Good morning, and welcome to National Grid's half-year results presentation. Thank you for joining us this morning. I'm Nick Ashworth, Director of Investor Relations, and I'm joined this morning by our CEO, John Pettigrew, and CFO, Andy Agg. As usual, there'll be time for questions after the presentation, but given the Investor Day later, please focus your questions on the first six months' performance. With that, I'd just like to draw your attention to the cautionary statement that you'll find at the front of the presentation. I'll now hand over to John to begin.
Thank you, Nick. Good morning and welcome to the call. As usual, I'm joined by Andy Agg, our CFO, and after the call, we'll both be happy to take your questions. Looking across the group, I'm delighted with the progress we've made over the past six months, so let me start with the key takeaways. Following the transactions we announced in March, we were pleased to complete the purchase of WPD in June, a little ahead of expectations as we advance our strategic pivot that places National Grid at the heart of delivering net zero. The sale of our Rhode Island business continues on track, with completion expected by the end of the financial year. We've recently launched the sale of a majority stake in our U.K. gas transmission business and expect to complete sometime next summer.
Alongside these transactions, we've now moved to a new operating model with seven business units across the group as we look to deliver the financial, customer, and regulatory outcomes that will be required on the journey to net zero. This has led to the creation of U.S. business units for New York and New England and U.K. business units for transmission and distribution. Management layers have been removed, with each unit having P&L accountability and clear responsibility for delivering the innovation and efficiency specific to their area. As we've announced this morning, it will help us deliver a new GBP 400 million cost efficiency program, maintaining a flat, controllable cost base even whilst assets grow by over 20%.
This focus on our cost base will in turn help us to deliver at least 95% of our allowed returns across our U.S. businesses as we achieve these efficiencies and support our ability to reach our targeted 100 basis points of annual allowed performance through RIIO-T2 period, alongside our continued focus on efficient capital delivery. I'm really excited to be able to talk about all of these areas and more at our investor event this afternoon, where I hope to see many of you in person. Alongside these key takeaways, I've also been really pleased with the strong financial and operational performance that we've delivered in the first half. On an underlying basis, that is excluding the impact of timing, exceptional items, and the contribution from gas transmission and metering, which are now classified as discontinued businesses.
Operating profit of GBP 1.4 billion was 52% above last year at constant currency. This was helped by a first-time contribution from WPD. Even excluding this, operating profit increased by 24% compared to the prior year as we saw a first-time contribution from the new IFA2 interconnector to France, part of our GBP 2 billion investment program to deliver four new interconnectors by 2024 and an incremental GBP 250 million of EBITDA, and higher revenue contribution from U.K. Electricity Transmission as we start the new RIIO-T2 period, where we'll be investing on average over 50% more per annum than in RIIO-T1 to accelerate the energy transition. Consequently, underlying earnings per share was up 66% compared with the first half of last year.
Given this strong start, we now expect to deliver full-year underlying EPS significantly above the top end of our 5%-7% range. This is primarily driven by early commissioning of our new NSL interconnector, coupled with higher auction prices across our interconnector portfolio, which is expected to deliver around GBP 100 million higher operating profit. Andy will, as usual, cover the performance of each of our segments in more detail shortly. Moving now to our investment in critical infrastructure. Capital expenditure for our continuing operations was in line with guidance at GBP 2.8 billion, 22% above the prior year, reflecting our investment in enabling the energy transition across our markets, including higher U.K. Electricity Transmission investment on large projects such as the connection of the new Hinkley power station at Hinkley Point in the Southwest.
The investment of GBP 315 million by WPD, and increased U.S. network investments in reducing emissions from our gas pipelines and storm hardening for our Electricity Distribution network. In line with our policy, the Board has proposed an interim dividend of GBP 0.1721 per share, reflecting 35% of last year's full-year dividend. Turning next to our safety and reliability performance. Safety is at the heart of delivery across our businesses. I'm pleased to say that in the first half of FY 2022, we saw our lost time injury frequency rate maintained at the level of 0.11, the same as last year. Turning to reliability, which has also remained excellent across our U.K. and U.S. networks.
In the U.S., we responded well to a number of storms, including tropical storms Elsa and Henri, where we saw significant disruption across our Massachusetts jurisdiction. However, despite this disruption, I'm proud to say that we were able to restore over 90% of our customers within 19 hours. In the U.K., we've managed well through the summer despite low levels of wind generation, demonstrating the effectiveness of the new tools the electricity system operator is using as the energy transition progresses.
Looking forward, the electricity system operator has published its winter outlook, forecasting an electricity capacity margin of 6.6%, slightly lower than last year, although well within the required reliability standards. With regards to the U.K. gas network, while there have been heightened awareness of gas prices in the past few months, like electricity, we're forecasting sufficient capacity this coming winter with available peak capacity of over 600 ,000,000 cu m per day compared to a cold day demand forecast of around 500,000,000 cu m. In the U.S., following the Northeast at the end of last month and given the ever-present possibility of further storms, we've again reviewed our procedures and are well prepared for the coming period. In our National Grid Ventures business, the fire at our Sellindge interconnector station has led to the loss of half the capacity of IFA1.
Following our internal investigation, we now expect 500 MW to be back online by next October, and I'm pleased we were recently able to announce that the remaining 500 MW will be back in service earlier than we anticipated by December 2022. Moving now to the operating performance across the business in the first half, and starting with our new business, WPD, where following our purchase on the 14th of June, we're now reporting its contribution as our U.K. Electricity Distribution business. As I've said before, I'm incredibly excited about the opportunities WPD adds to the group. Its long-term, highly visible growth and the transformation it brings to National Grid's shape and positioning at a time of significant change across the energy sector.
The first few months tells me there are lots of opportunities for National Grid learning from WPD's low-cost customer-centric business model and for WPD to learn from our track record of engineering excellence. You'll hear more about this from Phil Swift, the WPD President, later this afternoon. In our first three and a half months of ownership, WPD's capital program delivered GBP 315 million of investment, mainly resulting from demand-related reinforcement, asset replacement, network faults and IT upgrades. Our focus is now on finalizing the business plan for the upcoming RIIO-ED2 regulatory review, which will be submitted in early December. As with the RIIO-T2 process, we've taken on board significant amounts of stakeholder and customer feedback and reflected this in the plans, while also taking into account the lessons learned from the recent RIIO-T2 review.
These plans will address the investment opportunity to deliver a step up in the capacity to support wider rollout of electric vehicles, greater adoption of electric home heating, and more renewable generation connecting to the distribution network. Moving on to our U.K. Electricity Transmission business. The first six months of RIIO-T2 marked a successful start to the new regulatory period. We continued our capital program with GBP 587 million of investment, 17% higher than the first half of last year. This investment was driven by a further step up in our asset maintenance activity, such as network refurbishment and substation replacement. Continued progress on the Hinkley-Seabank connection, where we're utilizing the new T-pylon for the first time, and higher spend on the tunnel boring phase of our GBP 1 billion-pound London Power Tunnels project. The last half has also seen our technical appeal reviewed by the CMA.
Its final determination was published at the end of October, where it confirmed the removal of the outperformance wedge. Having spent time recently at COP26 listening to and engaging with politicians and policymakers to encourage acceleration of green investment, it's never been a more critical time to have a regulatory framework that can enable its delivery at pace if we are to meet the challenges and opportunities of net zero. You'll hear more about this from me this afternoon. Finally in the U.K., with the sale process now launched, gas transmission is reported as a discontinued operation. However, I'm really pleased with the performance in the first half of the year as it begins this new RIIO-T2 period. Capital investment of GBP 131 million was up 38%, reflecting higher spend on asset health.
Like Electricity Transmission, is targeting 100 basis points of outperformance through this price control period. Moving now to our U.S. jurisdictional businesses, starting with New York. In the period, we invested GBP 851 million, up 10% at constant currency, mainly driven by COVID restrictions in the prior period. Our biggest program of work is the replacement of leak-prone pipe, where we've delivered 171 mi in the first half, which is an increase of 80 mi in the prior period as we further reduce methane emissions across our network. On the electric side, you'll hear later about the progress we're making with transmission opportunities in Upstate New York, such as the 2 GW New York Energy Solution project, which will help bring more renewable energy into the state.
This project will replace eight-year-old transmission lines and is due for completion by FY 2023. Turning to regulation, I'm pleased with the significant progress we've made, where we're targeting returns of at least 95% of the allowed level each year. We've reached a joint proposal with the New York Public Service Commission staff for NEMO in Upstate New York. The three-year settlement, which includes an allowable ROE of 9%, will see us invest $3.3 billion in electric and gas infrastructure, fund over 300 new positions supporting measures such as new gas safety initiatives and energy efficiency programs, and adopt innovative new features such as performance-based incentives, giving us the ability to earn incremental returns up to an additional 86 basis points in our electric business. Moving across to New England. In the period, we invested GBP 700 million flat on the prior year.
While we saw higher levels of investment in Massachusetts, lower spend in Rhode Island due to COVID offset this increase. Like New York, we made strong progress with lead chrome pipe replacement and have delivered 85 mi of new pipe in the first half. On the electric side, we've continued investing to strengthen our networks against increased storm activity and to respond to customer requests, primarily in new urban residential areas. Turning to regulation, we've agreed a new rate case for Massachusetts Gas effective from October. This follows the same formula as our performance-based rates we agreed for Massachusetts Electric last year. The rate case will further allow an ROE of 9.7%, incremental operating expenses of $65 million, and over 130 new positions to support CapEx of around $3.5 billion over five years.
These Massachusetts rate cases, combined with the inflation forecasts we incorporate in our New York rate plans, means we have businesses that are in a strong position to mitigate our inflation exposure. Looking now at National Grid Ventures, where we now include U.S. generation following our reorganization. Investment of GBP 282 million was marginally up on the prior period. It was primarily focused on delivery of our interconnectors, and we're pleased that the North Sea Link, our subsea connection with Norway, came online ahead of schedule in October this year. Our Viking Link with Denmark remains on track to be operational in 2024. Moving to the U.S., our onshore renewables business has completed the 200 MW Prairie Wolf Solar Project in Illinois, which will be commissioned by year-end and will bring our capacity under operation to just over 600 MW.
Let me now hand over to Andy to take you through the detailed financials before I come back and briefly summarize our first half year achievements. Andy.
Thank you, John, and good morning, everyone. I'd like to highlight that, as usual, we're presenting our underlying results excluding timing and that all results are provided at constant exchange rates. The changes to our portfolio provide a bit of complexity this year, and I'll shortly talk through the moving parts before turning to the group's half-year performance. However, the overall changes to our reporting lines, as John mentioned earlier, should enable a clearer understanding of our business performance going forward. With the acquisition of the U.K.'s largest electricity distribution network, Western Power Distribution, completing on the 14th of June, 2021 , its contribution is now included from that date. Our U.K. gas transmission business, including our legacy gas metering business, is now held as a discontinued operation following the launch of the process for a majority stake sale in this business.
As such, all earnings from this segment have been excluded from the underlying earnings of the continuing group. Rhode Island was classified as held for sale on the 31st of March this year, and so depreciation ceased. However, since it does not meet the size criteria of discontinued operations under IFRS, we continue to include its operating profit contribution within underlying earnings until the sale to PPL is complete. This remains on track for the end of our financial year.
Finally, as we move to business unit reporting, our U.S. Regulated operations will be separately reported under New England and New York. Consequently, our U.S. generation business will now report through the National Grid Ventures portfolio. We are now reporting the U.K. electricity system operator separately from Electricity Transmission. For comparability, prior numbers are shown adjusted for these changes. Before I turn to our half year performance, I just want to say a few words on the new GBP 400 million cost efficiency program that we've announced this morning. The program builds on the U.K. and U.S. efficiency initiatives that we've run over the last two years that have already delivered over GBP 150 million of savings.
The move to a new organizational structure along business unit lines, as John mentioned earlier, has provided the opportunity for us to identify further efficiency savings, both in the core businesses and across the shared corporate functions. In total, we are targeting over GBP 400 million of savings across the group over three years, with the aim to keep controllable operating costs flat whilst growing our asset base around 20%. Across our U.S. businesses, we expect the efficiencies to be over GBP 300 million, and in the U.K., Electricity Transmission together with National Grid Ventures are targeting around GBP 100 million of savings. These efficiencies will come through a number of areas, such as the increasing use of technology and digital solutions that will deliver greater working practice productivity, as well as standardizing our working practices and retaining more of this knowledge within the business.
These programs sit alongside the continuing work we are doing on driving capital efficiency across the group, particularly in our large asset delivery programs, such as for RIIO-T2 in our U.K. Electricity Transmission business. You'll hear about some of the many areas where we are innovating and driving efficiencies across the business units later at our investor event. Now, turning to our half year performance. Underlying operating profits on a continuing basis increased by GBP 483 million to GBP 1.4 billion.
As John said, removing the first time contribution from WPD, operating profits still increased 24% year-over-year, driven by the first time contribution from the IFA2 interconnector as our interconnector program moves from construction into the operational phase, and a higher contribution from U.K. Electricity Transmission as we move into RIIO-T2 and begin to deliver a capital program that will be over 50% greater per annum than in RIIO-T1. Higher operating profit, as well as a lower than anticipated increase in financing costs, given some one-off benefits in other interest, resulted in underlying earnings per share increasing by 66% to GBP 0.228. Capital investment from continuing operations was GBP 2.8 billion, 22% higher than the prior year.
This reflects the first- time inclusion of WPD capital investment this period. The impact of COVID restrictions in the U.S. in the prior period, and progress on major electricity projects such as London Power Tunnels 2 and Hinkley-Seabank in our U.K. Electricity Transmission business, all partly offset by lower interconnector spend. In line with our policy, the board has proposed an interim dividend of GBP 0.1721 per share, representing. Scrip uptake in the summer on the full-year dividend was 49% and will 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 our new business. On the 14th of June, 2021, we acquired WPD for a total cash consideration of GBP 7.9 billion.
The deal was financed by a GBP 8.2 billion bridge loan, which is expected to be largely repaid using the proceeds of the planned disposal of our Rhode Island business to PPL and the majority stake sale of our U.K. gas transmission and metering businesses. On consolidation, we made a number of accounting adjustments as required by IFRS, which have ultimately had a net positive impact on the income statement. Firstly, PP&E has been fair valued and brought onto the balance sheet at GBP 10 billion below the value in the WPD accounts. With only marginal changes to asset lives, this results in a lower depreciation charge going forward. This has been broadly offset by the removal of customer contributions previously recognized by WPD on the balance sheet, removing the benefit to operating profit going forward.
Net debt has been fair valued upwards by GBP 1.6 billion to GBP 8.2 billion to reflect credit spreads, interest, and inflation rates at the time of acquisition. This results in a lower annual interest charge. We will recognize an intangible asset of GBP 1.7 billion, representing WPD's regulatory license, as well as goodwill of GBP 4.7 billion. Both of these balances will be subject to annual impairment testing. Consequently, for the half year, we include a contribution of GBP 257 million within underlying operating profit and capital investment in the period of GBP 315 million. Underlying operating profit for the U.K. Electricity Transmission business was GBP 552 million, up GBP 65 million compared with the last half year.
This primarily reflects the move to CPIH inflation indexation and higher base revenues as we enter the first year of RIIO-T2. We invested GBP 587 million on system resilience, asset health, and new connections. This was GBP 86 million higher, reflecting progress on multiple large projects such as London Power Tunnels 2 and Hinkley-Seabank, partly offset by lower investment in Smart Wires as these projects near completion. We've now had time to work through the RIIO-T2 final determinations in more detail since their publication. Whilst the price control will be challenging, we believe we'll be able to find ways to innovate and deliver efficiently for our customers. As we complete projects started in RIIO-T1 and move into RIIO-T2, we are targeting to deliver 100 basis points of operational outperformance on average through the five-year period.
Given this profile, we also expect to deliver this level of performance in the first full year of this price control. On the electricity system operator, underlying operating profit was up GBP 12 million in the period to GBP 49 million, with higher revenues at the start of the new price control more than offsetting higher costs. Moving now to the U.S., where underlying operating profit for New York was GBP 141 million, GBP 29 million lower than the prior year. This reflects higher revenues through our rate case settlements, as well as the non-recurrence of COVID costs from the prior period, more than offset by higher storm costs in the period, increased depreciation from higher levels of investment, as well as a reassessment of recoverable environmental reserves, mainly due to inflation.
Capital investment was GBP 851 million, GBP 76 million higher than prior year at constant currency. Increasing CapEx was driven by the impact of COVID restrictions in the prior year. Overall, we expect full-year ROE to increase to at least 95% of our allowed level, improving on the 2020, 2021 performance. Turning to New England. Underlying operating profit was GBP 247 million, GBP 67 million higher than the prior year. This reflects higher rates in our Massachusetts Electric business under its new rate settlement, lower bad debts due to the resumption of collections, as well as lower COVID costs, and the cessation of depreciation following the reclassification of Rhode Island as held for sale. Capital investment was GBP 700 million, GBP 7 million lower than prior year at constant currency.
Massachusetts has seen higher levels of investment, primarily driven by the impact of COVID restrictions in the prior year. However, this has been more than offset by permit delays due to COVID in the Rhode Island business. Overall, full-year ROE is expected to increase compared to 2020, 2021, which was adversely affected by storms, and we expect to achieve over 80% of our allowed level. Looking forward, given the combination of new Massachusetts gas rates from the1 st of October, together with the new efficiency program we have announced this morning, we expect to make significant progress towards our target of at least 95% of our ROE allowances.
National Grid Ventures continued to perform well with underlying operating profit up GBP 66 million to GBP 147 million in the half year. This primarily affected first-time contributions from the IFA2 Interconnector, which commissioned earlier this year, and growth in our U.S. renewables business. Our 50% ownership in the Nemo interconnector to Belgium also benefited from higher auction prices, helping the performance of our joint ventures. However, performance was partially offset by a fire at the 2 GW IFA1 converter station in Sellindge, Kent in September. The fire caused significant damage to infrastructure on-site, with 1 GW of capacity currently offline. We now expect 500 MW to be back online by October 2022, with the remaining 500 MW to be back in service in December 2022.
We are working on ways to bring the asset back online as quickly as possible and will update on the expected cost of repairs when we have more detail. With insurance in place to largely cover business interruption and rebuild costs, we don't anticipate a material financial impact on the group. Capital investment across National Grid Ventures increased from GBP 272 million to GBP 282 million in the period. This reflects investments in additional capacity at our LNG terminal on the Isle of Grain and renewable generation in the U.S., largely offset by lower CapEx on the interconnector program following last month's successful commissioning of the NSL interconnector to Norway. The operating profit for other activities for the half year was GBP 14 million, GBP 45 million higher than last year.
This principally reflects fair value gains on investments held by National Grid Partners, our portfolio of start-up companies, innovating and investing in new technologies that will drive a smarter energy future, including Dragos, a cybersecurity company for critical infrastructure. Capital investment was GBP 40 million, GBP 15 million higher than last year. With the launch of the sales process, we are now reporting our U.K. gas transmission business, including the legacy gas metering business, as discontinued. For the period, operating profit excluding timing was GBP 332 million. This was GBP 144 million higher than the prior year, following a change in revenue charging methodology, which has removed volume linkage and will lead to lower levels of seasonality going forward. Capital investment was GBP 131 million, GBP 36 million higher than the prior year.
This primarily reflects higher spend on asset health and emissions work. Having now assessed the final determination for RIIO-T2, gas transmission is targeting to deliver 100 basis points of operational outperformance on average through the five-year period. Net finance costs were GBP 475 million, up GBP 73 million, reflecting higher financing costs following the first time inclusion of WPD debt and funding of the acquisition bridge facility, partly offset by lower pension interest costs as well as interest on favorable property tax settlements. Our effective interest rate was around 20 basis points lower than the prior year at 3.1%.
At constant currency, net finance costs are now expected to be around GBP 200 million higher for the full year as a result of higher inflation, higher average net debt following the acquisition of WPD, and our ongoing capital investment program, partly offset by one-off benefits in other interest. The underlying effective tax rate before joint ventures was 19%, 330 basis points higher than the prior year, due to a change in the profit mix and the reduced impact of prior year adjustments. For the full year, the underlying effective tax rate, excluding the share of joint venture post-tax profits, is expected to be around 21%. Underlying earnings were GBP 812 million, with EPS of GBP 0.228 , up 66% on the prior year.
Finally, given the strong start to the year, we now expect to deliver full-year underlying EPS significantly above the top end of our 5%-7% range. This is primarily driven by early commissioning of our new NSL interconnector, coupled with higher auction prices across our interconnector portfolio, which we expect to deliver around GBP 100 million higher operating profit. Moving now to cash flow. Cash generated from continuing operations was GBP 2 billion, up 27% compared to the prior year. This reflects the first-time contribution from WPD. Net cash outflow in the period amounted to GBP 1.6 billion, down 24% on the prior period, with higher capital investment partly offset by lower cash dividends given the scrip uptake.
Net debt increased by GBP 12.9 billion to GBP 41.5 billion, reflecting the consideration paid for WPD and its existing debt, partly offset by the reclassification of debt in National Gas as held for sale. For the full year, net debt is expected to remain consistent with the level at 30th September at around GBP 41.5 billion, excluding the impact of FX. This includes the expected benefit of the Rhode Island disposal proceeds. I've said previously that our net debt to RAV is expected to remain stable above 7% once we have completed our announced portfolio repositioning and that this level keeps us comfortably within the range required by our credit rating agencies to maintain our existing ratings.
As a reminder, our target range is above 7% [Moody's senior ] to debt and above 10% S&P FFO to debt ratio. Before handing back to John, and given market expectations around high levels of inflation and interest rates, I just want to touch on the potential impacts we see across our businesses. Looking across the group and the regulatory settlements we have in place, moderately higher inflation is a positive over the long term, with the protected real returns across a good proportion of our regulatory assets, while moderately higher interest costs should be broadly neutral over time. As an example on inflation, in the U.K., higher inflation is a positive to our GBP 23 billion regulated asset base given inflation. This is partly offset by GBP 4 billion of inflation-linked debt.
A 100 basis point one-year increase in inflation represents around GBP 190 million of incremental economic value. Across our income statement, while higher inflation will lead to higher interest costs in the near term from our inflation-linked debt, our regulatory frameworks mean we have good inflation protection in the longer term as our revenues catch up. In our U.K. regulated businesses, revenues are linked to CPIH, and we also get revenue protection for specific movements in labor and materials costs under the real price effects mechanisms. In the U.S., our Massachusetts and FERC regulated businesses have annual increases. In New York, we're able to include forward-looking prices in our rate plans.
Moving to interest, the cost of debt allowance in the U.K. is updated annually, and assuming efficient funding of debt, higher interest costs should be neutral to P&L as we will receive revenue allowance for it over time. In the U.S., regulators take into account the cost of debt and provide for it and pass through these costs to customers, which is why most of this debt is fixed rate and long-term in nature. To summarize our half-year, we've delivered a strong financial performance and now see full-year underlying EPS significantly ahead of our 5%-7% growth rate. We now include our U.K. Electricity Transmission business, WPD, for the first time following our strategic pivot to electricity. We are seeing our interconnector program move into its operational phase with the first-time inclusion of IFA 2 and commissioning of our NSL Link.
Capital investment levels are up, driven by new regulatory settlements with a greater focus on energy transition, while our balance sheet remains strong, allowing us to fund our investments efficiently. We have moved to a new operating model and announced a new GBP 400 million cost efficiency program as we continue to focus on delivering a fair and affordable clean energy future for all. With that, I'll hand you back to John.
Thank you, Andy. To finish, we've had a strong start against our five-year financial framework of annual asset and EPS growth. This is enabling us to upgrade our full-year EPS guidance to be significantly ahead of our 5%-7% range. We're delighted to have completed the acquisition of WPD a little earlier than anticipated, having hit the ground running as we start to integrate and share best practice. We're confident our new operating model structure will deliver the most efficient outcomes for all our stakeholders as we progress the journey to net zero. On the back of this, we've announced a new GBP 400 million cost efficiency program to be delivered over the next three years.
We made a strong start to the new RIIO-T2 price control in our U.K. Electricity Transmission business and have line of sight on operational and capital efficiencies to deliver outperformance through the period. We've successfully completed a full refresh of rates across our New York and New England businesses, giving us fantastic visibility and regulatory certainty. I'm also really pleased to see our interconnector program heading from construction into operation with a first-time contribution from IFA 2 in the period, as well as the commissioning of our Norwegian interconnector last month. That just leaves the Viking Link to come on in FY 2024. Finally, we're on track to deliver our five-year financial framework of 6%-8% asset growth, 5%-7% EPS growth, and most importantly, to continue to deliver our sustainable CPIH-linked dividend.
At our investor event later today, we're looking forward to giving you a lot more information on the medium and long-term drivers of growth and how we're working with all our stakeholders to deliver a clean, fair, and affordable energy future. Hopefully, we'll see many of you there in person. Thank you for listening. Andy and I will now be happy to take questions on the first half performance.
Excellent. Okay, let's make a start. So John Musk, I can see you've got your hand up. Do you want to ask the first question?
Okay. It does look like John has got his hand up. Dominic, why don't you ask the first question?
Hear anything at all, from the Zoom call?
Dominic, I can hear you now. Do you hear me?
Yes, I can now hear you. Yes.
Excellent.
Thank you for that. Yeah, I mean, the questions I've got are two actually, or they're saying that I think Beep has printed it up on the screen, which is about the GBP 400 million of cost savings and how much of that is in the U.S. and in order for you to meet the regulatory targets and how much of that can go up. The second one is on your offshore wind JV with RWE. I was hoping that you could probably give us some color as to what you think is gonna happen to the BOEM later this year or beginning of next year, and your scope for ambitions for expansion into the offshore wind industry. Thanks.
Okay. Thanks, Dominic. Let's start with our cost savings. As you saw this morning, we've announced our target for GBP 1 million cost savings. That's broadly made up of three-quarters of those savings will be in the U.S. business, so GBP 300 million, another GBP 100 million in the U.K. Effectively, what we're trying to do here is, you know, as we look forward over the next few years, we've got significant growth in our investment, and we're looking to keep our cost base broadly flat while we're delivering that. It's really a cost avoidance program. We think through looking at things like digital innovation, technology and driving productivity and performance, we can deliver those cost savings.
Those cost savings will then help to deliver the ROEs that we've set out previously in terms of getting above 95% in our U.S. businesses and delivering, as you hear today, 100 basis points of outperformance in our U.K. businesses. In terms of the offshore wind joint venture, so as you know, we entered into a joint venture with RWE last year to look at the opportunities off the northeast coast. Given National Grid's experience and world-class capability in offshore cabling, together with our knowledge of the northeast from a regulatory perspective, it seemed like a natural evolution for us, given the capabilities we've built up over the last few years.
We're looking at the opportunity that's in front of us, so in terms of bidding for the seabed access, which is likely to be at the turn of the year. I think it's forecast to be around about January time. Our approach, as always, with investments that we do in National Grid Ventures, is to take a very disciplined approach. We will look at the opportunity, and if we think it's right for our shareholders, then we will progress that, but time will tell in terms of exactly what that looks like as we move forward.
Okay. Thanks for that, Dominic. I can see, Jenny, you've got your hand up, so why don't we go to Jenny? Jenny Ping.
Hi. Thanks very much. Two questions. Just following on the GBP 400 million cost savings, obviously, GBP 300 million you said is in the U.S. Can you just confirm there is no expectations as part of the rate settlement, any cost savings to be returned or shared to consumers? So basically, at that GBP 300 million is flowing through to the shareholders' bottom line. And then I note there is no mention of WPD in the U.K. part within that GBP 100 million. Should we read that as there isn't any, or is this to come, I guess, after the regulatory review? And then secondly, just on net debt, at least my numbers, my net debt is much lower than the GBP 41.5 billion that you have indicated for year-end.
I was just wondering, maybe Andy, if you can walk us through the building blocks of how we get from what it was last year and the various parts to get to that GBP 41.5 billion. Thanks.
Okay. Thanks, Jenny. Let me take the first two, and then I'll hand over the third to Andy. In terms of the efficiency targets that we're setting today, they're fundamentally about delivering on the returns that we set out, so getting to above 95%. There are some sharing mechanisms within our rate files in the U.S., but they tend to be when you're significantly above the allowed return, you can start to share that with customers. You know, this cost efficiency program, first and foremost, is about getting to above 95%. In terms of WPD, as you'd expect, you know, our focus at the moment is very much on making sure that we put the very best business plan that we can into Ofgem.
Since WPD became part of National Grid in the middle of June, I've been hugely impressed just with the level of detail that's in their business plan. I think they're the only DNO that have published three versions. I think they've had more than 17,000 stakeholders comment on it. I think I'm very confident that they've got a plan that is really going to deliver what their customers and stakeholders need. That has been the focus. You know, as I said, when we did the acquisition back at the beginning of the year, you know, I remain hugely excited with the opportunity to bring together the capabilities and track record that WPD has in terms of delivering on reliability and short-term incentives and customer service together with National Grid's engineering and asset management capabilities.
I see that as a real opportunity going forward, but the focus to date has been very much on that business plan. Andy?
Yeah. Thanks, Jenny, for the question. Hopefully you'll have seen in the presentation this morning the main movers to get to our half year GBP 41.5 billion. That obviously excludes now the held for sale elements relating to both gas transmission in the U.K. and also around just over $1 billion related to the Rhode Island business. In terms of what our guidance to that being flat net by the end of the year, that assumes that we will complete the Rhode Island transaction. It means that the disposal proceeds will have come in. As we guided to and we've reaffirmed again this morning, we'd expect to complete the gas transaction in the summer of 2022.
Therefore, there's no expected proceeds, and that held for sale amount will still be in the balance sheet as of 31st of March. Broadly therefore the Rhode Island proceeds net offset other normal working capital and cash movements that we expect through the second half.
Thanks, Andy. John. John Musk, I think you do have your hand up, so let's go back to John.
Yes, good morning. Hopefully you can hear me now.
We can. Yeah.
Good. Thank you. Part of the sort of beat, let's say in the first half has been in the interconnectors as you highlighted. Can you outline where you sit on those versus the regulatory caps that are in place on those interconnectors? Also, I think the mechanism is a five-year average in terms of clawing back any beats. Can you just confirm that? Then secondly, hopefully this is really an H1 and not a sort of CMD question, but with the strong guidance that you're giving today of mid-teens or sorry, low teens EPS, and sticking to the five to seven on average, does that mean the back end is coming down a bit or am I reading too much into that?
Yeah. Thanks, John. Let me take the first and then I'll ask Andy to take the second. In terms of the interconnectors, just so everybody's got the sort of picture. The interconnectors, you know, we drive our revenues through the arbitrage in terms of the difference in energy prices, in the capacity that we sell. There are regulatory wrappers around that. We got slightly different regulatory wrappers and approaches to each of the individual interconnectors. What you saw in the results today was, as we look forward, we are expecting to see strong interconnector performance in the second half, partly because we got the new IFA2 interconnector and its results. We've also brought on the Norwegian interconnector early, and we are expecting the arbitrage to remain attractive going forward.
In terms of those are the things that are driving the GBP 100 million that we talk about in the results today. In terms of where we sit, it is a five-year process, John. You know, where we are at the moment will be determined by what happens over a rolling five-year period. What I would say is that the returns in the interconnectors continue to be in excess of what we see in our onshore transmission business. Andy.
Yeah. Thanks, John. In terms of the guidance, you may remember back in May when we first set out the 5%-7%, we did, you know, we positioned it as our five-year average CAGR in terms of EPS through to FY 2026. You know, that remains a good guide to date. What we've explained this morning is given the performance that we now see with Norway coming online slightly earlier, and with the arbitrage pricing that we're able to contract in, as you described, the GBP 100 million puts us into the low to mid-teens in terms of growth this year. Our 5%-7% over five years always assumes sort of the long run normalization of arbitrage rates.
Therefore the guidance is our best view for this year, but that's why over the five years, the 5%-7% remains a valid guidance range.
Thanks, John. Mark Freshney, I see you've got your hand up.
Hi. Yes. Hello. Thanks for taking my question. Andy, a couple of questions for you. On the first on the acquisition bridges, the GBP 8.2 billion, it seems your strategy is now to just let those run and pay them down with the NGG plc proceeds. You know, can you confirm that and whether you'd be looking for an earlier refi? Secondly, on and then you cut out a little bit, and I wasn't able to check quickly enough, but on the GBP 1.6 billion fair value uplift for the WPD debt, presumably a large amount of your net debt is therefore or GBP 1.6 billion of your net debt is non-cash.
If you were to undertake a buyback of those bonds, presumably there would not be a write back through the income statement. Is that correct? Finally, a question for you, John, just on the cost inflation. I take what you say about RAV indexation and debt indexation and so forth, but I guess the risk is that construction inflation and the kind of goods and services that you deal in go up by more than consumer inflation. Can you talk about what you've seen as you've gone to market to tender for equipment and services recently and what you're seeing from your supply chain on pricing? Thank you.
Yeah. Thanks, Mark. Let me take the third, and then I'll hand over to Andy to take the first two. In terms of price inflation, you're right. Let me just start to make sure everyone understands the sort of position for National Grid. We have a pretty effective hedge on inflation with obviously we get the indexation of the RAV in the U.K. on our regulated businesses, and that will continue for WPD as well of course. Then in the U.K., increasingly with the new rate cases we put in place, we've got inflation protection on the revenues in Massachusetts Electric and Gas. In New York, we've always had the ability to be able to put a forecast inflation into any forward multi-year rate case that we've done. We feel that we got pretty good hedge.
On top of that, of course, in the U.K., we got the real price effect adjustment for commodities and raw materials from Ofgem as part of the price controls. What we're seeing in the market is some modest pressure, particularly on labor and raw materials. I would say it's modest at the moment. I guess the most significant thing we're seeing and we're managing actually is from the supply chain: just time duration for ordering materials. We've had to adjust the way that we deliver our projects to make sure that we're getting our strategic supplies in earlier and that we're committing to doing that on an earlier basis than we've done previously. It's not something I'm losing sleep over, but it's definitely something that needs to be managed at the moment.
I'd say we're seeing modest price increases at the moment, but we are, you know, in a fortunate position that we've got very good hedges through our sort of regulatory agreements. Andy?
Hi, Mark. In terms of the GBP 8.2 billion bridge loan, I think it's always been our intent to use the proceeds of Rhode Island and gas transmission and sort of metering to pay down the majority of that. Then any remaining balance, you know, depending on how we do with the gas transaction, that'll just be part of our normal refinancing plans as we go through next year. Remembering that we're continuing to fund the ongoing business on top of that as well. We've also been in the market through the first half. We did a green bond at a PLC level as well, for example.
You know, we continue to fund our organic business on top of the plans around the bridge financing. In terms of the fair value adjustment, you know, your question sort of implies that we might be doing something. I think, as I said back in May, you know, we're inheriting the debt book, and at this point, we have no plans other than to continue to run that debt book through to its maturity. What will happen is that fair value accretion will effectively return back to the P&L over the remaining life of the bonds associated with the debt book as an acquisition.
That's back behind my comments in the presentation around we'll get a small pickup in the P&L with that accretion going back through the income statement.
Thanks, Andy. Deepa, I think you've got your hand up.
Thank you. I had a couple of questions. Actually, just staying on WPD, I didn't fully follow all the things, Andy, that you said because the audio quality was poor. With reference to the published accounts of WPD, are you able to kind of quantify what are the different moving parts? They had depreciation of GBP 250 million. They had interest of close to GBP 300 million. You said that these would be lower. Can you quantify how much? You also mentioned something around some customer earnings that goes away. Again, can you explain what that is and just quantify that? On the debt itself, the GBP 1.6 billion, you've shown that in your net.
You've shown that in your net debt, but obviously from a cash flow modeling, you're still going to be paying the coupon. I presume that's not gonna be very different from the GBP 300 million that you inherited. Please just correct me if the cash interest outflow is any different. On the cost-cutting program, just wanted to double-check that we shouldn't really be modeling all of that GBP 400 million getting into the bottom line if we also assume, for example, that you're hitting 95% ROE, right? I just wanted to check whether there was anything around, say, NGV Ventures or anything which would be additive and incremental on top of what we should already consider for the regulated businesses. Thank you.
Okay, thanks. Thanks, Deepa. Let me just take the third and give Andy the first two. Yes, you're absolutely right. In terms of the cost efficiency program, that's exactly how we're thinking about it. It's there to help us to contribute to deliver that 100 basis points of outperformance operationally that we're committing to in Electricity Transmission and to get to the 95% of the allowed returns in the U.S. That is absolutely how you should think about it.
Okay. Thanks, Deepa. In terms of the fair value adjustments and the impact going forward, there's three main elements that impact the income statement. Firstly, I mentioned the write down to around GBP 10 billion in terms of the fair value of the PP&E, so the fixed assets coming into the balance sheet. That of itself would lead to a slightly lower depreciation charge going forward. I made the comment as well that, you know, we have absolutely reviewed asset lives but have made only marginal changes to align with our own. And the point I made earlier was that will be offset by derecognizing around GBP 2.7 billion of customer contributions that WPD had previously received, which would otherwise have been returned back through the income statement as well.
The combination of those two items broadly offsets itself in operating profit. The net impact in income is through the fair value of debt point, as I mentioned in the previous question, that GBP 1.6 billion of non-cash accretion will effectively be amortized off through the income statement over the life of the bonds. That will lead to a pickup in terms of the post-acquisition income statement going forward. But you're absolutely right, it's non-cash. The cash coupon will be as per the original debt instruments. No change there.
Thanks, Deepa. Martin. Martin Young, I think you've got a question.
Yeah. Can you hear me?
Yeah. Yeah, we can hear you, Martin.
First question is around the GBP 400 million cost reduction program. Just wondered if there are any implementation costs of any significance in that respect. Then please correct me if I'm wrong, but I think at the time on the WPD debt, the number of about GBP 6 billion or GBP 6.1 billion was mentioned, the debt. Obviously, with the GBP 1.6 billion uplift that you've talked about today, that would take us into the upper sevens. Am I wrong with that, GBP 6 billion debt acquired number, did that move? Is that the time between announcement and closing, I guess?
Okay. Thanks, Martin. I'll take the first and I'll ask Andy to take the second on debt. With regards to the GBP 400 million, in terms of the target we set today, yes, there are some costs associated with it. There are costs associated actually with the separation of Rhode Island and GT, and then there'll be cost to achieve in terms of delivering those efficiencies. I mean, broadly is around about GBP 400 million of cost to achieve across both the separation and those efficiency programs. Andy?
Yeah. Martin, thanks. In terms of the debt question, I don't have the GBP 6.1 billion in front of me, but the GBP 6.6 billion was effectively the book value in terms of WPD's accounts at the completion of the acquisition in June. And the GBP 1.6 billion is the non-cash fair value, which gets you to the GBP 8.2 billion. But those are the numbers as of the 14th of June.
Just looking, it looks like Mark, your hand is that a new hand up? You've got another question?
It's my other hand, yep.
Okay.
Got both hands up. Can you talk about CCUS and the, well, I guess Project Cavendish is attached to Grain, but the, you know, the Humber cluster, clearly there's a big consultation going on there. Could you talk about expected total spend, returns requirements to the extent that you can and that you would remain committed to CCUS rather than let your gas transmission team take it on?
Yeah. Thanks, Mark. The work that we're doing around CCUS actually sits within National Grid Ventures, not within our gas transmission business, so it will stay there. I mean, at this stage, you know, first of all, we were delighted that, as you're aware, the U.K. government selected two projects to take forward, between now and 2025. Our project, you know, in with BP, and Equinor and others, was one of the ones that's selected. We're now, you know, taking it to the next stage, which is really understanding, what is the investment that's gonna be required, what are the costs associated with that. Probably most importantly at this stage, it's worth just emphasizing that, you know, what is the business model on which that investment is going to be done.
That is still to be consulted on with the U.K. government. You know, I very much see it as an opportunity and a business development opportunity, but it's just too early to say, Mark, in terms of exactly what is going to be the cost and what are the returns and what in fact is the business model and therefore, you know, what are the risk-adjusted returns that would be appropriate. What I would say from our perspective, you know, National Grid's role will be very much around the transport of the carbon onshore. You know, that is the expertise that we would bring to this joint venture. Other players in the market will bring their own expertise offshore, and in the production of hydrogen.
It's early days, but really pleased that we were selected, and we're continuing to work with our partners on exactly what that opportunity might look like.
Okay. I'm gonna go to, Bartek, I think, has got a question.
Yes. Good morning.
Morning.
Three, if I may, please. Firstly, on the CMA final decision, and actually the disappointing decision for you, do you think there's anything else you can do in order to improve the returns somehow and still challenge what Ofgem and CMA has decided upon? Secondly, on these 100 basis points outperformance you're expecting for NGET over RIIO-2, do we understand it? Should I understand it as CapEx and incentives outperformance, or this is something on top of what we usually outperform? I mean, how shall we understand this one? Thirdly, as interconnectors seems to be good assets, do you have anything else in your pipeline to start construction of in the near future? Thanks.
Okay. Let me just take those in turn. With regards to the CMA decision, I mean, I guess we were delighted to see that the outperformance wedge was removed, and really pleased in the final decision from the CMA that not only was it removed, you know, they didn't refer it back to Ofgem, but they absolutely removed it. I think we're very clear on that. Yes, we would be disappointed with the cost of equity. You know, that was the reason we made the referral. On a technical basis, we felt there were errors in the calculation, but the CMA have said that effectively it's within the realms of the judgment that Ofgem has. In terms of short-term, is there any route to appeal it?
There is a route to appeal it, which is judicial review. I think as I sit here today, I think that is incredibly unlikely that we would go down that route. The team's obviously going through the detail of the judgment. It's well over 1,000 pages, but I think it's unlikely that there will be any judicial review from National Grid. I think more broadly, you know, I've always said that I think there is an opportunity to think around the regulatory framework, the institutional arrangements, and the market mechanisms that we have in the U.K. as we think about delivering the energy transition, over not just the next five years, but over the next 30 years. That's certainly something that we'll be looking to discuss with Ofgem and others as we move forward.
In terms of the 100 basis points for RIIO-T2, well, I'll use this as an opportunity to advertise our investor day this afternoon. If you are able to make it, then you'll get the opportunity to spend some time with Chris Bennett and the ET team, where they'll talk through in detail how they're approaching RIIO-T2. At a high level, you know, we'd expect to deliver that 100 basis points through operational outperformance, both in CapEx and OpEx. That 100 basis points of outperformance is operational outperformance. It doesn't include any financial outperformance that we may be able to deliver. In terms of the interconnectors, as you know, we still have the work to do to complete the Danish interconnector, which should be complete by FY 2024.
We're just in the middle of ratcheting up the Norwegian interconnector, so 700 MW is already flowing, and we're aiming to increase that up to 1.4 GW by hopefully the end of the fiscal year. Beyond that, there's a lot of work going on as part of the sort of vision for the North Sea. Again, if you're at the investor day this afternoon, you'll get a chance to see how the team is thinking about our vision for the North Sea, both in terms of potential future interconnectors of which we think there are opportunities. The U.K. government recently set out that they feel there could be potentially up to 18 GW of interconnection between mainland Europe and the U.K., and we're a long way away from that.
also the team is looking at things called multipurpose interconnectors, where not only do you connect point to point between the U.K. and Europe, but actually you interconnect into that electrical connection, offshore wind farms. We've got a couple of projects running with system operators in mainland Europe on the potential for those types of sort of interconnectors, which we call multipurpose interconnectors. There's a lot of activity going on at the moment in that area, really thinking about what is the vision for the North Sea. If you are there this afternoon, you'll get a chance to see some of that.
Dominic, I think you've got your other hand up.
Hi there. Yes, sorry about this. Can I have a couple of follow-up questions, please?
Of course.
Firstly, yesterday SSE announced a couple of things that were quite interesting. One, that they talked about dyssynergies, I think it was GBP 95 million a year for splitting their business into two, and a GBP 200 million, I think, one-off cost. You obviously are doing quite a lot of restructuring at the moment. Are those numbers kinda in line with what you think the synergies/dyssynergies are for WPD integration and gas transmission sort of demerger? Secondly, would you be interested in buying a 25% stake in a networks or would control be something that's sort of paramount to your investment decision?
The final question, just quickly about the WPD, and apologies if you mentioned it, as I said, the sound quality was kept breaking out, but you had GBP 10 billion of fair value. Could you just quickly tell us what were the accounting assumptions to get to that GBP 10 billion? And is that essentially sort of based on a RAV number, or is it actually done on some form of DCF, or how does it work? If you could sort of give us some color on that. Thank you.
Okay. Let me take the first two, Dominic, and Andy take the third. In terms of dis-synergies and what SSE said yesterday, I think you know, I don't think it's for me to comment on SSE's business. I don't know their business well enough to know whether those numbers are the right numbers or not. What I would say is that, you know, undertaking a separation is a complex process, and what we've set out in our numbers today, as you saw, is the cost of separation together with the GBP 400 million of efficiencies that we've set out, we think that's about GBP 400 million. You know, we always aim, you know, we've rotated our portfolio over the years many times as you know, and we always aim to try and minimize any stranded costs.
It is not a simple process, I would say, which is why it takes the time that it does. In terms of our interest in SSE's announcement on 25%, I think I'd say, Dominic, given the significant strategic pivot that we announced at the beginning of this year, with the acquisition of WPD, the sale of Rhode Island, and the sale of majority stake in gas transmission, I think we're gonna focus very much on that and making sure that we do that very well. It positions us, as I said back in March, you know, fantastically well. It makes us 70% electric, 30% gas, broadly, you know, balanced between the U.K. and the U.S., and very well positioned for the energy transition. I think that will remain our focus, as we move forward.
In terms of the GBP 10 billion fair value, Andy?
Dominic, you're right. The GBP 10 billion is effectively the fair value attached to the existing PP&E of WPD. While obviously that's recorded at historical cost, we're required to fair value that as at the acquisition date. I distinguish that from the value also mentioned. There's a GBP 1.7 billion license intangible, which relates to the, you know, part of the future benefits of ownership together with the goodwill balance. The approach, to get technical for a moment, is that you're required to look at the cash flows associated with the existing fixed assets. There's lots of precedent, as you can imagine, from other transactions that our advisors look at in terms of comparable fair values.
It ends up back solving to a small multiple of RAV. You do look at the cash flows. It's because you're only looking at the historical existing assets, not the future growth and future investment, obviously, which is one of the main focuses for us with that acquisition.
Okay. Thanks. Chris, I think you've got your hand up.
Good morning, everyone. Just one question from me. John, earlier you mentioned in relation to inflation that you'd been adjusting the way that you manage projects and that you had seen some pressures come through, but they've been modest so far. You also mentioned some hedges through regulatory agreements or a comment like that, which unfortunately I didn't hear at all. I'm wondering whether you could repeat what you said and maybe expand on it just to give us an idea of how that regulatory framework may benefit you through this period.
Yeah, it's fine, Chris. Sorry. The line might not be great today. Yeah, what I was saying was we sort of have a natural hedge against increased inflation through our regulatory contracts. In the U.K., obviously with re-regulation, we get indexation of the RAV. As inflation increases, the increase in the value of the RAV increases with that, and then that flows through to revenues in the U.K. Over and above that in the U.K., we have built into the regulatory framework what's called real price effects. That effectively adjusts our revenues every year for increases in commodity prices and raw materials that's over and above inflation. That's what I meant by the hedge.
Similarly in the U.S., you know, as we've evolved the regulatory framework, we now have in Massachusetts five-year regulatory agreements, which are, you know, performance-based regulation, which is I-X, where I is inflation. The minus X at the moment is a positive number of 1.7 for electricity and 1.3 for gas. Again, our revenues increased by more than inflation in our Massachusetts business. Finally, I was saying in New York, we've always been able to include forecast inflation into any multi-year settlement that we've done. To the extent that we get that forecast right, we've got some coverage. We do have some exposure in New York to the extent that we get that forecast wrong. It's at the revenue line and at the asset base line that we've got this natural hedge.
Thanks, Chris. Martin, I think you've got a question.
Yeah. Can you hear me?
Yep, yep.
Yeah, it's only a very quick one. I'm following up on the GBP 400 million sort of separation and cost reduction implementation costs. Will they be accounted for as non-underlying? At some stage, you will take a hit for that GBP 400 million and keep it out of your underlying adjusted definition? Thanks.
Thanks, Martin. Andy to answer.
Yeah. Martin, the answer is that that's what we expect. Obviously, we have to look, you know, at those costs each year, but our current expectation that you'll have seen a small amount going through this year's performance, of around GBP 24 million, which is, you know, the initial spend on some of that. Yes, we'd expect to take the remaining portion through exceptional, and outside of underlying as we incur them. Yeah.
Dominic, is that your hand, new hand? No, no. Okay. It looks like there are no further questions. I'll just check to see that I haven't missed any. Okay. In which case, I'll just say thank you, everybody, for joining the call this morning. As you heard, I think our first half has been, you know, good operational and financial performance. I think we're very well positioned to deliver on our strategic operational and financial objectives for this year. I'm very hopeful that we'll see some of you in person later on this afternoon at our investor event. Thank you very much, everybody, and hopefully see you later on today.