National Grid - Earnings Call - H1 2018

Transcript

Operator (participant)

To the National Grid half-year results presentation. Good news: no changes to my speech this morning. We will begin with safety and no planned fire alarm tests. If you hear an alarm, please leave this room through the doors to my right here. Also, make note of the cautionary statement that's in your packs. And as usual, after John and Andrew's presentations, we'll have time for Q&A. All the material is on our website. And I now hand you over to our CEO, John Pettigrew. Thank you.

John Pettigrew (CEO)

Thank you, Arti, and good morning, everyone. As usual, Andrew and I joined this morning by Nicola Shaw and Dean Seavers, who will be on hand to assist with any questions. Let me start with a review of our performance in the first half of 2017 2018. It's been a busy period for the group, and I'm pleased to report we've made good progress. On an underlying basis, that is, excluding the impact of timing, operating profit increased by 2% to GBP 1.4 billion, reflecting new rates in the U.S. for our Massachusetts Electric and Downstate New York Gas businesses. Underlying earnings per share were 20.4p, 1.8p below last year's EPS on a like-for-like pro forma basis, mainly driven by higher interest charges on our index-linked debt.

In line with our dividend policy, the board has recommended an interim dividend of 15.49p per share, representing 35% of last year's total dividend. Our investment in critical infrastructure continues to increase in the first half of this year to GBP 2 billion, up 4% at constant currency. Our outlook for the year remains unchanged from what we set out in May, driven by our expectations for a stronger second half, mainly due to the seasonality of our U.S. profits, so it's been a positive first half, and this performance continues to support our investment proposition to shareholders, one that offers an attractive combination of yield and asset growth in the 5% range. Turning now to our safety and reliability performance. As you know, safety is core to National Grid, and I'm pleased to say we've had a good first six months.

Our focus on ensuring we have the right safety plans and procedures underpins our world-class safety performance with a lost-time injury frequency rate of 0.09. Across both our U.S. and U.K. networks, reliability has remained strong. In the U.S., we continue to see the benefits of our investments to improve network resilience. Last week, we responded to one of the most severe storms in recent years, affecting all of our jurisdictions and impacting over 400,000 customers. We provided a strong response and were assisted by other utilities, and as is normal practice with these events, we'll carry out a post-storm review to see how we can improve our response in the future. In the U.K., our system operators have been working hard to ensure we have the right tools in place to efficiently balance the system.

This winter will be the first year under the new capacity market rules, which has contributed to a significant improvement in the capacity margin, up from 5.7% -10.3%. Turning now to our key achievements and developments in the first half across the group, I want to start with the U.S. because, as many of you heard at our New York seminar in September, we see strong growth potential. In the coming years, we expect significant investment opportunity driven by the need to replace aging infrastructure and to modernize the networks. As you know, rate plans play a key part in ensuring our capital plans are fully funded. And over the last six months, we've continued to make good progress on our rate filing program with our Niagara Mohawk Gas and Electricity businesses, now in settlement discussions with the New York PSC staff.

To remind you, NiMO represents over 50% of our New York rate base. Our rate filings requested $331 million of incremental revenue, with capital investment of over $800 million and a return on equity of 9.79%. The PSC staff's initial response agreed with the vast majority of our capital investment plans and around half of our revenue requests. This is encouraging at this stage in the process. We've worked hard to improve the quality of our engagement with the New York PSC and are hopeful that a reasonable settlement will be reached by the end of December, with the rates coming into effect from April 2018. This means we'll have new rates for over 70% of our U.S. rate base, contributing to an improvement in performance and allowing us to achieve returns as closely allowed as possible. Turning next to the U.K. regulated businesses.

With the sale of a 61% share in our U.K. gas distribution business last year, we've reshaped our portfolio to strengthen National Grid's ability to deliver higher asset growth. As you know, in June, we returned around GBP 3.2 billion via the special dividend of just over 84p per share. To date, we've returned 60% of the total GBP 834 million via the share buyback program. Both our electricity and gas transmission businesses continue to deliver high levels of performance. Under RIIO, we generate outperformance by delivering efficiently. Ongoing process improvements and further innovation increase our efficiency over time, lowering the cost of delivery, which is shared with our customers. A case in point is St Fergus, our northernmost gas transmission site and largest terminal importing gas onto the national transmission system. Due to the coastal location, the site is exposed to harsh environmental conditions resulting in corrosion.

We've developed innovative techniques for dealing with corrosion on pipework as it transitions below ground. This technique avoids a full excavation, reducing the cost profile by 85%. The projected savings of St Fergus alone through the adoption of this technique is around GBP 10 million, and we intend to use this across the national transmission system for similar repairs in the future. And this is just one of many great examples of how the RIIO framework is working for customers, driving process improvement and innovation to reduce the cost of the work that we do. And of course, customers directly share in the benefit of this efficiency. As of March this year, RIIO had generated GBP 460 million of such savings for customers.

Moving on to our U.K. system operator role, in August, following extensive consultation, Arti announced the changes and the funding we'll receive to evolve our Electricity System Operator business. We continue to work to ensure we're ready for April 2019, when the Electricity System Operator, while still wholly owned by National Grid, will operate as a legally separate company with its own board and license. So turning now to National Grid Ventures, I'm pleased to say we've made good progress in all areas, including the interconnectors that are currently under construction. We've completed seabed surveys for NiMO, our interconnector with Belgium. Construction work on the converter stations is progressing well, and the project is on target for completion in 2019.

On the North Sea Link, our 1.4 GW interconnector with Norway, we successfully completed all the civil works on the Norwegian side last month, and the project is on target for completion in early 2022. National Grid's share of investment in these two projects is expected to be around EUR 1.2 billion. For IFA2, the second interconnector with France, we've commenced the offshore surveys, and we're now progressing the design and permit work as planned. I'm also pleased that in June, we were awarded preferred bidder status for the Shetland New Energy Solution, with contracts expected to be signed in December. So this is a 60 MW, 260 km interconnector between the Shetland Islands and Scotland and demonstrates our ability to be successful in a competitive environment. And the link should be operational by 2021. In the near term, interconnectors are a major feature of National Grid Ventures.

As I set out in May, National Grid Ventures was created to explore growth opportunities, to reinforce our technological expertise, and strengthen our commercial capabilities as we continue to evolve for the future. I'll touch on these broader initiatives later. Overall, I'm pleased to say we've made good progress across the group on our key priorities. In the U.S., we continue to deliver on our regulatory strategy. In the U.K., we continue with our focus on efficiency and innovation. In National Grid Ventures, we've made significant progress on our new development projects. I'll talk more about each of these projects later, but first, over to Andrew to discuss the group's first half financial performance in more detail.

Andrew Agg (CFO)

Thank you, John, and good morning, everybody. Before I go into the results, I would like to point out that both John and I are using the pro forma 2016 2017 comparatives. These are the numbers we use to measure our performance both internally and externally. As a reminder, the pro forma numbers for last year include an estimate of the 39% share of U.K. gas distribution, now called Cadent, and adjust the share count to reflect the impact of the share consolidation and buyback. Obviously, the comparisons to last year are made more complex by the accounting for the disposal, and this is exacerbated by the impact of timing on our statutory numbers. We've tried to be as clear as we can within the limitations imposed on us by financial reporting regulations. However, I do realize this may be confusing.

First half performance has also been impacted by the change in business mix, which means the seasonality of U.S. gas operations has a greater impact on the first half-second half split. So now to the first half results. Headline operating profit of GBP 1.3 billion and earnings per share of 18.5p per share were both down on last year, mainly reflected the expected reversal of timing differences. Excluding timing and foreign exchange, operating profit was GBP 25 million higher than the first half of last year and was in line with our expectations. Underlying earnings per share of GBP 20.4 per share is GBP 1.8 lower than last year, mainly due to higher RPI accretions on our index-linked bonds. Capital investment was GBP 2 billion, a 4% increase at constant currency. This reflects the continued investment in our core regulated businesses, as well as the ramp-up of spend on our interconnector projects.

Our balance sheet remains strong, and we are on track to deliver good overall returns and value added for the year. As usual, I will start with electricity transmission. Operating profit was GBP 542 million, down 22% compared to the first six months of last year. Excluding timing, operating profit was GBP 70 million, or 11% lower, primarily due to the lower reduction in base allowed revenues and lower basis income. We invested GBP 515 million on the reinforcement of our networks and new connections.

This was GBP 71 million lower than last year, reflecting the lower spend on the Western Link. Looking ahead to the full year, we expect to deliver totex outperformance close to last year. The contribution from legacy allowances will also be consistent, but as a result of the reduction of the basis opportunity, current year incentive performance will be lower. Overall, though, we expect good outperformance for the year.

For gas transmission, total operating profit was GBP 33 million lower than the prior period, but GBP 29 million higher, excluding timing. This underlying increase reflects higher revenues due to allowances for the Avonmouth Pipeline. As you know, these revenues will be returned next year when the outcome of the mid-period review is put through the price control model. This will reduce operating profit next year by approximately GBP 85 million. This is simply how the Ofgem adjustment flows through our IFRS revenue. However, this will have no impact on returns as the allowances have been excluded from those calculations. Gas transmission capital investment increased by GBP 41 million to GBP 157 million. This included spend on the Humber Pipeline project and investment in asset health. We expect totex performance to be similar to last year as we continue to make the necessary investments in the system.

This is to ensure we meet the network output measures, even though this is above our allowances. We expect the good performance on other incentives to continue, and as I've discussed previously, our legacy allowances have ceased. Overall, the return on equity will be around the allowed return of 10%. Now turning to the U.S., headline operating profit of GBP 433 million was in line with last year, with the benefit of foreign exchange offsetting adverse timing. Excluding timing and foreign exchange, operating profit was up GBP 59 million due to higher revenues from new rates in Massachusetts Electric and our Downstate New York Gas businesses. Capital investment was GBP 1.1 billion, which a constant currency is in line with a high level of spend last year. We expect full year investment to be higher than last year.

As we previously indicated, we expect the U.S. return on equity to be 90% of the allowed. This reflects the improved performance we expect under our new rate plans. Over the medium term, our U.S. operating profit, excluding timing, is expected to increase in line with asset growth of around 7% per annum. We are now showing National Grid Ventures as a separate part of other activities. Our existing interconnector, Grain LNG, and metering businesses continue to perform well, delivering similar levels of profitability to the prior year.

Capital investment has increased significantly to GBP 180 million compared to GBP 87 million last year, reflecting the investment in our interconnector projects that John mentioned earlier. The full year operating profit contribution from NGV is expected to be in line with the prior year. Other activities include our St William joint venture with Berkeley Homes, our residual property business, and certain central costs.

At the half year, operating profit was GBP 26 million, GBP 13 million higher than last year, reflecting the timing of property transactions. The share of post-tax earnings from our remaining 39% stake in Cadent was GBP 55 million compared to GBP 71 million on a pro forma basis. This reduction is mainly due to adverse year-on-year timing. The contribution from Cadent for the current year and for our pro forma results includes the impact of a proportionate shareholder loan from National Grid to Cadent. This means GBP 15 million of interest income is recognized as a credit in the interest line, but as an equivalent reduction in our share of Cadent's profits. Before I move on to talk about our interest charge for the first six months, I thought it would be helpful to step back and look more broadly at how rising inflation and interest rates affect the group's operating results.

In the U.K., inflation on our asset base is managed through an uplift to the regulated asset value and recovered over the life of the assets. By deferring the impact of RPI into the RAV, the regulator keeps the cost to consumers lower in the short term but rewards shareholders over the longer term. We have partially hedged this by issuing RPI-linked debt. Higher RPI is economically positive as the indexation of GBP 19 billion of RAV is far greater than the indexation on GBP 7 billion of RPI-linked debt. A 100 basis point increase in RPI would therefore represent a net total of GBP 120 million of incremental asset value. However, in the short term, the current higher inflationary picture decreases U.K. earnings as the impact on our interest charge is greater than the amount that was used to determine our 2017 2018 revenues.

It will be two years before the impact of higher inflation is trued up in revenue. The cost of debt allowance in the U.K. is updated annually based on the 10-year iBoxx tracker. This mechanism has a lagged impact but protects the company in a rising interest rate environment. The key, as I have discussed before, is comparing the cost of new debt issued against the spot rate on the index. In the U.S., nominal regulation builds in the recovery of an assumed level of inflation in the year in which it occurs. This provides a faster cash return, which means that the rate base is reduced quicker and therefore is not affected as much by inflation. Our rate filing program is designed to adjust the cost of service and the return on equity to reflect increases arising from inflation, although the speed of recovery obviously varies by jurisdiction.

The key to managing this is timely rate cases to mitigate the impact on returns. U.S. regulators take into account the cost of debt and provide for a straight pass-through of these costs to customers. This is why most of this debt is fixed rate, long-term debt. So turning back to performance for the first half. Finance costs were GBP 527 million, up 23% on a pro forma basis. We have now cycled through a full year of RPI increases, so we expect this to have a much lower impact in the second half. Our effective interest rate was increased by 80 basis points to 4.7%, again due to higher RPI. The effective tax rate before joint ventures was 20.8%, down 200 basis points from last year, mainly due to the lower U.K. corporation tax rate.

Earnings per share were 18.5p, 6.5p lower than last year on a pro forma basis, mainly due to adverse timing of 4.7p. Operating cash flow was GBP 2 billion. This was higher than last year, primarily due to lower pension contributions. Net debt increased by GBP 3.8 billion to GBP 23.1 billion. The increase includes the return of GBP 3.6 billion of the gas distribution proceeds to shareholders and an increase of GBP 1.4 billion related to business requirements. These factors have been partially offset by stronger sterling and other non-cash movements, which decreased net debt by GBP 1.2 billion. In the first half of the year, we raised over GBP 1 billion of new long-term financing. Consistent with our policy, the board is recommending an interim dividend of GBP 15.49 per share, representing 35% of our prior year full dividend.

The return of the GBP 4 billion of gas distribution proceeds is well advanced, as both John and I have mentioned. The remaining buybacks are expected to be completed in the second half. The capital distribution is designed to maintain our per share measures. This will reduce the average share count by 300 million shares this year and a full year impact of around 400 million shares next year. Underlying performance for the group, excluding timing, is expected to remain consistent with the full year guidance we provided in May. The two areas to highlight are: first, our share of Cadent performance will reflect an incremental GBP 22 million annual depreciation charge associated with purchase price adjustments from the fair value exercise carried out by the new owners. This wasn't reflected in the pro forma EPS we provided in May, as it wasn't available at that time.

Adjusting for this, our 2016 2017 pro forma EPS would be 58.6p per share rather than 59.2p per share we discussed in May. And second, in the U.S., despite the net outflow and timing in the first half, we continue to over-recover revenues associated with the NYSERDA funding program. The over-recovered balance at September was $358 million, and over-recoveries are expected to continue until November, at which time the balance will begin to be repaid at the rate of approximately $10 million per month. So let me summarise. The financial performance across the group as a whole is in line with our expectations. We expect a significantly stronger second half as a result of cycling through U.K. RPI increases and increased seasonality due to a greater proportion of our businesses being represented by U.S. gas.

Our capital investment has increased, supporting asset growth in line with our stated range of 5%-7%, and our financial position remains robust. With that, I'll hand you back to John.

John Pettigrew (CEO)

So thank you, Andrew. So as I said at the start, we've had a busy first six months, and I'm pleased with the progress that the group has made. So turning now to our priorities for the second half, where I'll cover our key areas of focus and also provide some context in the environment in which we operate. And I'll start with the U.K.. So since privatization, National Grid has made significant progress. Our electricity transmission costs today are 30% below that of privatization levels. In the last 10 years, we've invested about GBP 14 billion in transmission infrastructure, and today our electricity and gas transmission costs represent just 3% of the average household bill.

And under RIIO, we'll continue to invest and drive efficiency through the types of initiatives I discussed earlier. Anyone following the energy sector in the U.K. in the last six months can be no doubt, from a customer, political, and regulatory perspective, that the cost of energy remains top of the agenda. There's been wide-ranging discussion and commentary on the functioning and ownership of the U.K.'s energy sector and whether it's delivering value for customers. In effect, we're seeing ever greater pressure to deliver higher quality services while simultaneously reducing costs. But as I just outlined, this is not a new area of focus for National Grid, as the regulatory framework that we operate within incentivizes us to achieve precisely this.

National Grid is a responsible organization and will continue to work closely with local and national governments to ensure we're able to deliver world-class services while responding to customer needs. So turning now to regulation. At the end of August, Ofgem released a consultation for the needs case and options for delivery for Hinkley-Seabank. This is a significant project with expected CapEx of almost GBP 1 billion. Ofgem are consulting on three models for the delivery of this important connection. We've responded to this, and we await Ofgem's decision. Ultimately, our overarching goal is to remove the regulatory uncertainty so that we can focus on the timely connection of the power station. We expect the needs case to be published in December, along with a consultation on the preferred delivery model, which will be confirmed in 2018. And now I'd like to touch on RIIO-2.

In July, Ofgem issued an open letter setting out their key principles for the future framework. We're pleased to see that many of their principles are consistent with our view, including putting the customer at the heart of decisions and ensuring infrastructure is built as efficiently as possible. We firmly believe that with these shared principles, Ofgem should be able to create a regulatory framework that ensures efficient delivery of needed capital investment whilst providing investors with certainty and confidence in the utility sector. As you can see from the timetable on the slide, we're still three and a half years away from the start of RIIO-T2, and the exact financial parameters won't be known for some time, but 2018 will be an important year in the establishment of the overall framework for the price control.

Ofgem's high-level timetable indicates a framework decision around the middle of next year, with accompanying specific consultations beginning after this. We'll certainly be updating you along the way to 2021. However, we don't intend to respond to every piece of communication from Ofgem, but we'll provide updates when it makes most sense. Ultimately, there are, of course, a number of parameters that make a successful price control, from base returns, levels of investments, outperformance incentives, to speed of cash, and we've got a good track record of collaborating to achieve successful regulatory frameworks and being able to deliver against our price controls for our customers and for our shareholders. As for our near-term priorities in the U.S., the first is to reach a settlement for the ongoing NiMO rate case, with a new rate due to come into effect in April 2018.

We also intend to submit rate case filings for our Massachusetts Gas and Rhode Island Gas and Electric businesses this month. Together, these two businesses represent around 20% of our U.S. business. The Massachusetts Gas filing is the first since 2010 and will enable us to update revenues to more closely reflect our current cost of service and to allow us to earn returns closer to the allowed levels. The Rhode Island Gas and Electric filing will be the first since 2013. While Rhode Island regulation includes capital trackers, it's important that we reset our operating expenses to ensure that we can earn a fair level of return. In addition to rate filings over the next six months, we have a number of priority initiatives to optimize our performance and evolve the U.S. organization to deliver a significant increase in CapEx.

As we mentioned in September, we now have a U.S. capital delivery function that is responsible for the majority of our U.S. capital spend and will emulate the U.K. capital delivery function with clear end-to-end accountability. This approach is key for some of our major capital projects that are in the early stages of development, like the Metropolitan Reliability Infrastructure project in Brooklyn, which is a $250 million five-year gas project aimed to support the long-term system demands in New York City, and the Northwest Nassau project on Long Island, which is a six-year, $280 million project that involves installing 11 miles of gas mains and replacing older sections of the transmission network. Together, both of these projects, funded through our rate plans, represent more than $500 million of investment.

Given the scale of the projects, the end-to-end process work should have a real impact of reducing risk and driving the overall success of these projects. At National Grid, we're at the forefront of technology and innovation, and we know it's a key driver for our long-term success. Before I talk about National Grid Ventures, I want to pick up on two areas of technological development that are increasingly important in the near term, where we're actively pursuing opportunities. Starting with renewables, where we've seen continued reduction in their costs, in the U.K., offshore wind is being developed at prices unheard of only a short time ago. Similarly, if we look at solar in the U.S., we've seen the cost fall by 85% since 2009. The reducing price of renewables is creating growth opportunities for National Grid.

For example, we've connected the U.S.'s first offshore wind farm in Rhode Island, and recently we won a project on Long Island for 23 MW of utility-scale solar. Looking forward, we're also working with offshore wind providers to provide more renewable generation into Massachusetts. Therefore, I believe renewables will continue to bring opportunities for National Grid at multiple points along the supply chain. The second area is storage, where, through the reduction in lithium battery costs by 73% since 2010, batteries are increasingly becoming an important component in the energy mix. I'm pleased to say that next year, we'll start the construction of our first large-scale battery energy storage system in the U.S. on the island of Nantucket. This solution, which has been developed in tandem with Tesla, will provide the additional capacity needed on the island.

Although this is a relatively small project, I highlight it because it demonstrates how storage solutions are one of a number of options we can use to respond to customer needs. And finally, as you know, we've seen the continued developments in electric vehicles. Although it's early days, I'm excited about the role we're already playing. For example, in the U.S., we're proposing 1,200 charging stations in Massachusetts, and in the U.K., we're in discussions with the government on how to develop needed infrastructure to support the adoption of EVs. So turning now to our near-term priorities for National Grid Ventures. As I discussed earlier, we already have a good pipeline of new interconnectors under construction, and there are further opportunities too. For example, last week, the Danish government announced its backing for the 1.4 GW Viking Link between the U.K. and Denmark.

A final investment decision is to be taken next March, with completion planned for 2022. In the U.S., we have a growing pipeline of business development opportunities, including competitive transmission, battery storage, and electric vehicle infrastructure. In the second half of this year, we'll continue to develop these opportunities, while also taking small steps to better understand the impact of distributed technologies on the networks. One particular area of focus will be the transmission projects, Granite State Power Link and Northeast Renewable Link. In July, we submitted bids to bring renewable energy to Massachusetts through both of these projects. The results of the tender process will be known in January 2018, and if successful, these would represent over $1 billion of new capital investment. Overall, I'm pleased to report good progress in all of our businesses, and I'm confident this momentum will continue.

In the second half, we'll continue to focus on our priorities as we work to finalize the NiMO rate filings, continue our engagement with Ofgem on RIIO-2 and Hinkley-Seabank, and seek opportunities to grow the business while remaining focused on performance optimization and keeping pace with the evolution of our industry. As I said earlier, we're operating in a dynamic environment, but National Grid has strong fundamentals that underpin our ability to create value over the long term. We have a high-quality asset portfolio, a strong balance sheet, access to solid growth opportunities driving asset growth and yields, and excellent teams that are motivated to deliver enhanced performance. I'm confident that we're well positioned for attractive growth and good shareholder returns. Thank you for your attention, ladies and gentlemen. Andrew and I would be happy to take any questions. We've got a mic.Hi.

You seem more than ever to be talking about National Grid Ventures and be proactively going after growth rather than taking growth in your rate bases. Can you talk about the returns in National Grid Ventures and what kind of returns you see and how those compare to the core businesses? Secondly, just on capital deployment within the group, it seems that National Grid is moving from being 70% of CapEx in the U.K. to well over 50% in North America in just a few years. Can you talk about where you see that going and whether you'd be able to find the growth in North America?

Okay. Let's first start with the first question in terms of National Grid Ventures.

I mean, actually, as I said earlier, in May, our focus is very much in three areas: in our U.K. core regulated businesses, our U.S. core regulated businesses, and also, as the industry continues to develop, we want to take advantage of opportunities which we're focusing through National Grid Ventures. So the U.S. is growing, as we said in September, at around 7% per annum in terms of the regulated asset base. We've got strong growth there. In the U.K., we're expecting the capital investment to be at a similar level to what we've seen in the first four years of RIIO, which is about GBP 1.3 billion per annum. But National Grid Ventures is an opportunity, and as I said, the initial focus is very much on the construction of the interconnectors.

This year, the capital investment is around about GBP 400 million, and we've got some good opportunities, as I've said in my speech, going forward, so it's not more of an emphasis; it's more about making sure that we're focusing in all three areas going forward. In terms of the overall shape, I mean, the overall shape was impacted by the successful sale of 61% of our gas distribution business last year, so with the growth rates that we're seeing over the medium term in the U.S. and the U.K., then naturally, the overall shape is going to head towards a sort of 50/50 split between the U.K. and the U.S. Our medium expectation is the U.S. will grow at around about 7% and the U.K. by about 5%, and returns in ventures? So returns in ventures, the focus at the moment is on our interconnectors business.

Any investment we make in an interconnector or in any project of National Grid, we've got a very disciplined approach. Our expectation, as we said before, for the interconnectors is that they're likely to earn returns based on the scenarios that we've tested at slightly higher than what you expect to see on the onshore transmission businesses in the U.K.. And of course, they're protected with the cap and collar that we've got in place for new interconnectors going forward as well.

Thank you.

Jenny Ping (Analyst)

Thanks very much. It's Jenny Ping from Citi. I just wondered whether you have any comments on the back of the Helm review, some of the issues that's raised in terms of the networks and the profitabilities there. And then secondly, you talk about EV infrastructure and discussion with the U.K. government.

Can you just give us an update there as to where you are, what the potential structure could look like, and the potential spends there? Thanks.

John Pettigrew (CEO)

So in terms of the Dieter Helm report, I think it's fair to say it was comprehensive and ambitious given the time scales that Dieter had to do it. And I think there are some interesting concepts in there, particularly around simplification and transparency that he's promoting. From a networks perspective, I don't agree with his analysis on RIIO. I think when you look over the last four years with National Grid, then it's clear that we've delivered about GBP 460 million of savings through actually delivering projects more efficiently using innovation, whereas Dieter has sort of focused in on the assumptions that were set out at the beginning of RIIO-T1.

The government this week has opened up the opportunity to respond to that with a call for evidence that's due just after Christmas. We'll look at the detail now, and we'll respond accordingly to it. In terms of EVs, as part of the response to the industrial strategy that came out a few months ago, National Grid set out a concept really about how do you address the key issue of range anxiety. One of the ideas around that is potentially creating a network of service stations that have access to fast charging. The simplistic concept is you can charge your car in the time it takes to get a cup of coffee. If you were to do that, then you potentially need quite a significant amount of power potential of the transmission system.

So we've been exploring that concept both with service station providers, car manufacturers, and the government to see whether there's an opportunity to create a backbone for infrastructure in an EV as part of the government's broader ambitions to roll out electric vehicles. In terms of potential investment opportunity, then it would be several hundred million to connect all the key service stations in the U.K., but it's very, very early days. And this is a concept at the moment, and we've got a lot more work to do to think about the impact on networks and how best you address issues like range anxiety.

Nick Ashworth (Analyst)

Thank you. Morning. It's Nick Ashworth at Morgan Stanley. Firstly, can you give us an indication around how much money has been spent on the interconnectors?

I think both of you talked about it in your presentation, so it'd be good to know how much has gone into that already. Secondly, where will net debt be by the end of the year? Looking at the technical guidance, it seemed to be pointing towards GBP 24 billion, but I just wanted to make sure that I'd read that correctly. And then finally, in the U.S., you're talking about targeting 90% of the allowed returns. Does that mean that you think you will get there this year? What are the risks around that? And just a little bit more color around that would be helpful. Thank you.

John Pettigrew (CEO)

Okay. So I'll take the first and third, and I'll hand the second to Andrew. Okay.

So in terms of interconnectors, against the projects that we've got in construction at the moment and potentially including Viking, then the overall capital investment would be around about GBP 2.2 billion. I mean, currently, this year, we're probably going to spend a couple of hundred million, so it's going to ramp up over the next two to three years quite significantly to get the projects complete. So NiMO is due to be complete in 2019, so it's further advanced. The NSL is due in 2021. And if we take Viking forward, that'll be in 2022 and IFA2 in 2021. So actually, over the next four or five years, there'll be quite a ramp-up in capital investment for the interconnectors.

Nick Ashworth (Analyst)

But in terms of how much has already been spent today or by the end of this year, it will be?

John Pettigrew (CEO)

It's probably something around about GBP 400 million, Andrew.

Andrew Agg (CFO)

Yes.

John Pettigrew (CEO)

Somewhere around about GBP 400 million, I would guess. In terms of allowed returns, so as you said in your question, so we've set a target to achieve 90% of allowed returns this year. So clearly, we get the benefits this year of the KEDLI and KEDNY settlement that we did last year, as well as Massachusetts Electric. So at the half-year stage, we remain confident that we're going to hit that target.

Andrew Agg (CFO)

Yeah. And on net debt, we estimated about another GBP 500 million of business-related spend. There's about another GBP 500 million of potential for gas distribution, so somewhere around GBP 24 billion assuming constant currency. Currency is the big sort of swing factor.

John Pettigrew (CEO)

Thank you. Should we go? Dominic.

Dominic Nash (Analyst)

Hi there. Yeah, it's Dominic Nash from Macquarie. Two questions, please. Firstly, I see that you're developing this 23 MW of solar on Long Island.

Are you actually the owner-operator of this renewable generation? And sort of follow-on sort of question from that is the scale of opportunities for renewables in the U.S. is obviously huge. Is this something that if it works and you could actually potentially roll out a magnitude or two greater? And my second proper question is, how are the negotiations going with the DSO versus TSO debate on who's going to be sort of controlling the lower voltage networks? Will you be the people sort of controlling that?

John Pettigrew (CEO)

Okay. So in terms of the sort of three questions, so in terms of the first question, the solar opportunity on Long Island, so this is actually a JV that we're in with NextEra. So it's a relatively modest investment, around about $30 million. And we're currently in negotiation with the Long Island Power Authority for a long-term PPA.

But as an opportunity, leading into your second question, one of the reasons that we created National Grid Ventures was to look for opportunities where the type two investment have similar characteristics that we believe we have in terms of infrastructure energy. So infrastructure energy that requires good engineering, good asset management, low risk, with regulatory characteristics are things that we would look to explore through National Grid Ventures. And renewables clearly is one of those opportunities. In terms of the TSO/DSO, we're making good progress actually through the work that the ENA has set up to really establish a clearer framework for transferring data and understanding where the constraints are on the systems. And that particular work is going well. It's focused very much with U.K. Power Networks at the moment because there's some real constraints in their network.

We're identifying where they are and working to see what the whole system solution is. So that work is progressing well, I think.

Dominic Nash (Analyst)

When do you think we'll get clarity on that?

John Pettigrew (CEO)

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

Iain Turner (Analyst)

Thanks. It's Ian Turner from Exane BNP Paribas asking about the accounting implications of the NYSERDA thing. And it looks as if if you X that out, you're actually under-recovering by more than there's more under-recovery on the ex-NYSERDA performance than there is in the headline figures. Is that right?

Andrew Agg (CFO)

Yes.

So we actually did continue to over-recover by about $10 million a month through the first half of the year. So the balance, I think, has gone up from somewhere about $270-$350 million in the first half of the year. So that was a contra to the other. But if you remember, we did have quite a significant timing balance in the U.S. at the end of last year, which is part of what we've handed back. NYSERDA is, unfortunately, this is one of the quirks of IFRS accounting. We have this discussion often. Notice the chairman's smiling in the front row about the fact that we actually have to recognize revenue, which is probably not ours, and we then have to give it back over time. That is part of the reason why we highlight timing as an issue.

So effectively, under GAAP, it would have just been a deferral, and you wouldn't have seen it through the P&L under IFRS. We count it as revenue, and the giveback would go back through revenue. So it's just going to have a legacy impact on us going forward, probably for a couple of years now.

Iain Turner (Analyst)

But it's basically a switch from over-recovering to paying it back is sort of +120, -120.

Andrew Agg (CFO)

Yes. Yeah. Yeah. Yeah. Eventually, we'll not just be effectively taking what we're continuing to take through bills. We'll actually then start passing on to NYSERDA as well. So you'll lose the 120 over-recovery and move to 120 over-recovery. Unfortunate.

James Brand (Director)

Thank you. James Brand from Deutsche Bank. Two questions both on the U.S.

Firstly, I was wondering whether you could give just a view on what the impact of U.S. tax reform might be on you if it goes through somewhere in line with the current proposals. And secondly, obviously, I guess one of the other focuses of Trump has been infrastructure spend and the need for a massive infrastructure investment program. And when you have rate reviews in the U.S., there's always been a bit of a trade-off between infrastructure spend requirements and affordability. I was wondering whether you could give us an update on whether it's becoming any easier for you to convince regulators of the need for investment and whether that trade-off between affordability and investment is moving a bit closer to facilitating more investment than in the past.

John Pettigrew (CEO)

Okay. I'll try to do the second. You do the first?

Andrew Agg (CFO)

Yep. I'll do the first. Okay. Yep.

So on U.S. tax reform, obviously, there is the draft bill that we've seen. A couple of things of interest for us. Obviously, one, which is the fact that they seem to indicate that interest deductibility for utilities will remain, which is important. The other key factor which we were interested in was obviously around property tax deductions, deductibility, because that is obviously key. The other factor that's there is obviously the elimination of bonus depreciation, which for utilities, again, which actually is quite good because effectively at the moment we do have this situation where all our investment is depreciated in year one. We're building up a very large tax liability against RAV, and that's actually been a break on RAV growth over that period of time. So obviously, there's still a long way to go.

There are a number of things in the legislation which we don't particularly like, so we'll be working to look at those, particularly around holdcos and what that means from an interest deductibility perspective and so forth. So there are some things, and obviously, there's a long way to go before we can actually give you the real picture of what it is. I think the interesting thing, which I think is one which comes back to you, is the second part which leads into the second part of the question, potentially there is some actually headroom this gives because effectively, if you have a significant reduction in the tax rate, effectively there is a give back potentially to customers.

Can that be used then to actually invest more, give you a bit more bill headroom to do some more of the infrastructure investment, which we think is necessary?

John Pettigrew (CEO)

In terms of the infrastructure, I guess we're keen to see when any legislation or thoughts come forward in terms of infrastructure. It was certainly part of the initial key policy areas, but we're waiting to see it, and potentially that's a positive thing. For our U.S. business, state is really important as well. In terms of the infrastructure drivers, if you look at our downstate gas businesses last year, we set out the requirements for investing both for safety, resilience, reliability, and to start to adapt the networks. We asked for $3 billion over three years, and effectively that's what the regulators supported us with.

If you look at NiMO in upstate New York, the affordability issue is more of an issue in upstate New York just in terms of demographic. But in the initial response from staff against our capital investment proposals, which were again driven by safety, resilience, reliability, as well as some grid modernization, their initial view was to accept about 92% of our electricity transmission CapEx and about 82% of our gas. So from a starting point, that's a very high level. When we put our rate filings in place, we're very cognizant of affordability. So obviously, in recent years, we've had the benefits of commodity prices coming down, so there's been some headroom. But we also look to shape our rate filings to mitigate the initial impact.

So if you look at our KEDLI and KEDNY one last year, for example, we smoothed the revenue impact over three years rather than a customer seeing a significant increase in year one. And we have the same engagement and discussions with regulators in upstate New York as well.

Fraser McLaren (Analyst)

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

John Pettigrew (CEO)

Okay.

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

Andrew Agg (CFO)

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

Just a quick question with your system operator hat on.

There's been quite a lot of comments about perhaps the de-risking or reduction in grid volatility because of battery storage or a more stable system. Given that one of your responsibilities is keeping the lights on and balancing the system, how do you see that evolving with battery storage and new other solutions? Are you more confident about the stability of the grid going forward?

John Pettigrew (CEO)

Yeah. Thank you for the question. I think over the last three or four years, the system operator has been consistently looking at developing new products and services that are in lows to balance the system as efficiently as possible, reflecting the new challenges that intermittent generation brings. So I think it was at the full year results we talked about the fact that some of the new products we put in place have included what's called fast frequency response.

It wasn't technology specific, but things like storage are really well placed to be able to provide those services where you need to have response from generation in sort of milliseconds. We put a tender out. We got a huge response. I think it was over 1,000 MW actually in response, and we bought 200 MW, which is what we needed as the system operator. Every year, we set out our strategy for how we're going to operate the system, and at the moment, we're looking at what we can do to simplify the products we bought historically so that we've got the right products and services going forward, and that will continue as we see more and more intermittent generation coming on. I think solar storage will be an important part of the types of tools that the system operators will need to use.

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

Sorry, I can't.

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

So I'm very confident that the system operator will be able to forecast how the requirements are changing, will be able to buy the products and services it needs to balance the system. The challenges are changing. We've reported this year we've had the first summer daytime demand that's been below the nighttime demand. We've had periods where we've seen no fossil fuel generation on the network. So the network is evolving all the time, but we are confident that we can develop the products and services we need to meet those challenges. Okay. If there are no more questions, can I thank everybody for coming today?

As I finished, I think we're very confident that we're in a great position in terms of the asset portfolio we've got and good to see you all. Thank you very much.