National Grid - H1 2024

Transcript

Nick Ashworth (Head of Investor Relations)

Good morning, and welcome to National Grid's half-year results presentation. I'm Nick Ashworth, head of Investor Relations, and it's great to have so many of you on the call today. Firstly, please can I draw your attention to the cautionary statement at the front of the pack? As usual, a Q&A with John and Andy will follow the presentation. Please join via the Conference Call to ask a question. All of today's materials are available on our website, and of course, for any further queries after the call, please do feel free to reach out to me or one of the IR team. So with that, I'd now like to hand you over to our CEO, John Pettigrew. John.

John Pettigrew (CEO)

Thank you, Nick. Good morning, everyone, and welcome to the call. As usual, I'm here with Andy Agg, our CFO, and following our respective presentations, we'll be very happy to take your questions. It's been a busy six months for National Grid, with solid progress, both in terms of financial performance and delivering against our strategic priorities. The energy transition remains a fundamental priority for governments around the world and at the core of National Grid's strategy. But you only need to look at the recent headlines to see a growing awareness of the practical challenges associated with delivering it. The way that decarbonization goals are met could have real implications on the affordability, reliability, and security of energy. We've continued to proactively engage with governments and regulators to push for faster progress on the reforms needed to provide a stable, predictable, and investable environment to deliver net zero.

I'm pleased with the significant progress we've made in the first half. Six months ago, we set out five priority areas for policy reform in the U.K., and we've seen positive progress for each. In electricity transmission, we're stepping up our investment with the 17 major projects awarded to us as part of the Accelerated Strategic Transmission Investment, or ASTI, framework, now included in our license. In September, the Prime Minister's speech on the government's approach to net zero, while delaying near-term bans on combustion engines and gas boilers, actually endorsed many of the policies we've been advocating for, including a Strategic Spatial Energy Plan that gives certainty to what needs to be built, where and when, fast-track planning processes for nationally significant projects, and a new connect or move approach to grid connections.

We've also seen significant progress in the U.S., where we've submitted proposals in Massachusetts for the investments needed to support the stage 2050 decarbonization goals. We've received approval to take forward our Propel New York Energy Transmission project with New York Transco, which will support offshore wind coming into the state. There's been a step forward with the Twin States Clean Energy Link project, which will connect Canadian hydropower to New England, with it being selected by the Department of Energy for federal funding. Last month, our Community Offshore Wind joint venture was successful with the most recent New York offshore wind solicitation, with a provisional offtake award of 1.3 GW. Clearly, the last six months show that we're now firmly in a new phase of capital delivery for the energy transition, and as a result, today, we've updated our five-year financial frame.

Between April 2021 and March 2026, we now expect to invest around GBP 42 billion, up from our previous guidance of GBP 40 billion, increasing our investment in the decarbonization of energy systems. This will modestly enhance both our asset growth and underlying earnings per share growth within the existing ranges. And as we enter this exciting new phase of strong capital delivery, we'll continue to play our part in mitigating the affordability challenge across our customer base, having now exceeded our GBP 400 million cost efficiency target six months early. So, turning to our financial performance. On an underlying basis, that is excluding the impact of timing and exceptional items, operating profit from continuing operations was GBP 1.8 billion in the first half, down 14% compared to the prior year at constant currency.

The underlying business has performed well in the first half, with the prior year helped by a number of one-offs as we completed transactions. Underlying earnings per share was broadly in line with expectations at 23.8 pence, with no change to our full-year guidance. Our regulated businesses delivered a record GBP 3.5 billion of investment, up 10% year-over-year at constant currency, while capital investment for our continuing operations was GBP 3.9 billion. In line with our policy, the board has declared an interim dividend of 19.4 pence per share, reflecting 35% of last year's full-year dividend. Turning next to our reliability and safety performance. Firstly, on reliability, which has remained strong across our U.K. and U.S. networks.

In the U.K., many of you will have seen the Winter Outlook Report published by the Electricity System Operator at the end of September. This year, the ESO's forecast an electricity capacity margin of 7.4%, slightly higher than last year's and broadly in line with recent winters. However, the ESO expects there will be some days when we'll need to utilize tools such as system notices, and following its successful pilot last year, the Demand Flexibility Service, which incentivizes customers to reduce consumption during periods when margins are tight. We're confident in delivering our usual high standard of reliability across our networks in the months ahead and remain vigilant as we move through winter in both the U.K. and the U.S. Moving to safety.

Our lost time injury frequency rate was 0.09, compared to 0.11 last year, and against a group target of 0.1. But tragically, one of our U.K. Electricity Distribution colleagues lost his life when he fell from height at a site in Ludlow in August. As you'd expect, this has been deeply felt right across the group, and we're focused as a leadership team on making sure that the lessons learned from this tragedy are shared across the organization. Moving now to our operating performance across the group and starting with the U.K. electricity distribution. We've had a good start to the new ED2 price control, with capital investment in the first half, reaching GBP 608 million, up 4% on the prior period. Primarily reflecting higher spend on new customer connections, including the Hinkley Point nuclear connection.

In July, we hosted our first investor event since acquiring WPD, where we set out our plans to deliver the RIIO-ED2 price control, including a 30% step-up in annual investment from ED1 to ED2, how we intend to deliver our target 100-125 basis points of outperformance, with a focus on TotEx efficiency, and our progress in integrating electricity distribution into the group, including identifying GBP 100 million in synergies to be delivered over the next three years. In the first half, we also enabled more than 40,000 domestic connections of low-carbon technologies, such as solar panels, EV charge points, batteries, and heat pumps.

In the face of the huge surge in demand for connections to our network, in September, we announced a plan of action, which will release 10 GW of incremental grid capacity to accelerate the connection of renewable generation assets. Moving to our U.K. electricity transmission business, capital investment was a record GBP 800 million in the first half, a 27% increase versus the prior year. This increased investment, including nearly 3 GW of new connections in the period, including the world's largest offshore wind farm, Dogger Bank in Yorkshire, and the Larks Green Solar Project near Bristol, the first of its kind to be connected directly to the U.K. transmission network. We've also achieved two important milestones in the first half, with the completion of tunnel boring at our London Power Tunnels.

The project, which will future-proof the network for growing electricity demand in the capital, remains on track for completion in 2026, and the completion of all 116 T-pylons on our Hinkley Connection Project, which will provide low-carbon energy to 6 million homes and businesses. We've also made significant progress in standing up our new strategic infrastructure organization, the business unit that will deliver our ASTI projects, with 320 people now working within the division. As the map shows, we are continuing the detailed engineering work for the 12 onshore and five offshore projects that we've agreed to progress so far with Ofgem, and which are now in our electricity transmission license.

In particular, in the period, we've selected the preferred suppliers for HVDC cable and converter stations on the Eastern Green Links One and Two projects, and received all planning consents on the English side of the links. We've launched our engagement with the global supply chain to select enterprise partners for 9 of the 12 onshore projects within ASTI, and we've made good progress in consenting the Yorkshire Green and Bramford to Twinstead lines. As we continue to progress engineering works, the profile of ASTI investment will become clearer. With our expectation of around GBP 3 billion of CapEx on these projects as part of our financial frame to 2026, and including inflation, our current CapEx estimate is mid- to high teens across the 17 projects. In New York, capital investment of GBP 1.3 billion was 5% higher at constant currency.

This was driven by continued work on the FERC-regulated Smart Path Connect project, where we're rebuilding 110 miles of transmission lines in upstate New York to enable larger-scale renewable generation to connect. And higher levels of leak-prone pipe replacement, with 148 miles replaced in the first half, continuing to reduce methane emissions from our network. We've also continued to progress work on new transmission projects approved last year under the Climate Leadership and Community Protection Act. In total, we'll invest around $2.9 billion in projects that will enable incremental renewable generation capacity in the state. And we've also seen strong regulatory progress. At the beginning of September, the Public Service Commission staff responded to our rate filing for our downstate gas businesses, KEDNY and KEDLI.

We're pleased to see broad support from the staff on our submission, including the need for increased investment, and anticipate reaching a joint proposal early next year for new rates effective from April. Moving to our New England business, where we've also had a busy regulatory period. In September, we submitted our Electric Sector Modernization Plan, which sets out a roadmap for our network to help achieve the state's 2050 net zero goal. Within it, we've outlined the critical investments needed across our network over the coming decades, including proposing investment of around $2 billion over the next five years. In September, the regulator also approved annual rate adjustments for Massachusetts Electric of $67 million and for Massachusetts Gas of $57 million. These new rates became effective at the beginning of October. Capital investment in the first half was GBP 789 million.

This was 9% higher than the prior period at constant currency and excluding the Rhode Island business, which we sold last year. This was driven by increased spend in electric distribution, with higher customer connection requests and further investment in grid modernization. In the first half, we completed upgrades to the Tewksbury Substation under the competitively awarded FERC 1000 process. These upgrades are a cost-effective solution to ensure grid reliability, when an expected 2 GW of fossil fuel generation in the greater Boston area is retired next year. Finally, moving to National Grid Ventures, where capital investment totaled GBP 326 million, and included continued investment on the phase IV expansion of our Isle of Grain LNG facility and our Viking Link interconnector, with the final sections of cable now laid and joined.

Investment in the first half was GBP 205 million lower than the prior period at constant currency, following the completion of the Sellindge converter station rebuild last year. With construction activity on our Viking Link to Denmark now nearing completion, the project is moving into commissioning. We expect the 1.4-gigawatt interconnector to be online by the end of October, bringing the operating capacity of our interconnector portfolio to 7.8 GW. In October, National Grid Renewables started operations of the 274-MW Yellowbud Solar Project in Ohio. This takes the total renewable operating capacity to 1.3 GW, with a further 800 MW under construction.

So with that overview of operational performance in the first half, let me now hand over to Andy to take you through the financials before I come back and talk about our priorities for the rest of the year. Andy?

Andy Agg (CFO)

Thank you, John, and good morning, everyone. I'd like to highlight that, as usual, we're presenting our underlying results, excluding timing and exceptional items, and that all results are provided at constant exchange rates, unless specified. We continue to report our 40% remaining stake within U.K. Gas Transmission, now National Gas, as a discontinued operation, following the agreement to sell a further 20% interest to the Macquarie-led consortium, and the option allowing them to acquire the remaining interest. As such, all earnings from this business have been excluded from the underlying earnings of the continuing group. So, turning to our half year performance, we're pleased with the operating and financial results achieved, with underlying operating profit on a continuing basis at GBP 1.8 billion, in line with expectations. The prior period was helped by certain one-off items, namely St.

William property sales, two months' contribution from NECO, our Rhode Island business that was sold to PPL, and insurance proceeds received at our IFA interconnector following the fire in September 2021. In aggregate, these three items totaled over GBP 320 million, and were the main reasons for the lower year-over-year performance. Key contributors to operating profit for this period were higher revenues across our regulated businesses as a result of indexation in the U.K. and increases in rates across our U.S. businesses. Our NSL interconnector to Norway receiving an upward cap adjustment following its post-construction review, as well as a non-repeat of the prior year Western Link settlement. In addition, we achieved a further GBP 53 million of efficiency savings in the half, taking our total to GBP 426 million, ahead of our GBP 400 million target six months early.

We will continue to drive efficiencies and expect a similar performance in the second half as we complete this program. With net interest charges remaining broadly flat, underlying earnings per share therefore followed operating profit, and at 23.8 pence per share, was 27% lower than the prior year. Whilst underlying EPS was more weighted to the first half in the prior year than historically, we see this year reverting back to our long-term trend, where broadly, just under two-thirds of earnings are delivered in the second half. Turning now to our capital program, where we continue to make strong progress. Capital investment across our regulated networks at GBP 3.5 billion was another record level, and up 10% year-over-year. Overall, capital investment from continuing operations was GBP 3.9 billion.

This increase has been driven by higher connection spend and early investment relating to our new ASTI projects in our U.K. electricity transmission business, grid modernization work in Massachusetts, and a step up in our investment in the Smart Path Connect transmission project in upstate New York. In line with our policy, the board has declared an interim dividend of GBP 0.194 per share, representing 35% of last year's total. Scrip uptake in the summer on the full year dividend was 4%, and we'll again be offering the scrip option at the half year. Now, let me take you through the performance of each of our business segments. Starting with U.K. Electricity Distribution. Underlying operating profit was GBP 563 million, down GBP 16 million versus the prior year. Revenues benefited from indexation of the RAV.

However, this was more than offset by lower incentive revenues, as expected at the start of the new ED2 period, and profit from the sale of its smart metering business in the prior period. As we set out at our investor event in July, we expect to deliver operational outperformance of 100-125 basis points across the ED2 price control. This will largely be driven through totex efficiencies, strengthened by synergies following the acquisition. To date, we've delivered GBP 18 million of our GBP 100 million three-year group synergy target, so far, mainly procurement enabled, for example, through the adoption of lower-cost cabling designs taken from transmission. Capital investment increased to GBP 608 million for the half year, an increase of GBP 24 million compared to the prior period, primarily driven by higher spend on asset replacement and connections....

This includes the GBP 65 million Hinkley Point electricity distribution connection link, which remains on track to complete in 2024. Moving to U.K. electricity transmission, where underlying operating profit was GBP 656 million, up GBP 92 million compared with the prior period. Strong first half performance was driven by higher allowed revenues, given indexation, as well as non-recurrence of the GBP 69 million returned in the prior period relating to Western Link. Capital investment was GBP 800 million, 27% higher than the prior period. This is partly driven by work in our RIIO-T2 projects, including system resilience, asset health, and new connections work, as well as significant progress on our major capital projects.

We've also seen a step up in investment on our ASTI projects in the half, notably driven by our offshore projects, Eastern Green Link 1 and 2, where we've signed joint venture agreements with ScottishPower and SSE, and selected the preferred suppliers of HVDC cable and converter stations. For our onshore ASTI projects, we've launched our Great Grid Upgrade Partnership tender to source enterprise delivery partners and secure the supply chain that will help deliver these projects. We plan to award contracts in 2024. However, given the need for pace with our Yorkshire Green project, we have already signed contracts for overhead lines and substation work. Finally, in the U.K., the electricity system operator saw underlying operating profit down GBP 18 million in the period to GBP 34 million.

Following the passing of the Energy Act 2023 at the end of October, the business has been classified as held for sale. Moving now to the U.S., where underlying operating profit for New York was GBP 119 million, GBP 76 million lower than the prior year. Higher net revenue, driven by increases in rates and continued delivery of its cost efficiency program, were more than offset by higher depreciation, given increasing investment levels, higher recoverable bad debts, given the cessation of the state's bill relief program, and a pension buyout gain occurring in the prior period. Capital investment was GBP 1.3 billion.

This was GBP 62 million higher than the prior year, helped by a step up in investment in the $550 million Smart Path Connect transmission project in upstate New York, and increased investment in our gas distribution networks as we continue progress on our leak-prone pipe replacement program. However, the prior period included non-cash lease additions, including the Volney-Marcy transmission line lease. Excluding this impact, capital investment was up nearly GBP 200 million. Turning to New England, underlying operating profit was GBP 218 million, GBP 33 million lower than the prior period, excluding the impact of Rhode Island. Higher rates in Massachusetts Gas, driven by its capital tracker, and in Massachusetts Electric, driven through its annual performance-based rates mechanism, were offset by higher recoverable storm costs and higher recoverable bad debts, following an increase in commodity prices.

Capital investment was GBP 789 million, GBP 64 million higher than prior year, again, excluding the impact of Rhode Island. This was driven by grid modernization investment in our electricity distribution networks and increased asset condition work across our New England power transmission assets. Moving to National Grid Ventures, we continued to see good performance, delivering underlying operating profit of GBP 278 million, including joint ventures. This was helped by solid interconnect performance, notably on our NSL interconnector, and good performance at the Isle of Grain LNG facility.

The decrease compared to the prior year of GBP 51 million can primarily be attributed to receipt of ElecLink insurance proceeds in the prior year, as well as a change in the phasing of our onshore renewables projects, where we now expect a higher proportion of sales into our joint venture in the second half. Capital investment across National Grid Ventures was GBP 326 million, driven by continued progress on the Viking Link to Denmark as we near completion of our sixth interconnector, and investment in our Grain LNG expansion project, with the new tank's construction work nearing completion. Investment was lower by GBP 205 million, as the prior year included the majority of the ElecLink converter station rebuild spend, as well as peak investment at Viking Link and the Isle of Grain.

Our other activities reported an operating loss of GBP 13 million versus a GBP 145 million profit in the prior period. This is principally driven by property sales completing last year, predominantly as part of the St. William transaction. Capital investment was GBP 13 million. Turning to finance costs and tax. Net finance costs were GBP 711 million, down GBP 10 million. Lower inflation on index linked debt and lower bridge financing costs were partially offset by the impact of higher interest rates. The underlying effective tax rate before joint ventures was 24.7%, 500 basis points higher than the prior year, due to the increase in the U.K. corporate tax rate from 19% to 25%, and the change in profit mix, given higher property sales in the prior year.

For the full year, the underlying effective tax rate, excluding the share of joint venture post-tax profits, is expected to be around 26%.... Underlying earnings were GBP 875 million, with EPS at 23.8 pence. Moving now to cash flow. Cash generated from continuing operations was GBP 3.1 billion, up 30% compared to the prior year. This increase is principally driven by favorable U.K. timing at the electricity system operator, partially offset by lower underlying operating profit compared to the prior year. Net cash outflow in the period amounted to GBP 2.6 billion, a reduction on the prior year, as higher cash flows from operations were only partially offset by higher levels of cash dividend, given a lower scrip uptake.

As such, net debt increased by GBP 2.9 billion-GBP 43.9 billion compared to the prior year end. For the full year, we expect net debt to increase by just over GBP 0.5 billion from the September level at a 1.2 U.S. dollar exchange rate, including the GBP 700 million expected receipt of proceeds from the sale of 20% in National Gas to the Macquarie-led consortium. As we announced this morning, we have updated our five-year financial frame, with group capital investment for the 2021 to 2026 period now expected to be around GBP 42 billion, up from our previous guidance of up to GBP 40 billion. We expect this increased investment to be modestly enhancing to asset and EPS growth.

We are committed to our strong investment-grade credit rating and expect to deliver this growth while maintaining our group gearing guidance, with regulatory gearing to remain in the low 70% range for the period. This increase in investment is being driven by our ASTI projects, where we now expect to spend around GBP 3 billion, up from our prior GBP 1 billion guidance, which now leads to investment across electricity transmission of around GBP 11 billion, up from GBP 9 billion previously. The ASTI increase is driven primarily by progress we have made on four projects: Eastern Green Link 1 and 2, Yorkshire Green, and Bramford to Twinstead. With 17 ASTI projects now in our license, and as we progress detailed engineering work, this is improving clarity around the scope of these investments.

Reflecting this, our current best estimate for total investment in these projects is in the mid- to high-teens billions of GBP range. Finally, and as usual, alongside updating our five-year financial framework to 2026, we have also updated our more detailed forward guidance for this full year, which now includes the Electricity System Operator being held for sale. Excluding the accounting benefit of ceasing depreciation for the ESO, our overall guidance for underlying EPS for FY 2024 remains the same as we set out in May. With that, I'll hand you back to John.

John Pettigrew (CEO)

Thank you, Andy. I want to finish by spending a few minutes on our priorities for the second half of this year, starting with the U.K. As I mentioned earlier, I'm encouraged by the progress we're seeing from government and Ofgem in response to our call for a greater urgency, both in terms of action and mindset. The Energy Act has now become law and will establish a new future system operator, introduce onshore competition for networks, and implement a net zero duty for Ofgem. We've also seen consultations on National Policy Statements, on community benefits, on the Nationally Significant Infrastructure Projects process, and on market reform. And Nick Winser, the Electricity Networks Commissioner, has set out his recommendations for fundamental reforms to the planning system and the creation of a Strategic Spatial Energy Plan, endorsed by the Prime Minister in his net zero speech.

We've got an exciting few months ahead. We've seen good progress in the first half, and we'll continue to push for more in the coming months as we look to see consultations and announcements from government translated into real decisions and policy reform. Nowhere is the need for change more apparent than in the connections process, and the forthcoming Connections Action Plan from government and Ofgem is a critical opportunity to move from the current first-come, first-served approach to a connect or move model and stop so-called zombie projects from blocking the queue. In the meantime, we're creating new solutions in electricity transmission to address this challenge. This includes evolving the way we coordinate with DNOs and how we treat storage. These changes will deliver 40 GW of network capacity for projects that are ready to connect.

We'll delve into the topic of connections in our next Grid Guide 2 series for investors in early 2024. Alongside connections, another key area where we're working with stakeholders is moving forward with planning reforms. Over the coming months, we expect refreshed National Policy Statements from government to provide greater clarity and authority on the need and urgency of infrastructure projects to support their timely delivery. As part of this, we're continuing to support the development of a Strategic Spatial Energy Plan, together with a Centralised Strategic Network Plan, which will set out what needs to be built and where to support a more efficient system in the long-term. In our U.K. electricity transmission business, our focus is on driving forward the 17 ASTI projects, whilst we continue to work with government and Ofgem on the policy changes needed to deliver them.

Last month, Ofgem published its Future Systems and Networks Regulation framework decision, which sets out how they see the framework evolving. We'll continue to engage with Ofgem as they move towards publishing their sector-specific methodology consultation at the end of this calendar year. This will be used as the basis for developing our RIIO-T3 business plans for submission during 2024.... Together, these will give us further confidence and clarity on the profile of investment over the second half of the decade. Moving away from regulation, another key priority for us in the second half is to deliver our new contractual model for working with the supply chain. We've now launched the procurement process for our enterprise partnership model, and over the coming months, we'll be selecting our strategic partners to ensure we have the supply chain in place to deliver these projects in the time frames required.

In electricity distribution, we're focused on closing out a strong first year of delivery under RIIO-ED2 as we step up our investment. Whilst the U.K. government has recently delayed the ban on the sale of combustion engine cars and gas boilers to 2035, our expected asset growth is not impacted, as over 95% of our investment is already agreed within our baseline allowances. Moving next to our key priorities in the U.S. We'll continue to build regulatory momentum across our jurisdictions. In New York, alongside finalizing settlement negotiations on KEDNY and KEDLI, we also remain on track to file a new rate case for our Niagara Mohawk electric and gas business next summer. We've also got a busy regulatory agenda in Massachusetts, where we filed our electric sector modernization plans.

Within it, we outlined the investment required to help the state meet its targets under the 2050 Clean Energy and Climate Plan. Our proposal includes upgrades to improve the resilience of network infrastructure, increased digitization of the grid, and new customer programs to encourage energy efficiency and the adoption of clean energy solutions. We're now engaging with stakeholders before making a formal filing in January next year. We're also finalizing the next rate filing for our Massachusetts electric business, which we'll submit later this month. On the policy front, we're continuing to advocate for reforms to support the clean energy vision. This includes progressing a new Clean Heat Standard with lawmakers in Massachusetts, which enables more renewable natural gas to be blended into our distribution networks. We hope to see similar legislation introduced in New York early next year.

Across our U.S. operations, we're focused on efficiently delivering our capital program. We'll continue to progress our large-scale transmission projects. In New York, in addition to the $550 million Smart Path Connect project I mentioned earlier, we've begun work on our $800 million CLCPA Phase One projects. This includes rebuilding 170 miles of transmission lines, upgrading 16 existing substations, and building two new ones, and the installation of new technologies, including dynamic line ratings. We're also continuing to develop our CLCPA Phase Two projects, which includes a further 400 miles of transmission line rebuilds and 5 new substations and 11 substation upgrades. These projects will help New York to meet the goal of achieving 70% renewable electricity by 2030, while enhancing the reliability and resilience of the transmission network.

As I mentioned earlier, in October, the Twin States Clean Energy Link project was selected to move to the next stage. Over the coming months, we'll work with the Department of Energy to progress the 1.2 GW capacity project, which, if built, will deliver clean power from Canada into the region and has the potential to create significant savings for customers. In National Grid Ventures, we'll progress negotiations with NYSERDA on the provisional offtake award of 1.3 GW for our Community Offshore Wind joint venture with RWE. We also expect to progress our bid in, into the New Jersey offtake solicitations in the first half of the next calendar year. We've a busy time ahead of us, but before I finish, I want to spend a moment on our role as a responsible business.

As I've said before, at National Grid, we understand the important role we play in enabling both net zero and ensuring the benefits of the energy transition are shared with everyone and that nobody is left behind. That responsibility is integral to our core strategy and underpins everything that we do. In 2020, we articulated this with our first Business Responsible Charter. Since then, our business has evolved significantly with the repositioning of our portfolio, and so in September, we published a refreshed charter. One of the areas I'm most proud of in the update is that, as a group, our near-term emissions reduction targets are now aligned to the 1.5-degree pathway, as verified by the Science Based Target Initiative, or SBTi.

With this, our aim is to reduce Scope 1 and 2 emissions by 60% by 2030, from a 2018-19 baseline, while reducing Scope 3 emissions by 37.5% by 2034. Further detail on our updated Responsible Business Charter and a replay of recent ESG investor webcasts are available on our website. In summary, it's been a busy first half with solid financial and operational performance. For me, it's clear the opportunity ahead of us is huge. We've made significant progress and have a clear understanding, not just of the scale of the challenges ahead, but also how to overcome them. The momentum around policy reform we've seen on both sides of the Atlantic makes me optimistic, but we now need to see announcements and consultations translated into decisions and actions.

At National Grid, we're entering an exciting new phase of strong capital delivery. We're delivering the energy transition today, and we're ready to meet the opportunities of tomorrow. Let me stop there, and Andy and I will be happy to take your questions.

Operator (participant)

Thank you, sir. Ladies and gentlemen, just as a reminder, star one. If you wish to ask a question, that's star one, if you want to ask a question. Thank you.

John Pettigrew (CEO)

... Okay, so if we could start the Q&A session. Pavan from J.P. Morgan, why don't you take the first question? And then Dominic from Barclays, why don't you take the second. So, Pavan, why don't you open with the question?

Pavan Mahbubani (Analyst, European Utilities)

Hey, guys. Good morning. Thank you for the presentation and for taking my questions. I have three, please. Firstly, you've upgraded your CapEx guidance by GBP 2 billion, and you talk about modest enhancements to asset growth and EPS CAGR within existing ranges. Could you give us a bit more of a steer, particularly around EPS? I recall back in May, you were talking about towards the lower end of the range due to changes in capital allowances. Is it fair to assume that a decent base case now is toward the middle of the range for EPS?

Second question, following on from that is, if we were to then adjust for the capital allowance impact on your EPS, again, is it a fair assessment that today's announcement should actually be seen as on a like-for-like basis, coming on top of the 6%-8% EPS range or above the top of that range, as you set it out before the capital allowance position changed? And then, my final question is on New York rate filings. I note in your statement this morning that the New York PSC has responded to your rate filing with a 9.1% allowed ROE versus your 9.8% request. Do you expect an improvement on this front, or should 9.1% be our base case going forward? Thank you.

John Pettigrew (CEO)

Thanks, Pavan. Why don't I take the first and third, and Andy, take the second? I mean, in terms of the upgrade to our forecasting CapEx, you're right. You know, previously, we talked about GBP 40 billion between 2021 and 2026, and we've upgraded that to GBP 42 billion today. I mean, the reason for that, just to give you some context, is over the last six months, we've done a huge amount of work on the early projects associated with ASTI, and in particular, four of them. A lot of engineering work, a lot of clarity around the scope, also engaged with the supply chain, and it's on the back of that, that we have a clearer view, and we always want to be as transparent as we possibly can, that we've upgraded to the 42.

As you said in the statement, we've said that that will modestly enhance both the asset growth and the EPS. In May, Andy talked about the fact, with the capital allowance change, that we'd be in the lower part of the 6%-8% range. Yes, on the basis that it's a modest increase, it's gonna head us towards the middle of that. In terms of the New York rate filing, I have to say I'm really pleased, actually. The team did a huge amount of work engaging with the PSC before we made the rate filing, so there were no surprises when we actually made it.

When we saw the initial response, there was strong recognition of the need for investment, and also strong recognition for some of the programs we were suggesting to put in place for vulnerable customers. We initially went in with a 9.8, and the PSC staff have come back initially with a 9.1. We're now in that sort of process of looking to see if we can do a settlement and negotiation. That will run for the next several months. I would hope that we'll find some middle ground between us, but we'll see where we get to with that. But their starting point is 9.1, and our rate case filing was 9.8. So we'll see where we get to in the next few months. Andy, do you want to take the second one?

Andy Agg (CFO)

Yeah, sure. Thanks, thanks, Pavan. So just building on what John's point around, you know, with the updated guidance this morning, putting us closer back towards the middle of the range. You're absolutely right. So if it weren't for the capital allowances impact to the 6-7p, we would now be looking at EPS CAGRs above the top of the six-eight. Absolutely.

John Pettigrew (CEO)

Okay. Thanks, Pavan.

Pavan Mahbubani (Analyst, European Utilities)

Very clear. Thank you, team.

John Pettigrew (CEO)

Thanks, Pavan. Should we take Dominic, and then Deepa from Bernstein?

Dominic Nash (Head of European Utilities Research)

Hi, can you hear me okay?

John Pettigrew (CEO)

Yep.

Dominic Nash (Head of European Utilities Research)

Hi there. Thank you very much for your presentation. I've got two, two questions, or my first one's probably got two parts to it. So first of all, you've increased your CapEx to, or your investment to GBP 42 billion, out to the end of 2026. And that basically means that your run rate, I think, goes from GBP 8 billion this year to sort of GBP 10 billion for the following two years.

But you, you've spent quite a lot of time on this presentation talking about the fact that ASTI is only GBP 3 billion after 2026, and we've got what another, probably around about another GBP 15 billion to go, that there's another ASTI framework, potentially coming, at, at the beginning of, of 2024, that the U.S. is clearly looking like this CapEx is, is gonna go up. So, the first question I've got on, on that is: What do you actually think the, the potential for, the run rate for sort of the ASTI spend and the the new beyond the 17 projects are gonna get to, and what sort of timeframes is that GBP 15 billion going to be spent? Secondly, 2026, is gonna be there in the bat of an eyelid, I think. We're only looking what?

Sort of two, two years out. When do you think you'd be in a position to come back to, to us with a view of what your investment, and balance sheet, management will look like? How soon do you think you're gonna have clarity so that we can sort of see out to sort of 2030 and, and beyond? And then the third question, is on the SO. I see you now, it's now an asset held for sale. Could you provide some, some sort of guidance on the timeline and how the price is going to be set, and what happens if it gets set at a level that is not satisfactory for you? Thank you.

John Pettigrew (CEO)

Okay, Dominic, thanks. Let me take those questions. So in terms of how we're thinking about the capital investment beyond 2026, it's similar to what I said in May, actually. So I think we've had good progress over the last six months. You know, the way I would describe it to my, and I do describe it to my team, actually, is the mist is starting to rise, and you've seen that today in terms of upgrade in the short-term with the projects that we've been developing that took us from the 40 to the 42. But actually, over the next period, actually, we need to get a bit more clarity about exactly what is the CapEx we're being asked to deliver over the longer period. And there's still some uncertainty around that.

Secondly, and probably most importantly, what's the profile of that CapEx? So obviously, we're waiting to see what the outcome of things like the Nick Winser review are and where the government's gonna get to on some of the policy decisions, such as community benefits and so on. And that's gonna influence what the profile of that CapEx looks like. And then finally, of course, we're waiting to see what the regulatory framework will look like in terms of incentives around delivery. Once we've got that transparency and that clarity, we'll be able to share with the market how we see the CapEx profile looking beyond 2026.

In terms of timing, for the things that we control, then we will absolutely update the market when we have better information, and that's exactly what we've done today with the update for the GBP 42 billion. But there are certain elements that aren't in our control, but we've got a broad indication of what we're hoping to see. So, you know, over the next period, we are hoping to see a response from the government in terms of the Nick Winser review around streamlining the planning process, and the National Policy Statements. We've got the sector-specific consultation coming out in December, and depending on how much information is in that, that will help us with the regulatory framework.

You've got the ESO publishing its next Centralised Network Plan with the investment it sees beyond 2030, now to 2035, hopefully in the first quarter of next year. So if those things happen in the time frames that are currently being indicated, we're, you know, the mist will continue to clear, and we'll be able to provide some transparency. But those things are not actually in my gift in terms of control. So the answer is, as soon as we've got that transparency, we will share it with you. In terms of the ESO, so let me just start by saying we're sort of delighted that the Energy Bill has gone through, actually. The Energy Bill was required for the government to be able to actually to buy the system operator from National Grid.

As you know, we've always been supportive of the fact that with the role that the ESO has been asked to provide, that it's right that it's separated from National Grid. Over the last 12 months, we in the background have been busy preparing for that separation, potentially in the summer of next year. We're doing a lot of the IT separation work that you'd expect us to do. Now that the Energy Bill has gone through, we're now in a position where we can engage with government on the commercial side of it. They've recently appointed their advisors, and we're just initiating those conversations now. So, you know, we'll keep the market informed as that goes through, but we've literally just started those discussions.

Jenny Ping (Managing Director, Utilities and New Energy, Equity Research)

Thank you.

John Pettigrew (CEO)

Okay. So if we could, we'll take the question from Deepa next, and then James from Deutsche Bank.

Deepa Venkateswaran (Managing Director and Head of Utilities & Clean Energy research)

Thanks, John. I have two questions. The first one is on the community energy project for offshore wind that you won with RWE. Could you talk about what your return expectations would be for taking FID in this project? I know FID is not till maybe around 2027, but if you could contextualize your return expectation in the context of, say, your 10% FERC allowed returns for transmission projects, that would be helpful. And then could you, in the same, way, and also comment on, you know, some of the problems that other projects are being having in both New York and New Jersey, and how do you feel comfortable with the East Coast offshore wind at this point? So that was my first question.

Second one is on the Ofgem debt indexation informal consultation that's expected at the end of this year. What do you expect them to say, and how have your engagement with Ofgem been so far? And, do you see that they're fairly open to not doing anything or looking at this data? So those would be my two questions. Thank you so much.

John Pettigrew (CEO)

Yeah. Thanks, Deepa. So, I'll actually answer your first question in reverse order. Just talk a little bit about the problems that you referenced in the offshore market in the Northeast. I mean, obviously, we've seen what's been going on in the Northeast with a number of projects either withdrawing or looking to renegotiate, and obviously, you'd have to talk to those companies about the specifics of that. What I would say is that, given the timing of our response to the solicitation in New York, we were able to reflect in our bids what was actually going on in the supply chain, including things like indexation, which we had the opportunity to provide in our bid.

So we're, you know, we're pleased that provisionally we've got an agreement for the 1.3 GW as part of our joint venture with RWE. We now enter into the negotiation phase with NYSERDA, so ultimately, you know, that-that's a process that we have to go through over the next few months. But ultimately, you know, our position hasn't changed in terms of we, you know, this is discretionary investment in our National Grid Ventures business. It needs to fit into the overall capital program for the group, and it needs to have returns, which we've historically said need to be in excess of what we would see in our regulated businesses, given the nature of them. But the negotiation will determine whether that's the case.

I'll also just remind you, I'm sure you're aware, that as part of the joint venture, we've always got the option to withdraw right up to FID if we find that the investment proposition is not something that works for National Grid. So that's an option that we have going forward. But we're hopeful that the negotiations will start relatively soon and are likely to run into the first quarter of next year, I suspect. In terms of the inflation consultation that Ofgem's doing on debt CPI indexation, I have to say, to be fair to Ofgem, I think they've been very balanced about this.

They absolutely recognize the importance of inflation as a foundation stone in regulation in the U.K., and they also recognize the importance of creating a regulatory framework that encourages investment going forward. As you know, the consultation set out, I think, five options from do nothing to a voluntary contribution and everything in between. National Grid has been working with the ENA and has set out our response, which is if you take a long-term perspective on this, we don't think there is an issue. But clearly, Ofgem, you know, need to look at it, given where inflation has been over the last couple of years. I don't know where they're gonna land.

I think potentially, dealing with it as part of RIIO-T3 may be the right thing to do, but I do think they are taking a very balanced approach to it, in the conversations I've had with them.

Deepa Venkateswaran (Managing Director and Head of Utilities & Clean Energy research)

All right, thank you.

John Pettigrew (CEO)

Okay, so if we could take James from Deutsche Bank next, and then Martin, Martin Young from Investec.

James Brand (Director)

Hi, good morning. Thanks for taking my questions. I've got two. First is on the, well, they're both on the balance sheet, to some degree. But firstly, within the five-year financial plan, you said in the statement that you expect gearing levels and other credit metrics to sit within your current rating bands. However, there's a bit of perception out there, at least among some investors, that the metrics get a bit tighter over the plan period. So first question is, is that a fair perception, or do you think there's still a very comfortable buffer that persists on your rating metrics throughout the period? And then secondly, long-term, obviously, the CapEx is, you know, looks like it's gonna be pretty huge.

I'm sure you're not gonna, you know, set out just now in detail how you're gonna fund that, but I was just wondering if there was any preferred way that you were prepared to share for funding that future CapEx. In the past, you've obviously sold assets when needed in order to fund the big CapEx program. Would that be the preference going forward, or all options are on the table? Thank you.

John Pettigrew (CEO)

Okay. Thanks, James. Andy, do you want to?

Andy Agg (CFO)

Yeah, sure. Morning, James. Thank you. Firstly, on the current five-year frame, I mean, just to reiterate, I think what we've said again this morning, which is very consistent with what we've previously said, that, you know, even with the step up to GBP 42 billion, driven by ASTI, as John set out, we very much see that continuing to deliver gearing, regulatory gearing in the low 70s. Very consistent with what we said previously, and very much in line with maintaining a sensible and appropriate buffer against the credit metrics. And as you know, the two key ones we look at are the Moody's RCF to debt and S&P's FFO to debt. So absolutely no change.

Can't comment on how other people are modeling that, but that's very clear from us, and that's unchanged from where we were at year-end as well. In terms of the longer-term, you know, as John set out already, I think there's a lot of work still to do, in terms of, you know, the cadence of the spend, the timing, the regulatory frameworks that we're just starting to engage with Ofgem on, in terms of, you know, the future, looking out to T3 and the ASTI framework. And of course, we will want to work through all that, and then we absolutely would look at, you know, what's the appropriate funding strategy.

But it's fair to say that, if you look at, you know, the approach we have today, we continue to have access to a wide range of tools. You know, we continue to use today, obviously, senior debt. We utilize the scrip on an ongoing basis. We have, you know, existing and future potential access to the hybrid market, where we have, you know, considerable headroom that we haven't tapped previously. We've demonstrated that we can utilize, you know, asset moves as well. You've seen that over the last few years. And of course, you know, we have a complete toolkit, up to, you know, utilizing things like partnerships as we've done across interconnectors and things, and of course, wider access to the capital markets, debt and equity. So all of that is available to us.

But as we said a couple of times, you know, we will come back to the appropriate tools when we're clear on the cadence and timing of the CapEx.

John Pettigrew (CEO)

Okay. Thanks, Andy.

James Brand (Director)

Thank you very much.

John Pettigrew (CEO)

Okay, so we take Martin next, and then Harry Wyburd.

Martin Young (Senior Analyst of Energy, Utilities, Renewables and Waste Equity Research)

Yeah. Good, good morning. Good morning to everybody. My question is one that sort of, you know, follows on in a bit of the same vein from what James was asking, and, you know, comments that John had made earlier around, you know, offshore wind in the U.S. You know, it strikes me that you've got a significant opportunity to do a lot of things well into the next decade. Not all of those are going to be mandatory. You've mentioned partnerships as one potential route to doing things, but maybe you could just give us a sort of high-level overview as to how you will approach whether or not you want to do something that potentially lands at your door. Because at the end of the day, that does link back to James' question about how it all can be financed.

Thank you.

John Pettigrew (CEO)

Yeah, thanks, Martin. I mean, and I think, you know, the answer I and Andy have just given sort of reflects that, which is, you know, I've always said for National Grid, venture investments, it's right that we're in adjacent markets because we're able to take the, the capabilities we have across Grid and identify opportunities which would potentially give us incremental returns above what we see in our regulated businesses. But we will only do that in a very disciplined way, where the returns are in excess of our hurdle rates for, on a risk-adjusted basis, and where it fits into the overall group capital investment plan. And that approach hasn't changed, whether it's looking at, onshore, wind, offshore wind, or any of the investments we make in, in National Grid Ventures, including things like interconnectors and NPIs.

So that will be the disciplined approach that we continue to apply. As I said in my previous answer, with regards to the offshore wind, we're now in the negotiation phase. We will see what it looks like financially, but we also have the option, should we choose, to exit that, without any loss of income to National Grid going forward as well.

Martin Young (Senior Analyst of Energy, Utilities, Renewables and Waste Equity Research)

... Okay, thanks.

John Pettigrew (CEO)

So I was going to take Harry, Harry Wyburd next. And just looking down the list, and then we'll take Sam Arie.

Harry Wyburd (Managing Director and Head of European Utilities & Clean Energy Equity Research)

Thanks. Morning, everyone. It's Harry Wyburd from Exane. So two from me, please. The first one's on, on politics and specifically on Great British Energy, which popped up a few times again at the Labour conference. And I just wondered whether you had any more thoughts on how you think Great British Energy might interact with what you're doing. And specifically, would it—thanks, Andy, for the, for the list, I guess, of tools on the balance sheet. But is there a possibility that Great British Energy could be another tool that you might have on the balance sheet? So, for instance, would the government perhaps be willing to co-invest with you in some projects, or might this be a way of accessing actually very cheap government-backed capital for your project? And then the second one's on, on debt cost.

So I think since you, since you last had your full year results, gilt yields in your secondary market traded bond yields have gone up by about 50-100 basis points. So I just wondered whether that factored into what you've mentioned this morning on your EPS CAGR. So have you adjusted up slightly your new issue costs on debt? And how are you feeling about the interaction of that with the, obviously, indexation on your cost of debt allowances, which acts a bit more slowly than the changes in rates that we've been seeing over the last few months? Thank you.

John Pettigrew (CEO)

Okay, thanks. Thanks, Harry. Why don't I take the first question, and I'll ask Andy to take the second. Well, with regards to GB and more broadly, sort of policy with the Labour Party, I mean, as you'd expect, given the position National Grid plays in the U.K., we always engage both with the government and with the Labour Party opposition. And I have to say, you know, they recognize, as does the government, actually, about how important networks are in the energy transition. And a lot of things that we put in our spring policy document around policy reform and community benefits, and a special energy plan, they're very much aligned with us.

With regards to Great British Energy, we've had some really good conversations with them about that, and we do see potential benefit in some of the things that they talk about that, that GB Energy could do. For example, using the convening powers of government to coordinate potentially the supply chain at the U.K. level so that we can capture some of the capacity that's gonna be needed worldwide is certainly an area that potentially could be beneficial in. Similarly, they've talked about investing in technologies that perhaps are not yet ready for private capital, and that seems a very sensible thing. They did reference at the conference potentially investing in competitive transmission where necessary.

I think our personal view is if we get the right regulatory framework and we get the right, stable policies, that actually there's plenty of access to capital in the private market, and that's probably not best where public funds should be spent. But they're at very early stages of thinking on this as well, and we continue to engage with them. Andy?

Andy Agg (CFO)

Yeah, thanks, Harry, for that. In terms of debt yields, I think, firstly, you'll have seen actually in the results that we announced this morning, you know, overall, interest costs and treasury costs were flat, slightly down. But within that, yes, we're absolutely seeing higher interest rates, both in terms of refinancing existing debt and, of course, financing growth as well. This, you know, offset by other factors this first half. In terms of future guidance, yeah, to be clear, I don't second-guess the forward curves. We very much use the curves that we see in different markets. And your point on spreads, absolutely cognizant of that today. Again, we tend to make sensible assumptions around forward spreads. And again, I don't assume anything heroic in our forward guidance.

So, you know, I'm comfortable that the updated guidance we've given out to 2026 very much takes account of the macro factors that we're seeing. In terms of the link through to the, you know, the debt mechanisms in regulation, as you know, in the U.S., obviously, we continue to have a right of pass-through treatment as long as we continue to issue efficiently, which of course, we always look to do. And in the U.K., with the way the index works and the true-up mechanism, I think, you know, absolutely, we still believe, particularly with the adjustment that Ofgem made to the ED2 mechanism late on, that that gives us opportunity to continue to perform well against that.

What I think I would say, though, is as we look ahead to T3 in particular, I do think that the cost of debt mechanism will be something that we would want to work with Ofgem on. Recognizing a growing CapEx book in a growing interest rate environment is something that I think we will have to look again at the existing cost of debt mechanism. And I think that's something Ofgem recognized today as well.

John Pettigrew (CEO)

Okay, thank you, Andy.

Harry Wyburd (Managing Director and Head of European Utilities & Clean Energy Equity Research)

Very clear. Thank you.

John Pettigrew (CEO)

Thank you. Sam, why don't we take your question, then we'll go to Rob from Morgan Stanley. But Sam first.

Sam Arie (Managing Director)

Okay. Thank you very much, and good morning, everybody. I'm gonna come back to the topic that I think everyone is kind of scratching away at, which is this kind of CapEx, CapEx outlook, sustainability, financing formula. I recognize that you're kind of not, not wanting to lay all your cards out at the minute, but perhaps I could just nudge you into sharing a bit more, thinking on how this is all gonna add up. And perhaps correct me if I'm understanding anything wrong here, but I think my first observation is that your, what you might call business as usual CapEx, is probably going up in the next period. We hear a lot about the importance of, you know, debottlenecking the network side of the energy transition, and clearly there's demand and so on.

So you're probably gonna need to spend at least as much as you currently are doing, plus a bit. Then you have the ASTI projects on top. Then you maybe have some other things in the U.S. It seems like quite a big bump to the CapEx outlook. On the ASTI project, second point, I think we were previously hoping that Ofgem might have some kind of special help for you on the ASTI project, but it seems like in October, they seem to have said no to that. That it'll all just be dealt with within the wider price control. So I'm wondering if you, kind of that was a disappointment from your point of view. I heard your comment earlier that you've kind of continued to work with Ofgem. I wonder if that's what you were referring to?

But I think more generally, it still seems like there's quite a big question here, and you mentioned, of course, you can access debt and equity markets, that you could do more asset rotation. But I suppose then those things would be dilutive. So if I turn this all into a question, it might be: Am I right in thinking that the longer-term earnings growth rate has got to go down, either because you can't keep the CapEx equation balanced, in the same way as you have done in the current plan, or because you have to take some fairly dilutive measures, to make the financial equation work, and then that dilutes the EPS growth?

I mean, I'm just trying to get a sense of like, it seems to me there's like a big unanswered question here, then it's maybe a bit stressful, but I may be overestimating, and I'd just love to understand how, how difficult a problem you think this is to solve.

John Pettigrew (CEO)

Thanks, Sam. Let's break that down. So I'll have a go at doing the first two questions, and then I'll ask Andy if you could pick up the third. I mean, in terms of the CapEx outlook, I mean, I'm sort of gonna reiterate, but I'll try and expand on what I said earlier, which is from our perspective, we think it's really important that we can provide transparency and clarity to the market when we've got a degree of certainty. We don't need absolute certainty, but we need a degree of certainty. And we're still not yet in a position where we know exactly what we're being asked to deliver in terms of CapEx.

And you quoted some of the things that are uncertain, whether it's, you know, the KEDNY and KEDLI rate case in the US, the Massachusetts electric rate case, which we're filing this month. We've got the Electric Sector Modernization Plan in the U.S., and then in the U.K., we've got the ESO due to do its next Transitional Network Plan in the new year. So we're working through that at the moment to get a clarity on what we're being asked to do and what will be put out to competition and all those sorts of things. Probably most importantly, from my perspective, Sam, then, is what's the profile of that CapEx? As you know, without any reform in the U.K. for planning, for example, it takes between seven and 12 years to build a transmission line.

If we see some streamlining, which is one of the things that Nick Winser was recommending in his report, then that profile would be very different to if we don't see that profile. We don't see those reforms. Similarly, local communities are quite active, particularly in the East Anglia part of the country, about how they feel about investment. So getting the community benefits right is gonna influence what that profile looks like as well. So that's what we're working through at the moment, and then ultimately, we need to get a good understanding of what the regulatory framework is, which leads into Andy's answer around funding in terms of what is the speed of cash and slow money and fast money, what's the depreciation rates, what's the returns, what's the incentives to deliver it quicker or not?

So all of that has to be worked through, and once we've got that, we'll be able to articulate very clearly what the profile of CapEx looks like beyond 2026. In terms of frameworks and the ASTI framework and separating it out, I'll answer it more broadly. I think the decision document that came out recently from Ofgem sort of aligned with our expectations, and there were many things in it that we were very pleased about. So Ofgem's recognition for the need for change of the regulatory framework, I think, was really important. They talked about evolving the RIIO framework. I think the recognition that there will be a separate framework for large projects is in that document, and I think that is important.

But they also talked about their desire to streamline and simplify the regulatory framework, but also create a framework that actually is attractive for investors. So all of that, I was really pleased about. There was, in that document, a statement about dealing with the sort of the financial side of ASTI as part of RIIO-T2, T3. That is something we will continue to have dialogue with Ofgem on. I do think there is advantages in separating that out. We can live with it if it's dealt with in T3, but I have a preference to try and deal with it sooner, and we'll continue that dialogue with Ofgem over the months to come. Andy.

Andy Agg (CFO)

Yeah. Thanks, thanks, Sam. I mean, in terms of, you know, what it may or may not mean for future trends, and, and to a degree, getting very hypothetical here, given sort of, the previous answers around, all the uncertainties and the things we need to work through. But I think what I would say is, as we've seen in, previous price controls, actually, it's not just, the levels of CapEx, but it's other levers, that will have a big impact on, earnings profiles, particularly in the U.K. businesses. And I think actually, if you go back to the, the FSNR, document, there was, positive commentary in there around sort of the need to, create an investable framework, recognizing, you know, what that... We may need to look at returns and so forth.

But I think as we've seen in T2, also recognition that you need to look at the wider set of cash levers, which could involve things like asset lives, it could involve things like the fast, slow money mix as well. So all of those things will absolutely play into future profiles. So I think it's way, way too early to start to speculate on, you know, what EPS CAGRs may or may not do in the longer-term. There's an awful lot of water to flow under the bridge before we can get there.

John Pettigrew (CEO)

Thanks, Andy. Okay, I'm gonna take the next question from Rob, from Morgan Stanley, and then Jenny from Citi. Rob?

Rob Pulleyn (Managing Director)

Thanks. Thank you for taking my question. There's only one. There's a different tack on the prior topic, which I think is very much part of investors' debate at the moment, and that's the impact of inflation. This mid to high teens, so let's assume GBP 15 billion-GBP 19 billion of ASTI CapEx you've firmed up today. What was that, say, a year ago when you looked ahead? And while inflation is obviously passed through in your regulatory regime, it still needs financing in advance. And on that basis, aside from, shall we say, the quantum of work or the cost of finance, which was the previous questions, could the inflation we're seeing in these infrastructure projects lead to difficult decisions on capital allocation between, frankly, the opportunities you have in ET, ED, US, and NGV?

If I can push the envelope a bit, which of those lines would be the priority for capital allocation? Thank you.

John Pettigrew (CEO)

Well, let me have a go at answering question one. I'll reference a little bit of question two, but then hand it over to Andy, if that's okay. I mean, in terms of the mid- to high teens for the 17 ASTI projects, you know, what we've done over the last 6 months is a huge amount of work on the early ASTI projects. So I think Andy referenced them. So the Eastern Green Link projects 1 and 2, Bramford to Twinstead and Yorkshire Green. And in doing that, we've got a much clearer view of the scope, we've got a much clearer view of the engineering solutions, and we've engaged with the supply chain and entered into contracts. So all of that has driven the 40-42.

We haven't really talked about ASTI for quite a long time, actually, in terms of the overall cost of it, as we've been sort of working through with Ofgem about what's gonna be our license obligation and actually whether we're going to be doing all 17, which we only actually got information on at the beginning of this year. Actually, last time it was referenced, I think Ofgem put in their consultation a number around 12 for the 17 projects. So that was back in 2021, 2022. So with inflation indexation and the latest view of what we're seeing in the supply chain, you quite quickly get to mid- to high teens, and that was the logic for it. And as I've already said today, as we work through the later projects in ASTI, we'll continue to update the market.

But really, it was 12 that was in the consultation document, eighteen months or so ago. If you index it for inflation and then reflect what we've said today, you sort of get to mid- to high teens. In terms of your inflation question, the only point I was gonna make, which links to the major projects in the U.K., which is the way that the regulatory process does work, is that actually, as we develop these projects out from an engineering perspective, prior to agreeing the allowances with Ofgem, we actually do get the opportunity to go to the market and see what the cost of those projects are. So to the extent that we're seeing inflationary pressure in the supply chain, we're able to have that conversation with Ofgem prior to setting the allowances for each of those individual projects.

We're just going through that process for these early projects that I've just referenced. So, to the extent that we're seeing inflationary pressure, we're able to reflect that and have that conversation with Ofgem up front. Andy?

Andy Agg (CFO)

Yeah. Thanks, Rob. And I think the other part of your question was around, you know, how does this feed into potential thinking about capital allocation? And I think a couple of broad thoughts on that. One is, of course, as I'm sure you're aware, in terms of sort of the regulated businesses that we operate, you know, we will have absolutely meet our regulatory obligations. So as the owners of those businesses, those CapEx plans are agreed with our regulators, meet customer needs, and we're obligated to deliver, and we will always prioritize and ensure we do that on both sides of the Atlantic.

I think, you know, you've heard us say before that the post-pivot mix that we've moved to in sort of electric gas towards 75/25 is one we're very comfortable with. The U.K., U.S. overall split to the group again relatively close to 50/50 again is something we're very comfortable with. And as John said a couple of times this morning, I think in his opening comments, that you know, when we think very carefully about the discretionary opportunities in National Grid Ventures, we will, of course, be disciplined, and it would depend on the return opportunities available, and of course, how and whether they fit into the overall capital frame of the group. So that's broadly how we would think about capital allocation going forward.

Rob Pulleyn (Managing Director)

Right. Thank you. Over.

John Pettigrew (CEO)

Thanks. Thanks, Rob. Thanks, Andy. So I'll go to Jenny from Citi and then Bartek from Société Générale. So, Jenny.

Jenny Ping (Managing Director, Utilities and New Energy, Equity Research)

Thanks very much. Hi, morning, everyone. So just a question for Andy. At the full year results, when we talked about the 6-7p, you at the time alluded to that being a temporary change and therefore being reflected in your earnings. But I remember you saying that if it does become an enduring change and if it is going to stick around, then you would certainly look to remove that impact. And as we go into Autumn Statement, there is more discussion about full expensing and therefore the impact from that. I just wondered whether, if we did have confirmation of that, you would effectively then add back the 6-7p into your earnings. Thanks.

Andy Agg (CFO)

Yeah. Thanks, Jenny. No, I would just reiterate precisely what I said in May, and which is, you know, at the moment, it is a temporary phenomenon of the three years that it has previously been announced. We didn't believe it was the right thing to do to change our fundamental way of presenting our results. I'd repeat what I said there, though, and I've seen exactly the same commentary and speculation in the media around what the Chancellor may or may not say. If it does become enduring, then absolutely we would look again.

and as I said then, if it's material and it's distortive to how we present our economic performance, we would absolutely look at the right way to do that, and that may lead us to add it back. But we'll wait and see what the Chancellor says first.

John Pettigrew (CEO)

Thanks, Andy. Thanks, Jenny. Bartek.

Bartek Kubicki (Sell-side Equity Research Analyst)

Good morning, and thank you for taking my questions. Still free to come, please, very short ones. First, I mean, plenty of discussions on ASTI and future investment and the potential of funding and regulatory changes. I guess you can indeed speed up a cash generation in the future with, for instance, higher share of fast money or shorter depreciation periods. But just hypothetically, would you consider changing the nominal? Would you favor changing the regulatory framework in the U.K. to a nominal one, where actually the returns would be higher in nominal terms, of course, and then cash flow generation will be quicker to fund future growth? Second, in your presentation, you mentioned about the first transmission-connected solar farm.

Bartek (Analyst)

I just wonder if this is something what could happen more often in the U.K., and as a result, it does pose an upside risk to your investments in the future. And thirdly, on your FY 2024 technical guidance, just two things when I compare this guidance and the one presented at FY 2023 stage. You have decreased your contribution expectations from JVs, claiming that the contribution from interconnections will be lower. So I just wonder if you are already seeing a normalization of earnings coming from interconnectors, or we are still at levels above historical ones? And on the technical guidance, you are also mentioning about additional 40 basis points of 1% ROE creation in New England, and I think it's coming from the property tax return.

If you can perhaps describe what is this, and whether it will have an actual impact on your earnings and cash flows? Thank you.

John Pettigrew (CEO)

Thanks, Bartek. Why don't I take the first two, and then I'll ask Andy to talk about guidance? I mean, in terms of the regulatory framework, so I do think, I do think it's important that we get the right regulatory framework for these, for these major projects. You know, you heard me say already this morning, as we think about this, one of the things that's important to us is that clarity on that, whether it's returns, whether it's fast money, slow money, whether it's depreciation periods, all of that is up for the debate, and we need to work through that. In terms of regulation, actually, one of the things that I think is very beneficial for investors in National Grid is to have that mix of nominal and real regulation between the U.K. and U.S.

That gives you a slightly different mix between yield and growth, as you know, which is beneficial. And I'd add to that as well, that a shift to nominal regulation would have quite a significant impact on customer bills, which is something that we need to be mindful as part of the energy transition. So I'm not really an advocate for nominal regulation in the U.K. for those reasons, but we do need to get the right regulatory framework. I do agree with you on that. In terms of the transmission farms, I mean, actually, it's the first transmission directly connected solar farm to the transmission system.

If you look at the connection queue, that currently exists in the U.K., there's over 400 GW of people looking to connect to the transmission system. And actually, over that 400 GW, about 80 GW of it is, I think is solar. So there's an awful lot of people out there that are looking to connect to the transmission system. So, I don't see it as much as a risk as, you know, they are customers that will look to connect to the transmission system, and we will need to reinforce it. Ultimately, as you know, there's a lot of work going on around connection queues and who are the real projects and which ones do we need to remove. But nonetheless, we will need to serve those customers in the same way as we serve other technologies. Andy?

Andy Agg (CFO)

Yeah. Thanks, Bartek. In terms of our guidance, I think you raised the two points. Firstly, on our guidance in relations to joint ventures, and as you say, you know, in terms of interconnectors, it's probably too early to say, is this just a reversion to long-term rates? I think what we have seen, obviously, as you know, over the last year or two, is higher levels of arbitrage payments coming through on the capacity auctions. We are absolutely seeing that soften a bit this year, but again, if you look at the curves, you do see them coming down. But I think we'll have to wait and see whether that is actually a long-term normalization. It's still, you know, healthy returns, just to be clear.

It's just slightly lower than what we've seen over the last year or two. So we're still very pleased with the performance of those interconnector assets overall. And then in terms of the one-off item in Massachusetts, what it is, it relates to regulatory agreements that we reached with the DPU earlier this half, in relation to property tax costs that we've incurred in prior years, that they've now agreed that we should be entitled to recover, which is why we recognize it through the ROE this year, now we've got that clarity from the regulator in Massachusetts.

John Pettigrew (CEO)

Thank you, Andy. That's all the questions we've had on the telephones, but I think we've got time, Nick, for one question that maybe has come in online.

Nick Ashworth (Head of Investor Relations)

Yeah, let's do one last question then. So, from Ahmed Farman at Jefferies. There's a couple of questions. The first one, actually, Ahmed, it's on ASTI CapEx. I think hopefully, we've answered that with some of the other questions that have been asked. So the other question is, the first half results show a year-on-year decrease in the U.S.-regulated business operating profits. Could you please share some thoughts on the performance you're expecting for this business over the second half, and what ROEs you're expecting to achieve in New York and New England this year?

John Pettigrew (CEO)

Do you wanna do that, Andy?

Andy Agg (CFO)

Yeah, sure. Thanks, Ahmed. I think firstly, I'd draw your attention to a couple of comments we made in the presentation, that we do see the U.S., you know, as always, having a very skewed first half, second half split. And therefore, we continue to be, you know, very positive about the overall performance of the U.S. business for the full year. You'll have seen in our detailed guidance for New York and New England that we do expect, you know, significant growth in New York. You'll see that, probably around, you know, slightly lower because of the update that we gave to the environmental charge in our pre-close. But even allowing for that, we expect significant year-on-year operating profit growth in New York.

In terms of ROEs, our guidance is unchanged other than the single item that I just referred to in Massachusetts. So, you know, and again, that's unchanged from the guidance that we gave back in May.

John Pettigrew (CEO)

Okay, in which case, I'd like to just thank everybody for joining us today and for, for a fantastic set of questions. I mean, I guess, just to finish off, our key message is really with strong, really solid financial performance in the first six months, and reconfirming our full year guidance today, as you just heard from Andy. Very pleased with the operational performance across the group and the regulatory progress that we're making, and also the influence we're having on policy agenda as well. But very much, entering an exciting phase of delivery of the energy transition, as you've seen with the CapEx numbers that we've reported today. But we feel very well positioned both to navigate the challenges, but take advantage of the opportunities that are ahead of us as part of this energy transition.

Thank you all for joining us, and I look forward to seeing you all in the next couple of weeks.