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National Grid (NYSE:NGG)
Q3 2018 Earnings Conference Call
Nov. 08, 2018, 4:15 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Aarti Singhal -- Director of Investor Relations

Good morning, everyone, and welcome to the National Grid Half Year Results Presentation. A warm welcome also to those of you who are watching this on the web. As usual, we will start with safety. No planned fire alarm test this morning. So if you hear an alarm, you do need to leave this room and go toward reception downstairs. Also the cautionary statement which is here behind me, I draw your attention to that.

And with that, I'd like to hand you over to John Pettigrew. Thank you.

John Pettigrew -- Chief Executive Officer

So thank you, Aarti, and good morning, everyone. I'm joined this morning by Andy Agg, our Interim CFO; and Nicola Shaw, our UK Executive Director who will be on hand to assist with any questions at the end of the presentation. Unfortunately, Dean Seavers, our US Executive Director is not able to join us today.

As usual, I'll start with a review of our performance for the period and once Andy has been through the financials, I'll come back and talk about our second half priorities and outlook. So let me begin with our financial performance for the period.

On an underlying basis, that is excluding the impact of timing and major storms, operating profit was down GBP79 million at constant currency to GBP1.3 billion. This mainly reflects the return of UK Gas Transmission allowances associated with Avonmouth, lower profits in the US due to minor storm costs and the impact of US tax reform.

This was partly offset by increased revenue from our new US rates and income from legal settlements.

Underlying earnings per share was GBP0.197 for the period, up by 6% at constant currency, benefiting from a lower tax rate in the US and a reduced share count from the buyback program relating to the return of gas distribution proceeds last year.

During the period, we invested over GBP2.1 billion in critical infrastructure, representing an increase of 7% at constant currency. And finally, as you know, our policy is to pay 35% of the prior year's total dividend at the half year, resulting in an interim dividend of GBP0.1608 per share, an increase of 3.8% on 2017.

So as you can see, it's been a solid first six months of financial performance with strong organic asset growth.

I'll now turn to our safety and reliability performance. The last six months have seen continuous strong levels of safety performance. With a combined lost time injury frequency rate of under 0.1 which is comparable to world-class safety performance. Our reliability has also remained excellent.

We had near 100% reliability for our UK electric and gas networks and despite a number of storms in the US during April and May, we maintained strong reliability across our US networks during the period. Our system operator published at winter outlook in October with a forecast electricity capacity margin of 11.7%, which is up from 10.3% last winter.

UK gas demand is forecast to be lower this winter at 46.6 billion cubic meters, versus actual demand of over 54 billion cubic meters last winter. And bearing in mind the major storms we experienced in the US last year and the extremely cold temperatures in the UK, we have, as we always do reviewed our procedures and are well prepared for the coming period.

Now, before I turn to the detail, let me outline four strategic highlights for this half. Firstly, we've decided to exercise the options on our remaining share in Cadent. Second, we've completed the full refresh of rates for our US distribution businesses. Third, we started a significant cost efficiency program in the UK to become a leaner, more agile business, and lastly on the growth front, we've taken the final investment decision on our Viking interconnector to Denmark.

All of these are significant milestones and I'm really pleased with the progress that we've made. I'll provide you with more detail on each of these achievements over the course of this morning.

On Cadent, this morning we announced that we decided to exercise our option on our remaining 39% share, which will be complete at the end of June 2019. This will complete the process of exiting gas distribution in the UK, we've realized significant value for our shareholders with GBP4 billion return last year, and reshaped our portfolio toward higher growth.

In May, we settled the cash proceeds of GBP2 billion, would be reinvested in the business to support the strong organic growth we expect over the medium term. As a result, the performance of Cadent has been classified as discontinued and is no longer included in our underlying numbers.

Now to (ph) our operational performance and the significant investments we're making. In the US, we've invested $1.5 billion so far this year, and (ph) in the US is made up of a large number of small projects. But we also continue to develop larger ones, such as the almost $80 million asset replacement substation in Providence Rhode Island. We're in the final month of this project, which involves transferring and energizing circuits from the old substation to the new one.

The new substation is one of a number of works that we're extremely proud of, not only does this increase the reliability for our customers, but it also supports further economic development in Providence, it enhances safety and it helps to keep customer bills low.

Moving to our regulatory progress in the US. As I've just mentioned, we've also completed the full refresh of rates for all of our distribution businesses. With Rhode Island, gas and electric and Massachusetts Gas being agreed in the last two months, and I'll expand on these shortly.

This full refresh is a significant milestone and provides us with a solid foundation from which to deliver strong returns and earnings as well as fund the increasing capital investment plans that we have. We've also progressed regulatory discussions on the phasing of bill reductions for the lower US tax rates as well as for the return of the deferred tax credit.

Andy will cover both of these in more detail in a moment. Looking at the new rates in Rhode Island, we agreed a three-year rate plan from September 2018. This allowed a 9.3% return on equity with an annual CapEx of $240 million. We also have new performance incentive mechanisms, which will provide the opportunity to earn between 7 basis points and 20 basis points of additional returns.

And for Massachusetts Gas, the order provides a base return on equity of 9.5% and annual CapEx of $413 million. This will be invested in modernizing our network to ensure the highest levels of safety and reliability and connecting new gas customers. New rates were effective from the 1st of October.

Now, let me update you on our union negotiations in Massachusetts. Many of you will be aware that we are currently in dispute with two of our gas unions over terms and conditions. These two unions represent 1,250 workers from our US workforce of over 16,000.

Particular issues around employee healthcare contributions as well as proposals bring future employees into a defined contribution pension scheme, rather than a defined benefit plan. Over the last few years, we have agreed very similar terms with 16 other unions and therefore we are hopeful that we can reach an agreement with these two unions very soon.

The negotiations have been ongoing for several months and as no agreement was reached before the existing contracts expired, we implemented our contingency workforce plans from the end of June. This includes the employment of fully trained contractors, these are workers from other parts of our business, increased supervision to ensure safe operation, and the establishment of the temporary work sites.

These activities have ensured that during the work stoppage, we've continued to successfully provide the service our customers expect including completing almost 40,000 individual jobs. As a consequence of the work stoppage, we've incurred additional costs of GBP97 million which are classified as exceptional.

Now to the UK. Operationally, both our electricity and gas transmission business has continued to deliver good levels of performance. For example, in our Electricity Transmission business, RIIO-T1 includes allowances and targets for maintaining the health of our assets. This involves the replacement and refurbishment of our primary assets to improve their condition and decrease the level of network risk.

I'm pleased that we're forecasting (ph) all of our targets, we've done this at a cost below our allowances which is delivering real value for our customers and our shareholders.

And in Gas Transmission, we're making good progress on Feeder 9 with the tunnelling under the Humber Estuary.

This is an important project to safeguard the security of supply for a pipeline that transports 20% of the UK's annual gas needs. To-date, the tunnel boring machine has completed over 1,700 meters of the almost 5,000 meter tunnel and we remain on track for commissioning in the autumn of 2020.

And as many of you heard at our Investor Day in September, we are also responding to the rapid changes we're seeing in our industry, embracing new opportunities and technologies to better meet the needs of our customers and also create value for all of our stakeholders.

In this context, we focus very hard on our cost base to ensure that our UK business is as efficient as possible and well positioned for the future. An extensive program is under way that is expected to deliver four key outcomes. A flatter, leaner organization; further economies of scale; simplified processes and ways of working, and more efficient use of IT and back office activities.

It's these outcomes that will ensure that we'll become a more agile organization equipped to be even more responsive to our customers. We expect to deliver GBP100 million of OpEx savings from 2021, and Andy will take you through the financial impact of this in more detail shortly.

Now, to the regulatory developments in the UK. There have been three areas of focus in the period: Hinkley-Seabank, RIIO-T1 reopeners and most importantly, the RIIO-2 Framework, which I'll cover later. On Hinkley, we previously communicated, Ofgem's final decision was broadly consistent with its initial view.

As a consequence, we will consider all options when Ofgem introduce changes to our license at the end of this year or the beginning of 2019. Secondly, in September, Ofgem reached a final decision of funding for certain projects and programs of work, which were subject to reopeners as we entered into RIIO-T1. These included additional allowances for physical and cyber security, investments in our Gas Transmission compressor fleet to meet the emission -- European emission standards.

Asset health costs for the Feeder 9 pipleline and funding for visual impact provision scheme in Dorset. We were pleased that Ofgem allowed the necessary funding for the investments that we need to make on physical and cyber security.

However, we were disappointed not to get the funding for the compressor works. As a consequence, we are now reviewing our approach to meeting the required emission standards, including with its progress with the second units of Peterborough and Huntingdon in RIIO-T1, and deferring the entire -- entirely the workers in Fergus and Hatton. On Feeder 9, Ofgem changed their initial decision on the needs case, awarding us GBP111 million to continue this project.

And the funding for the Dorset project of GBP116 million is a great example of listening to our stakeholders want and designing solutions to meet that in the most efficient way.

And finally, turning to National Grid ventures on our property business, we continue to make good progress on the three interconnectors we have under construction. All three, Nemo to Belgium, North Sea link to Norway and IFA2 to France remained on track with some important milestones over the last three months.

North Sea link has completed its first two cable laying campaigns with 260 kilometres buried under the sea so far. We made good progress in IFA2 and on Nemo, energization and station testing is under way with full testing starting in December and with the expected commissioning being before the end of March, next year.

Our property business has also continued to perform well. I'm pleased that in October, Hammersmith and Fulham Council gave initial planning approval for our Fulham development. Fulham is a 17-acre site with over 1,800 residential units, 35% of which will be affordable homes. This was an important step in the transfer of the site into the St William joint venture and this year, subject to final approval by the Mayor of London.

So in summary, I'm pleased to report we made solid progress in the period and we are well set for the remainder of this year. We've delivered against the priorities we set and I expect further progress in the second half as we continue to evolve the group to the changing needs of our industry. More on this shortly, but first, let me hand over to Andy to discuss the financial performance in more detail.

Andy Agg -- Interim Chief Financial Officer

Thank you, John and good morning everybody. Before I start, I'd like to highlight that we are presenting this morning, the underlying results for our continuing business, excluding timing and excluding also the results of Cadent in both 2017-2018 and 2018-2019.

As John mentioned, underlying operating profits reduced by GBP79 million at constant currency to GBP1.3 billion. Operating profit benefited from additional revenue with new rates in our New York jurisdiction and from the settlement of legal proceedings in other activities.

However, this was more than offset by the expected return of Avonmouth revenues in Gas Transmission, the impact of US tax reform, and higher storm costs. As you know, the impact of tax reform at the operating profit level is offset through a lower tax charge. This, together with a lower interest charge and a reduced share count due to the return of the gas distribution proceeds last year, contributed to a 6% increase in earnings per share to GBP0.197.

This performance excludes two exceptional charges that we've taken during the first half related to the contingency workforce in Massachusetts and to the efficiency program in our UK business, which John has covered. Capital investment was GBP2.1 billion, 7% higher at constant currency. This reflects increased investments in our US regulated business as well as the ramp-up of investments on our interconnected projects.

Our balance sheet allows us to efficiently fund this growth, and overall, we are on track to deliver good returns and value-added for the year with the interim dividend increased in line with our policy.

Now, let me walk you through the performance of each of our segments. Underlying operating profit for the electricity transmission business was GBP556 million, up 3% compared to the first six months of last year, reflecting higher regulator revenues.

We invested GBP462 million on the reinforcement of our networks and on new connections. This was GBP53 million lower than last half year, reflecting the completion of a number of larger non-load related projects. Looking ahead, investment will increase next year as we begin work on undergrounding of overhead lines in Dorset and on delivering increased network output measures.

For the full-year, we expect to deliver stronger totex outperformance, in part due to the increased allowances available to us for data centers and for cyber security from the September reopener filings. The contribution from other incentives and legacy allowances will be broadly consistent with the prior year, and as a result, we expect outperformance above the 200 basis point to 300 basis point range.

In Gas Transmission, where operational performance remains on track, underlying operating profit was GBP91 million. This is GBP53 million lower, primarily reflecting the expected return of Avonmouth pipeline revenues. As a reminder, this is one of the vagaries of the way the RIIO Framework flows through our IFRS results. These adjustments will have no impacts on our returns as the allowances have already been excluded from these calculations.

Gas Transmission capital investments was GBP153 million broadly in line with the prior period. This included investments in Feeder 9, the Humber pipeline replacement project and continued investment in our asset health program. The September reopener filings resulted in reduced allowances for the upgrade of our compressor fleet and for Feeder 9.

These lower allowances will be reflected in the current year return on equity, which we now expect to be slightly lower than the allowed level of 10%. The allowance update (ph) will flow through next year's IFRS performance with the 2019-2020, full-year negative MOD adjustment of approximately GBP80 million.

Turning now to our UK cost efficiency program. We continue to look hard at our cost base to ensure it's appropriate for the remainder of RIIO-T1 and for the future. We've recognized exceptional cost of GBP127 million in the first half. Approximately half of this will be a cash outflow of this year with the remainder over the next two years.

This program is designed to generate OpEx savings of around GBP50 million next year and at least GBP100 million per year from fiscal '21 onwards, with cash flow benefits in each of the next two years. We continue to expect to deliver outperformance of 200 basis points to 300 basis points this year and in each of the remaining years of RIIO-T1.

In our US regulated businesses, underlying operating profit was GBP431 million, GBP95 million lower than last year. This reflects the benefit of new rate case outcomes, offset by the impact of US tax reform, which as you know is offset on the tax line together with a GBP56 million increase in storm costs.

The majority of these will be recoverable through our existing regulatory mechanisms. The higher than usual level of storm costs in the first half means that this year's profitability is more weighted toward the second half than usual. We expect to offset any further headwinds of tax reform, cost inflation and IFRS 15 over the remainder of the year, driven by the natural seasonality of the business and contribution from new rates coming into effect.

As John has already mentioned, we had to implement contingency workforce plans from the end of June this year in our Massachusetts Gas business. Incremental cost of GBP97 million have been recognized as an exceptional item in the first half of this year. Capital investment was $1.5 billion, $100 million higher. This included slightly lower capital investment in Massachusetts Gas business, as we focus on the implementation of our contingency workforce plans.

Excluding the Massachusetts work contingency costs, returns for the US are expected to be at a similar level to the prior year.

Turning now to the latest on US tax reform. As we've previously discussed, the reduction in the federal tax rate from 35% to 21% will be significantly beneficial to our customers. It will be economically neutral for utilities, but will reduce our cash flows in the near-term. There are three areas that I'd like to update you on this morning.

Firstly, we now have clarity on bill reductions for all of our operating companies, including updates for KEDNY, KEDLI and Massachusetts Electric, since we last updated you in May. Secondly, the return of the $2.2 billion deferred tax balance. This will now be returned over an average period of up to 50 years significantly longer than the initial view of 20 years to 30 years.

And thirdly, rate base growth will increase due to the lower build up of deferred tax into the future, largely as a result of bonus depreciation ending for utilities. Over time, this will be beneficial to both operating profit and cash flow.

So now let me discuss how these items collectively flow through the income statement over the next couple of years. 2018-'19, will see a partial impact on operating profit of $210 million. This is more than offset by the full year effects of the lower tax charge, which will therefore represent a small benefit to earnings. 2019-'20 will have an additional impact to operating profit of around $110 million, that would not be a significant impact on year (ph) on earnings as the overall operating profit impacts will then be offset by the lower tax rate.

In National Grid Ventures, our existing interconnectors, Grain LNG and Metering businesses continue to perform well, delivering similar levels of profitability to the prior year. Capital investments increased to GBP212 million, compared to GBP180 million last year. As John mentioned, we've ramped up cable laying and onshore construction on North Sea Link and IFA2.

This was partially offset by lower investments at Nemo, as the cable laying has now been completed. Other activities include our St William joint venture with Berkeley Homes, our residual property business and certain central costs. At the half year, operating profit from the property business was GBP38 million, GBP15 million lower than last year.

For the full year, the majority of the expected property profits relate to the Fulham transaction, which is forecast to take place in the second half. Corporate Center and other contributed GBP38 million at the half-year point, including GBP94 million of benefit from legal settlements to recover costs associated with the US systems implementation.

Finance costs were GBP494 million, down 9%. We benefited by nearly GBP50 million (ph) including lower pension interest and a higher rates of capitalized interest, offsetting the underlying increase from the growth in net debt. The second half interest charge will be higher, as some of the benefits will lessen in the second half.

Our effective interest rates decreased by 30 basis points to 4.4%. The underlying effective tax rate before joint ventures was 19.3%, down 360 basis points from last year, primarily due to the lower US tax rate. As I mentioned earlier, the lower tax charge, interest benefit and reduced share counts helped EPS increase to GBP0.197, GBP0.012 higher than last year.

Operating cash flow was GBP1.9 billion broadly in line with last year. Net debt increased by GBP2.6 billion to GBP25.6 billion. The increase includes ongoing business requirements of GBP1.2 billion and GBP1.4 billion of exchange rate impacts, as the dollar has strengthened since the year-end, it was $1.4 to the pound at 31st of March.

As we indicated in May, for the full year, and excluding the impact of exchange rates, we continue to expect ongoing business requirements to increase net debt for the year by approximately GBP2.5 billion.

In the first half of the year, we raised over GBP1 billion of new long-term financing, all for our US business. This included a $350 million, 10-year bonds in our Rhode Island business, which priced with a coupon of 3.9%. Securing funding ahead of the new rate case coming into effect in September.

Consistent with our policy, we will pay an interim dividend of GBP0.1608 per share, representing 35% of last year's total. Scrip uptake on the full-year dividend was 31% and we'll again be offering the scrip option at the half year. As we stated in May, we don't plan to buy back the scrip shares this year given the very strong asset growth levels we're seeing.

Turning now to our focus on the efficient funding of our growth. Over the last five years, our asset portfolio has grown by 5% on average, adjusting for the gas distribution disposal. We maintained an A minus credit rating for the Group and we're gearing steady at around 65% at constant currency. This has enabled us to raise debt cost effectively with access to a wide range of debt sources.

As you know, with the combination of US organic growth and interconnector investments, our portfolio is enjoying particularly strong asset growth. We are efficiently funding this growth through a mix of debt internally generated cash flows and by utilizing the scrip option.

In addition, we'll be retaining the proceeds from the disposal of our remaining 39% share in Cadent, for reinvestment in our business. Putting this all together with a strong CapEx visibility that we have, we expect gearing to be around the 65% level by 2021 on a constant currency basis.

For this coming year, at year-end, we expect gearing to be a couple of percentage points higher as we won't be receiving the Cadent proceeds until around June 2019. From 2022 onwards, the majority of our in-flight interconnector CapEx will be complete and the EBITDA generated from these businesses will benefit the Group from that point forward.

Turning now to look at our expectations for the full year. Compared to our year-end technical guidance, there are three main updates. Firstly in the US regulated business, we've incurred higher than anticipated storm costs in the first half. So full year US profitability is not likely be slightly lower than last year. This will have no significant impact on ROE, as the majority of these costs are recoverable under our regulatory mechanisms.

Secondly, we've recognized legal settlements of GBP94 million in our other activity segment, which will benefit our full year performance. And finally, we expect the interest charge for the second half of the year to be slightly higher, as some of the benefits in the first half are not repeated.

So, in summary, our performance remains on track and we expect a net benefit of the full year from the items I've just described. Our capital investment has increased supporting asset growth of at least 7% in the near-term, and our financial position remains strong.

And with that, I'll hand you back to John.

John Pettigrew -- Chief Executive Officer

So thank you, Andy. As you know, National Grid is a long-term business. Each step we take in the near-term is focused on creating long-term value for all of our stakeholders. So let me now turn to our major priorities for the second half, looking at them through the lens of the full long-term drivers of success for National Grid.

To remind you, these are: putting our customers first; optimizing the performance of our core business; seeking our growth opportunities in a disciplined way and; evolving the business for the future. National Grid has a vital role to play in enabling customers to benefit from the changes in our industry.

The Energy transition and wider technology advancements mean that we're better able to give our customers a more cost-effective service. I strongly believe the performance optimization is central to our role to meet the changing needs of our customers.

For a regulated utility like National Grid, a key element to maximize value for customers is stable and predictable regulatory frameworks. The incentivized optimization go through innovation and efficiency. And regulatory frameworks are of course a major area of focus for us in the UK, we're in discussion with Ofgem on the (Technical difficulty) and on competition. On RIIO-T2, the framework decision document that was published at the end of July, provides a solid foundation for this.

Ofgem confirmed the key principles of RIIO-T1 will remain. That is, incentives, innovation and output based regulation. There are however many areas that we will continue to discuss with Ofgem, including achieving a fair return on equity, that's reflective of the level of risk in transmission networks. Ofgem will publish their sector specific consultation in December, which will provide further detail on the cost to capital, incentives, outputs and other financial parameters for our transmission businesses.

This concentration will conclude in the second quarter of calendar 2019. In the meantime, we'll continue to work with our new stakeholder panels to better understand customer expectations, which will help frame our response to Ofgem's consultation early in next year. We will of course provide you with updates on this consultation and the wider RIIO-T2 process as it progresses to 2021.

The secondary of UK regulatory focus for us is the proposed introduction of increased competition. We support principle of onshore competition and we'll work with Ofgem to develop a framework that delivers value both for customers and shareholders. We'll be responding to the consultation on the special purpose vehicle model shortly, where together with the competition proxy model, Ofgem plans to introduce the license modifications in the next 6 months.

In our view, these are complex models that don't present a clear customer benefit case and we'll continue to engage with Ofgem on these. We believe that our long-term track record of efficient delivery puts us in a strong position to win in a competitive environment. We competitively tender around 90% of our costs, including both equipment and construction works.

However, this doesn't mean that we are complacent. We'll continue to look for new ways to reduce our costs overall, as we are doing with the cost efficiency program that we described earlier today.

Let me now turn to the regulatory frameworks in the US, where we have a number of near-term priorities. With the completion of the refresh of rates for our distribution companies, we now have rates that allow us to invest appropriately to meet safety and reliability targets. For our next filings, we are proposing to evolve the regulatory frameworks, we'll do this while providing more options for regulators to meet policy outcomes on decarbonization and changing customer needs.

An example of this will be Massachusetts Electric where we will be filing later this month. As part of this filing, we will be proposing a five-year forward-looking incentive based framework. In addition, although currently small, I'm pleased that incentivization is now a regulatory feature of many of our rate plans and when we aim to expand further into the future.

We're also continuing to adapt our investment response to our customers' requirements and to anticipate their future needs. This focus is increasingly at the heart of every filing that we make. And our forthcoming Massachusetts Electric filing will include a request to significantly expand the rollout of electric vehicle charging infrastructure. This can provide over 17,000 new charging points across the state.

We're also looking at the filing in New York for advanced metering infrastructure implementation, which follows a collaborative stakeholder process. If approved, we'll replace approximately 1.7 million existing electric and 640,000 gas metering points. This would represent a significant investment of over $650 million over six years, and we are planning to submit this filing later this month.

And finally, US regulatory priorities, we've also started reviewing the next steps for KEDNY and KEDLI, when the current three year plan concludes at end of calendar 2019. Now let me spend a few moments on another key priority for us, our Interconnectors projects.

As I said at the start of the presentation, one of the strategic highlights for us in the last 6 months was the final investment decision of Viking Link, subject to the resolution of a number of minor issues. As a reminder, this link is a 760 kilometer, 1.4 gigawatt joint venture with a Danish transmission owner.

Our investment will be GBP850 million and when it goes live in 2023, it's expected to eventually contribute around GBP100 million of EBITDA, as well as imports over 80% clean energy. In the next 6 months, our priority will be to progress with Viking as well as the continued efficient delivery of our other three interconnected projects under construction. These represent a combined investment of GBP2.1 billion through to 2023.

This is a valuable growth driver for the Group contributing an expected GBP250 million of EBITDA, when they're fully operational of the mid 2020s. For our core regulator networks, given the age of our assets in both the US and in the UK, asset health investment for safety and reliability remains a key growth driver.

In the US, new customer focused investment drivers such as the electric vehicle and metering opportunities I've just discussed provide us with further potential in the medium term. And in the UK, as I mentioned a few moments ago, we'll be working closely with the stakeholder panels as part of the RIIO-T2 process to make sure that we are planning the right investments to meet the customer needs from 2021.

And this will be a key part of our work over the next 6 months. So our committed interconnector CapEx, clarity on investment under RIIO-T1 and the completion of our rate filing refresh in the US, provides significant visibility for group capital investment through to 2021 and beyond.

This all combine to give us high-quality asset growth of at least 7% for the next 2 years and at the top end of our 5% to 7% range in the medium term. And with the final divestment of UK gas distribution, we now have a portfolio of businesses with high-quality growth for the future, supporting our investment proposition of growth and income for shareholders.

Looking across the Group, one of our key priorities is to deliver the capital plans, we've been funded for as efficiently as possible. And we'll continue to do this in the second half of this year.

Beyond our core regulated networks and interconnector investments, we are also developing other opportunities. In particular, we are investing in opportunities arising from the growth in large scale renewable generation. We have a small, but growing portfolio of renewables with almost 30 megawatts of installed solar and storage in the US and more under construction.

As I've mentioned at the year-end results, the long-term contracted nature of regulatory underpinning makes renewables well suited to the risk-reward profile of our portfolio. This is because they leverage many of our core capabilities in engineering and project development, asset management and financing.

For these reasons, in the coming months, we'll continue to look for opportunities in the rapidly expanding US renewable space. We're also progressing wind generation opportunities. These include deepwater wind and National Grid Ventures partner that was awarded contracts to install 400 megawatts by Rhode Island and 200 megawatts by Connecticut. We'll be advising Deepwater on the subsea cable construction and have options to purchase the subsea links when commissioned.

So overall, we're well positioned to take advantage of the opportunities that arise from the ongoing energy transition. So in summary, we've delivered solid financial performance in the first half with strong strategic progress, while continuing to grow the portfolio. We are influencing the evolution of our regulatory frameworks in both the US and in the UK and significant activities under way to make us a more agile organization.

We'll continue to develop a disciplined approach to the many growth opportunities we have across the group and coupled with efficient delivery, this will create long-term value for customers and shareholders.

Now Andy, Nicola and I will be happy to take any of your questions.

Questions and Answers:

Chris Laybutt -- JPMorgan -- Analyst

Good morning. Christopher Laybutt, JP Morgan. Two questions, please. The first, there was some headlines on Bloomberg about your dividend this morning. Just wondering whether you could provide some clarification around the dividend and RIIO-T2 and has there been any changes to the policy or is the policy unchanged, and secondly, just in terms of government consultations that are currently under way in relation to UK regulation and regulated assets, one recently launched by the Chancellor, how do you think these might impact your business? And is there any relevance for RIIO-T2?

John Pettigrew -- Chief Executive Officer

In terms of dividend policy, the policy remains absolutely the same, which is we look to grow the dividend, but at least from the foreseeable future, we've always recognized the importance of sustainability of dividend to our shareholders and as a business we always look to try and work through rate filings and price controls in delivering our dividend.

As I said, in May, it's clearly underpinned by a sensible set of regulatory assumptions and that remains the same as I said in May. In terms of the consultation, actually there are two concentrations at the moment on regulation more broadly. So there was the one announcement by the Chancellor last week at the budget which was looking specifically at innovation and then there was one launch that's been undertaken by the NIC (ph) looking more broadly at regulation and I think our position is that we welcome those consultations and reviews from an innovation perspective.

I think there is an opportunity potentially to better align regulatory frameworks to innovation, particularly where it's a very long-term, and some of the five-year price control going forward quite often innovation takes much longer to deliver value for customers. So there was an opportunity there. And in the broader regulatory consultation, we'll be looking to see how we can contribute to that, as I said, we welcome it, I think there potentially are opportunities to think about the duties that the economic regulators have in the context of a changing energy landscape going forward particularly around things like encouraging infrastructure investments and meeting energy policy target.

Unidentified Participant -- -- Analyst

(inaudible). If I can ask some three questions. On Nemo, is there any scope and do you have any incentives to make that available sooner rather than later and help the volumes out. Secondly, on US tax reform, you've given us some helpful views on earnings.

Can you just give us an idea what that means for cash flow in the same sort of basis? And then finally, and I think I asked this question six months ago, can you just update on your thinking on Brexit and the impact that will have in your business?

John Pettigrew -- Chief Executive Officer

Why don't I take the first and the third and Andy take the second? So in terms of Nemo, I mean, simpler terms we're incentivized to complete it as quickly as possible. Actually, we're in the last phases of the construction of Nemo, so as I said in my speech we're just about starting the testing process that will continue if they go to December, and we're looking to commission by March. So there is a very sort of set playbook you have to go through to the commission and interconnector, we are very used to that given the work we've done in the past and we'll be doing it as quickly as possible. But at the moment our view is that it will be done by March.

In terms of Brexit, I think you asked it, the opposition is changed particularly in that as you'd expect with a company like National Grid, we work very closely with government and with regulators to make sure that we are considering all possible scenarios around Brexit.

Our focus has been as the system operator, considering security (ph) of supply, and we -- our position is, we don't see any significant issues at this point. We obviously look at it from an interconnector perspective and we believe the fundamentals of interconnection don't change in the Brexit.

The internal energy market is the goal standard, but if it's not the internal energy market, we know that we can trade on the interconnector effectively going forward. And then third area like any business we are considering our supply chain and making sure that we got the appropriate strategic space in place.

So I think we're well set in terms of considering the scenarios but we continue to work close with government and Ofgem to make sure that we understand the fuller landscape. Andy?

Andy Agg -- Interim Chief Financial Officer

Thanks. So on tax reform. The figures I mentioned in my speech, the $210 million this year, The additional $110 million to make a $320 million next year will impact cash, as we said in the short term because of that, the net operating loss position from a tax position whereas the impacts flow through to cash, and when we get to be in a cash tax paying position in the early to mid-20s we do expect the cash to neutralize out.

Deepa Venkateswaran -- Bernstein -- Analyst

Thank you. This is Deepa from Bernstein. I have three questions. So firstly on your UK cost program that you've launched. It's very close to RIIO-T2, so isn't it possible that all the benefits of this will be entirely clawed back as you start RIIO-T2. So I was just wondering about the timing.

Secondly on -- following from the previous question actually on the Viking FID that you've just taken, what are your assumptions about the CO2 differentials between the continent and the UK and the GBP100 million of EBITDA that you've given? Is that kind of robust even if the UK had, I don't know a total carbon price of maybe GBP24 and if the continent had something maybe substantially different from that and so, what's that?

And the third one is just on the Massachusetts issue that you have with the unions, it seems like you're paying around GBP33 million per month for this temporary disruption. How long do you expect this to go on and is there something in the second half as well that you're expecting? Thanks.

John Pettigrew -- Chief Executive Officer

So let me start with the UK efficiency program. So I think if you go back to 2013, we've always set out National Grid to deliver as efficiently as possible, recognizing the importance of affordability and value for money for customers. And in the first five years at RIIO, I think we'll be very successful in that as you know, we've returned GBP540 million to customers and currently transmission represents about less than 3% of the bill.

But in the context of, you can never rest on your laurels, we're not complacent and with the changes that have gone on in the external environment and the changing demands that we see of our customers, we think it's perfect timing actually to make sure that we have an organization that not only can deliver over the next couple of years, that remains a RIIO-T1 but also there it positions us really well for RIIO-T2.

So that's what we're doing, it's really a reflection and we're seeing very different needs from our customers from what they were back in 2013, and we think it's important to address that. We also think we got a duty to make sure that we're driving value for our customers.

As Andy said, the program itself will deliver about GBP50 million of OpEx reductions next year and GBP100 million in 2021. We think that will position us very nicely in our engagement with stakeholders as we think about RIIO-T2 as well.

Andy Agg -- Interim Chief Financial Officer

In terms of Viking, I mean, in Viking we do a whole host of scenarios in terms of what the market might look like, so it's not just tax in terms of CO2. We also have to model for things like the arbitrage and what's the generation backgrounds can be looking like in Europe as well as in the UK.

So we're comfortable, the estimate we provided today is a central estimate based on all those different modeling in scenario that we've done.

So we do take into account that there could be changes in tax, but similarly, there are going to be changes in the generation back on both in the UK and the US and therefore the arbitrage which really drives the value for the interconnectors, will also can potentially vary.

So we do a whole host of scenario testing and what we presented today is a central range, which we think is probably, if not our best view (ph).

John Pettigrew -- Chief Executive Officer

In terms of Massachusetts and the work stoppage, let me just take you back and then I'll talk about the costs. So in terms of the work stoppage, we have been in negotiations with these two unions for a while, when we got to the end of the contract in June, we were in a position where unfortunately we hadn't agreed terms and conditions.

Impacts about (Technical Difficulty) people in our US business and we've agreed to these terms with probably 16 other unions. The two areas of split (ph) are OK and paying a small excess on national healthcare claims and pensions and fundamentally that's about for future employees moving from a DB scheme to DC scheme. The position is in order to be able to deliver a safe and reliable network, we need to bring contractors in, we need to be sure we have the right supervision, so we can deliver a safe and reliant network to our customers and as I said in the speech, we've done (ph) about 40,000 jobs so far.

The cost of that in the half year is the GBP97 million that we've set out. We are hopeful that we will get to a resolution in a reasonably short time's course, we are in active dialog with the unions, as we speak today.

James Brand -- Deutsche Bank -- Analyst

Hi. James Brand from Deutsche Bank, I also have three questions. The first is also on the cost cutting and the context that within the context against your outperformance targets in the UK of 2% to 3% for the rest of this regulatory period, and obviously, at the moment, you're around the 2% mark.

So, not to ask you for a clear guidance on kind of specific numbers, but if there is any context you can give us around the cost cutting there, whether that's to hold the 2% level so you can be within that range or maybe hopefully push up the level of outperformance over the last couple of years in the period.

And then second question is also linked to that is whether, when you calculate the totex outperformance, do you take into account the restructuring costs or do you strip those out as exceptionals?

And then thirdly, also again on Massachusetts, you suggested from your comments that you had gone through this process in many states already, but I'm just wondering whether there were many or many unions already -- whether there were many unions, why you in the future would (Technical difficulty) kinds of discussions or whether you're most of the way through that process across the US? Thanks.

John Pettigrew -- Chief Executive Officer

I'll take the first and the third and then Andy will take the second. In terms of the efficiency program, our intention is to really underpin the 200 basis points to 300 basis points of outperformance that we committed to. So that's what our guidance says, we're not going to point any more specifically on that.

What we have set out is we're expecting it to deliver around GBP50 million of benefit next year and GBP100 million per annum from 2021. Obviously, that gets shared with customers quite rightly as part of our totex mechanism, but it will help to underpin 200 basis points to 300 basis points of commitment that we've made, and as I said earlier, it will also put us in a great position to move forward into RIIO-T2 as well.

In terms of the unions, as I said, the vast majority of the unions that we deal within the US over the last few years, we have moved to these terms and conditions, there are few local unions left that we will -- as those contracts expire come to address the similar issues, but the vast majority have actually been dealt with and the specific focus is on these two unions in Massachusetts at the moment. Andy?

Andy Agg -- Interim Chief Financial Officer

Yes, thanks. And on the restructuring costs, as John said, in the same way that the benefits of the efficiency program will flow through totex be shared with consumers. The cash spend in terms of achieving those efficiencies will also go through the totex mechanism and be shared. So north of GBP127 million the accounting entry (ph) but as we spend the cash against that flows through totex.

Fraser McLaren -- Bank of America Merrill Lynch -- Analyst

Hey, good morning. It's Fraser McLaren from Merrill Lynch. I also have three questions. So first of all, the GBP94 million US legal recoveries, is there any risk that the US regulators try to nab any of that?

Secondly, could you give us a bit more context please on the US renewables ambition and what might that look like? Is it likely to be incremental investment or larger acquisitions? And then just finally again on the Massachusetts union issue, could you help us to try, could you help us please to get the GBP97 million cost so far into perspective in terms of what these items are worth to you in Massachusetts?

John Pettigrew -- Chief Executive Officer

So let's start with the legal settlement. So this relates to IS systems in the past as you know, which we incur those costs, and a large part of those costs were incurred by shareholders. So there is no expectation that regulators will pull back on the GBP94 million, it will stay with National Grid.

In terms of the renewables ambition, as I said, back in May. I mean, and as I've said today. We do see the rapid growth in the renewables in the US as an opportunity, it allows us to use a lot of the capabilities that we have in National Grid.

And over the last few years, we've built up a small portfolio of both solar and storage and we continue to, so we have about 40-odd megawatts in construction with the battery -- a large battery on Nantucket island as well as some developments with next year on Long Island. So we've been building up the capability.

Our approach to it will be exactly the same as our approach to all investments, which is we take a disciplined approach and if we see an opportunity on a risk adjusted basis that delivers good returns for our investors, then we will look at it very carefully and take it forward.

In terms of acquisitions, opposition is always been saying which is, there may well be small or modest acquisitions, but opposition acquisitions as we got very strong growth organically, we, of course look at an opportunity, but only if it was compelling to our shareholders and customers will we take it forward.

In terms of GBP97 million so, I wasn't quite sure of the context the question was?

Fraser McLaren -- Bank of America Merrill Lynch -- Analyst

Yes, I'm just wondering if you were to give the unions what they want, how much would it actually cost?

John Pettigrew -- Chief Executive Officer

Yes. So I think the most important point to bear in mind here is that, so the dispute is very narrow and in terms of terms and conditions, but it is important from a US regulatory perspective, that we are mindful of fact that customers ultimately pay for the costs of the work that we do, including pensions and healthcare.

And the fact that we have agreed this with 16 unions, it's important that we protect that value as well. So both protecting that value and ensuring that we are fulfilling our duties to make sure that we're delivering value for money for customers is the reason why this is really important.

Verity Mitchell -- HSBC -- Analyst

Verity Mitchell from HSBC. I've got three questions, the first one is on gas transmission, you've got an extra GBP80 million MOD payment for 2020. Is that do we know about that already or is that an addition to the MOD adjustments, we had already seen.

And secondly, sorry, going back to Massachusetts -- can you just confirm, I mean there's been lots of press speculation and are you actually not doing any work at the moment, do you expect emergency work? And in terms of your Mass Electric filing, is there not going to be some reputational damage from this irrespective of the costs involved?

John Pettigrew -- Chief Executive Officer

So why don't I take the second and I'll (inaudible) do the first one. Sorry, just repeat the second one, what's it, I just want to make sure to get the context right.

Verity Mitchell -- HSBC -- Analyst

The second one was, you already -- I understand that you really doing emergency work at the moment you are actually fulfilling your normal business, is that actually true and what kind of reputational risk do you face with that? Given that you're just about to go into rates for Mass electric?

John Pettigrew -- Chief Executive Officer

Yes. So let me just put that into context. So, some of you would be aware actually that just over a month ago, there was quite a significant safety incident in Massachusetts with Columbia Gas, it wasn't part of National Grid, that resulted in a number of explosions, some injuries in a single facility, as well, so it was a very serious incident in Massachusetts.

Quite rightly resulted in the DPU, the regulator in Massachusetts indicating they're going to do a safety audit across Massachusetts and we welcome that, and we'll be working with them on that.

Subsequent to that, we had a relatively minor event in Woburn in Massachusetts, which impacts about 300 customers, the pipeline wasn't damaged, customers -- there was no damage to customer property and restored the customers within 24 hours.

But in that context, the Massachusetts DPU suggested National Grid that our focus should be in the short term on emergency work, mandatory work and compliance work, and effectively placing a moratorium and work outside of that. In Massachusetts, actually there are always moratoriums during the winter.

So tenants themselves places moratoriums to avoid too much disruption, particularly given the harsh nature of it to effectively moratoriums has been brought forward. We are continuing to work with the DPU. As you know, our focus as a company is always been on delivering world-class safety and it continues to be on our performance during the work stoppage has been exceptional in that regard.

But we will work with DPU to understand what their concerns and issues are. The overall impact in terms of the capital investment plan as you've seen in the first half were about $100 million up. Our expectation for the capital investment plan for the US is that we're going to be at similar to last year's levels about GBP3.3 billion, maybe slightly lower.

Massachusetts gas represents less than 20% of our CapEx plans. So we're working with the DPU and making sure that we address any issues. In terms of the filings, I think, we have a very constructive relationship with the DPU, more broadly, I think you've seen that with the most recent Massachusetts gas rate case where we sell them a three-year rate case with a 9.5% return and an increase in the capital investments. So I think we continue to work very closely with the DPU, and we have a very constructive relationship.

Andy Agg -- Interim Chief Financial Officer

Yes. And in terms of the proposed MOD adjustment for Gas Transmission, I mentioned the GBP80 million in my speech, that's our latest estimate that we expect to go through the MOD adjustments for '19, '20. But it includes a number of things, includes our estimate initially from the reopener impact and that will get confirmed when the MOD adjustment process runs by the end of this month.

Nick Ashworth -- Morgan Stanley -- Analyst

Hi, it's Nick Ashworth of Morgan Stanley. Just a couple of numbers questions just to check. On the cost efficiency program in the UK, you said it's GBP127 million in the first half. I think it also says in the statement that it will be a little bit higher in the full year. Do you know where that will go to for the full-year?

Secondly, can I just get an update on how much is actually invested so far in the interconnectors? And then finally, thinking about growth in the future, you talked a little bit about renewables, in the US as well, I know there's potentially going with transmission for 1,000 (ph) and some of the projects, which have come up for bidding that.

Can you talk a little bit about that landscape? I know all the focus grid -- it feels like all the focus has been on distribution over the last few years, but I know there are more opportunities coming for transmission and given the business over here and the small business you have over there, lots of opportunities are there for transmission quite over the next few years in the US.

John Pettigrew -- Chief Executive Officer

Okay, so I'll give Andrew the numbers one, the first one. In terms of investment of the interconnectors, so we've got the four under constructions, the name not yet finished, we've spent to-date around about GBP500 million of the GBP2.1 billion that are set out.

So we've still got significant investments to go between now and 2023. In terms of the US landscape, it continues to be an area that we look at very closely. The opportunities for competitive transmission in the US tend to be quite lumpy and sporadic.

I think last time we were together we talked about an opportunity with Granite State, which was to bring clean energy down from Canada or in upstate New York into the Northeast. We had a proposal, would use some of our rates way (ph). But it was a wind solution and ultimately, Massachusetts chose a hydro solution.

There continues to be opportunities in early forms of development with different states issuing RFPs most recently Connecticut have issued one and we continue to look at that and to look upon with people to see if there are opportunities. So nothing specific at the moment, it's quite sporadic, but there is definitely a lot of opportunity.

And similarly on the offshore wind side as well as we mentioned with deepwater, we see a lot of activity in the Northeast for offshore wind. Andy?

Andy Agg -- Interim Chief Financial Officer

Yeah. Just in terms of the UK costs as you said GBP127 million was the cost recorded for half year because that program is under way as we speak, the final cost will be trued up as we go through the second half and we know what they eventually end up with. The total will then be an exceptional for the full year as it is for the half.

Nick Ashworth -- Morgan Stanley -- Analyst

Have you done a lot of it already or is the incremental bit -- (multiple speakers)

John Pettigrew -- Chief Executive Officer

I think the incremental rather than GBP127 million is the majority of it.

Nick Ashworth -- Morgan Stanley -- Analyst

Okay, thank you.

Mark Freshney -- Credit Suisse -- Analyst

Hi, it's Mark Freshney from Credit Suisse. Two questions. On the impact of the US tax reform, the $320 million near-term adverse impact. Is there anything you're having to do within the subsidiary level to move capital around to ensure that the subsidiaries continue to be appropriately capitalized? My other point is -- or other question is, at the Group level, you mentioned that gearing would rise from 64% -- you mentioned a couple of percent by year-end before getting the proceeds and from the sale of Cadent, but is there anything else that you would need to do at the Group level in terms of cap -- rotation of capital to get that gearing down because it seems that given you just sanctioned Viking it looks set to remain higher for a sustained period of time.

John Pettigrew -- Chief Executive Officer

I'll hand it to Andy. I'll just reiterate that. I think we're in a much better position now in terms of clarity and visibility on the impact of tax reform. So as Andy, I think when we last met, we were still waiting to get some clarity from a number of our regulators in terms of impact of the 35% reduction to 21%, and how the deferred tax credit was going to work. I think we now have that clarity and as we said GBP210 million impact this year increasing to GBP320 million next. So I think with that visibility, we have a good sense of how we've managed it. I will hand it to Andy to talk about specifics.

Andy Agg -- Interim Chief Financial Officer

Yes, thanks. So, I'll take the first one. In terms of the US operating companies, Mark as you know our policy broadly is to run all of our operating companies, UK and US in line with the regulatory gearing levels. So therefore when there (inaudible) changes like this as we always do, we look to either raise debt or shift to smaller equity injections or dividends to keep the actual gearing ratios in line. So we'll just allow for this change as cash from the tax reform in the same way we do with everything else. So there's no sort of specific action required in the short-term.

At the Group level, as you said, I mentioned in my speech, we do see a little tick up this year, for a number of reasons, some of that is some of the timing outflows that we're seeing in UK and US this year. Some of it is, will be FX related. The Cadent proceed is coming in just after the year end, means that it's just a timing difference when that cash comes in, but to reiterate, as we've said previously, some of the other measures that we will continue to look at, so the efficiency programs, the rate filings, the scrip option, there is role about keeping the balance sheet in the right place, in my speech, again we guided to be around 65% gearing level by '21 as well.

John Pettigrew -- Chief Executive Officer

Okay. If there are no more questions, can I just thank everybody for coming today. As I said in my speech, I think a solid set of results in the first six months with strong operational and strategic progress and we continue to be on track, it is good to grow the business in the 5% to 7% range and actually for the next few years, we're right at the top of that range.

So thank you very much, and safe journey.

Duration: 67 minutes

Call participants:

Aarti Singhal -- Director of Investor Relations

John Pettigrew -- Chief Executive Officer

Andy Agg -- Interim Chief Financial Officer

Chris Laybutt -- JPMorgan -- Analyst

Unidentified Participant -- -- Analyst

Deepa Venkateswaran -- Bernstein -- Analyst

James Brand -- Deutsche Bank -- Analyst

Fraser McLaren -- Bank of America Merrill Lynch -- Analyst

Verity Mitchell -- HSBC -- Analyst

Nick Ashworth -- Morgan Stanley -- Analyst

Mark Freshney -- Credit Suisse -- Analyst

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