National Grid Regulatory News (NG.)

Report for the period ended

30 September 2018

John Pettigrew

Chief Executive

"We have continued to make strong operational progress in the first six months whilst maintaining excellent levels of safety and reliability. Investment in our networks increased to £2.1bn, including further progress on our three major interconnector projects. In the UK, we are implementing a cost efficiency and restructuring programme to ensure that we continue to drive outperformance for customers and shareholders. In the US, we have completed a full refresh of our rate plans so that all our distribution businesses are now operating under new rates, a major milestone which will support our continued growth. We continue to seek a fair settlement on union negotiations in Massachusetts.

"Strategically, we have made good progress with the decision to exercise options for the sale of our remaining 39% share in Cadent and the final investment decision on the Viking interconnector. Looking forward, National Grid is well positioned for the ongoing energy transition and we are on track to achieve asset growth at the top end of our 5-7% range in the medium term."

1 ‘Underlying’ represents statutory results excluding exceptional items, remeasurements, timing and major storm costs. These and a number of other terms and performance measures used in this document are not defined within accounting standards and may be applied differently by other organisations. We have provided definitions of these terms on page 52 and reconciliations of these measures on pages 52 to 55. 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

Inside Information in relation to the decision to exercise Cadent options

This announcement is being disclosed in accordance with the Market Abuse Regulation (EU596/2014) and has been determined to contain inside information in line with the definition therein.

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 52.

OVERVIEW

National Grid has continued to deliver strong operational and safety performance, with an employee injury frequency rate of under 0.1 - less than one lost time injury per million hours worked. Capital investment increased by £136 million at constant currency to £2,130 million for the first six months of the year. 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.

Underlying operating profit decreased £79 million (or 6%) at constant currency versus the prior period to £1,285 million. This mainly reflects the expected return of UK Gas Transmission allowances associated with Avonmouth, the impact of US tax reform, and lower profits in the US due to storm costs. This was partly offset by increased revenue from our new US rates, and benefits from legal settlements.

'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 52 to 55.

Headline operating profit decreased by £54 million at constant currency versus the prior period to £1,202 million. Headline EPS was 17.8p compared to 16.6p in the prior period. For reconciliation between Statutory, Headline and Underlying results please refer to pages 52 to 55.

Decision to exercise Cadent 39% options

We have decided to exercise the options over our remaining 39% share in Cadent and the sale is expected to complete at the end of June 2019, subject to customary regulatory approvals. As previously announced, the expected proceeds of £2 billion will be retained by the business to reinvest in the strong organic growth we anticipate in the medium-term. The financial results of Cadent for this and the prior period have therefore been classified within discontinued operations.

US Regulated business makes good progress - all distribution companies now under refreshed rates

We made good regulatory progress in our US Regulated business as we completed the refresh of rates in our distribution businesses. Following the agreement of new rates for Rhode Island Gas and Electric in August and Massachusetts Gas in September, all distribution companies are now operating under updated rates, supporting increased levels of investment and strong returns. Investment drivers in Northeast US are projected to continue to sustain a high level of asset growth for the US business of over 7% p.a. over the medium-term.

The lower US operating profit reflects the impact of US tax reform, and £56 million higher costs from a number of storms. The majority of storm costs are recoverable under existing regulatory mechanisms. Due to seasonality, US full year profits are weighted towards the second half. This will be more pronounced than usual this year due to higher storm costs in the first half, and with new rates coming into effect in Rhode Island and Massachusetts Gas in September and October respectively. Overall, the lower tax rate will represent a small benefit to full-year earnings in 2018/19.

Massachusetts Gas update

We continue to negotiate with two of our gas unions in Massachusetts over employment terms and conditions. The two unions represent 1,250 workers from our US workforce of 16,000. Particular issues include the amount of employee contribution to healthcare and proposals to bring future employees into a defined contribution pension scheme, rather than a defined benefit plan. Over the last few years, we have agreed very similar terms with 16 other unions and are hopeful that we can reach an agreement with these two unions.

The negotiations have been ongoing for several months and as no agreement was reached before the existing contracts expired, we had to implement contingency workforce plans from the end of June this year. This includes the employment of fully qualified contractors and workers, the use of workers from other parts of the business, increased supervision to ensure safe operation, and the establishment of temporary work sites. These activities have ensured that critical work continues safely and that there is minimal disruption to our customers. As a consequence, we have incurred additional costs of £97 million which have been classified as exceptional.

Our objective is to reach a fair settlement that allows the business to deliver vital services at a reasonable cost to customers, minimise any future cost increases and protect the agreements already in place with the other unions.

During the work contingency, we have continued to safely provide the service our customers expect, including the completion of almost 40,000 individual jobs.

In October, we had a minor incident in Woburn where, as a precaution, we shut off gas supply to 300 homes before testing the system and reconnecting the affected homes. No damage was caused. With this happening on the back of the tragic event in the Merrimack Valley, which is outside our gas service territory, the Massachusetts Department of Public Utilities (DPU) requested we only undertake mandatory and compliance work. We are currently working to resolve this moratorium, as well as keeping the DPU informed on the union negotiations.

UK businesses focused on delivering further cost savings under RIIO-T1

Our UK regulated operations continue to perform well in the sixth year of the eight year RIIO-T1 price control. Reliability remains strong while the businesses continue to drive efficiency and build on the significant total expenditure (totex) savings achieved for customers.

Organisational review of the UK business

During the first half of this year we commenced a multi-year programme covering a range of initiatives to drive further efficiency and lower costs for customers. These initiatives will continue our drive to become a more agile organisation that is positioned to be more responsive to customers. The range of initiatives include a flatter, leaner organisation, further economies of scale, simplifying our processes and ways of working, and making more efficient use of IT and back office activities.

To achieve the long-term benefits of these initiatives, we have provided for costs of £127 million in the first half of 2018/19, which we expect will help us generate opex savings of £50 million in 2019/20 and at least £100 million annually from 2020/21. We continue to expect to deliver outperformance of 200-300 basis points in each of the remaining years of RIIO-T1.

RIIO-T1 reopeners and Visual Impact Provision funding

Ofgem reached a final decision in September on funding for certain projects and programmes of work which were subject to reopeners as we entered RIIO-T1. We submitted four requests to adjust baseline allowances: additional allowances for data centres and cyber security; investments in our Gas Transmission compressor fleet to meet European emissions standards; asset health costs for the Feeder 9 pipeline replacement under the Humber Estuary; and funding for a Visual Impact Provision scheme for under-grounding overhead lines in Dorset.

We were pleased that Ofgem allowed the necessary funding for the investment in physical and cyber security in both electricity and gas transmission. However, we were disappointed not to receive funding for the compressor works, and we are now reviewing our approach to meeting the required environmental obligations. With regards to Feeder 9, Ofgem changed its initial decision on the needs case, awarding us £111 million to continue this project. On the Visual Impact Provision scheme, Ofgem made its final determination on 2 November awarding us £116 million.

RIIO-T2 preparation well underway

We welcome the RIIO Framework Decision document Ofgem published at the end of July, which provides a solid foundation as we move into the sector specific consultation phase later this year.

Ofgem confirmed that the key principles of RIIO-T1 will remain, namely incentives, innovation and output based regulation. Ofgem also emphasised the importance of RIIO-T2 being a stakeholder-engagement led process, which we advocated for, and in which we have experience through our US distribution businesses.

Whilst we are pleased with some decisions in the framework document, such as transition to CPIH (Consumer Price Index including Housing), and withdrawal of the proposal to cap returns, there remain areas that we will continue to discuss with Ofgem in the coming months. For example, we believe the cost of equity remains too low. We aim to achieve a fair return that is reflective of the level of risk in transmission networks, together with incentive opportunities to outperform that deliver benefits to customers and shareholders.

Sector specific consultations start towards the end of this year and we expect to see a gradual narrowing towards the final framework with initial proposals expected in mid-2020. Overall, we believe that RIIO-T2 must deliver a total financial package that can fund the necessary investment as well as fairly remunerate shareholders for this investment.

Solid first half for National Grid Ventures (NGV) and other activities

We continue to make good progress on the three interconnectors we have under construction, and have approved investment to proceed with the Viking interconnector to Denmark, subject to the resolution of a number of minor issues.

The Nemo Link, North Sea Link and IFA2 interconnectors remain on track, with important milestones over the last six months. North Sea Link has progressed cable laying, with 260 kilometres buried under the seabed. Good progress has also continued on IFA2, with completion of duct works in the cliffs at Chilling on the south coast. On Nemo Link, energisation and station testing is underway, and commissioning is expected before the end of March next year.

Our combined investment in these four interconnector projects will be over £2.1 billion. They are expected to contribute approximately £250 million annual EBITDA when fully operational by the mid-2020s.

Preliminary planning approval for Fulham property site

In our St. William joint venture, a planning application was submitted for over 1,800 new homes on the Fulham site during 2018. In October, the London Borough of Hammersmith and Fulham resolved to grant planning permission, subject to the agreement of a satisfactory Section 106 agreement dealing with the provision of affordable housing and other developer financial contributions. Over a third of the new homes built will be affordable. Subject to securing planning permission, site development is scheduled to start in 2019 and we expect the site will be transferred into the St. William joint venture during 2018/19.

Corporate centre

Corporate centre and other activities including Property contributed £76 million to operating profit during the half year, including £94 million of benefit from legal settlements to recover costs associated with a US systems implementation, in line with the treatment of the original costs.

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.

£2.1 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 £2,130 million, an increase of £136 million or 7% at constant currency compared to the first half of 2017/18.

* NG Ventures and other activities capital investment includes equity and financing in joint ventures and associates but excludes £20m and £8m equity contribution to St. William property joint venture for 2018 and 2017, respectively.

Investment in the US Regulated business was £1,177 million for the first six months of this year, an increase of £88 million over the prior period at constant currency. The increase reflects mandated gas work across New York and Rhode Island, partly offset by a reduction of around £60m in capital expenditure in Massachusetts Gas during the implementation of the work contingency plan. The US business continues its significant investment in leak prone pipe replacement, enabling customer growth and reinforcing the electricity system to improve the safety and reliability of networks. This sustained level of investment was a key feature of the updated regulatory filings in the Rhode Island Electric and Gas and Massachusetts Gas businesses, and is expected to continue in future filings, supporting strong levels of rate base growth over the medium term.

The UK regulated businesses invested £615 million in the first half of 2018/19, with UK Electricity Transmission and UK Gas Transmission both investing in asset health to meet their respective Network Output Measures. Investment in our UK Electricity Transmission business was £53 million lower than the prior period, primarily reflecting lower non-load related investment.

National Grid Ventures and other activities investment increased by £105 million to £338 million in the first half of the year versus the prior period. Of this increase, £64 million reflected higher capital expenditure on the IFA2 (France) and North Sea Link (NSL) interconnectors, both of which continue to progress well.

FINANCIAL STRENGTH

Over £1 billion of new long-term financing

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, National Grid raised over £1 billion of new long-term debt. All of the funding was for the US business, with the majority at holding company level. Net debt increased to £25.6 billion in the six months, £2.6 billion higher than at 31 March 2018 (£23.0 billion). This increase was driven by movement in exchange rates (£1.4 billion), and underlying business requirements (£1.2 billion).

Interim dividend of 16.08p, increased in line with policy

The Board has approved an interim dividend of 16.08p per ordinary share ($1.0616 per American Depositary Share). This represents 35% of the total dividend per share of 45.93p in respect of the last financial year to 31 March 2018 and is in line with the Group's dividend policy. The interim dividend is expected to be paid on 9 January 2019 to shareholders on the register as at 23 November 2018.

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 2018/19 interim dividend of 16.08p represents a 0.59p (3.8%) increase over the interim dividend for the year ended 31 March 2018 of 15.49p.

The scrip dividend alternative will again be offered in respect of the 2018/19 interim dividend. As previously announced, we do not expect to buy back the scrip shares issued during 2018/19 or 2019/20, unless there is sufficient balance sheet capacity.

Board changes

As previously announced, Andrew Bonfield stood down as Finance Director at the Annual General Meeting on 30 July 2018. Andy Agg, previously Group Tax and Treasury Director, is currently Interim CFO.

In May, we also announced that Pierre Dufour would be stepping down as a Non-executive Director of the Board with effect from the end of the Annual General Meeting.

In April 2018, we announced the appointment of Amanda Mesler as a Non-executive Director of the Board with effect from 17 May 2018. On appointment, Amanda joined the Audit, Finance and Nominations Committees of National Grid.

OUTLOOK

Following the refresh of our rate case programme, good financial performance is expected to continue in the US business. The UK business remains on track to deliver outperformance in the 200-300 bps range, and the contribution from National Grid Ventures and Other activities is expected to be above prior year.

Looking ahead, National Grid sees strong growth prospects across the Group. There are a wide range of growth drivers for the US, UK and NGV businesses, which are expected to deliver high quality asset growth of at least 7% for the next two years, and at the top end of our 5-7% range in the medium term.

The business continues to be well positioned with a balanced portfolio and an efficient balance sheet that underpins asset and dividend growth.

2018/19 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. It is prepared on the basis of the Group's continuing operations, excluding the results of Cadent which have been classified as a discontinued operation.

UK Electricity Transmission

Net Revenue (excluding timing) is expected to increase by approximately £80 million compared to 2017/18, reflecting inflationary increases on base revenues and revised system operator incentives. 

Totex outperformance is expected to increase compared with 2017/18, partly reflecting the higher allowances available to us in the reopener decision as well as improved incentive performance. Overall Return on Equity outperformance is expected to be above the 200-300 bps range.

UK Gas Transmission

Net Revenue (excluding timing) is expected to decrease, with approximately £160 million of lower revenue allowances compared to 2017/18, primarily due to the return of revenues relating to the Avonmouth project through the annual MOD adjustment2.

Totex performance is expected to be lower than 2017/18 primarily reflecting lower allowances from the RIIO-T1 reopener decision. Incentive performance is also expected to be marginally lower. As a result Return on Equity is expected to be slightly lower than the allowed level in 2018/19.

UK Timing

Revenues will be impacted by timing of recoveries including impacts from prior years. Electricity Transmission is expected to under-recover by around an additional £100 million compared to 2017/18. Gas Transmission timing is expected to under-recover at a similar level to 2017/18.

US Regulated operations

Net Revenue (excluding timing) is expected to increase by about £80 million, reflecting the full year benefit of new rate case filings and capex trackers, partially offset by the impact of tax reform and the adoption of IFRS15. After inflationary impacts on operating costs and £56 million of storm costs, we expect underlying operating profit to be slightly below the prior year. The majority of storm costs are recoverable under regulatory mechanisms. Costs associated with the Massachusetts Gas workforce contingency plan are classified as an exceptional item and excluded from the underlying results.

Excluding the impact of the Massachusetts workforce contingency costs, Return on Equity for overall US Regulated operations is expected to remain at a similar level to the performance in 2017/18.

US Timing

US in-year timing is heavily influenced by volumetric impacts and commodity prices, particularly over the last quarter of the financial year. We expect payments of previously over-recovered NYSERDA balances to now reduce revenue by approximately $30 million during 2018/19.

National Grid Ventures and Other activities

Revenue is expected to increase year-on-year, mainly due to the forecast sale of the Fulham site to St. William in our Property business, subject to receiving appropriate planning consents. Profits from the Property business are expected to be almost double last year's level as a result of this and other sales. Other activities will also benefit from the £94 million of legal settlements. These benefits will be partially offset by the revenue impact of fewer domestic meters in the Metering business.

Joint Ventures and Associates

Our share of the profit after tax of joint ventures and associates (excluding Cadent) is expected to be broadly in line with the prior year.

Interest and Taxation

Net finance costs in 2018/19 are expected to increase, driven by higher average net debt and the non-repeat of gains on the disposal of available for sale investments, partially offset by lower RPI and the benefit of lower pension interest.

For the full year 2018/19, the underlying effective tax rate, excluding the share of joint venture and associate post-tax profits, is expected to reduce to around 21%.

Changes to accounting standards

No material impact on EPS is expected following the adoption of IFRS9 'Financial Instruments' and IFRS15 'Revenue from Contracts with Customers' in 2018/19.

Investment, Growth and Net Debt

Overall Group capital investment for 2018/19 is expected to be at a similar level to the £4.3 billion of investment in 2017/18. In our UK transmission businesses we expect to invest £1.2 billion; in our US Regulated business capex is expected to be slightly below the prior year level of $3.3 billion, in part due to lower investment in Massachusetts Gas. Investment in our NGV and Other businesses will increase reflecting investment in interconnector projects.

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

Operating cashflow generated from continuing operations is expected to reduce, including the impact of lower tax allowances in US revenues.

Net debt is expected to increase (excluding the impact of foreign exchange) from £25.6 billion at the half year, reflecting ongoing business cash requirements of approximately £1.3 billion.

Weighted average number of shares (WAV) is expected to increase from 3,367 million for the first half of the year to approximately 3,390 million reflecting the impact of scrip shares.

2 In November 2017, Ofgem ran the financial models that calculate substantial elements of the revenue allowances for National Grid’s UK regulated businesses. The outcome of these model runs (known as the ‘MOD adjustments’) were in line with National Grid’s expectations.

FINANCIAL REVIEW

Unless otherwise stated, all financial commentary in this release is given on an underlying basis at actual exchange rates for continuing operations. The use of these alternative and regulatory performance (or non-IFRS) measures is intended 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. For definitions and metrics see pages 52 to 55 of this statement.

Profits and earnings from continuing operations

Six months ended 30 September

Definitions

In considering the financial performance of our business and segments, we use various adjusted profit measures in order to aid comparability of results year-on-year. The various measures are explained below and reconciled on pages 52 to 55.

Underlying - This is one of the measures used by management to assess the performance of the underlying business. This measure excludes exceptional items, remeasurements, timing and major storm costs. The impact of major storm costs is adjusted for when the total impact on the Group's performance in any one year is sufficiently large.

Constant currency - The underlying profits for prior periods are also shown on a constant currency basis to show the year-on-year comparisons excluding any impact of foreign currency movements. This basis is explained in more detail on page 52.

Operating profit and controllable costs

Statutory operating profit was £1,017m, down £257m (20%) compared with the prior period at actual exchange rates.

Underlying operating profit and controllable costs

Underlying operating profit for the first six months was £1,285m, down £83m against the same period last year at actual exchange rates. The year-on-year movement in exchange rates had a £4m adverse impact on underlying operating profit. On a constant currency basis, underlying operating profit was down £79m (6%).

Underlying operating profit from regulated activities decreased by £128m on a constant currency basis. Net regulated income decreased by £2m, driven by return of Avonmouth revenues in UK Gas Transmission. Regulated controllable costs increased by £18m while post-retirement costs decreased by £11m and US bad debts increased by £2m. Depreciation and amortisation increased by £34m and other costs increased by £83m, including increased US storm costs.

Underlying operating profit from National Grid Ventures and Other activities increased by £49m in the period on a constant currency basis with £94m of benefit from legal settlements partly offset by lower property profits in the first half of this year.

Interest

Adjusted net finance costs at £494m were £48m lower than the same period in 2017/18 at actual exchange rates, and £46m lower than 2017/18 at constant currency. This partly reflects lower pension interest costs and higher levels of interest capitalised.

The effective interest rate on Treasury managed debt for the period was 4.4% compared with 4.7% in the first six months of 2017/18.

Underlying profit before tax and taxation

The Group's share of post-tax results from joint ventures and associates was £25m, up by £5m from the same period in 2017/18, including a tax credit in respect of our investment in the partnership with Sunrun.

Underlying profit before tax was down 4% at actual exchange rates to £816m.

Underlying taxation was £153m, £36m lower than the prior period, reflecting lower profits and the reduction in the US federal corporate income tax rate to 21%. The underlying effective tax rate (excluding JVs and associates' profits) decreased to 19.3% compared to 22.9% in the previous period.

Other adjusted earnings metrics, EPS, exceptional and statutory earnings

After deducting earnings attributable to non-controlling interests of £1m, underlying earnings attributable to equity shareholders were £662m, up £6m compared with the same period in 2017/18. Underlying earnings per share increased 6% to 19.7p, benefiting from the lower share count that has resulted from the 2017/18 share consolidation and buy-back programme as part of the return of the proceeds from the UK Gas Distribution sale.

Timing reduced earnings by £64m in the first half of the year, reflecting the return of previously over-recovered revenues in the UK and the US. Exceptional items and remeasurements for continuing operations decreased statutory earnings by £170m after tax. A detailed breakdown of these items can be found on page 32. After these items and non-controlling interests, statutory continuing earnings attributable to equity shareholders were £428m and statutory continuing EPS was 12.7p.

Discontinued operations increased statutory earnings by £3m after tax. This included a negative impact of £45m from exceptional items. A breakdown of these items can be found on pages 34 to 35. Statutory earnings attributable to equity shareholders including discontinued operations were £431m, and statutory basic earnings per share including discontinued operations was 12.8p compared with 19.1p for the same period in the prior year. The decrease compared to the first half of 2017/18 partly reflects costs related to our UK restructuring programme and the Massachusetts workforce contingency plan. With effect from 30 June 2018 the investment in Quadgas HoldCo Limited was classified as held for sale.

Cash flow

Cash generated from continuing operations before taxation was £1,941m, £81m lower than 2017/18 reflecting increased levels of spend on exceptional items.

Funding and net debt

Net debt as at 30 September 2018 was £25.6bn, £2.6bn higher than at 31 March 2018 (£23.0bn). Movement in exchange rates accounted for £1.4bn of this increase, with underlying business requirements accounting for £1.2bn.

BUSINESS REVIEW

Six months ended 30 September

UK ELECTRICITY TRANSMISSION

Underlying operating profit in UK Electricity Transmission was £556m, up £16m for the first six months of the year compared to the same period in the prior year. Underlying net revenues increased £28m due to higher base revenues. This was partially offset by a higher depreciation charge.

Capital investment of £462m was £53m lower than the prior period. This reflects lower investment following the completion of several large non-load related projects. Overall investment in the period reflected £336m of non-load related investment whilst load related investment was £126m.

As previously reported, Western Link experienced technical faults during the commissioning phase. The link is now delivering up to 2,250MW power transfer capability from Scotland to England and Wales and we continue to monitor progress.

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 and additional allowances from reopener filings.

In July, Ofgem chose a Competition Proxy Model as the regulatory framework for Hinkley-Seabank. We remain disappointed that Ofgem believe this is the right model for Hinkley-Seabank as we do not believe it will benefit consumers in the long term. We expect Ofgem to introduce changes to our licence by the end of this year, or early 2019, and we will consider all our options at that stage. However, we remain committed to delivering Hinkley-Seabank to time and to quality as per our licence obligations.

On 28 September, Ofgem published its decision to allow £65m of additional allowances for enhanced cyber security costs for the Electricity System Operator (ESO). The allowances relate to spend that has been made over the whole of the RIIO-T1 period. We expect recognition of allowances related to historic spend will benefit the Return on Equity reported in 2018/19.

On 2 November, Ofgem made their final determination on funding for the undergrounding of lines in an Area of Outstanding Natural Beauty in Dorset, awarding us £116m.

The separation of the ESO continues to go smoothly. We remain on track for a legally separate ESO from 1 April 2019.

UK GAS TRANSMISSION

Underlying operating profit in UK Gas Transmission was £91m, down £53m for the first six months of the year compared to the same period in the prior year, with lower underlying net revenues of £56m primarily due to the expected return of allowances related to Avonmouth that were received in prior years.

Capital investment of £153m was £4m lower than the prior period, driven by a small reduction in asset health spend in the period. We expect capital investment for the full year to be in line with the prior year.

On 28 September, Ofgem published its decision on a number of reopener filings made by Gas Transmission. Ofgem approved the needs case for additional asset health costs of £111m to fund the replacement of the high-pressure gas transmission pipeline under the Humber Estuary. They also approved additional allowances of £48m for enhanced cyber security costs, however disallowed a request to retain £123m of allowances in relation to the recovery of costs to upgrade compressors to comply with the Industrial Emissions Directive (IED). We are now reviewing our approach to meeting the required environmental obligations.

The UK Gas Transmission business expects to deliver its regulatory outputs at a level of totex above the associated regulatory allowance for this year. This includes the impact of lower allowances for the upgrade of our compressor fleet and our Humber Estuary (Feeder 9) pipeline replacement project. As a result, we expect to deliver a Return on Equity slightly lower than the allowed level in 2018/19. The business continues to focus on process improvements and innovation to increase efficiency over time and we expect to deliver close to the allowed level of return over the remainder of the RIIO-T1 period.

US REGULATED OPERATIONS

Underlying operating profit in the US Regulated business was £431m, down £95m for the first six months of the year, at actual exchange rates. This was driven by the impact of US tax reform and £56m impact from higher storm costs, the majority of which are recoverable through regulatory mechanisms.

Capital investment was £1,177m, £82m higher than the prior period at actual exchange rates. The majority of this investment relates to leak prone pipe replacement and gas system reinforcement in the gas businesses, and storm hardening and resilience across the electric networks. The increase versus the prior period reflects mandated gas work across New York and Rhode Island, partly offset by the impact on capital expenditure due to the Massachusetts Gas workforce contingency plan. 

Operating company rate refresh completed

During the first six months, the US Regulated business completed the refresh of its rate case programme with all distribution companies now operating under rates following an update process that began in 2015. A rate case settlement was approved for our Rhode Island Electric and Gas businesses in August 2018, and a rate case order was issued for our Massachusetts Gas business in September 2018. The Rhode Island settlement, which lasts for three years, provides a 9.3% allowed Return on Equity, with annual capex of $240m providing further medium term clarity on our US growth rates. For Massachusetts Gas, the order provides a 9.5% allowed Return on Equity and annual capex of $413m. Together, these companies represent 19% of National Grid's US rate base. These new rates for Rhode Island Electric and Gas came into effect on 1 September 2018 and for Massachusetts Gas on 1 October 2018.

We plan to file a rate case for the Massachusetts Electric business in November 2018. The company represents over 10% of National Grid's US rate base. New rates would be expected to come into effect by 1 October 2019.

US tax reform

As we stated in May, the reduction in the federal tax rate from 35% to 21% will be significantly beneficial to customers. It will be economically neutral for utilities but will reduce cash flows in the near term.

We now have clarity on bill reductions for all our operating companies, including updates for KEDNY, KEDLI and Massachusetts Electric since May. The return of the $2.2bn deferred tax balance liability will now be made over an average period of up to 50 years. Rate base growth will increase due to the lower build-up of deferred taxes in the future. Over time this will be beneficial to operating profit and cash flow.

These items will collectively flow through the income statement over the next two years. 2018/19 will see a partial impact on operating profit of $210m, which is expected to be more than offset by the full year impact of the lower tax charge, representing a small benefit to full-year earnings. 2019/20 will have an additional impact to operating profit of around $110m. No significant in-year impact is expected on earnings as operating profit impact is offset by the lower tax rate.

NATIONAL GRID VENTURES AND OTHER ACTIVITIES

NATIONAL GRID VENTURES

For the first six months, National Grid Ventures made a £162m contribution to Group profit before tax, consisting of operating profit and post-tax share of JVs and associates earnings. Capital investment was £212m, up £32m versus the prior year.

Nemo Link, IFA2 and North Sea Link interconnector construction remain on track

We have reached important milestones over the last six months on our three interconnectors under construction; Nemo Link, IFA2 and North Sea Link, which remain on track for commissioning in 2018/19, 2020/21 and 2021/22 respectively.

On Nemo Link, energisation and station testing is underway, and we expect full testing to start in December, and commissioning before the end of March next year. On IFA2, we completed the horizontal drilling through the cliffs at Chilling on the south coast, with ducts installed ready to receive the six AC cables in the new year. On North Sea Link, we completed the first two cable laying campaigns, with 260 kilometres buried under the seabed so far and an additional 130km manufactured and transported to Norway ready to lay in 2019.

Approved investment decision on the Viking Link interconnector

We have approved investment to proceed with the Viking Link interconnector, subject to resolution of a number of minor issues. The 760km, 1.4GW HVDC interconnector between Bicker Fen in England and Revsing in Denmark will be a joint venture with Energinet, the Danish transmission owner, and will be the longest interconnector in the world. The link represents an £850m investment for the Group and is expected to eventually contribute around £100m of EBITDA annually after planned commissioning in 2023.

OTHER ACTIVITIES

We have decided to exercise the options over our remaining 39% share in Cadent and the sale is expected to complete at the end of June 2019, subject to customary regulatory approvals. As a result, the results of Cadent for this and the prior period have been classified as discontinued operations and are no longer included within underlying results.

The Property business delivered an operating profit of £38m, as a result of land sales at Wandsworth, Hornsey and Oxted, the latter two sites into the St. William joint venture.

Corporate and other activities profits were up £65m principally due to £94m of legal settlement benefits in line with the treatment of the original costs, partly offset by the absence of a prior year provision release.

Capital investment was up £73m to £126m, principally driven by upgrades to our IS systems and investment in gas business enablement projects in the US.

We have established a venture capital business called National Grid Partners, based in California. It will make modest investments to ensure we are at the forefront of technological developments relevant for our industry. Investments are focused on start-ups and small companies developing new technologies that will provide clear benefit to our existing businesses.

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 52.

Alternative Performance Measures derived from IFRS

The following are terms or metrics that are reconciled to IFRS measures and are defined on pages 52 to 55.

Net revenue

Adjusted profit measures

Underlying results

Constant currency

Timing impacts

Capital investment

Net debt - defined in note 11 on page 39.

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 those relating to the role of the UK electricity system operator; 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; 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; inflation or deflation; 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, train or 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, development activities relating to changes in the energy mix and 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, including assumptions in connection with the Company's sale of the remaining Cadent stake. 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 193 to 196 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 2018 and 2017 relate to continuing operations.

2. Comparatives have been re-presented to reflect the classification of our retained interest in Quadgas HoldCo Limited as a discontinued operation in the current period (see note 6).

1. Comparatives have been re-presented to reflect the classification of our retained interest in Quadgas HoldCo Limited as a discontinued operation in the current period (see note 6).

2. The other comprehensive income from discontinued operations relates to items of other comprehensive income of Cadent (investment held through Quadgas Holdco Limited), comprising £35m (2017: £60m) remeasurement gains on pension assets and post-retirement benefit obligations, and £1m (2017: £4m) net gains in respect of cash flow hedges. Both items are shown net of tax.

3. The non-controlling interests for the six month periods ending 30 September 2018 and 30 September 2017 relate to continuing operations.

1. Comparatives have been re-presented to reflect the classification of our retained interest in Quadgas HoldCo Limited as a discontinued operation in the current period (see note 6).

2. Cash flows used in discontinued operating activities in both 2018 and 2017 related to the disposal of the UK Gas Distribution business.

3. Acquisition of investments includes Technology and Innovation investments.

4. Cash flows from discontinued investing activities relates to the receipt of £66m (2017: £nil) of dividends and £12m (2017: £15m) of interest on the shareholder loan from our investment in Quadgas HoldCo Limited (see note 6).

5. Cash flows used in discontinued financing activities in 2017 related to the liability management programme related to the UK Gas Distribution business.

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 2018 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 2018 and 2017, together with the audited consolidated statement of financial position at 31 March 2018.

The financial information for the year ended 31 March 2018 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 2018, 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 these 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 2019. The notes to the financial statements have been prepared on a continuing basis unless otherwise stated. The Group has adopted IFRS 9 'Financial Instruments' and IFRS 15 'Revenue from Contracts with Customers' for the first time with effect from 1 April 2018. 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 2018, other than as outlined below in relation to discontinued operations.

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.

Events or transactions which are classified as exceptional items or remeasurements are defined in the Annual Report and Accounts and Form 20-F.

We continue to adopt a columnar presentation as we consider it improves the clarity of the presentation, and is consistent with the way that financial performance is measured by management and reported to the Board and Executive Committee, and better enables users of the financial statements to understand the results. The inclusion of total 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.

Areas of judgement and key sources of estimation uncertainty

In preparing this half year financial information, the areas where judgement has been exercised by management in applying the Group's accounting policies and the key sources of estimation uncertainty remain consistent with those applied to the Annual Report and Accounts for the year ended 31 March 2018.

In applying the Group's exceptional items framework for the half year, we have considered three key matters. As described further in note 4, we have concluded that the costs associated with the Massachusetts Gas work continuation (£97m) and the UK cost efficiency and restructuring programme (£127m) should be treated as exceptional. We also considered whether the £94m income from two legal settlements received in the period should also be classified as exceptional. However, we concluded it was appropriate to recognise the income in earnings before exceptional items (within Other Activities), in line with the treatment of the original costs.

In addition, in preparing the half year financial information, we have exercised our judgement in concluding that it is appropriate to classify our investment in and shareholder loan to Quadgas HoldCo Limited (Quadgas), along with the related Further Acquisition Agreement (FAA) and Remaining Acquisition Agreement (RAA) derivatives, as held for sale and as a discontinued operation, as detailed in note 6.

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

Going concern

Having made enquiries and reassessed the principal risks, the Directors consider that the Company and its subsidiary undertakings have 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.

New IFRS accounting standards and interpretations adopted in the period

The Group has adopted IFRS 9 'Financial Instruments' and IFRS 15 'Revenue from Contracts with Customers' for the first time with effect from 1 April 2018. Refer to note 17 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 2018 that have had a material impact on the Group's results.

New IFRS accounting standards and interpretations not yet adopted

The Group continues to assess the impact of IFRS 16 'Leases', which will be implemented on 1 April 2019. The Group enters into a significant number of operating lease transactions. Under IFRS 16, our operating leases will be accounted for on the consolidated statement of financial position as 'right-of-use' assets. This treatment will increase both our assets and liabilities and subsequently, will result in an increase in finance costs and depreciation and a reduction in operating costs.

We continue to assess our revenue, service contracts and power purchase contracts to determine whether we have the right to use assets under those contracts and whether they fall within the scope of IFRS 16. We plan to apply IFRS 16 using the modified retrospective approach, whereby comparatives will not be restated on adoption of the new standard but instead a cumulative adjustment will be reflected in retained earnings. We will provide further details of the impact that the implementation of IFRS 16 will have in the Annual Report and Accounts for the year ending 31 March 2019.

There are no new accounting standards 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

We present revenue and the results of the business analysed by operating segment, based on the information the Board of Directors uses internally for the purposes of evaluating the performance of operating segments and determining resource allocation between operating segments. The Board is National Grid's chief operating decision-making body (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.

The following table describes the main activities for each reportable operating segment:

National Grid Ventures (NGV) does not meet the thresholds set out in IFRS 8 to be identified as a separate reportable segment and therefore its results have not been disaggregated. Other activities that do not form part of any of the segments in the above table primarily relate to UK property development together with insurance and corporate activities in the UK and US and the Group's investments in Technology and Innovation companies.

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. There are no material sales between the UK and US geographical areas.

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 2018 when compared to 31 March 2018. 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.

(a) Revenue

1. Included within NGV and Other is £294m (2017: £294m) of revenue relating to NGV and £44m (2017: £59m) of revenue relating to UK property development.

2. Segmental analysis (continued)

(b) Operating profit

Below we reconcile total operating profit to profit before tax from continuing operations. Operating exceptional items and remeasurements of £94m expense (2017: £nil) detailed in note 4 are attributable to UK Electricity Transmission; £33m expense (2017: £nil) to UK Gas Transmission; and £58m expense (2017: £15m income) to US Regulated operations.

1. Comparatives have been re-presented to reflect the classification of our retained interest in Quadgas HoldCo Limited as a discontinued operation in the current period (see note 6).

2. Included within NGV and Other is £131m (2017: £132m) of operating profit (both before and after exceptional items and remeasurements) relating to NGV and £38m (2017: £53m) of operating profit (both before and after exceptional items and remeasurements) relating to UK property development.

3. NGV and Other includes gains of £94m (2017: £nil) in relation to cash received in respect of two legal settlements.

2. Segmental analysis (continued)

(c) Other segmental information