Company Announcements

OVERVIEW

A solid performance in the first half

National Grid has reported strong operational progress in both the UK and US for the first six months of the year. However, like all companies, we have incurred COVID-19 related costs, impacting our financial performance.

Safety has remained paramount and we continue to focus on ensuring the public, our employees and contractors are safe. During the period ended 30 September, our businesses have continued to deliver good performance with lost time injury frequency rates (LTIFR) trending down to 0.11 from the year end LTIFR performance of 0.12. On reliability, our performance has remained good across our businesses as we have successfully managed low levels of demand, particularly in the UK, and we have responded well to a series of large storms across our US regions.

Half-year financial performance

Underlying operating profit at constant currency decreased £147 million (11)% versus the prior period to £1,147 million (down 12% at actual exchange rates). This mainly reflects the impact of increased COVID-19 related costs including US bad debts, higher US storm costs, and non-recurrence of prior year MOD adjustments for UK Electricity Transmission, partly offset by higher revenue from US rate increases and the timing of UK Gas Transmission exit capacity income.

'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 44 to 47.

Capital investment decreased by £136 million at constant currency to £2,560 million. This was driven principally by the non-recurrence of the National Grid Renewables Development LLC (previously known as Geronimo) acquisition and lower spend in UK Gas Transmission (lower Feeder-9 expenditure), partly offset by higher expenditure in UK Electricity Transmission (London Power Tunnels 2 and Hinkley-Seabank) and in our US regulated electricity transmission business.

Delivering safe, reliable networks through the COVID-19 pandemic

Throughout the COVID-19 pandemic the Group has adapted to new ways of working. We have delivered safe, reliable networks, whilst managing through all the new regulations and restrictions. During the first half, we have:

•  Delivered on our substantial investment programme by investing £2.6 billion across our networks, broadly in line with investment in the same period last year;

•  Delivered an outstanding response to a greater number of storms in the US;

•  Maintained our cost discipline, and made good progress alleviating some of the COVID-19 cost pressure, remaining on track to deliver on our UK and US efficiency targets;

• Ensured we behave as a responsible and purpose led business, with a continued focus on our safety culture, supporting our people and our communities.

In the US, at the onset of the pandemic, our safety team created our COVID-19 Health and Safety Plan to act as a guideline for all employees and contractors. This helped deliver over 400 field visits across our operations in May to ensure new ways of working and safety expectations were made clear which has allowed us to deliver our critical investment with limited disruption. In the UK, our teams have continued to work through this period, with key workers going out on site during lockdown to keep gas and electricity flowing with enhanced safety protocols. We have also worked closely with our contractors across all projects to minimise delays associated with COVID-19, including major projects such as the London Power Tunnels 2 and Hinkley Point projects.

COVID-19 - update on financial impact

During the first half, we estimate that COVID-19 impacted our underlying operating profit by £117 million year-on-year in three broad areas: (1) an increase in our bad debt provision of approximately £56 million, (2) a shortfall of revenue under existing regulatory agreements of £41 million, and (3) net direct costs of £20 million. In addition to the £117 million impact, the delay to updating rates in KEDNY and KEDLI at the start of COVID-19 resulted in a further approximate £24 million impact in the first half.

We continue to expect a full year impact from COVID-19 of around £400 million to underlying operating profit given the seasonal nature of our US regulated business. Whilst we see future uncertainties from COVID-19, we will continue to find ways to drive cost efficiencies. On this point, we have made progress to alleviate much of the direct cost burden, mitigating around £60 million of direct COVID-19 costs during the first half.

We also maintain our guidance of up to £1 billion of cash flow impact in the full year. On top of the underlying operating profit impact, we expect (1) continued weaker demand and lower revenues, which will be recovered as usual through regulatory true-ups in later years; (2) lower cash collections from our US customers, which, whilst below prior year levels, are in line with our expectations, and; (3) a small impact from revenue deferrals related to system costs in the UK that we will recover next year.

In the US, we remain confident that we will be able to recover the majority of our US COVID-19 related costs through our regulatory mechanisms. Whilst some of this will be through the usual course of rate filing negotiations, such as recovering revenue deferrals, some will be through separate filings. For example, we have open regulatory proceedings on COVID-19 cost recovery in both New York and Massachusetts. In June, we filed a Cost Recovery Plan with other stakeholders with the Massachusetts regulator, seeking to establish a regulatory asset for incremental COVID-19 costs; and in July, we joined other utilities in New York and filed comments with the Public Service Commission (PSC) on the effects of COVID-19 on our business. We will continue to work with all stakeholders on this during the second half of FY21. 

In the UK, we have seen some limited impact from COVID-19. We have been working with industry and Ofgem on financial support packages to support the industry through these unforeseen circumstances. For Transmission Network Use of System (TNUoS) and gas charges, we provided £11 million as part of a wider industry scheme to support suppliers over the summer period. These charges will be recovered in the current financial year. For Balancing Services Use of System (BSUoS) charges, we provided £16m of temporary support to suppliers and generators to defer the payment of an element of the summer excess costs which will be recovered in the next financial year. We will continue to closely monitor this throughout the duration of the pandemic.

US delivering good performance despite increased storms

We achieved good performance across our US operating companies during a period with significant storm activity. With the impact of Tropical Storm Isaias in August and several major storms, the financial impact of major storms in the first half was $61 million. We also had a large storm that impacted upstate New York,  Massachusetts, and Rhode Island in early October. Given the additional storms in October, it is likely we will incur over $100 million of storm costs for the full year.

The October storm was our third most impactful event in the last 15 years, where we saw over 550,000 customers lose power but with 95% fully restored in New York within 64 hours. Tropical Storm Isaias in early August was our seventh most impactful event in terms of customer disconnections. We have experienced 18 major storms in HY21 compared to 8 in HY20. Nevertheless, our operational response has been strong especially considering the COVID-19 impact which added complexity to our response efforts and required us to manage our Incident Command Structure remotely. Our crews have responded rapidly to restoring over 1 million disconnected customers during Isaias and the October storms, and there have been no safety incidents during these storms for our field workforce.

Storms remain a major focus for us and for our regulators given the enormous disruption they bring to customers and the cost of lost productivity to local communities. We continue to work with regulators to ensure our rate settlements reflect this changing climate, and we are focused on continuous improvement and are piloting digital technologies to help improve our performance. For example, we are using a new digital product called Vegetation Management Optimisation (VMO) that is capable of utilising satellite imagery to map the areas where vegetation poses a high risk to our networks, given trees cause the greatest number of outages in all our jurisdictions.

Capital investment across our US businesses in the first half was £1,641 million, £75 million higher than the prior period at constant currency. This was driven by higher expenditure in our US regulated electricity transmission business, partly offset by lower gas spend due to the COVID-19 impact in downstate New York. We had work restrictions in place in New York and Massachusetts in the early part of the year which limited the type of work we could complete, especially in our Gas Business in New York City and Boston. For example, we had restrictions in place around the removal of old gas pipelines in our leak prone pipe replacement programme. However, this work has accelerated in recent months as restrictions have eased. In addition, our resource planning and construction teams have rebalanced our investment portfolio to deliver the significant investment required across our networks.

We have continued to make progress on regulatory rate filings. In July, we filed a request with the New York PSC to update electric and gas distribution rates for Niagara Mohawk (NIMO), our upstate New York distribution business. This represents a one-year filing, with revenue data submitted for two additional years to help facilitate a multi-year settlement. New rates are expected to become effective July 2021. It proposes capital investment of $3.6 billion across the three years to help modernise the electric and gas networks, and fund clean energy infrastructure such as electric vehicle charging and renewable natural gas projects. This includes a proposal for a hydrogen demonstration project that would be the first of its kind in the United States, producing hydrogen from renewable electricity which could be used, stored and blended into the network. The filing also proposes funding for 500 new positions, new performance-based rates and incentives, as well as earnings adjustment mechanisms, all whilst managing customer bills and affordability in response to COVID-19.

In downstate New York, we remain in discussions for a multi-year settlement for our KEDNY and KEDLI gas businesses. Whilst we have not yet reached a settlement, we have continued a constructive dialogue with PSC staff and other stakeholders, and have agreed to extend discussions by two months from the end of November to the end of January. We remain hopeful that an agreement with PSC staff and other stakeholders will be reached by the end of the calendar year that can then be approved by the Commission. We also have a way forward to solving the short and medium term issues around gas supply constraints in downstate New York which focuses on delivering investment to enhance existing CNG and LNG infrastructure, as well as significant increases in energy efficiency and demand side response measures.

On 13 November, we plan to file for new rates for our Massachusetts Gas business, to become effective in November 2021. As part of our filing, we are proposing a multi-year agreement with a Performance Based Mechanism similar to that we had agreed for our Massachusetts Electric business last year. If agreed, this will help give us longer term visibility for our investments, greater protection against cost pressures, and more incentives to innovate and create value for our customers.

From a cost efficiency perspective, we continue to streamline operations, simplify our supply chain, and rationalise our property portfolio. We delivered over $30 million of efficiency savings last year, and committed to delivering $50 million per annum from 2020/21 onwards.

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.

For Electricity Transmission, capital investment reached £548 million, up £77 million on prior year. This was principally driven by the London Power Tunnels 2 and Hinkley Point projects, both of which are progressing well. On Hinkley Point, the project involves a 46 kilometre connection between Bridgwater and Seabank, with an expected completion date of 2026. The first foundations have been completed for the new T-pylons which will be used for this line.

Gas Transmission capital investment was £85 million, £82 million lower than prior year. This primarily reflects lower asset health work at our Bacton and St Fergus gas terminals, the completion of the tunnel for the Feeder-9 pipeline, and lower emissions works at Peterborough and Huntingdon. The Feeder-9 pipeline under the Humber estuary is now near commissioning, and represents our largest gas project in a decade.

We were disappointed with the draft determinations on RIIO-2 when they were published by Ofgem in July. The proposals may result in a significant reduction in network reliability, and would also mean lower allowed capital expenditure, lower returns, limited incentives, and extensive use of uncertainty mechanisms. In addition, Ofgem has proposed a clawback of £556 million from the T1 price control, and a business plan incentive (BPI) penalty of £93 million. In September, we submitted a comprehensive response to the draft determinations that highlighted three main areas of concern, namely that the draft determinations (a) reduce reliability and resilience across the network, (b) jeopardise net zero progress, and (c) erode regulatory stability. Our submission also provided evidence to support our view that both the BPI and clawback were unjustified. We have provided further evidence to justify the investment necessary to maintain network safety and reliability that our stakeholders have asked for. Since our submission, we have continued to engage with Ofgem on the RIIO-2 framework, including at the Open Meetings in October. We continue to work towards a settlement that is acceptable for all our stakeholders and remain hopeful that this is an outcome that can be achieved in December.

We also continue to work on ways to drive innovation and efficiencies as we look to the future, building on the £100 million of cumulative savings we expect to achieve this year. Our focus remains on; (1) streamlining our maintenance operating procedures, (2) further digital innovations to increase productivity, and (3) making improvements to our back-office processes. Some of these benefits will come in the way we manage our day-to-day operations. For example, over the next six months, we will be launching the first phase of our new digital tool, to transform work management and scheduling across electricity and gas transmission, consolidating legacy technology. But we are also working on ways to deliver larger, scalable, benefits across major projects, in particular looking at how we use contractors through the project lifecycle, as well as ways to deliver greater capex efficiency through our supply chains. Once we have greater clarity on the RIIO-2 framework, we will be able to understand how much further we can drive efficiencies.

Electricity System Operator (ESO)

As the UK energy industry continues to evolve, we are working with the government and regulator to review the most appropriate structure for the ESO following legal separation last year. The Board believes it is important that the current external review of the structure of the ESO results in a stable outcome which best enables the UK to meet its 2050 net zero commitment and represents value for consumers.

Further growth for NGV and other activities

* Share of post-tax profit/(loss) is before exceptional items and remeasurements.

We continue to make significant progress on our interconnector portfolio. In October 2020, IFA2, our second connection to France, passed an important milestone, entering its energisation phase, allowing electricity power to run through the cable before going live later this year. For North Sea Link, we have successfully laid over 590km of cable as planned and the project remains on track for completion by the end of 2021. We also began construction work on Viking Link earlier this year, which is expected to become operational in late 2023.

On 22 September we announced a co-operation agreement with TenneT to explore the feasibility of connecting Dutch and British wind farms to the energy systems of both countries via subsea electricity cables, called multi-purpose interconnectors. Whilst there is still a lot of work that needs to be done to determine a suitable financing structure, the development would be the first of its kind for the UK and the Netherlands in the North Sea.

Last month, our LNG importation terminal on the Isle of Grain signed a 25-year agreement with Qatar Petroleum that will provide the Qatari company with storage and redelivery capacity at Grain LNG from mid-2025. This marks the conclusion of Grain LNG's competitive "Open Season" process which began in November 2019. The agreement will allow National Grid to invest in an additional tank and associated vaporizer capacity, bringing our future annual throughput capacity to 25 bcm of natural gas versus current capacity of 20 bcm. Total capital investment of £425 million will be spread over 5 years, with the project starting in 2021.

We recently launched National Grid Renewables, the new unified brand for our US renewable energy business within NGV. National Grid Renewables is focused on developing, owning and operating large-scale renewable energy assets across the United States, and brings together a number of our businesses including solar, onshore wind, and battery energy storage previously taking place under the NGV and Geronimo Energy brands.

National Grid Renewables continues to expand its clean energy development pipeline. In April, we signed a Virtual PPA agreement with Cargill for the 200MW Prairie Wolf Solar Project in Illinois, which is expected to commission in FY22.

The Property business delivered an operating profit of £25 million, down £21 million versus the prior period, reflecting the timing of completion of site sales. During the first half, we sold 21 sites, including two to St William at Ascot and Hertford, all of which were former gas works sites.

Responsible Business Charter - our commitment

National Grid is fully committed to its role in tackling climate change and as a responsible company for the communities that we serve. In October, we reached our next milestone in this journey with the launch of our Responsible Business Charter.

The Charter describes our long-term goals across five pillars: (1) the environment, where we have committed to achieve net zero on our own emissions by 2050, and a new target to reduce scope 3 emissions by 20% by 2030; (2) our communities, where we aim to provide access to skills development for 45,000 people and contribute half a million volunteering hours by 2030; (3) our people, where the safety and well-being of our employees is paramount, and where we aim to have 50% diversity in our senior leadership group by 2025; (4) the economy, where our main contribution is the safe and reliable delivery of energy, but where we are also committing $250 million into smarter technology that will benefit society; and (5) the right governance, where we will embrace diversity and inclusion, allowing all voices to be heard within our organization and across all our stakeholder groups. Following publication of the Charter, we will also publish our first Responsible Business Report next year, alongside our Annual Report, to demonstrate how we are progressing against the commitments and ambitions that we have laid out.

To support the delivery of our commitment as a responsible business in relation to our communities, we have also launched Grid for Good. This is our flagship community investment programme, designed to deliver social mobility in the hardest to reach corners of our communities for disadvantaged youth aged between 16 and 24. Through the Grid for Good pathway, and with the help of our employee volunteers, young people have a unique opportunity to learn about the energy industry, network with one another, gain valuable skills, receive a mentor, have a chance to gain valuable work experience, and ultimately achieve meaningful careers with us and our partners now, or in the future. We believe that fresh talent and diverse perspectives in our own organisation and our industry will be a key contributor in achieving a diverse workforce who will help us to deliver against our net zero ambitions. 

Board changes

In September, we announced the appointment of Paula Rosput Reynolds to succeed Sir Peter Gershon as Chair. Paula will join the Board on 1 January 2021 as Non-executive Director and Chair Designate and will assume the role of Chair after a transitionary period and no later than the conclusion of the 2021 Annual General Meeting. Sir Peter will remain as Chair until this time.

Paula is currently a Non-executive Director at General Electric Company and the Senior Independent Director of BP plc where she also chairs the Remuneration Committee. She is currently also a Non-executive Director and Chair of the Remuneration Committee of BAE Systems plc but will step down from BAE prior to 1 January 2021.

In July, we announced that Mark Williamson will step down as Chair of the Audit Committee, with effect from 10 November 2020. Liz Hewitt, Independent Non-executive Director of the Company, stepped into the role on this date.