National Grid : 18 Jun 2020 Full year results for the period ended 31 March 2020

London | 14 November 2019:

National Grid, a leading energy transmission and distribution company, today announces its Half Year results.

Report for the period ended 30 September 2019

Highlights

• • Announcing today a new target to achieve net zero for own emissions by 2050

• • Regulatory progress in US and UK:

  • o Multi-year agreement for Massachusetts Electric

  • o Draft RIIO-2 business plans submitted

  • o Welcomed Ofgem's "minded-to" position on Hinkley-Seabank to move away from Competition Proxy Model

• • Cost efficiency programme on track: £50m in the UK and $30m in the US in 2019/20

• • Construction of three interconnectors on target

• • Completed US Geronimo acquisition

• • Received £2bn proceeds for sale of final Cadent stake

Financial performance

• • Underlying operating profit up 1% to £1.3bn due to increase in US Regulated profits (statutory operating profit down 1% to £1.0bn reflecting adverse timing)

• • Underlying EPS up 2% to 20.0p, due to a US tax settlement relating to prior periods

• • Statutory EPS of 11.3p, down 11% reflecting adverse mark to market remeasurements

• • Capital investment £2.7bn up 28% driven by increase in US capital spend and £0.2bn Geronimo acquisition

• • Interim dividend 16.57p/share, in line with policy

Financial summary

Six months ended 30 September - continuing operations

Statutory results

Underlying1

Unaudited

Operating profit (£m)

Profit before tax (£m)

Earnings per share (p)

2019 1,003 404 11.3

2018

% change

2019

2018

% change

1,017 (1)

1,301 785 20.0

1,285 1

522 (23)

816 (4)

12.7 (11)

19.7 2

Capital investment2 (£m)

John Pettigrew

Chief Executive

2,722

2,130 28

2,722

2,130 28

"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."

1 'Underlying' represents statutory results excluding exceptional items, remeasurements, timing and major storm costs. Further detail and definitions for all alternative performance measures are provided on page 48.

2 Includes additions to PP&E, intangibles, contributions to JV and associates (excluding St William), investment in National Grid Partners and total consideration for the Geronimo acquisition.

Contacts

Investor Relations

Aarti Singhal	[phone]	[phone]
Nick Ashworth	[phone]	[phone]
Jon Clay	[phone]	[phone]
James Flanagan	[phone]	[phone]
Media
Molly Neal	-	[phone]
Gemma Stokes	[phone]	[phone]
Teneo
Charles Armitstead	[phone]	-
Conference call details

An analyst presentation will be held at the London Stock Exchange, 10 Paternoster Square, London EC4M 7LS at 09:15 (GMT) today. There will be a live webcast of the results presentation available to view atinvestors.nationalgrid.com.

Live telephone coverage of the analyst presentation at 09:15

UK dial in numbers

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US dial in numbers

[phone] (US toll free)

[phone] (New York)

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National Grid

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You can view or download copies of the latest Annual Report and Accounts (ARA) and Performance Summary from National Grid's website atinvestors.nationalgrid.com or request a free printed copy by [e-mail]

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.

Six months ended 30 September Underlying operating profit

At actual exchange rates

At constant currency

(£ million)

2019

2018

% change

2018

% change

UK Electricity Transmission UK Gas Transmission

583

556

5

556 5

66

91

(27)

91 (27)

US Regulated

525

431

22

452 16

NG Ventures and other activities Total underlying operating profit

127

207

(39)

209 (39)

1,301

1,285

1

1,308 (1)

'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.