL REVIEW

In managing the business, we focus on various non-IFRS measures which provide meaningful comparisons of performance between years, monitor the strength of the Group's balance sheet as well as profitability, and reflect the Group's regulatory economic arrangements. Such alternative and regulatory performance measures are supplementary to, and should not be regarded as a substitute for, IFRS measures which we refer to as statutory results. We explain the basis of these measures and, where practicable, reconcile these to statutory results in 'Alternative performance measures/non-IFRS reconciliations' on pages 48 to 51. The Group does not believe that these measures are a substitute for IFRS measures, however, the Group does believe such information is useful in assessing the performance of the business on a comparable basis.

Also, we distinguish between adjusted results, which exclude exceptional items and remeasurements, and underlying results, which further take account of: (i) volumetric and other revenue timing differences arising from our regulatory contracts and (ii) major storm costs which are recoverable in future periods, neither of which give rise to economic gains or losses.

Performance for the six months ended 30 September

Statutory operating profit was £14 million (1%) lower than in the first six months of last year. There were no exceptional items in the current year compared to £224 million last year, although this was partially offset by higher commodity remeasurement net losses. UK Electricity Transmission net revenues also increased compared to the prior period. These benefits were offset by reduced US regulated net revenues due to timing of commodity cost recoveries and the non-recurrence of legal settlements.

Statutory profit after tax was down 10% against the comparative period, reflecting higher interest charges including mark-to-market financial remeasurements losses this year partly offset by a lower tax charge.

Adjusted operating profit (excluding exceptional items and remeasurements) was down 9% and adjusted profit after tax was down 11%, principally reflecting adverse timing movements.

Underlying operating profit of £1,301 million was up £16 million (1%) against the comparative period. Although the comparative period included £94 million of legal settlement income, this was more than offset by higher underlying US profits driven by increased underlying net revenues, and lower storm costs in the first half of this year.

Reconciliation of different measures of profitability and earnings

The table below reconciles our statutory profit measures for continuing operations, at actual exchange rates, to adjusted and underlying versions.

The following tables set out the income statement on adjusted and underlying bases.

Segmental income statement

Six months ended 30 September

UK Electricity Transmission adjusted operating profit increased compared to the same period in 2018/19 primarily driven by a swing in timing recoveries. 

UK Gas Transmission adjusted operating profit decreased year on year, primarily as a result of lower net revenues, reflecting pricing effects which have affected the phasing of revenues between the first half and second half of the year.

US Regulated adjusted operating profit was lower than the same period last year, as a result of £205 million adverse year on year timing movements.

Operating profit in NG Ventures and Other activities reduced by £80 million (39%) compared to the same period last year primarily driven by the non-recurrence of £94 million legal settlements received in 2018/19. 

Further analysis of the movements in underlying operating profit is provided in the Business Review.

Financing costs and tax

Net finance costs

Adjusted net finance costs were £59 million higher than the prior period. This was primarily due to higher average net debt as we fund the asset growth in our businesses. Finance costs also increased due to buy-back costs on the early redemption of a €1.25 billion hybrid bond and higher charges related to IFRS 16 (Leases). These were partly offset by lower interest on RPI-linked debt. The effective interest rate on treasury managed debt was 4.4%, in line with the rate for the first six months of 2018/19.

Joint ventures and associates

The Group's share of net profits from joint ventures and associates increased by £12 million to £37 million, primarily as a result of gains generated from sales by the St William property joint venture.

Tax

The effective tax rate at the half year is affected by both seasonality in our US business and the impact of timing under/over-recoveries. The headline effective tax rate (excluding JV profits) was 7.7% (prior year 18.9%). The underlying effective tax rate (excluding JV profits) was 13.2% (prior year 19.3%). The effective tax rates for this year have benefitted from a £48 million tax settlement in the US relating to prior periods.

Discontinued operations

In November 2018, we announced our decision to exercise our put option over our entire 39% interest in Quadgas, the holding company for the Cadent gas networks. The sale completed in June 2019 and we received proceeds of approximately £2 billion. As described further in note 6, we have treated all items of income and expense relating to Quadgas, amounting to £6 million, within discontinued operations.

Net debt

National Grid's balance sheet remains robust, with strong investment grade credit ratings from Moody's, Standard & Poor's and Fitch.

During the first six months of the year, net debt increased to £27.8 billion, £1.3 billion higher than at 31 March 2019. This increase was driven by an additional £0.5 billion of lease liabilities being recognised upon transition to IFRS 16, exchange movements on opening net debt of approximately £1.0 billion and underlying business cash requirements, partially offset by the £2 billion receipt of Cadent proceeds.

National Grid raised over £2.4 billion of new long-term financing in the first half of the year. This includes the refinancing of a €1.25 billion hybrid bond in September, a new $500 million bond in Boston Gas and £950 million of new financing for National Grid Electricity Transmission.

Interim Dividend

The Board has approved an interim dividend of 16.57p per ordinary share ($1.0673 per American Depositary Share). This represents 35% of the total dividend per share of 47.34p in respect of the last financial year to 31 March 2019 and is in line with the Group's dividend policy. The interim dividend is expected to be paid on 15 January 2020 to shareholders on the register as at 29 November 2019.

The Group's dividend policy is to aim to grow the ordinary dividend per share at least in line with the rate of UK RPI inflation each year for the foreseeable future.

The scrip dividend alternative will again be offered in respect of the 2019/20 interim dividend. As previously announced, we do not expect to buy back the scrip shares issued during 2019/20 or 2020/21.

BUSINESS REVIEW  

Six months ended 30 September

UK ELECTRICITY TRANSMISSION

Underlying operating profit for the UK Electricity Transmission business was £583 million, up £27 million compared with last half-year, primarily reflecting inflationary increases on base revenues, partially offset by true-up of prior year ESO incentives.

We invested £471 million on the reinforcement of our networks and new connections. This was £9 million higher than last half-year and included higher spend on Hinkley-Seabank, partly offset by reduced capitalised interest in relation to Western Link, and completion of non-load related projects.

The business expects to deliver its regulatory outputs for the year at a cost below the associated regulatory totex allowance. This reflects continued delivery of efficiencies in the capital programme and non-load related maintenance activities.

For the full year, totex outperformance is expected to increase slightly and Incentive and Other performance is expected to be slightly down on last year. Overall, Return on Equity outperformance is expected to be slightly above the 200-300 basis points range.

Following almost 10 years of development and construction activities and over £1.2 billion investment by Western Link (a joint venture between National Grid and ScottishPower), we are pleased the final stages of commissioning have commenced, and when complete, we will formally take full ownership of our share of the Link from the contractor.

As set out on page 5, we will submit our final Electricity Transmission RIIO-2 business plan to Ofgem in December 2019.

UK GAS TRANSMISSION

Underlying operating profit for UK Gas Transmission was £66 million. This was £25 million lower compared to the prior period, driven by lower underlying net revenues resulting from reduced capacity price charges on the gas network. In September 2018, as part of the return of Avonmouth allowances, we set a lower annual charge for exit capacity to avoid an over-recovery in revenues, and this charge continued through into the first half of 2019/20.

Gas Transmission capital investment was £167 million, £14 million higher than prior year. This primarily reflects increased compressor expenditure, partly offset by reduced spend on the Feeder 9 Humber estuary pipeline project.

As set out on page 5, we will submit our final Gas Transmission RIIO-2 business plan to Ofgem in December 2019.

Full year totex performance is expected to be higher than 2018/19 and Incentive and Other performance is expected to be broadly in line with last year. As a result, RoE is expected to be around the allowed level in 2019/20.

US REGULATED OPERATIONS

In our US regulated businesses, underlying operating profit was £525 million, £94 million higher than prior year. This reflects higher revenues from new rate cases and lower storm costs, partly offset by higher depreciation.

Capital investment was £1,588 million, £411 million higher than the prior period at actual exchange rates. The increase versus the prior period reflects higher pipe replacement activity in downstate New York, greater reliability project spends such as the Metropolitan Reliability Infrastructure project, and lower prior year spend in Massachusetts due to the labour dispute.

Our cost efficiency initiative is progressing well, and we continue to streamline operations, simplify our supply chain, and rationalise our property portfolio. We expect to deliver $30 million of efficiency savings this year, and $50 million from 2020/21 onwards, in the context of a fast-growing business and asset base.

Overall, we expect returns to increase to at least 95% of the allowed RoE for 2019/20, reflecting the completion of the refresh of distribution rates with a first full year contribution from new rates in our Rhode Island and Massachusetts Gas businesses.

On 30 October 2019, the Rhode Island Division for Public Utilities and Carriers (DPUC) published an initial report into the gas supply event on Aquidneck Island in January 2019. Since the event we have worked with the DPUC, to help to determine the root causes of the interruption. We are pleased that the report reflects National Grid's commitment to safety and our exemplary emergency response, and we agree with many of the issues raised, some of which we have already addressed. We believe the report findings confirm our concerns regarding operations of the Algonquin transmission system.

Operating company rate cases

During the period, we agreed a new rate plan for our Massachusetts Electric business with new rates effective on 1 October. This five-year rate plan provides a 9.6% allowed RoE, on an equity ratio of 53.5%, and an initial annual revenue increase of $42 million. The order includes a new Performance Based Rate Mechanism (PBRM) that will fund both capital and operational expenditure across the duration of the rate plan, ensuring inflation is factored into the cost base.

In downstate New York, we filed for new rates for KEDNY and KEDLI in April 2019. We provided data to support a four-year settlement, with a proposed base RoE of 9.65%, and the potential for additional upside incentives. We requested an annual capex allowance of $1.5 billion, the majority of which relates to improving the safety and reliability of our networks. We also requested revenue increases of $196 million and $61 million for KEDNY and KEDLI respectively.

Our filing included additional innovative rate design elements, such as performance-based rates and incentives as well as new earnings adjustment mechanisms. We also filed proposals to help facilitate New York's move towards clean energy, including:

·; Future of Heat proposals, with renewable gas programmes and a Green Gas Tariff;

·; increased energy efficiency programs; and

·; pilots for power to gas and hydrogen blending.

We also included a geothermal demonstration pilot for 900 customers and continue to push for grid modernisation across all our networks.

In late August, the PSC provided their first responses to this filing. This included an RoE of 8.2% and proposed a number of other adjustments.

NG VENTURES AND OTHER ACTIVITIES

NG VENTURES

For the first six months, NG Ventures made a £153 million contribution to Group profit before tax, consisting of operating profit and post-tax share of JVs and associates earnings. Capital investment was £432 million, up £220 million versus the prior year.

Strong progress on interconnectors

The IFA2 interconnector to France remains on track for commissioning in 2020/21. Converters at both ends are substantially complete with initial HV equipment being delivered and 150km of the 200km offshore cable section has been completed.

The North Sea Link interconnector to Norway remains on track for commissioning in 2021/22, with over 650km of cable now laid as planned.

On the Viking Link interconnector to Denmark, contracts were awarded in August 2019 for the converter stations and cable manufacture. All planning consents have been granted for the UK cable route and construction is expected to start in mid 2020 with completion of the works expected by end of 2023.

In total, we are investing around £2 billion in these three new interconnectors and Nemo (which entered service in January 2019), that we expect will contribute around £250 million of EBITDA by the mid-2020s creating value for our shareholders as well as bringing cleaner sources of energy to the UK.

Acquisition of Geronimo complete

As announced in July, we successfully completed the acquisition of Geronimo, a leading US onshore wind and solar developer. National Grid has also entered into a joint venture agreement with Washington State Investment Board. The total cost of the acquisition was £209 million, including £90 million for a 51% interest in the joint venture which included 379 megawatts of solar and wind generation projects.

OTHER ACTIVITIES

In June, we completed the sale of the final tranche of our remaining 39% stake in the holding company of Cadent Gas receiving further cash proceeds of £2 billion.

The Property business delivered an operating profit of £46 million, up £8 million versus the prior period. This increase reflects the timing of completion of site sales, with the largest site sold in the period being in Poplar, East London. Corporate and other activities profits were down £77 million principally due to the non-recurrence of the £94 million legal settlement received last year.

Capital investment was down by £62 million to £64 million compared to last year, principally driven by lower IT expenditure.

APPENDIX

Unless otherwise stated, all financial commentaries in this release are given on an underlying basis at actual exchange rates. Underlying represents statutory results excluding exceptional items, remeasurements, timing and major storm costs. The underlying basis is further defined on page 47.

Alternative Performance Measures derived from IFRS

The following are terms or metrics that are reconciled to IFRS measures and are defined on pages 47 to 50:

Net revenue

Adjusted profit measures

Underlying results

Constant currency

Timing impacts

Capital investment

Net debt - defined in note 12 on page 38.

PROVISIONAL FINANCIAL TIMETABLE 

CAUTIONARY STATEMENT

This announcement contains certain statements that are neither reported financial results nor other historical information. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include information with respect to National Grid's (the Company) financial condition, its results of operations and businesses, strategy, plans and objectives. Words such as 'aims', 'anticipates', 'expects', 'should', 'intends', 'plans', 'believes', 'outlook', 'seeks', 'estimates', 'targets', 'may', 'will', 'continue', 'project' and similar expressions, as well as statements in the future tense, identify forward-looking statements. These forward-looking statements are not guarantees of National Grid's future performance and are subject to assumptions, risks and uncertainties that could cause actual future results to differ materially from those expressed in or implied by such forward-looking statements. Many of these assumptions, risks and uncertainties relate to factors that are beyond National Grid's ability to control, predict or estimate precisely, such as changes in laws or regulations, including any arising as a result of the United Kingdom's exit from the European Union, announcements from and decisions by governmental bodies or regulators, including proposals relating to the RIIO-2 price controls as well as increased political and economic uncertainty; the timing of construction and delivery by third parties of new generation projects requiring connection; breaches of, or changes in, environmental, climate change and health and safety laws or regulations, including breaches or other incidents arising from the potentially harmful nature of its activities; network failure or interruption, the inability to carry out critical non network operations and damage to infrastructure, due to adverse weather conditions including the impact of major storms as well as the results of climate change, due to counterparties being unable to deliver physical commodities, or due to the failure of or unauthorised access to or deliberate breaches of National Grid's IT systems and supporting technology; failure to adequately forecast and respond to disruptions in energy supply; performance against regulatory targets and standards and against National Grid's peers with the aim of delivering stakeholder expectations regarding costs and efficiency savings, including those related to investment programmes and internal transformation, cost efficiency and remediation plans; and customers and counterparties (including financial institutions) failing to perform their obligations to the Company. Other factors that could cause actual results to differ materially from those described in this announcement include fluctuations in exchange rates, interest rates and commodity price indices; restrictions and conditions (including filing requirements) in National Grid's borrowing and debt arrangements, funding costs and access to financing; regulatory requirements for the Company to maintain financial resources in certain parts of its business and restrictions on some subsidiaries' transactions such as paying dividends, lending or levying charges; the delayed timing of recoveries and payments in National Grid's regulated businesses and whether aspects of its activities are contestable; the funding requirements and performance of National Grid's pension schemes and other post-retirement benefit schemes; the failure to attract, develop and retain employees with the necessary competencies, including leadership skills, and any significant disputes arising with National Grid's employees or the breach of laws or regulations by its employees; the failure to respond to market developments, including competition for onshore transmission, the threats and opportunities presented by emerging technology, the failure by the Company to respond to, or meet its own commitments as a leader in relation to, climate change development activities relating to energy transition, including the integration of distributed energy resources; and the need to grow the Company's business to deliver its strategy, as well as incorrect or unforeseen assumptions or conclusions (including unanticipated costs and liabilities) relating to business development activity. For further details regarding these and other assumptions, risks and uncertainties that may impact National Grid, please read the Strategic Report section and the 'Risk factors' on pages 212 to 215 of National Grid's most recent Annual Report and Accounts. In addition, new factors emerge from time to time and National Grid cannot assess the potential impact of any such factor on its activities or the extent to which any factor, or combination of factors, may cause actual future results to differ materially from those contained in any forward-looking statement. Except as may be required by law or regulation, the Company undertakes no obligation to update any of its forward-looking statements, which speak only as of the date of this announcement.

UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1. The non-controlling interests for the six month periods ended 30 September 2019 and 2018 relate to continuing operations.

1. The other comprehensive income from discontinued operations relates to items of other comprehensive income of Cadent (investment held through Quadgas Holdco Limited). Refer to note 6 for further details.

2. The non-controlling interests for the six month periods ended 30 September 2019 and 30 September 2018 relate to continuing operations.

Notes to the financial statements

1. Basis of preparation and new accounting standards, interpretations and amendments

The half year financial information covers the six month period ended 30 September 2019 and has been prepared in accordance with IAS 34 'Interim Financial Reporting' as issued by the International Accounting Standards Board (IASB) and as adopted by the European Union (EU); and the Disclosure and Transparency Rules of the Financial Conduct Authority. This condensed set of financial statements comprises the unaudited financial information for the half years ended 30 September 2019 and 2018, together with the audited consolidated statement of financial position as at 31 March 2019.

The financial information for the year ended 31 March 2019 does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. It should be read in conjunction with the statutory accounts for the year ended 31 March 2019, which were prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the IASB and as adopted by the EU, and have been filed with the Registrar of Companies. The Deloitte LLP audit report on those statutory accounts was unqualified, did not contain an emphasis of matter and did not contain a statement under Section 498 of the Companies Act 2006.

The half year financial information has been prepared in accordance with the accounting policies expected to be applicable for the year ending 31 March 2020. The notes to the financial statements have been prepared on a continuing basis unless otherwise stated. The Group has adopted IFRS 16 'Leases' for the first time with effect from 1 April 2019. Other than in this respect, the half year financial statements have been prepared on a basis consistent with that applied in the preparation of the financial statements for the year ended 31 March 2019.

Our consolidated income statement and segmental analysis (see note 2) separately identify financial results before and after exceptional items and remeasurements. The Directors believe that presentation of the results in this way is relevant to an understanding of the Group's financial performance. Presenting financial results before exceptional items and remeasurements is consistent with the way that financial performance is measured by management and reported to the Board and Executive Committee and improves the comparability of reported financial performance from year to year. The profit for the period from continuing operations before exceptional items and remeasurements forms part of the incentive target set annually for remunerating certain Executive Directors and accordingly we believe it is important for users of the financial statements to understand how this compares to our results on a statutory basis and period on period. Events or transactions which are classified as exceptional items or remeasurements are defined in the Annual Report and Accounts and Form 20-F.

Areas of judgement and key sources of estimation uncertainty

In preparing this half year financial information, we have considered the areas where judgement has been exercised by management in applying the Group's accounting policies and the key sources of estimation uncertainty as compared to those applied in the preparation of the Annual Report and Accounts for the year ended 31 March 2019:

• Categorisation of certain items as exceptional items or remeasurements: at the 2019 year end, we applied the Group's exceptional items framework to four key items within continuing operations. For the half year, we have concluded that there are no exceptional items within continuing operations. We continue to treat certain items as remeasurements as disclosed in note 4.

• Classification of Quadgas as held for sale and as a discontinued operation: at the 2019 year end, we concluded this interest should be classified as held for sale and as a discontinued operation. Following the completion of the sale of these interests in the period, no significant judgements remain for the half year.

• The key sources of estimation uncertainty are consistent with those for the year ended 31 March 2019:

◦ the valuation of liabilities for pensions and other post-retirement benefits; and

◦ the cash flows applied in determining environmental provisions.

Going concern

Having made enquiries and reassessed the principal risks, the Directors consider that the Group has adequate resources to continue in business for the foreseeable future, being a period of not less than 12 months from the date of this report. Accordingly, it is appropriate to adopt the going concern basis in preparing the half year financial information.

1. Basis of preparation and new accounting standards, interpretations and amendments (continued)

New IFRS accounting standards, interpretations and amendments adopted in the period

The Group has adopted IFRS 16 'Leases' for the first time with effect from 1 April 2019. Refer to note 18 for details of the impact and transition adjustments arising on adoption. There are no other new standards, interpretations and amendments, issued by the IASB or by the IFRS Interpretations Committee (IFRIC), that are applicable for the period commencing on 1 April 2019 that have had a material impact on the Group's results.

New IFRS accounting standards, interpretations and amendments not yet adopted

There are no new accounting standards, interpretations and amendments to existing standards that have been issued, but are not yet effective or have not yet been endorsed by the EU that were not disclosed in our Annual Report and Accounts. The Group has not early adopted any standard, amendment or interpretation that has been issued but is not yet effective.

2. Segmental analysis

Revenue and the results of the business are analysed by operating segment, based on the information the Board of Directors uses internally for the purposes of evaluating the performance of each operating segment and determining resource allocation between them. The Board is National Grid's chief operating decision maker (as defined by IFRS 8 'Operating Segments') and assesses the profitability of operations principally on the basis of operating profit before exceptional items and remeasurements (see note 4). As a matter of course, the Board also considers profitability by segment, excluding the effect of timing. However, the measure of profit disclosed in this note is operating profit before exceptional items and remeasurements as this is the measure that is most consistent with the IFRS results reported within these financial statements.

The results of our three principal businesses are reported to the Board of Directors and are accordingly treated as reportable operating segments. All other operating segments are reported to the Board of Directors on an aggregated basis. The following table describes the main activities for each reportable operating segment:

The NG Ventures operating segment represents our key strategic growth area outside our regulated core business in competitive markets across the UK and the US. The business comprises all commercial operations in metering, LNG at the Isle of Grain in the UK, electricity interconnectors and our new investment in Geronimo Energy LLC (Geronimo), with a focus on investment and future activities in emerging growth areas. NG Ventures does not currently meet the thresholds set out in IFRS 8 to be identified as a separate reportable segment and therefore its results are not required to be separately presented. However, certain additional disclosure is included in the footnotes below.

Although the National Grid Electricity System Operator was legally separated on 1 April 2019, its results are still presented to the Board of Directors as part of the UK Electricity Transmission segment, and therefore no change has been made to our reportable operating segments.

Other activities that do not form part of any of the segments in the above table or NG Ventures primarily relate to our UK property business together with insurance and corporate activities in the UK and US and the Group's investments in technology and innovation companies through National Grid Partners.

The US Regulated segment typically experiences seasonal fluctuations in revenue and operating profit due to higher delivery volumes during the second half of the financial year, for example as a result of extreme weather over the winter. These seasonal fluctuations have a consequential impact on the working capital balances (primarily trade debtors and accrued income) in the consolidated statement of financial position at 30 September 2019 when compared to 31 March 2019. The majority of UK revenues are governed by the arrangements under RIIO, through which revenue is primarily based on availability of transmission capacity rather than usage, and therefore are not subject to the same seasonal fluctuations as in the US.

2. Segmental analysis (continued)

(a) Revenue

1. Sales between operating segments are priced having regard to the regulatory and legal requirements to which the businesses are subject. The analysis of revenue by geographical area is on the basis of destination.

2. Included within NG Ventures and Other is £291 million (2018: £294 million) of revenue relating to NG Ventures.

(b) Operating profit