National Grid plc
Q3 2017 Earnings Call Transcript

Published: 9 Nov 2017

[Aarti Singhal:]

Just to my speech this morning, we will begin with safety and no planned fire alarm tests, if you hear an alarm, please leave this room through the doors to my right here. Please also make note of the cautionary statement that's in your packs. As usual, after John and Andrew's presentations, we will have time for Q&A. All the material is on our website and I now hand you over to our CEO, John Pettigrew. Thank you.

[John Pettigrew:]

So, thank you, Aarti and good morning everyone. So as usual Andrew and I, John this morning by [indiscernible] we will be happy to assist with any questions. So, let me start with a review of our performance in the first half of '17, '18. It's been a busy period for the group and I'm pleased to report we made good progress. On the underlying basis that is excluding the impact of timing operating profit increased by 2% to £1.4 billion reflecting new rates in the U.S. from Massachusetts Electric and downstate New York gas businesses. Underlying earnings per share were 20.4p 1.8p below last year's EPS on a like for like pro forma basis mainly driven by high interest charges on our index linked debt. In-line with our dividend policy the Board has recommended an interim dividend of 15.49p per share representing 35% of last year's total dividend. Our investment in critical infrastructure continues to increase in the first half of this year to £2 billion up 4% at constant currency. Our outlook for the year remains unchanged from what we set out in May driven by our expectations for a stronger second half mainly due to the seasonality of our U.S. profits. So, it's been a positive first half and this performance continues to support our investment proposition to shareholders when that often attract a combination of yield and asset growth in the 5% to 7% range. Turning now to our safety and reliability performance, as you know safety is core to National Grid and I'm pleased to say we've had a good first six months. Our focus and ensure we have the right safety plans and procedures underpins our world class safety performance with the loss time injury frequency rate at north 0.9. Across both the U.S. and U.K. networks reliability has remained strong, in the U.S. we continue to see the benefits of our investments to improve network resilience. Last week we responded to one of the most severe storms in recent years affecting all of our jurisdictions and impacting over 400,000 customers. We provided a strong response and were assisted by other utilities and as is normal practice with these events we'll carry out a postal review to see how we can improve our response in the future. In the U.K. our system operators have been working hard they have the right tools in place to efficiently balance the system. This winter will be the first year under the new capacity market rules which has contributed to a significant improvement of the capacity margin up from 5.7% to 10.3%. Turning now to our key achievements and developments in the first half across the group. I want to start with the U.S. because many of you here attended our New York seminar in September we see strong growth potential. In the coming years we expect significant investment opportunity driven by the need to replace aging infrastructure and to modernize the networks. As you know rate plans play a key part in ensuring our capital plans are fully funded and over the last six months we've continued to make good progress on our rate filing program with the Niagara Mohawk Gas and Electricity businesses and now [indiscernible] discussions with the New York PSE [ph] staff. To remind you know Niagara represent so 50% of our New York rate base. Our rate filings requested $331 million of incremental revenue with capital investment of over $800 million and return on equity of 9.79%. The PSU starts initial response agreed with the vast majority of our capital investment plans and around half of our revenue requests. This is encouraging at this stage in the process. We worked hard to improve the quality of our engagement with the New York PSC and I hope that a reasonable settlement will be reached by the end of December with the rates coming into effect from April 2018. This means we have new rates for about 70% of our U.S. rate base contributing to an improvement in performance and allowing us to achieve returns as closely allowed as possible. Turning next to the UK regulated businesses, with the sale of a 61% share in our UK gas distribution business last year we've reshaped our portfolio to strengthen National Grid's ability to deliver high asset growth. As you know in June we turned around £3.2 billion by the special dividend of just over 84p per share and to-date we returned 60% of the total £834 million pounds by the share buyback program. Both our electricity and gas transmission businesses continued to deliver high levels of performance. Under RIIO we generate outperformance by delivering efficiently. Ongoing process improvements and further innovation increase our efficiency over time lowering the cost of delivery which is shared with our customers. The case in point is in St Fergus our northernmost gas transmission site and largest terminal importing gas onto the national transmission system. Due to the coastal location the site is exposed to harsh environmental conditions resulting in corrosion. We've developed innovative techniques for dealing with corrosion on pipe work as transitions below ground, this technique avoids a full excavation reducing the cost by about 85%. The projected savings in St Fergus alone through the adoption of this technique is around £10 million and we intend to use this across the national transmission system for similar repairs in future. And this is just one of many great examples of how the real framework is working for customers driving process improvement and innovation to reduce the cost of the work that we do and of course customers directly sharing the benefit of this efficiency. As of March, this year we had generated £460 million of such savings for customers. Moving onto our UK system operator role. In August following extensive consultation [indiscernible] announced the changes and the funding we will receive to evolve our electricity system operator business. We continue to work to ensure we are ready for April 2019 when the electricity system operator was still wholly owned by National Grid will operate as a legally separate company with its own Board and license. So, turning now to National Grid ventures, I'm pleased to say we've made good progress in all areas including the interconnectors that are currently under construction. We have completed seabed surveys for NiMo. our interconnect with Belgium, construction work on the converted stations is progressing well and the projects is on target for completion in 2019. On the North Sealink, our 1.4 gigawatts interconnect with Norway we successfully completed all the civil works on the new engine side last month and the projects are on target for completion in early 2022. National Grid share of investment in these two projects is expected to be around €1.2 billion. For IFA2 the second interconnector with France we commenced the offshore surveys and we're now progressing the design and permit work as planned. I'm also pleased that in June we were awarded preferred bidder status for the shuttle in new energy solution where contracts is expected to be signed in December. So, this is a 60 megawatt 260 kilometer interconnector between the Shetland Islands in Scotland and demonstrates our ability to be successful in a competitive environment and the link should be operational but 2021. In the near-term interconnectors are a major feature of National Grid ventures but as I said in May National Grid ventures is created to explore growth opportunities, to reinforce our technological expertise and strengthen our commercial capabilities as we continue to evolve for the future and I'll touch on these broader initiatives later. So overall, I'm pleased to say we have made good progress across the group on our key priorities. In the U.S. we continued to deliver on our regulatory strategy, in the U.K. we continued our focus on efficiency and innovation and in National Grid ventures we made significant progress on our new development projects. I'll talk more about each of these projects later but first over to Andrew to discuss the group's first half financial performance in more detail.

[Andrew Bonfield:]

Thank you, John. Good morning, everybody. Before I go into the results I would like to point out the both John and I are using the pro forma 2016-17 comparatives. These are the numbers we use to measure our performance both internally and externally. As a reminder the pro forma numbers for last year including an estimate of the 39% share of UK gas distribution now Cadent and adjusted share count to reflect the impacts of the share consolidation and buyback. Obviously, the comparisons to last year are made more complex by the accounting for the disposal and this is exacerbated by the impact of timing on the statutory numbers. We've tried to be as clear as we can within the limitations imposed on us by financial reporting regulations. However, I do realize this may be confusing. First half performance has also been impacted by the changing business mix which means the seasonality of the U.S. gas operations has a greater impact on the first half second half split. So now to the first half results. Headline operating profit of £1.3 billion and earnings per share of 18.5p per share were both down on last year mainly reflected the expected reversal of timing differences. Excluding timing and foreign exchange operating profits £25 million higher than the first half of last year and was in line with our expectations. Underlying earnings per share of 25.4p per share is 1.8p lower than last year mainly due to higher RPI accretions on our index-linked bonds. Capital investment was $2 billion, a 4% increase at constant currency. This reflects the continued investment in our core regulated businesses as well as the ramp up of spend on our interconnector projects. Our balance sheet remains strong and we are on track to deliver good overall returns and value added for the year. As usual I will start with electricity transmission, operating profit was £542 million down 22% compared to the first six months of last year, excluding timing operating profit was £70 million or 11% lower primarily due to the lower reduction in base allowed revenues and lower [indiscernible] income. We invested £515 million on the reinforcement of our networks in new connections this was £71 million lower than last year reflecting the lower spend on the western link. Looking ahead to the full year we expect to deliver totex outperformance close to last year. The contribution from legacy allowances will also be consistent but as a result of reduction of the basis [ph] opportunity current year incentive performance will be lower. Overall though we expect good outperformance for the year. For gas transmission total operating profit was £33 million lower than the prior period with £29 million higher excluding timing. This underlying increase reflects higher revenues due to allowances for the [indiscernible] pipeline. As you know these revenues will be returned next year when the outcome of the mid period review is put through the price control model. This will reduce operating profit next year by approximately £85 million this is simply how the adjustment flows through our IFRS revenue however this will have no impact on returns as the allowances have been excluded from those calculations. Gas transmission capital investment increased by £41 million to £157 million, this included spend on the Humber pipeline project and investment in asset health. We expect totex performance to be similar to last year as we continue to make the necessary investments in the system. This is to ensure we meet the network output measures even though this is above our allowances. We expect the good performance and other incentives to continue and as I've discussed previously our legacy allowances have ceased. Overall the return on equity will be around the allowed return of 10%. Now turning to the US, headline operating profit of £433 million was in-line with last year with the benefit of foreign exchange offsetting adverse timing. Excluding timing of foreign exchange operating profit was up £59 million due to higher revenues from new rates in Massachusetts electric and that downstate New York gas businesses. Capital investment was £1.1 billion which at constant currency is in line with a high level of spend last year. We expect full year investment to be higher than last year. As we previously indicated we expect the U.S. return on equity to be 90% of the allowed. This reflects the improved performance we expect under our new rate plans. Over the medium term our U.S. operating profit excluding timing is expected to increase in-line with asset growth of around 7% per annum. We are now showing National Grid ventures as a separate part of other activities. Our existing interconnector Grain LNG and Metering businesses continue to perform well delivering similar levels of profitability to the prior year. Capital investment has increased significantly to £180 million compared to £87 million last year reflecting the investment in our interconnector projects that John mentioned earlier. The full year operating profit contribution from NGV is expected to be in line with the prior year. Other activities include our St. William joint venture with Berkeley Homes, our residual property business and certain central costs. At the half year our operating profit was £26 million, £13 million higher than last year reflecting the timing of property transactions. The share post tax earnings from our remaining 39% stake in Cadent was £55 million compared to £71 million on a pro forma basis. This reduction is mainly due to adverse year on year timing. The contribution from Cadent for the current year and for our pro-forma results includes the impact of a proportionate shareholder loan from National Grid to Cadent. This means £15 million of interest income is recognizes a credit in the interest line but is an equivalent reduction in our share at Cadent's profits. Before I move on to talk about our interest charge for the first six months I thought it would be helpful to step back and look more broadly at how rising inflation and interest rates for the groups operating results. In the UK inflation on our asset base is managed through an uplift to the regulated asset valley and recovered over the life of the assets. By deferring the impact of RPI into the rev the regulator keeps the cost to consumers low in the short term but rewards shareholders over the longer term. We have partially hedged this by issuing RPI-linked debt. Higher RPI is economically positive as the indexation of £19 billion of rev is far greater than the indexation on £7 billion of RPI-linked debt. A 100 basis point increase in RPI would therefore represent a total of net total of £120 million of incremental asset value. However, in the short term the current higher inflationary picture decreases UK earnings as the impact on our interest charge is greater than the amount that was used to determine our 2017-18 revenues. It will be two years before the impact of higher inflation is trued up in revenue. The cost of debt allowance in the UK is updated annually based on the 10 year iBox tracker. This mechanism has a lagged impact but protects the company in a rising interest rate environment. The key is as I've discussed before is comparing the cost of new debt issued against the spot rate on the index. In the U.S., nominal regulation builds in the recovery of an assumed level of inflation in the year in which it occurs. This provides a faster cash return which means that the rate base is reduced quicker and therefore is not affected as much by inflation. Our rate filing program is designed to adjust the cost of service and the return on equity to reflect increases arising from inflation although the speed of recovery obviously varies by jurisdiction. The key to managing this is timely rate cases to mitigate the impact on returns. U.S. regulators take into account the cost of debt and provide for a straight pass through of these cost to customers. This is why most of this debt is fixed rate long term debt. So, turning back to performance for the first half, finance cost was £527 million up 23% on a pro forma basis. We have now cycled through a full year of RPI increases so we expect this to have a much lower impact in the second half. Our effective interest rate was increased by 80 basis points to 4.7% again due to higher RPI. The effective tax rate before joint ventures was 20.8% down 200 basis points from last year mainly due to the lower UK corporation tax rate. Earnings per share were 18.5p, 6.5p lower than last year on a pro forma basis mainly due to adverse timing of 4.7p. Operating cash was £2 billion this was higher than last year primarily due to lower pension contributions. Net debt increased by £3.8 billion to £23.1 billion, the increase includes the return of £3.6 billion of the gas distribution proceeds to shareholders and an increase of £1.4 billion related to business requirements. These factors have been partially offset by stronger Sterling and other non-cash movements which decrease net debt by £1.2 billion. In the first half of the year we raised over a £1 billion of new long-term financing. Consistent with our policy the Board is recommending an interim dividend of 15.49p per share representing 35% of our prior year full dividend. The return of the £4 billion of gas distribution proceeds is well advanced as both John and I have mentioned. The remaining buybacks are expected to be completed in the second half. The capital distribution is designed to maintain at per share measures, this will reduce the average share count by 300 million shares this year and a full year impact of around 400 million next year. Underlying performance of the group excluding timing is expected to remain consistent with the full year guidance we provided in May. The two areas to highlight are first a share of Cadent performance will reflect an incremental £22 million annual depreciation charge associated with purchase price adjustments from the fair value exercise carried out by the new owners. This wasn't reflected in the pro forma EPS we provided in May as it wasn't available at that time. Adjusting for this at 2016-17 pro-forma EPS would be 58.6p per share rather than 59.2p per share we discussed in May. Second, in the U.S. despite the net outflow of timing in the first half we continue to over recovery revenues associated with a nice funding program. The over recover balance of September was $358 million and over recoveries are expected to continue until November at which time the balance will begin to be repaid at the rate of approximately $10 million per month. So, let me summarize, the financial performance across the group as a whole is in line with our expectations. We expect a significantly stronger second half as a result of cycling through UK RPI increases and increased seasonality due to a greater proportion of our businesses being represented by US gas, as capital investment is increased supporting asset growth in-line with our stated range of 5% to 7% and our financial position remains robust. With that I will hand you back to John.

[John Pettigrew:]

So, thank you Andrew. So, as I said at the start we've had a busy first six months and I'm pleased with the progress that the group has made. So, turning now to our priorities for the second half, where I will cover our key areas of focus and also provide some context in the environment in which we operate. I'll start with the U.K. Since privatisation, National Grid has made significant progress. Our electricity transmission cost per day are 30% below that of privatisation levels. In the last 10 years we've invested about £14 billion in transmission infrastructure and today our electricity and gas transmission costs represent just 3% of the average household bill. And under RIIO we'll continue to invest and drive efficiency through the types of initiatives I discussed earlier. Anyone following the energy sector in the UK in the last six months can be no doubt from a customer, political and regulatory perspective that the cost of energy remains top of the agenda. There has been wide ranging discussion and commentary on the functioning and ownership of the UK's energy sector and whether it's delivering value for customers. In effect we're seeing ever greater pressure to deliver higher quality services while simultaneously reducing costs, but as I just outlined this is not a new area of focus for National Grid as the regulatory framework that we operate within incentivizes us to achieve precisely this. National Grid is a responsible organization and we'll continue to work closely with local and national governments to ensure we're able to deliver world class services whilst responding to customer needs. So, turning now to regulation, at the end of August Ofgem released a consultation for the needs case and options for delivery for Hinkley Seabank. This is a significant project with expected CapEx of almost £1 billion. Ofgem are consulting on three models for the delivery of this important connection. We've responded to this and we wait for Ofgem's decision. Ultimately our overarching goal is to remove the regulatory uncertainty so that we can focus on the time of connection of the power station. We expect the needs case to be published in December along with a consultation on the preferred delivery model which will be confirmed in 2018. And now I would like to touch on RIIO-T2, in July Ofgem issued an open letter setting out their key principles for their future framework. We're pleased to see that many of their principles are consistent with our view including putting the customer at the heart of decisions and ensuring infrastructure is built as efficiently as possible. We firmly believe that with these shared principles Ofgem should be able to create a regulatory framework that ensures efficient delivery of needed capital investment as well as providing investors with certainty and confidence in the utility sector. As you can see from the time table on slide, we're still 3.5 years away from the start of RIIO-T2 and the exact financial parameters won't be known for some time. But 2018 will be an important year in the establishment of the overall framework for the price control. Ofgem's high level timetable indicates a frame of decision they are on the middle of next year with a company specific consultations beginning after this. We will certainly be updating you along the way to 2021 however we don't intend to respond to every piece of communication from Ofgem but will provide updates when it makes most sense. Ultimately there are of course a number of parameters that make a successful price control from base returns, levels investments, out performance incentives to speed of cash. We've got a good track record of collaborating to achieve successful regulatory frameworks and being able to deliver against our price controls for our customers and for our shareholders. Let's turn to our near-term priorities in the U.S. The first is to reach a settlement for the ongoing NiMo rate case, with the new rates due to come into effect on April 2018. We also intend to submit rate case filings for our Massachusetts Gas and Rhode Island gas and electric businesses this month. Together these two businesses represent around 20% of our U.S. business. The Massachusetts gas filings the first since 2010 and will enable us to update revenues to more closer reflect our current cost of service and to allow us to returns close at the earlier lower levels. The Rhode Island gas and electric filing will be the first since 2013, whereas Rhode Island regulation includes capital trackers, it's important that we reset our operating expenses to ensure that we can earn a fair level of return. In addition to rate filings over the next six months we have a number of priority initiatives to optimize our performance and evolve the U.S. organization to deliver significant increase in CapEx. As we mentioned in September we now have a U.S. capital delivery function that is responsible for the majority of our U.S. capital spend and will emulate the U.K. capital delivery function with clear end to end accountability. This approach is key for some of our major capital projects that are in the early stages of development like the Metropolitan reliability infrastructure project in Brooklyn which is a $250 million five year gas project aimed to support the long term system demands in New York City. The Northwest NASA project on Long Island which is a six year $280 million involves installing 11 miles of gas mains and replacing older sections of the transmission network. Together both of these projects funded through our rate plans represent more than $0.5 billion of investment and given the scale of the projects the end to end process work should have a real impact of reducing risk and driving the overall success of these projects. At National Grid we're at the forefront of technology and innovation and we know it's a key driver for our long term success. So, before it's all about National Grid venture, I want to pick up on two areas of technological development that are increasingly important in the near term where we are actively pursuing opportunities. Starting with renewables where we've seen continued reduction in the cost in the U.K., offshore wind is being developed the prices and [indiscernible] only a short time ago. Similarly, if we look to the—if we look at solar in the U.S. we've seen the cost by about 85% since 2009. The reducing price renewables is creating growth opportunities for National Grid, for example we've connected the U.S.s first offshore wind farm in Rhode Island and recently we want to project on Long Island for 23 megawatts of utility scale solar. Looking forward we're also working with offshore wind providers to provide more renewable generation into Massachusetts. Therefore, I believe renewables will continue to bring opportunities for National Grid at multiple points along the supply chain. The second area is storage with through the reduction of lithium battery costs by 73% since 2010 batteries are increasingly becoming an important component in the energy mix. I'm pleased to say that next year we saw the construction of our first large scale battery energy storage system in the U.S. on the Island of Nantucket, the solution which has been developed in tandem with Tesla will provide additional capacity needed on the island. Although this is a relatively small project I highlight it because it demonstrates our storage solutions or one of a number of options we can use to respond to customer needs. Finally, as you know we've seen the continued developments in electric vehicles, although it's early days I'm excited about the role we're already playing. For example, in the U.S. we're proposing 1200 charging stations in Massachusetts and in the U.K we're in discussions with the government on how to develop needed infrastructure to support the adoption of the EVs. So, turning now to a near term priorities for National Grid ventures. As I discussed earlier we already have a good pipeline and interconnector is under construction and there are further opportunities too. For example, last week the Danish government announced its backing for the 1.4 gigawatts Viking Link between the UK and Denmark. A final investment decision is to be taken next March with completion plan for 2022. In the U.S. we have a growing pipeline to business development opportunities including competitive transmission, battery storage and electric vehicle infrastructure. In the second half of this year we'll continue to develop these opportunities well as well taking small steps to better understand the impact of distributed technologies on the networks. And one particular area of focus will be the transmission projects Granite State Power Link and the Northeast Renewable Link. In July we submitted bids to bring renewable energy to Massachusetts through both of these projects. The results of the tender process will be known in January 2018 and if successful these would represent over $1 billion of new capital investment. So overall, I'm pleased to report good progress in all of our businesses and I'm confident this momentum will continue. In the second half we will continue to focus on our priorities as we work to finalize the NiMo rate filings, continue our engagement with Ofgem and RIIO-T2 and Hinkley Seabank and seek opportunities to grow the business whilst remaining focused on performance optimization and keeping pace with the evolution of our industry. As I said earlier we're operating in a dynamic environment, but National Grid has strong fundamentals that underpin our ability to create value over the long term. We have a high quality asset portfolio, a strong balance sheet, access to solid growth opportunities driving asset growth and yields and excellent teams that are motivated to deliver and enhance performance. I'm confident that we're well positioned for attractive growth and good shareholder returns. Thank you for your attention ladies and gentlemen, Andrew and I will be happy to take any questions.

[Unidentified Analyst:]

You seem more than ever to be talking about National Grid ventures and be proud to be going off to growth rather than taking growth in your rate basis. Can you talk about the returns in National Grid ventures and what kind of returns you see and how those compared to the core businesses? Secondly just on capital deployment within the group it seems that National Grid is moving from being 70% VV [ph] in the UK to well over 50% in the North America in just a few years. Can you talk about where you see that growth going and whether you'd be able to find the growth in North America?

[John Pettigrew:]

First, I will start with the first question in terms of National Grid ventures. As I said in May, our focus is very much in three areas, in our U.K. co-regulated businesses, our U.S. correlated businesses and also, we as the industry continues to develop we want to take advantage of opportunities which we're focusing through National Grid ventures. So, the U.S. is growing as we said out in September on [indiscernible] in terms of the regular and asset base we got strong growth there. In the U.K. we're expecting the capital investment to be at the similar level to what we've seen in the first four years of RIIO which is about £1.3 billion per annum, but National Grid ventures is an opportunity and as I said the initial focus is very much on the construction of the interconnectors, this year the couple investment is around about $400 million and we've got some good opportunities as I've set out in my speech going forward. So, it's not a more of an emphasis it's more of making sure that we're focusing in all three areas going forward. In terms of the overall shape, I mean the overall shape was impacted by our successful sale of 61% of our gas distribution business last year. So, with the growth rates that we're seeing over the medium term in the U.S. and UK they are naturally the overall shape is going to head towards a sort of 50

[Unidentified Analyst:]

And returns in ventures?

[John Pettigrew:]

So, return in ventures, you know the folks at the moment on our interconnectors business, any investment we make in interconnector on any project of National Grid we've got a very disciplined approach. Our expectation as we said before for the interconnectors is that they're likely to earn returns based on our - it's not that as we have tested slightly higher than what you expect to see on the onshore transmission businesses in the UK and of course they are protected with a call that we got in place for the new interconnectors going forward as well.

[Jenny Ping:]

It's Jenny Ping from Citi. I just wondered whether you have any comments on the back of the [indiscernible] review some of the issues that's raised in terms of the networks and the profitability there and then secondly you talk about EV infrastructure in discussion with the UK government, can you just give us an update that as to where you are, what the potential structure could look like, and the potential spends there? Thanks.

[John Pettigrew:]

So, in terms of the detailed report I think it's fair to say it was comprehensive and ambitious given the timescales that [indiscernible] had to do it. I think there are some interesting concepts in there particularly on simplification and transparency that he's promoting. From a networks perspective I don't agree with his analysis on RIIO, I think when you look over the last four years with National Grid then it's clear that we've delivered about £460 million of savings through actually delivering projects more efficiently using innovation whereas [indiscernible] focused in on the assumptions that set out at the beginning of RIIO-T1. So, you know the government this week has opened up the opportunity to respond to that with a call for evidence that's due just after Christmas, so we'll look at the detail now and we will respond accordingly to it. In terms of EV's, as part of the response to the industrial strategy that came out a few months ago National Grid set out a concept really about how do you address that the key issue of range anxiety and one of the ideas around that is potentially creating a network of service stations that have access to fast charging so the simplistic concept is you can charge your car in the time it takes to get the Costa coffee and if you were to do that then you potentially need quite a significant amount of power potential of the transmission system. So, we've been exploring that concept both with service station providers, car manufactures in the government to see whether there's an opportunity to create a backbone for infrastructure in EV as part of the government's broader ambitions to roll out electric vehicles. In terms of potential investment opportunity then you know it's would be several hundred million to connect all the key service stations in the UK, it's very, very early days and this is a concept at the moment and we've got a lot more work to do to think about the impact on networks and how best to address issues like range anxiety.

[Nick Ashworth:]

It's Nick Ashworth with Morgan Stanley. Firstly, can you give us an indicator about how much money is been spent on the interconnectors, you talked about it in your presentation, good to know how much of that has gone onto that already. Secondly, where will net debt be by the end of the year, looking at technical guidance it seems to be pointing towards 24 billion, I just wanted to make sure that I read that correctly and then finally in the U.S. you're talking about targeting 90% of the allowed returns. Does that mean that you think you will get there this year, what are the risks around I think just a bit more color on that would be helpful? Thank you.

[John Pettigrew:]

I will take the first and third and then I hand the second to Andrew. So, in terms of interconnectors against the projects that we've got in construction at the moment and potentially including Viking, our capital investment would be around about £2.2 billion I mean currently this year we're probably going to spend a couple hundred million so it's going to ramp up over the next two to three years quite significantly to get the projects complete. So NiMo is due to be completed in 2019 so as to further advance NS [ph] due in 2021 and if we take Viking forward it will be in 2022 and [indiscernible] in 2021 so actually over the next 4 or 5 years there will be quite a ramp up in capital investment for interconnectors.

[Nick Ashworth:]

But in terms of how this has already been spent today the value of this year will be?

[John Pettigrew:]

It's probably something around about 400 million, Andrew?

[Andrew Bonfield:]

Yes.

[John Pettigrew:]

Somewhere around 400 million I guess. In terms of low returns so as you said in your question we have set a target to achieve 90% of all of returns this year, so clearly, we get the benefits of the Cadent settlement that we did last year as well as Massachusetts Electric. So, at the half year stage we remain confident that we're going to hit that target.

[Andrew Bonfield:]

And on net debt we estimated about 0.5 billion of business related spent there's about another for 0.5 billion of potential gas distribution somewhere around 24 billion in constant currency, currency is the big sort of swing factor.

[Dominic Nash:]

It's Dominic Nash from Macquarie. Two questions please. Firstly, I see that your dividend was 23 megawatts of solar on Long Island, are you actually the owner operator or is your generation and so I guess that a follow-on to a question from that is, is the scale of opportunities for renewables in the U.S. is obviously huge. Is this something that if it works and you could actually potentially roll out a magnitude of two greater and my second question is, how are the negotiations going with the DSO versus TSO debate on who is going to be sort of controlling the lower voltage networks? Will you be the people sort of controlling that?

[John Pettigrew:]

In terms of the question, sort of three questions, in terms of the first quarter the solar opportunity on Long Island so this is actually a JV that we're in with next year. So, it's a relatively modest investment around about $30 million and we're currently in negotiation with the Long Island Power Authority for a long term PPA, but as an opportunity leading to your second question and one of the reasons that we created National Grid Ventures was to look for opportunities where you know the types of investment have similar characteristics that we believe we have in terms of infrastructure energy. So, infrastructure energy that requires good engineering, good asset management and low risk with regulatory characteristics are things that we would look to explore through National Grid ventures and renewables is clearly is one of those opportunities. In terms of TSO, DSO we're making good progress actually through the work that the ENA has set up to really establish a clear framework for transferring data and understanding where the constraints are on the systems and that particularly was going well, it's focused very much with UK Power networks at the moment because there's some real constraints in the network and we're identifying where they are and work and see what the whole system solution is. So that work is progressing well I think.

[Dominic Nash:]

When would you think we will get clarity on that?

[John Pettigrew:]

I think it's an ongoing thing rather than that it's a point in time. Dominic, I think as the networks continue to evolve I think the role of the system operator and its interaction with the DSO is going to have to continue to evolve. So, I'm not sure there is a deadline, but it will continue to ramp up as the networks continue to evolve and challenges change.

[Iain Turner:]

Thanks, it's Iain Turner from Exane. I'll ask about the accounting implications of the nice [indiscernible] thing. And it looks as if, if you axe that out you're actually under recovering by more than this sort of - there is more under recovery on the [indiscernible] performance than - and there is no headline figure, is that right?

[John Pettigrew:]

Yes. So, we actually did continue to over recover by about $10 million a month through the first half of the year, so the balance of thing has gone up from somewhere about $270 million to $350 million in the first half of the year. So that was a contra to the other, but if you remember, we did have quite a significant timing balance in the U.S. at the end of last year which is part of what we found it back. Now, so there is - unfortunately this is one of the quotes of our IFRS accounting, we have this discussion often, notice the Chairman smiling in the front row about the fact that we actually have to recognize revenue which is probably not ours and we then have to give it back overtime; that is part of the reason why we highlight timing as an issue. So effectively the under-gap would just be a deferral and we would have - you wouldn't have seen it through the P&L from SV counters [ph] revenue and the give back we got back through revenue so it's just going to have a legacy impact on us going forward, probably for a couple of years now.

[Iain Turner:]

I'll switch from being from over recovery [indiscernible]?

[John Pettigrew:]

Yes, eventually we'll not just be effectively taking what we continue to take through bills, we'll actually then start passing on to our service well; so, you will lose the 120 over recovery and move to 120 overcome [ph], unfortunately.

[James Brand:]

James Brand from Deutsche Bank; two questions, both on the U.S. Firstly, I was wondering whether you could give just a fewer more impacts of U.S. tax reform, might be on a year that goes through somewhere in line with the current proposals? And secondly, oversee, I guess one of the other focuses of Trump has been infrastructure spend and the need for a massive infrastructure investment program; and when you have great reviews in the U.S. it's always been a bit of a trade-off between infrastructure spend requirements and affordability. I was wondering whether you could give us an update on whether it's becoming an easy for you to convince regulators of the need for investment and whether that trade-off between affordability investments moving a bit closer to facilitating more investment in the past?

[John Pettigrew:]

I'll start with the second and you do the first.

[Andrew Bonfield:]

So, on the U.S. tax reform, obviously there is the draft bill that we've seen. A couple of things of interest for us, obviously one which is the fact that they seem to indicate that interest deductibility for utilities will remain, it's important. The other key factor which we were interested in was obviously around property tax deductions, deductibility because that is obviously a key. The other factor that's there is obviously the elimination of bonds depreciation which for utilities - again, which actually is quite good because effectively at the moment we do have the situation where all our investment is depreciated in year one, we're building up a very large deferred tax liability against Rev and that's actually been a brake on the Rev growth over that period of time. So obviously there's still a long way to go, there are a number of things in the legislation which we don't particularly like; so, we'll be working to look at those, particular around HOCOS [ph] and what that means from an interest deductibility perspective and so forth. So, there are some things and obviously it's a long way to go before we can actually give you the real picture of what it is. I think the interesting thing which I think is one, which comes back to your - the second part of it which leads into the second part of the question is, potentially there is some actually headroom this gives because effectively if you have a significant reduction in the tax rate, effectively there is a give back potentially to customers, and can that be used then to actually invest more, give you a bit more bill headroom to do some more of the infrastructure investment which we think is necessary.

[John Pettigrew:]

So, I mean in terms of infrastructure; so, I guess we're keen to see when any legislation or thoughts come forward in terms of infrastructure, so it was certainly part of the initial key policy areas but we're waiting to see and potentially, that's a positive thing. But for our U.S. business state is really important as well, so in terms of the infrastructure drivers, if you look at our downstate gas business last year, we set out the requirements for investing both for safety resilient through reliability and to start adopting networks. We asked for $3 billion over three years and effectively what's - that's what the regulators supported us with. If you look at NIMO [ph] in upstate New York, the affordability issue is more of an issue in upstate New York, just in terms of demographic. But in the initial response from staff against our capital investment proposals which again driven by safety resilience reliability, as well as some good modernization. Their initial view was to accept about 92% for transmission CapEx, about 82% our gas from a starting point, that's very high level. When we put our rate filings in place we're very cognizant of affordability, so obviously in recent years we've got the benefits of commodity prices coming down, so this needed some headroom. But we also look to shape our on rate fallings to mitigate the initial impact, so if you look at our Kelly and Kelly 1 [ph] last year for example, we smoothed the revenue impact over three years rather than a customer saying it increased in year one and we have the same engagement and discussions with regulators in upstate New York as well.

[Unidentified Analyst:]

McLaren [ph] from Merrill's, good morning, just two questions please. You seem to be expecting nine more to complete by the year end, that's a little earlier than you thought might be the case; does that mean that things are going particularly well and is that therefore related to your expectation of a reasonable outcome? And finally, just on tax guidance, notwithstanding the different definition used in the statement versus the full year, is the underlying rate now higher than your previous indications? And if so, why is that the case?

[John Pettigrew:]

So, I'll go with the first number and Andrew can do the second. And in terms of NIMO, position hasn't changed massively from where we were in September at the seminar, so following the staff's initial response to our filing, we agreed to enter into settlement discussions. Those discussions are going well, and our hope and expectation is that we could potentially come through conclusion towards the end of the year, but those discussions are ongoing as we speak.

[Andrew Bonfield:]

And on tax guidance, yes, it is slightly higher but that does reflect the mix of profits we're expecting for the full year. So, don't forget obviously the differentiation between UK profitability and U.S. profitability has quite a significant impact on the swing, some mix of profits, that's the major driver.

[Unidentified Analyst:]

[Indiscernible] from HSBC. Just a quick question with your system operator household; and there has been quite a lot of comment about - perhaps the de-risking of reduction in grid volatility because of battery storage or more stable system, given that one of your responsibilities is keeping the lights on and balancing the system, how do you see that evolving with battery storage and new other solutions? Are you more competent about the stability of the grid going forward?

[John Pettigrew:]

Yes, thanks for the question. I think over the last three or four years the system operator has been consistently looking at developing new products and services that are in lowest to balance the system as efficiently as possible, reflecting the new challenges that intermittent generation brings. So I think it was at the full year results we talked about the fact that some of the new products we've put in place have included what's called fast frequency response, it wasn't technology specific but things like storage are really well placed to be able to provide those services where you need to have response from generation in sort of milliseconds, we put a tender out, we got a huge response; I think it was over a 1000 megawatts actually response and we've bought 200 megawatts which is what we needed the system operator. Every year we set out structurally for how we're going to operate the system and at the moment we're looking at what we can do to simplify the products we bought historically so that we got the right products and services going forward, and that will continue as we see more and more of it and a generation coming on, I think solar - sorry, storage will be an important part of the types of tools that system operator will need to use.

[Unidentified Analyst:]

So, you're more optimistic about - what's your conclusion?

[John Pettigrew:]

Sorry?

[Unidentified Analyst:]

You're more optimistic about the ability of the system to be balanced.

[John Pettigrew:]

So, I'm very confident that the system operator will be able to forecast how the requirements are changing, we'll be able to buy the products and services and needs to balance the system. The challenges are changing, we've reported this year we've had the first summer day time demand that's been middle of the day - the night time demand, we've had periods where we've seen no fossil fuel generation on the network; so, the network is evolving all the time, but we are confident that we can develop the products and services we need to meet those challenges.

[John Pettigrew:]

Okay. If there are no more questions can I thank everybody for coming today. As I finished, I think we're very confident that we're in a great position in terms of the asset portfolio we've got, and good to see you. Thank you very much