TIDMNG. TIDM46QK

RNS Number : 2100G

National Grid PLC

18 November 2015

This half year report is available from the Investors section of the National Grid website (www.nationalgrid.com/investors).

18 November 2015

National Grid Electricity Transmission plc

Half year report for the six months ended 30 September 2015

Solid underlying first half performance

   --     Progress towards another year of good performance 
   --     Continued delivery of capital programme cost savings 

Financial results

   --     Adjusted operating profit(1) 4% lower at GBP610m 
 
 Six months ended           Adjusted results(1)         Statutory results 
  30 September 
 GBPm (unaudited)          2015    2014   % change    2015    2014   % change 
-----------------------  ------  ------  ---------  ------  ------  --------- 
    Revenue               1,954   1,745         12   1,954   1,745         12 
    Operating profit        610     635        (4)     610     688       (11) 
    Profit before tax       548     549          -     553     598        (8) 
    Capital investment      514     514          -     514     514          - 
-----------------------  ------  ------  ---------  ------  ------  --------- 
 

Outlook

   --     On track to deliver another year of asset growth and good returns 

STRATEGIC AND OPERATIONAL REVIEW

Investment and growth expectation

Last year, National Grid Electricity Transmission plc (the Company) set out a range of expected investment by regulated business of between GBP9bn and GBP13bn 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, the Company 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, the Company 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, the Company expects to deliver long-term asset growth in Electricity Transmission of around 6% p.a..

Business continues to perform well and make progress with regulatory arrangements

In the first six months of the year, the Company continued to drive capital and operating cost efficiencies across its business, reinforcing the Company's expectation for another year of strong operational returns.

Investment continues at broadly the same level as last year. The business maintains its drive for outperformance under its regulatory arrangements, delivering outputs at lower cost than the regulatory targets alongside good incentive performance.

Maintained strong safety and reliability for customers

The Company 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 injury per 100,000 hours worked in a 12 month period) and has achieved this target of 0.10 for 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 significant network investment activity, and the business has also maintained a very good level of reliability over this period.

The Company has implemented further improvements to its winter preparedness plans, to ensure minimal system constraints over the higher demand months. This is particularly important as margins become tighter due to the ongoing closure of existing generation plants. Reflecting this reduced generation availability, the Company has purchased additional supplemental balancing reserves, as it did last winter, to secure supplies for customers, achieving a considerably reduced unit cost. As a result the Company believes it has the tools it needs to manage a wide range of supply and demand scenarios for the coming winter.

Business continues to deliver efficiency savings to create value under regulatory arrangements

To maximise the benefit of regulatory arrangements, the Company continues to focus on improving the efficiency and effectiveness of its operations through innovation and an ongoing performance improvement agenda. Alongside value for money, customers also need safe and reliable networks and good customer service, which sets out the foundation for the critical, non-financial success factors for the long-term performance of the Company.

Focus on performance excellence drives efficiencies and significant savings to customers

The business continues to deliver totex efficiencies, in particular in relation to both load and non-load related spend in Electricity Transmission. This is being achieved through a focus on delivering the lowest sustainable cost solutions to delivering customer outputs. These solutions are the result of a variety of approaches, including contracting efficiencies, improved design and project planning and alternative "no-build" solutions to delivering the benefits of traditional capital and replacement projects. The business is further expanding the use of the performance excellence framework to drive further efficiencies.

The RIIO-T1 price controls included provision for a potential mid-period review. In November 2015, Ofgem commenced a consultation process on potential issues that may be relevant for triggering mid-period reviews. Any mid-period reviews are expected to focus on changes to outputs that can be justified by clear changes in government policy and new outputs that are needed to meet the needs of consumers and other network users. The reviews will not re-open the RIIO-T1 price controls or change the key financial parameters. As a result the Company expects customers to continue to be able to benefit from innovation and initiatives throughout the full eight year RIIO period.

Access to innovative, low cost funding options enabled by a strong balance sheet

The Company's balance sheet remains strong after another period of significant investment in new assets. The Company continues to enjoy strong credit ratings from Moody's, Standard & Poor's and Fitch.

Added value through low cost debt issuance

The Company has commenced drawing the GBP1.5bn EIB loan that was signed in November 2014. The drawdowns to date have been in RPI linked form and are at attractive rates. The Company has also extended the drawdown deadline by 10 months, allowing extra time to access this low cost funding.

Board changes

As reported in the National Grid Electricity Transmission plc Annual Report and Accounts 2014/15, Nick Winser stepped down from the Board of Directors on 1 July 2015. John Pettigrew assumed the role of non-independent Chairman of the Board on this date.

On 24 September 2015, Mike Calviou resigned as a director of the Board and was replaced by Cordi O'Hara on the same date.

Outlook

The Company remains on track to deliver another year of asset growth and good returns.

REVIEW OF OPERATIONS

 
 Six months ended 30 September     Adjusted operating     Capital investment 
                                         profit 
 (GBPm)                                2015       2014        2015       2014 
-------------------------------  ----------  ---------  ----------  --------- 
 Electricity Transmission               610        634         514        514 
 Other activities*                        -          1           -          - 
-------------------------------  ----------  ---------  ----------  --------- 
                                        610        635         514        514 
-------------------------------  ----------  ---------  ----------  --------- 
 

*Other activities relate to other commercial operations not included within the above segment and corporate activities.

Electricity Transmission

Operating profit was GBP24m lower in the first six months of the year, compared to the first six months of 2014/15, reflecting decreased regulatory revenue allowances as performance benefits and output adjustments from 2013/14 are shared with customers under the RIIO regulatory arrangements. The decrease in statutory operating profit of GBP78m reflected a non-recurring exceptional GBP53m benefit relating to legal settlements last year, increased depreciation and some operating cost increases. Timing increased operating profit in the period by GBP33m.

Electricity Transmission investment was GBP514m, in line with last year's level. Around half of the investment was associated with non-load related activities including for example the London Power Tunnels.

The Electricity Transmission business expects to deliver its regulatory outputs for the year for a level of totex below the associated regulatory allowance. This reflects continued delivery of efficiencies in the capital programme and non-load related and maintenance activities in particular. Following a very strong performance in 2014/15, the business expects to deliver a similarly strong level of totex incentive performance for the year as a whole. Totex for the first half of the year was approximately GBP650m compared to GBP600m in the first half of 2014/15.

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At this half way point in the year, the business is performing well compared to the targets of annual revenue incentive schemes and expects to deliver a good incentive outturn for the whole year. The maximum profit available under the balancing services incentive scheme (BSIS) has increased this year to GBP30m, with the sharing factor increased to 30% following the reset of the scheme as at April 2015.

On 30 September 2015 Ofgem published its decision in relation to additional site security costs. This has set an allowance of approximately GBP580m over the RIIO period to enhance security at critical sites of which approximately GBP370m is in the Electricity Transmission business. Ofgem also reviewed the efficiency of some historic spend in the last price control period. This review will result in a reduction in Electricity Transmission's regulatory asset value of approximately GBP25m. Separately, in the period, the business identified around GBP500m of potential new projects for enhancing visual amenity including the replacement of existing pylons with underground lines.

The Winter Outlook, published on 15 October 2015, indicates that sufficient generation is expected to be available for the winter of 2015/16 to meet the government targeted security of supply standard. This includes the benefit of around 130MW (de-rated) of demand-side balancing reserve (DSBR) and 2.3GW (de-rated) of supplemental balancing reserve (SBR) procured under a tender process managed by National Grid, approved by Ofgem and supported by the Department of Energy and Climate Change (DECC) over the summer. The total SBR and DSBR mechanisms are expected to provide additional capacity over the period of peak demand.

Following the announcement of further coal plant closures for March/April 2016 the outlook for 2016/17 shows further reductions in underlying supply margin and it is expected that procurement of DSBR and SBR services will be required for winter 2016/17. The Electricity Transmission business has further improved its processes in relation to winter preparation this year. This has been designed to ensure maximum availability of Transmission assets throughout what is expected to be the tightest winter for a number of years in terms of electricity supply margin.

APPENDIX: BASIS OF PRESENTATION AND DEFINITIONS

BASIS OF PRESENTATION

Adjusted and Statutory Results

Unless otherwise stated, all financial commentaries in this release are given on an adjusted basis.

'Adjusted' results are a key financial performance measure used by the Company, being the results for continuing operations before exceptional items and remeasurements. Remeasurements comprise gains or losses recorded in the income statement arising from changes in the fair value of derivative financial instruments to the extent that hedge accounting is not achieved or is not fully effective. Commentary provided in respect of results after exceptional items and remeasurements is described as 'statutory'. Further details are provided in note 3 on page 13. A reconciliation of business performance to statutory results is provided in the consolidated income statement on page 7.

DEFINITIONS

Post-retirement costs

Post-retirement costs include the cost of pensions and other post-employment benefits.

Timing

Under the Company's regulatory frameworks, the majority of the revenues that the Company is allowed to collect each year are governed by a regulatory price control. If the Company collects more than this allowed level of revenue, the balance must be returned to customers in subsequent years, and if it collects less than this level of revenue it may recover the balance from customers in subsequent years. These variances between allowed and collected revenues give rise to "over and under-recoveries". In addition, a number of costs are pass-through costs, and are fully recoverable from customers. Any timing differences between costs of this type being incurred and their recovery through revenues are also included in over and under-recoveries. Timing differences also include an estimation of the difference between revenues earned under revenue incentive mechanisms and any associated revenues collected. Timing balances and movements exclude any adjustments associated with changes to controllable cost (totex) allowances or adjustments under the totex incentive mechanism.

Identification of these timing differences enables a better comparison of performance from one period to another. Opening balances of under and over-recoveries have been restated where appropriate to correspond with regulatory filings and calculations.

Totex

Under the RIIO regulatory arrangements the Company is incentivised to deliver efficiencies against cost targets set by the regulator. In total, these targets are set in terms of a regulatory definition of combined total operating and capital expenditure, also termed "totex". The definition of totex differs from the total combined regulated controllable operating costs and regulated capital expenditure as reported in this statement according to IFRS accounting principles. Key differences are capitalised interest, capital contributions, exceptional costs, costs covered by other regulatory arrangements and unregulated costs.

CAUTIONARY STATEMENT

This announcement contains certain statements that are neither reported financial results nor other historical information. These statements are forward-looking statements. These statements include information with respect to National Grid Electricity Transmission plc's (the Company's) financial condition, its results of operations and businesses, strategy, plans and objectives. Words such as 'aims', 'anticipates', 'expects', 'should', 'intends', 'plans', 'believes', 'outlook', 'seeks', 'estimates', 'targets', 'may', 'will', 'continue', 'project' and similar expressions, as well as statements in the future tense, identify forward-looking statements. These forward-looking statements are not guarantees of the Company's future performance and are subject to assumptions, risks and uncertainties that could cause actual future results to differ materially from those expressed in or implied by such forward-looking statements. Many of these assumptions, risks and uncertainties relate to factors that are beyond the Company's ability to control or estimate precisely, such as changes in laws or regulations, announcements from and decisions by governmental bodies or regulators (including the timeliness of consents for construction projects); the timing of construction and delivery by third parties of new generation projects requiring connection; breaches of, or changes in, environmental, climate change and health and safety laws or regulations, network failure or interruption, the inability to carry out critical non network operations and damage to infrastructure, due to adverse weather conditions including the impact of major storms as well as the results of climate change due to counterparties being unable to deliver physical commodities or due to the failure of or unauthorised access to or deliberate breaches of the Company's IT systems and supporting technology; performance against regulatory targets and standards and against the Company's peers with the aim of delivering stakeholder expectations regarding costs and efficiency savings, including those related to investment programmes and internal transformation and remediation plans; and customers and counterparties (including financial institutions) failing to perform their obligations to the Company. Other factors that could cause actual results to differ materially from those described in this announcement include fluctuations in exchange rates, interest rates and commodity price indices; restrictions and conditions (including filing requirements) in the Company's borrowing and debt arrangements, funding costs and access to financing; regulatory requirements for the Company to maintain financial resources in certain parts of its business and restrictions on some transactions such as paying dividends, lending or levying charges; inflation or deflation; the delayed timing of recoveries and payments in the Company's regulated business and whether aspects of its activities are contestable; the funding requirements and performance of the Company's pension scheme and other post-employment benefit schemes; the failure to attract, train or retain employees with the necessary competencies, including leadership skills, and any significant disputes arising with the Company's employees or the breach of laws or regulations by its employees; and the failure to respond to market developments, including competition for onshore transmission, and grow the Company's business to deliver its strategy, as well as incorrect or unforeseen assumptions or conclusions (including unanticipated costs and liabilities) relating to business development activity, including assumptions in connection with joint ventures. For further details regarding these and other assumptions, risks and uncertainties that may impact the Company, please read the Strategic Report section and the 'Risk factors' on pages 20 to 21 of the Company's most recent Annual Report and Accounts. In addition, new factors emerge from time to time and the Company cannot assess the potential impact of any such factor on its activities or the extent to which any factor, or combination of factors, may cause actual future results to differ materially from those contained in any forward-looking statement. Except as may be required by law or regulation, the Company undertakes no obligation to update any of its forward-looking statements, which speak only as of the date of this announcement.

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UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

 
Consolidated income statement 
 for the six months ended 
 30 September                                                2015     2014 
                                                   Notes     GBPm     GBPm 
-----------------------------------------------    -----  -------  ------- 
 
Revenue                                            2(a)     1,954    1,745 
Exceptional other income                                        -       40 
Operating costs                                           (1,344)  (1,097) 
 
Operating profit 
   Before exceptional items and remeasurements     2(b)       610      635 
   Exceptional items and remeasurements              3          -       53 
Total operating profit                             2(b)       610      688 
 
Finance costs 
   Before exceptional items and 
    remeasurements                                   4       (62)     (86) 
   Exceptional items and remeasurements              3          5      (4) 
Total finance costs                                  4       (57)     (90) 
 
Profit before tax 
   Before exceptional items and remeasurements     2(b)       548      549 
   Exceptional items and remeasurements              3          5       49 
Total profit before tax                            2(b)       553      598 
 
Tax 
   Before exceptional items and remeasurements       5      (112)    (117) 
   Exceptional items and remeasurements              3        (1)     (11) 
Total tax                                                   (113)    (128) 
 
Profit after tax 
   Before exceptional items and remeasurements                436      432 
   Exceptional items and remeasurements              3          4       38 
 
 
Profit for the period attributable 
 to owners of the parent                                      440      470 
-------------------------------------------------  -----  -------  ------- 
 
 
 
Consolidated statement of comprehensive 
 income 
 for the six months ended 30 September        2015  2014 
                                              GBPm  GBPm 
----------------------------------------   -------  ---- 
 
Profit for the period                          440   470 
 
Other comprehensive income: 
Items that will never be reclassified 
 to profit or loss 
Remeasurements of net retirement 
 benefit obligations                            81  (20) 
Tax on items that will never be 
 reclassified to profit or loss               (16)     4 
Total items that will never be 
 reclassified to profit or loss                 65  (16) 
-----------------------------------------  -------  ---- 
 
 Items that are or may be reclassified 
  subsequently to profit or loss 
Net losses on cash flow hedges                 (4)  (30) 
Transferred to profit or loss 
 on cash flow hedges                            17     3 
Tax on items that may be reclassified 
 subsequently to profit or loss                (3)     6 
-----------------------------------------  -------  ---- 
Total items that may be reclassified 
 subsequently to profit or loss                 10  (21) 
-----------------------------------------  -------  ---- 
 
Other comprehensive income/(loss) 
 for the period, net of tax                     75  (37) 
 
 
Total comprehensive income for 
 the period attributable to owners 
 of the parent                                 515   433 
-----------------------------------------  -------  ---- 
 
 
 
Consolidated statement of financial position      30 September  31 March 
                                                          2015      2015 
                                           Notes          GBPm      GBPm 
----------------------------------------   -----  ------------  -------- 
 
Non-current assets 
Intangible assets                                          182       174 
Property, plant and equipment                           11,436    11,137 
Derivative financial assets                  6             347       402 
-----------------------------------------  -----  ------------ 
 
Total non-current assets                                11,965    11,713 
-----------------------------------------  -----  ------------  -------- 
 
Current assets 
Inventories                                                 30        30 
Trade and other receivables                                257       269 
Financial and other investments              8             494       478 
Derivative financial assets                  6              51        39 
Current tax asset                                            5         5 
Cash and cash equivalents                    8               -         3 
-----------------------------------------  -----  ------------  -------- 
 
Total current assets                                       837       824 
-----------------------------------------  -----  ------------  -------- 
 
Total assets                                            12,802    12,537 
-----------------------------------------  -----  ------------  -------- 
 
Current liabilities 
Borrowings                                   8         (1,372)   (1,611) 
Derivative financial liabilities             6            (50)      (98) 
Trade and other payables                                 (731)     (980) 
Provisions                                                (14)      (15) 
-----------------------------------------  -----  ------------  -------- 
 
Total current liabilities                              (2,167)   (2,704) 
-----------------------------------------  -----  ------------  -------- 
 
Non-current liabilities 
Borrowings                                   8         (5,748)   (5,512) 
Derivative financial liabilities             6           (692)     (625) 
Other non-current liabilities                            (373)     (348) 
Deferred tax liabilities                                 (844)     (791) 
Pension benefit obligations                              (312)     (410) 
Provisions                                                (79)      (77) 
-----------------------------------------  -----  ------------  -------- 
 
Total non-current liabilities                          (8,048)   (7,763) 
-----------------------------------------  -----  ------------  -------- 
 
Total liabilities                                     (10,215)  (10,467) 
-----------------------------------------  -----  ------------  -------- 
 
Net assets                                               2,587     2,070 
-----------------------------------------  -----  ------------  -------- 
 
Equity 
Share capital                                               44        44 
Retained earnings                                        2,622     2,115 
Cash flow hedge reserve                                   (79)      (89) 
 
Total equity                                             2,587     2,070 
-----------------------------------------  -----  ------------  -------- 
 
 
 
Consolidated statement of changes in equity 
 
                                                              Cash 
                                                              flow 
                                        Share   Retained     hedge    Total 
                                      capital   earnings   reserve   equity 
                                         GBPm       GBPm      GBPm     GBPm 
----------------------------------  ---------  ---------  --------  ------- 
Changes in equity for the 
 period: 
 
1 April 2015                               44      2,115      (89)    2,070 
----------------------------------  ---------  ---------  --------  ------- 
Profit for the period                       -        440         -      440 
Total other comprehensive 
 income for the period                      -         65        10       75 
----------------------------------  ---------  ---------  --------  ------- 
Total comprehensive income 
 for the period                             -        505        10      515 
Share-based payment                         -          2         -        2 
 
At 30 September 2015                       44      2,622      (79)    2,587 
----------------------------------  ---------  ---------  --------  ------- 
 
 
 
                                                              Cash 
                                    Called-up                 flow 
                                        share   Retained     hedge    Total 
                                      capital   earnings   reserve   equity 
                                         GBPm       GBPm      GBPm     GBPm 
----------------------------------  ---------  ---------  --------  ------- 
Changes in equity for the 
 period: 
 
1 April 2014                               44      1,946      (23)    1,967 
----------------------------------  ---------  ---------  --------  ------- 
Profit for the period                       -        470         -      470 
Total other comprehensive 
 loss for the period                        -       (16)      (21)     (37) 
----------------------------------  ---------  ---------  --------  ------- 
Total comprehensive income/(loss) 
 for the period                             -        454      (21)      433 
Share-based payment                         -          1         -        1 
 
At 30 September 2014                       44      2,401      (44)    2,401 
----------------------------------  ---------  ---------  --------  ------- 
 
 
 
Consolidated cash flow statement 
 for the six months ended 30 
 September                                         2015   2014 
                                           Notes   GBPm   GBPm 
---------------------------------------    -----  -----  ----- 
 
Cash flows from operating activities 
Total operating profit                     2(b)     610    688 
Adjustments for: 
  Exceptional items                          3        -   (53) 
  Depreciation and amortisation                     200    185 
  Share-based payment charge                          2      1 
  Changes in working capital                      (148)   (64) 

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  Changes in provisions                             (4)   (11) 
  Changes in pensions and other 
   post-employment benefit obligations             (25)   (30) 
  Gain on disposal of property, 
   plant and equipment                              (1)    (4) 
Cash flows relating to exceptional 
 items                                                -    113 
 
Cash flows generated from operations                634    825 
Tax paid                                           (59)   (54) 
-----------------------------------------  -----  ----- 
 
Net cash inflow from operating 
 activities                                         575    771 
-----------------------------------------  -----  -----  ----- 
 
Cash flows from investing activities 
Purchases of intangible assets                     (23)   (17) 
Purchases of property, plant 
 and equipment                                    (526)  (444) 
Disposals of property, plant 
 and equipment                                        1      1 
Net movements in short-term 
 financial investments                             (15)     23 
-----------------------------------------  -----  -----  ----- 
 
Net cash flow used in investing 
 activities                                       (563)  (437) 
-----------------------------------------  -----  -----  ----- 
 
Cash flows from financing activities 
Proceeds received from loans                        300      - 
Repayment of loans                                (110)      - 
Net movements in short-term 
 borrowings and derivatives                       (123)  (238) 
Interest paid                                      (84)   (92) 
 
Net cash flow used in financing 
 activities                                        (17)  (330) 
-----------------------------------------  -----  -----  ----- 
 
Net (decrease)/increase in cash 
 and cash equivalents                               (5)      4 
Net cash and cash equivalents 
 at start of period                                   3    (6) 
-----------------------------------------  -----  -----  ----- 
 
Net cash and cash equivalents 
 at end of period1                           8      (2)    (2) 
-----------------------------------------  -----  -----  ----- 
 
 
   1.      Net of bank overdrafts of GBP2m (2014: GBP2m). 

Notes

1. Basis of preparation and new accounting standards, interpretations and amendments

The half year financial information covers the six month period ended 30 September 2015 and has been prepared under International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB), and IFRS as adopted by the European Union, in accordance with International Accounting Standard 34 'Interim Financial Reporting' and the Disclosure and Transparency Rules of the Financial Conduct Authority. The half year financial information is unaudited but has been reviewed by the auditors and their report is attached to this document.

The following standards, interpretations and amendments, issued by the IASB and by the IFRS Interpretations Committee (IFRIC), are effective for the year ending 31 March 2016. None of the pronouncements had a material impact on the Company's consolidated results or assets and liabilities for the six month period ended 30 September 2015.

   --      Amendment to IAS 19 'Defined Benefit Plans: Employee Contributions; 
   --      Annual Improvements to IFRSs 2010-2012 Cycle; 
   --      Annual Improvements to IFRSs 2011-2013 Cycle. 

The half year financial information has been prepared in accordance with the accounting policies expected to be applicable for the year ending 31 March 2016 and consistent with those applied in the preparation of the accounts for the year ended 31 March 2015.

In preparing this half year financial information, the areas of judgement made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 March 2015.

The half year financial information does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. It should be read in conjunction with the statutory accounts for the year ended 31 March 2015, which were prepared in accordance with IFRS as issued by the IASB and as adopted by the European Union, and have been filed with the Registrar of Companies. The auditors' report on these statutory accounts was unqualified and did not contain a statement under Section 498 of the Companies Act 2006.

Having made enquiries and reassessed the principal risks, the Directors consider that the Company and its subsidiary undertakings have adequate resources to continue in business for the foreseeable future, and that it is therefore appropriate to adopt the going concern basis in preparing the half year financial information.

2. Segmental analysis

The Board of Directors is National Grid Electricity Transmission plc's chief operating decision making body (as defined by IFRS 8 'Operating segments'). The segmental analysis is based on the information the Board of Directors uses internally for the purposes of evaluating the performance of operating segments and determining resource allocation between segments. The performance of operating segments is assessed principally on the basis of operating profit before exceptional items and remeasurements.

The following table describes the main activities for each operating segment:

 
 Electricity Transmission   High voltage electricity transmission 
                             networks in Great Britain. 
-------------------------  -------------------------------------- 
 

Other activities relate to other commercial operations not included within the above segment and corporate activities. All of the Group's sales and operations take place within the UK. There were no sales between segments.

   (a)   Revenue 
 
Six months ended 30 September    2015   2014 
                                 GBPm   GBPm 
------------------------------  -----  ----- 
Operating segments 
  Electricity Transmission      1,953  1,744 
  Other activities                  1      1 
 
                                1,954  1,745 
------------------------------  -----  ----- 
 
 

2. Segmental analysis (continued)

   (b)   Operating profit 
 
                                   Before exceptional             After exceptional 
                                 items and remeasurements      items and remeasurements 
                               ---------------------------   --------------------------- 
Six months ended 
 30 September                           2015          2014            2015          2014 
                                        GBPm          GBPm            GBPm          GBPm 
---------------------------    -------------  ------------   -------------  ------------ 
Operating segments 
  Electricity Transmission               610           634             610           687 
Other activities                           -             1               -             1 
-----------------------------  -------------  ------------   -------------  ------------ 
 
                                         610           635             610           688 
  ---------------------------  -------------  ------------   -------------  ------------ 
Reconciliation 
 to profit before 
 tax: 
  Operating profit                       610           635             610           688 
  Finance costs                         (62)          (86)            (57)          (90) 
 
Profit before tax                        548           549             553           598 
-----------------------------  -------------  ------------   -------------  ------------ 
 
 

3. Exceptional items and remeasurements

Exceptional items and remeasurements are items of income and expenditure that, in the judgment of management, should be disclosed separately on the basis that they are important to an understanding of our financial performance and may significantly distort the comparability of financial performance between periods. Remeasurements comprise gains or losses recorded in the income statement arising from changes in the fair value of derivative financial instruments to the extent that hedge accounting is not achieved or is not effective.

 
Six months ended 30 September                 2015  2014 
                                              GBPm  GBPm 
-------------------------------------------   ----  ---- 
 
Included within operating profit: 
Exceptional items: 
 Legal settlements(1)                            -    53 
                                                 -    53 
 
Included within finance costs: 
Remeasurements 
 Net gains/(losses) on derivative 
  financial instruments(2)                       5   (4) 
--------------------------------------------  ----  ---- 
 
Total included within profit before 
 tax                                             5    49 
--------------------------------------------  ----  ---- 
 
Included within tax: 
Tax on exceptional items                         -  (12) 
Tax on remeasurements                          (1)     1 
--------------------------------------------  ----  ---- 
 
                                               (1)  (11) 
 -------------------------------------------  ----  ---- 
 
 
Total exceptional items and remeasurements 
 after tax                                       4    38 
--------------------------------------------  ----  ---- 
 
 
Analysis of exceptional items and 
 remeasurements after tax: 
Total exceptional items after tax                -    41 
Total remeasurements after tax                   4   (3) 
--------------------------------------------  ----  ---- 
 
Total                                            4    38 
--------------------------------------------  ----  ---- 
 
 

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1. During the six months ended 30 September 2014, the Group received GBP113m for settlement of legal claims relating to equipment procured in prior years. GBP13m has been credited to operating costs, GBP40m has been recognised as other income and GBP60m has been credited to plant and machinery within tangible fixed assets.

2. Remeasurements - net gains and losses on derivative financial instruments comprise gains and losses arising on derivative financial instruments reported in the income statement. These exclude gains and losses for which hedge accounting has been effective, which have been recognised directly in other comprehensive income or which are offset by adjustments to the carrying value of debt.

4. Finance income and costs

 
Six months ended 30 September                2015   2014 
                                             GBPm   GBPm 
------------------------------------------   ----  ----- 
 
Interest expense on pension obligations       (7)   (10) 
Interest expense on financial liabilities 
 held at amortised cost                      (95)  (118) 
Unwinding of discount on provisions           (2)    (2) 
Other interest                                (1)    (1) 
Less: interest capitalised                     43     45 
-------------------------------------------  ----  ----- 
 
Finance costs before exceptional 
 items and remeasurements                    (62)   (86) 
 
Net gains/(losses) on derivative 
 financial instruments included in 
 remeasurements                                 5    (4) 
-------------------------------------------  ----  ----- 
 
Exceptional items and remeasurements 
 included within finance costs                  5    (4) 
-------------------------------------------  ----  ----- 
Finance costs                                (57)   (90) 
-------------------------------------------  ----  ----- 
 
Net finance costs                            (57)   (90) 
-------------------------------------------  ----  ----- 
 
 

5. Tax

The tax charge for the period, excluding tax on exceptional items and remeasurements is GBP112m (2014: GBP117m). The effective tax rate of 20.4% (2014: 21.4%) for the period is based on the best estimate of the annual tax rate expected for the full year, excluding tax on exceptional items and remeasurements. The effective tax rate for the year ended 31 March 2015 was 21.3%.

The Finance Act 2013 enacted reductions in the UK corporation tax rate to 20% from 1 April 2015 (2014: to 21%). Deferred tax balances are currently reported at the 20% rate. A reduction in the corporation tax rate to 19% from April 2017 and a further reduction to 18% from April 2020 was announced in the 2015 Summer Budget. Although these reductions in the UK corporation tax rate have now been substantively enacted, they had not been as at the reporting date and consequently are not reflected in these interim financial statements. Following the change in rates becoming substantively enacted the Company will finalise its assessment during the second half of this year of the estimated impact on deferred tax, based on the latest projections of when the deferred tax balances will reverse.

6. Fair value measurement

Carrying values and fair values of certain financial assets and liabilities

Certain of the Group's financial instruments are measured at fair value. The following table categorises these financial assets and liabilities by the valuation methodology applied in determining their fair value using the fair value hierarchy described on page 72 of the Annual Report and Accounts 2014/15.

 
                               30 September 2015                  31 March 2015 
----------------------  -------------------------------  ------------------------------ 
                          Level   Level   Level           Level   Level   Level 
                              1       2       3   Total       1       2       3   Total 
                           GBPm    GBPm    GBPm    GBPm    GBPm    GBPm    GBPm    GBPm 
----------------------  -------  ------  ------  ------  ------  ------  ------  ------ 
 Assets 
 Available-for-sale 
  investments                 -       -       -       -      34       -       -      34 
 Derivative financial 
  instruments                 -     398       -     398       -     427      14     441 
                              -     398       -     398      34     427      14     475 
 ------------------------------  ------  ------  ------  ------  ------  ------  ------ 
 Liabilities 
 Derivative financial 
  instruments                 -   (633)   (109)   (742)       -   (611)   (112)   (723) 
 
 Total                        -   (235)   (109)   (344)      34   (184)    (98)   (248) 
----------------------  -------  ------  ------  ------  ------  ------  ------  ------ 
 

Financial assets and liabilities in the consolidated statement of financial position are either held at fair value or the carrying value if it approximates to fair value, with the exception of borrowings, which are held at amortised cost.

The estimated fair value of total borrowings using market values at 30 September 2015 is GBP7,977 million (31 March 2015:

GBP8,354 million).

Level 1: Financial instruments with quoted prices for identical instruments in active markets.

Level 2: Financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in inactive markets and financial instruments valued using models where all significant inputs are based directly or indirectly on observable market data.

Level 3: Financial instruments valued using valuation techniques where one or more significant inputs are based on unobservable market data.

Our level 3 derivative financial instruments include cross-currency swaps with an embedded call option, currency swaps where the currency forward curve is illiquid and in ation-linked swaps where the in ation curve is illiquid. In valuing these instruments a third party valuation is obtained to support each reported fair value.

As disclosed in note 3, gains/losses on our recurring financial instruments are recorded in remeasurements in the consolidated income statement.

The impacts on a post-tax basis of reasonably possible changes in significant level 3 assumptions for our derivative financial instruments are as follows:

 
 
                                                        2015(2)    2014 
Six months ended 30 September                              GBPm    GBPm 
----------------------------------------------------  ---------  ------ 
+20 basis point change in Limited Price 
 Inflation (LPI) market curve(1)                           (48)    (62) 
 
  *    20 basis point change in LPI market curve(1)          46      60 
----------------------------------------------------  ---------  ------ 
 

1. A reasonably possible change in assumption of other level 3 derivative financial instruments is unlikely to result in a material change in fair values.

   2.      Tax rates applied above: Derivative financial instruments 20% (2014: 21%). 

Movements in the six months to 30 September for derivative financial instruments measured using Level 3 valuation methods are presented below:

 
                          2015(3)   2014 
                             GBPm   GBPm 
At 1 April                   (98)   (53) 
Net (losses) / gains 
 for the period                 -    (9) 
Settlements                  (11)    (1) 
At 30 September             (109)   (63) 
-----------------------  --------  ----- 
 

3. Gains of GBP3m (2014: loss of GBP8m) are attributable to derivative financial instruments held at the end of the reporting period.

7. Reconciliation of net cash flow to movement in net debt

 
Six months ended 30 September               2015     2014 
                                            GBPm     GBPm 
--------------------------------------   -------  ------- 
 
(Decrease)/increase in cash and cash 
 equivalents                                 (5)        4 
Increase/(decrease) in financial 
 investments                                  15     (23) 
(Increase)/decrease in borrowings 
 and related derivatives                    (67)      238 
Net interest paid on the components 
 of net debt                                  84       92 
---------------------------------------  -------  ------- 
 
Change in net debt resulting from 
 cash flows                                   27      311 
Changes in fair value and exchange 
 movements                                    22     (34) 
Net interest charge on the components 
 of net debt                                (95)    (118) 
---------------------------------------  -------  ------- 
 
Movement in net debt (net of related 
 derivative financial instruments) 
 in the period                              (46)      159 
Net debt (net of related derivative 
 financial instruments) at start of 
 period                                  (6,924)  (6,415) 
---------------------------------------  -------  ------- 
 
Net debt (net of related derivative 
 financial instruments) at end of 
 period                                  (6,970)  (6,256) 
---------------------------------------  -------  ------- 
 

8. Net debt

 
                                     30 September  31 March 
                                             2015      2015 
                                             GBPm      GBPm 
----------------------------------   ------------  -------- 
 
Cash and cash equivalents                       -         3 
Bank overdrafts                               (2)         - 
-----------------------------------  ------------  -------- 
Net cash and cash equivalents                 (2)         3 
Financial investments                         494       478 
Borrowings (excluding overdrafts)         (7,118)   (7,123) 
Derivatives                                 (344)     (282) 
-----------------------------------  ------------  -------- 
 
Total net debt                            (6,970)   (6,924) 
-----------------------------------  ------------  -------- 
 

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