10 November 2015

National Grid plc

Half year report for the six months ended 30 September 2015

Steve Holliday, Chief Executive, said: 'Our business has delivered a strong performance in the first half of the year while maintaining high standards of safety and reliability for our customers and increasing our level of investment. Headline profits have benefited from an excellent performance from our interconnectors and property activities, which are strongly weighted towards the first half.'

Strong first half performance:

• Adjusted earnings per share of 28.4p, up 22%, principally driven by other activities

• Investment of £1.9bn up 17% at constant currency

• UK Regulated: progress towards another year of good performance

• US Regulated:

  • increased investment to over $1.4bn

  • agreed increased capex and extended tracker in downstate New York

  • full rate case filed for Massachusetts Electric

• Other activities: very strong first half UK interconnector and property performance

• Strong balance sheet maintained

  • interim dividend of 15.00p per share in line with policy

    
    

    Portfolio development:

• Commencing a process for the potential sale of a majority stake in UK Gas Distribution

  
  

  Financial results

  
  

  Six months ended 30 September	Adjusted results1			Statutory results
  Unaudited	2015	2014	% change	2015	2014	% change
  Operating profit (£m)	1,836	1,611	14	1,849	1,636	13
  Profit before tax (£m)	1,371	1,137	21	1,348	1,175	15
  Earnings per share (p)	28.4	23.2	22	27.8	23.9	16

  
  

  Outlook:

• On track to deliver another year of good overall returns and dividend growth

• Full year investment of around £3.7bn expected, driving asset growth of between 4% and 5%

Commenting on the outlook for the remainder of 2015/16, Steve Holliday added:

'Our UK Regulated businesses and other activities remain on track to deliver good performance this year. In the US, we have made significant progress, managing our cost base through a time of increased activity and we expect to maintain profits in line with last year.

In the second half of 2015/16 we will begin a process to rebalance our portfolio through the potential sale of a majority stake in our UK Gas Distribution business. Following a sale, National Grid's portfolio of businesses will have a higher asset growth profile and will remain well positioned to deliver strong returns and a sustainable, growing dividend. The UK Gas Distribution business has been an important part of National Grid and the sale of a majority stake will realise some of the value we have created for our shareholders.'

1 'Adjusted results' and a number of other terms and performance measures used in this document are not defined within accounting standards or may be applied differently by other organisations. For clarity, definitions of these terms have been provided on page 20. Prior year EPS has been adjusted to reflect the additional shares issued as scrip dividends, refer to note 6 on page 32.

CONTACTS

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CONFERENCE CALL DETAILS

An analyst presentation will be held at the London Stock Exchange at 09:15 (GMT) today.

There will be a live webcast of the results presentation available to view at http://view-w.tv/p/786-1014- 16438/en. The presentation will be available through the same link as a replay this afternoon.

Live telephone coverage of the analyst presentation at 09:15 (GMT)

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STRATEGIC AND OPERATIONAL REVIEW

Portfolio of businesses to deliver asset growth and an attractive dividend backed by a strong balance sheet

National Grid believes that it can deliver best value to shareholders through maintaining a portfolio of businesses with strong operational performance alongside annual asset growth of around 5-7%. The Board considers that this level of growth is both attractive and also consistent with sustaining a strong balance sheet and generating the cash required to fund the dividend policy, growing at least in line with RPI for the foreseeable future.

Proposed majority sale of UK Gas Distribution business

The Board regularly reviews the composition of the portfolio. As part of this, National Grid is commencing a process for the potential sale of a majority stake in its UK Gas Distribution business.

The UK Gas Distribution business is a very attractive, mature business delivering good cash flows and return on equity. The Board believes there is now an opportunity to rebalance National Grid's portfolio to deliver a higher asset growth profile and realise the value it has created in the networks.

The Group currently expects to grow its total regulated and other assets at around 5% p.a. over the next few years. The sale of a majority stake in the UK Gas Distribution business is expected to increase this growth rate towards the upper end of the Group's range mentioned above.

Following completion of a sale, the Board expects to return substantially all of the net proceeds to shareholders, while maintaining the strong balance sheet that allows the Group to continue to fund its investment programme and maintain the policy of increasing dividend per share by at least RPI for the foreseeable future. The process is likely to be completed in early 2017.

Overall long term growth expectation remains attractive, demonstrating benefits of the portfolio

Capital investment across the business was £1,919m in the period, an increase of £273m or 17% (at constant currency) compared to the same period in 2014/15, primarily reflecting increased investment in the US and in UK Gas Distribution.

UK investment and growth expectation

Last year, the Company set out a range of expected investment by its UK regulated businesses of between £16bn and £20bn over the eight year period to 2020/21. The Company currently expects the level of spend to be closer to the lower end of the range as the energy sector in the UK evolves.

Industry developments in the period included amendments to financial incentives for some future renewable projects, an increase in the level of solar generation, which is expected to reach over 10GW by March 2016, delay to the Hinkley Point nuclear project and increased notification of closures of existing coal and gas fired plant before winter 2016/17. This is combined with a much lower level of new generation connections to the electricity transmission system than the industry expected at the start of the decade. In total, National Grid expects to connect around 11GW of new generation over the eight year RIIO-T1 period, less than half the baseline level anticipated at the start of the period in April 2013.

In the medium to longer term, National Grid expects levels of embedded generation in the UK to increase. This could require an increased level of investment in the electricity transmission system to enable greater two-way flow patterns across grid supply points, and manage the volatility of renewable generation in the most cost-effective manner for customers. Combined with continued investment in asset renewal, National Grid expects to deliver long-term asset growth in UK Electricity Transmission of around 6% p.a..

Accelerated US Regulated and Other activity growth

In the US, the Group has increased the level of investment activity from last year. National Grid has again accelerated gas main replacement activities and electricity system reinforcement to further improve safety and environmental performance while delivering improved network reliability for customers. This capital investment is expected to be a key feature of new regulatory filings and to drive underlying rate base growth in existing US network businesses of around 7% p.a. for the next few years.

In addition, the Group is progressing proposed investments in UK interconnectors and a number of FERC regulated growth opportunities in the US.

Businesses continue to perform well and make progress with regulatory arrangements

In the first six months of the year, National Grid continued to drive capital and operating cost efficiencies across its network businesses, reinforcing the Group's expectation for another year of strong UK operational returns and steady US profits. National Grid increased its level of network investment, particularly in its US operations, and progressed two new UK interconnectors to Belgium and Norway, alongside a number of other projects outside of its existing network businesses. As a result, the Group is on track to deliver similar overall returns on equity to 2014/15 and asset growth of between 4% and 5% for the full year. This partly depends on the level of annual RPI inflation in the UK, which continues to be below the long run average. This will also impact the Group Value Added metric for the current year.

In the UK, investment in the transmission businesses continues at broadly the same level as last year while gas distribution investment has increased. The UK business maintains its drive for outperformance under its regulatory arrangements, delivering outputs at lower cost than the regulatory targets alongside good incentive performance.

In the US, the business has commenced a new round of full rate case filings, starting with the filing for Massachusetts Electric on 6 November, with new rates expected to take effect in October 2016. These filings are expected to capture the benefit of recent increased investments in asset replacement and network reliability and reflect long-term growth in costs, including property tax and healthcare costs. Along with a clear focus on productivity, the filings are key to improving achieved returns in the Company's US distribution activities. Following the Massachusetts Electric filing the business expects to file rate plans for the two New York downstate gas companies, KEDNY and KEDLI, in January 2016 with new rates to take effect in January 2017. In the meantime the Group has agreed a number of interim filings, including updated capital trackers and environmental cost recoveries in downstate New York.

National Grid's other businesses again made valuable contributions to Group performance, in particular, the Property business from asset sales in London and South East England as well as increased revenues from the French and BritNed Interconnectors. US corporate costs reduced significantly, reflecting the absence of US financial system stabilisation costs this year. Together with a gain on the exchange of the Group's stake in the Iroquois pipeline for shares in Dominion Midstream Partners, LP National Grid's other businesses contributed significantly to an overall first half increase in earnings.

Maintained strong safety and reliability for customers

The Group targets world class safety performance, measured as a lost time injury frequency rate of

0.10 or better (i.e. less than 0.1 lost time injuries per 100,000 hours worked in a 12 month period) and has achieved this target for three out of the last four months. The business remains focused on maintaining this good level of performance as it goes into the winter period.

This encouraging safety performance has been achieved throughout a period of increased network investment activity, and the business has also maintained a very good level of reliability over this