According to the company’s website press release on November 10, 2022, “The results we’ve announced reflect the strength and resilience of our business, delivering for all our stakeholders in challenging economic conditions. As we complete our strategic pivot, our investment in clean energy infrastructure has continued at pace, with a record £3.9 billion in the half year. This investment will continue into the future, and today, given changes to the macro-economic outlook, we are updating our five year financial framework that we set out 18 months ago. Between 2022 and 2026, we now expect to invest up to £40 billion in critical infrastructure, of which £29 billion will be directly in the decarbonisation of energy networks. Against this backdrop, we are focused on playing our part to mitigate the affordability challenges of our customers. We have achieved £225 million of operating cost efficiency savings to date, and this is enabling us to mitigate some inflationary pressures on both the business and our customers. We have also announced funding to help our most vulnerable customers and communities through this winter and next. However, ensuring security of supply and affordability, while delivering net zero goals, can only be achieved with clear and stable regulatory frameworks that incentivise the timely delivery of the investment required. We remain committed to working with governments and regulators to achieve this as we focus on delivering a clean, fair and affordable future for all.” John Pettigrew, Chief Executive
Highlights
Robust financial delivery
- Underlying operating profit up 50% at actual exchange rates to £2.1 billion (44% at constant currency). Of the 50% increase, 38% came from a full six months underlying operating profit from UK Electricity Distribution and higher property sales to Berkeley Group; and the remaining 12% came from other key drivers, including a first half contribution from North Sea Link and IFA1 insurance receipts, a stronger USD, partly offset by the sale of Narragansett Electric Company (NECO, Rhode Island) and the impact of NG Partners (NGP) fair value movements
- Underlying EPS for continuing operations of 32.4p, up from 22.8p in the prior period. This was driven by the above factors but also includes the impact of higher interest costs principally from inflation on index-linked debt and additional interest costs following the UK Electricity Distribution acquisition.
- Statutory operating profit up 50% to £2.2 billion, driven principally by the gain on the sale of NECO this year and lower remeasurement gains and adverse timing movements compared to the prior year.
- Statutory EPS of 30.8p, up from 10.5p on the prior period, driven principally by the gain on the sale of NECO this year, and no repeat of the exceptional deferred tax charge (UK rate change) from half year 2021/22.
- Interim dividend 17.84p/share in line with policy (17.21p/share in the prior period).
Highlights
Significant capital investment in energy infrastructure
- Record capital investment of £3.9 billion for continuing operations (including £214 million of non-cash lease additions in the US), up 37% on prior year at actual exchange rates (26% at constant currency). The increase was principally driven by an additional 2.5 months of UK Electricity Distribution ownership; higher investment across both New York and New England, including the start of our upstate New York transmission project Smart Path Connect; and higher investment for our Sellindge (IFA1) converter station rebuild, our Viking interconnector, and our Isle of Grain expansion project.
Nearing the completion of our strategic pivot
- Sale of NECO to PPL completed in May.
- Sale of a 60% stake in UK Gas Transmission & Metering on track to complete by the end of this calendar year.
Crystallised value in non-core assets
- Announced the sale of our 26.25% non-operated stake in the Millennium gas pipeline, New York, for cash proceeds of $552 million (transaction completed in early October 2022).
Helping our communities and customers during the global energy crisis
- Announced winter funding support for communities and customers in October 2022, with $17 million committed in the US and £50 million in the UK for individuals and families who require most help.
- Provided £250 million of working capital support for BSUoS charges through the Electricity System Operator (ESO).
Good regulatory progress
- Responded to Ofgem’s draft determinations for the RIIO-ED2 price control.
- ESO submitted its updated RIIO-2 Business Plan covering the regulatory period from April 2023 to March 2025.
- Responded to Ofgem’s ‘Accelerating onshore electricity investment’ consultation, providing our views on how to meet the government’s 50 GW offshore wind target.
- Received approval for $600 million of Phase 1 transmission investment projects, in support of New York’s Climate Leadership and Community Protection Act (CLCPA).
- Received $301 million approval in October from the Massachusetts regulator for our electric Grid Modernization Plan (GMP).
Further progress on our Group efficiency programme
- Delivered a further £85 million of Group efficiency savings during the half year. This is in addition to the £140 million cumulative savings reported at our full-year results in May.
Delivering on our responsible business commitments
- Published our second Responsible Business Report, demonstrating the progress we have made across our five pillars and the journey to net zero.
- Progressed our Clean Energy Vision for our US networks through continued engagement with our regulators and elected officials on our legislative and policy agenda.
Revised Financial Outlook and Guidance
- Underlying EPS growth from 2021/22 to 2022/23 in the middle of the new 6-8% CAGR range, assuming an average exchange rate of £1:$1.20, and after taking into account recently announced winter funding support.
- Given the macroeconomic moves we have seen over the past six months (including changes in foreign exchange rates, inflation and interest rates), coupled with confirmed further investment to deliver the energy transition, we have also updated our Financial outlook over the five-year period to 2025/26. We now expect:
- total cumulative capital investment of up to £40 billion (up from our prior guidance of £30-£35 billion);
- asset growth CAGR of 8-10% (up from 6-8%) backed by our strong balance sheet;
- driving underlying EPS CAGR of 6-8% (up from 5-7%); and
- credit metrics to remain within current rating thresholds, and Net Debt/RAV to be around 70% once all three transactions are complete.
- This five-year financial framework includes the UK Electricity Distribution business, and takes account of the sale of NECO in May 2022 and the planned sale of a majority stake in UK Gas Transmission & Metering by the end of this calendar year.
STRATEGIC OVERVIEW
A robust performance against a challenging economic backdrop
National Grid has reported a robust financial performance for the first six months of the year, underpinned by good operational progress in both the UK and US.
Group safety performance
The company has continued to focus on safety with a Group Lost Time Injury Frequency Rate (LTIFR)1 of 0.12, an improvement on year end but slightly above our industry leading Group target of 0.1. However, in May, one of our US employees tragically lost his life whilst carrying out maintenance work at a site in Massachusetts. We immediately conducted a thorough incident investigation led by our Group Chief Engineer and Group Director of Safety, which resulted in actions that have been fed into our safety strategy and have been implemented across the Group.
Half-year operating financial performance
Statutory operating profit is presented on page 3 which includes the impact of exceptional items, remeasurements and timing, and a reconciliation to our APMs is presented on page 58. Underlying operating profit increased by 50% at actual exchange rates (and by 44% at constant currency) versus the prior period, to £2,117 million. Of the 50% increase at actual exchanges rates, 38% came from a full six months underlying operating profit from UK Electricity Distribution and higher property sales to Berkeley Group; and the remaining 12% came from other key drivers, including a first half contribution from North Sea Link and IFA1 insurance receipts, a stronger USD, partly offset by the sale of NECO and the impact of NG Partners (NGP) fair value movements.
Capital investment (continuing operations) increased by £1,043 million at actual exchange rates (£791 million at constant currency) to £3,883 million during the half year. This was driven principally by an additional 2.5 months of UK Electricity Distribution ownership; higher investment across both New York and New England, including the start of our upstate New York transmission project Smart Path Connect; and higher investment for our Sellindge (IFA1) converter station rebuild, our Viking interconnector, and our Isle of Grain expansion project. Capital investment for the period includes £214 million of non-cash lease additions in the US.
Delivering on our strategy – nearing the completion of our strategic pivot
National Grid has delivered excellent progress on our strategy over the half year as we move towards the completion of our strategic pivot.
On 25 May, the company announced the completion of the sale of NECO to PPL Rhode Island Holdings LLC, receiving proceeds of £3.1 billion. The sale formed part of the strategic portfolio repositioning announced in March 2021 alongside the acquisition of UK Electricity Distribution and the sale of a majority stake in UK Gas Transmission & Metering.
The company remains on course to complete the sale of the 60% stake in UK Gas Transmission & Metering to Macquarie Asset Management and British Columbia Investment Management Corporation by the end of this calendar year. In September, the Competition and Markets Authority (CMA) began its review of the transaction which forms part of the approval process needed for the sale to complete. The consortium also has an option to acquire the remaining 40%, on broadly similar terms to those agreed for the majority stake, which can be exercised in the first half of 2023.
Other asset sales during the half year
Although not part of the strategic pivot, in September we announced the sale of our 26.25% Membership Interest in the Millennium Pipeline Company (MPC) to existing partner DT Midstream (DTM) for a cash purchase price of $552 million. MPC is a FERC2 regulated gas transmission pipeline in New York State in which we acquired our interest following the acquisition of KeySpan (Downstate New York) in 2007. Our stake was a non-operational, minority interest, and supply to customers will be unaffected as National Grid will remain a shipper through the pipeline for the foreseeable future. The transaction, which closed in October, has allowed us to crystallise value from a non-core asset.
Helping communities during the energy crisis
Company’s focus is on delivering the energy transition in the UK and the US to accelerate progress towards a more affordable, clean energy future. But we recognise we are doing this against a tough economic backdrop for our customers and communities, particularly as we look ahead to this winter. We have therefore recently announced funding to help our most vulnerable customers and communities who are faced with increased energy prices.
In October 2022, the Company committed $17 million in funding to be distributed through its non-profit partners and the National Grid Foundation that help customers in need across Massachusetts and New York. This funding is in addition to the Company’s Winter Customer Savings Initiative to help customers reduce their energy use, better manage their bills, and secure available energy assistance. Also in October, we launched a £50 million support fund in the UK to help alleviate financial distress caused by rising energy costs. Over the next two winters, the fund will make significant donations to organisations working on the front line of the energy crisis. It is targeted at charities who provide financial relief to households to help them with energy costs immediately; charities who fund energy efficiency measures to lower bills over the longterm; and charities providing advisory services for households who need help with energy bills, payments and debt. For example, money from the fund will be used by beneficiary organisations to increase the number of support staff working on crisis phone lines, provide fuel vouchers and insulate homes at no cost to families.
In addition, National Grid Electricity Distribution3 launched a £2.5 million fund in October 2022 which is open to grant applications from organisations working to help people in fuel poverty across the Midlands, the South West and Wales. As we announced in May, Ofgem approved National Grid’s request to make early repayments to consumers of £200 million over the next two years as part of the regulatory regime for electricity interconnectors. The company has agreed with the regulator to begin this return from April 2023.
Regulatory and Winter Outlook
United Kingdom
Affordability and energy security remain key political objectives across the UK and Europe, particularly given increased gas demand, sharply rising commodity prices following the Russian invasion of Ukraine, and challenging economic conditions.
Against this backdrop, Ofgem published its draft determinations in June for the RIIO-ED2 price control which will cover UK Electricity Distribution for the period from April 2023 to March 2028. The draft determinations are part of the process towards agreeing a regulatory framework that will enable the delivery of critical investment required to maintain the UK’s progress to net zero, and follows the submission of our final business plan in December 2021.
The company is now working with the regulator on four key areas:
- firstly, Ofgem has proposed a 19% reduction to our RIIO-ED2 totex. We are providing further engineering justification papers, and expect this gap to narrow;
- secondly, we have seen the benefits to customers that a successful incentives package can bring in RIIO-ED1, with our sector leading performance around customer security and availability of supply, and are working with Ofgem to include meaningful incentives in the final package;
- thirdly, the draft determination included 34 uncertainty mechanisms, which we believe should be streamlined to reduce complexity and allow for efficient investment; and
- lastly, given the recent macro-economic moves, we are also engaging closely with Ofgem on the right financing package, in particular a fair allowed cost of capital, both debt and equity, that reflects the changing returns expectations in the markets, to incentivise the accelerated investment needed. We expect Ofgem to publish final determinations in December.
In August, we responded to Ofgem’s ‘Accelerating onshore electricity investment’ consultation, providing our views on how to meet the government’s 50 GW offshore wind target by 2030. Our response outlined how the government’s 2030 ambition would benefit consumers, but also recognised the challenges that need to be addressed. In particular, we highlighted that over five times the amount of new electricity transmission infrastructure will need to be delivered in the next seven years than has been built in the past 30 years. Meeting this scale of challenge would require a reformed planning regime that includes how best to reduce the impact on local communities; a regulatory framework that incentivises the right behaviours to encourage timely delivery with an appropriate risk/reward balance; and comfort that the regulatory financing framework will be appropriate through the RIIO-T3 period.
Overall, the scale of the challenge will require us to fundamentally change the delivery model for this infrastructure, moving from a traditional project-by-project approach to a portfolio or programme approach with much earlier supply chain involvement. This is why we have called for National Grid to deliver 19 of the major transmission projects identified by the Holistic Network Design (HND) in order to maximise speed and efficiency, thus enabling us to deliver consumer benefits. We are working with government and Ofgem, as the regulator aims to make its final decision on this by the end of the calendar year.
In October, the Electricity System Operator (ESO) and Gas System Operator (GSO) published the power and gas Winter Outlooks for the upcoming winter in Great Britain. The ESO’s Winter Outlook Base Case shows de-rated margins of 3.7 GW or 6.3%, similar to recent winters and within the required Reliability Standards. Russia’s invasion of Ukraine has meant that, overall, this is likely to be a challenging winter for energy supply throughout Europe.
The ESO also modelled a scenario whereby the energy crisis in Europe results in electricity not being available to import into Great Britain. This could be due to a shortage of gas in Europe which in turn limits power generation. In preparation for winter, the ESO has developed additional tools to manage the risk which include: (a) securing contracts to keep approximately 2 GW of coal generation capacity open and on standby through this winter; and (b) creating a new Demand Flexibility Service with market funded incentives for cutting consumption at key times to reduce overall demand across the system. These new measures, alongside the robust set of tools already deployed by the ESO, will contribute to maintaining adequate margins and mitigate impacts to customers. In the unlikely event that electricity supply margins were further eroded, supply interruptions to customers could occur for short periods although all strategies, including the new measures, would be deployed to minimise the disruption.
The Gas Winter Outlook includes three potential winter scenarios and outlines gas reserve margins. The scenarios illustrate the extent to which Great Britain is dependent on flexible sources of imported gas supplies throughout winter, particularly Liquefied Natural Gas (LNG). The Outlook concludes that gas infrastructure in Great Britain has sufficient capability to meet peak (1 in 20) demand this winter, but underlines the importance of imported gas throughout to meet demand (a potential shortfall in European gas supplies could impact the ability for the UK to import gas should it be required). The GSO has the physical, commercial and market based tools to manage a supply and demand imbalance, including those related to a Gas Supply Emergency, should it be necessary.
Finally, we have continued to advance our plans to ensure an orderly transition of the ESO to a new Future System Operator (FSO) by or in 2024. The FSO will be an impartial body with responsibilities across both the electricity and gas systems. We are seeking clarity on the recovery of costs of the separation of the ESO as well as the structure of the FSO.
United States
In July, we received approval to proceed on Phase 1 transmission investment projects, in support of New York’s Climate Leadership and Community Protection Act (CLCPA). In 2020, the New York Public Service Commission (PSC) ordered all utilities to file proposals for distribution and transmission infrastructure projects required to meet CLCPA objectives. Utilities, including National Grid, grouped these projects into two categories, Phase 1 and Phase 2, based on project readiness and availability of supporting regulatory frameworks. Approval for Phase 1 represents around $600 million of investment before 2030 and includes projects such as 129 miles of circuit rebuild to support 330 MW of incremental renewable generation capacity. We anticipate a response on CLCPA Phase 2 projects before the end of 2022/23.
On 7 October 2022, the Massachusetts Department of Public Utilities (DPU) announced that it had approved $301 million for our electric Grid Modernization Plan (GMP) that we filed in July 2021. The funding is for Track 1 (existing technologies) and includes ‘grid-facing’ investments such as Volt-Var optimisation, which helps to reduce losses and minimise demand across the distribution network. We continue to await approval for Track 2 (new technologies) which includes customer facing investments, such as Advanced Metering Infrastructure (AMI), for which we filed for almost $400 million last summer. We anticipate an outcome by the end of calendar year 2022.
During 2021/22, our key highlights included:
- advocating for action to mitigate climate change on a global platform through our role as a Principal Partner at COP26;
- launching our US northeast Clean Energy Vision, which aims to deliver a more affordable energy future through a hybrid of electric and clean gas infrastructure;
- a commitment for the early return of £200 million from our interconnector business, helping to reduce customer bills;
- record levels of capital investment in critical infrastructure; and
- new community investments in both the UK and across our US jurisdictions.
The 2021/22 Responsible Business Report released in June set out the key achievements we have made against each of the pillar-level targets we published in our Responsible Business Charter. These included:
- a 65% reduction in scope 1 and 2 greenhouse gas emissions since our 1990 baseline;
- 2,500 MW of renewables connected to our UK and US transmission and distribution networks;
- 38.6% workforce diversity, up from 37.9% in the prior year, and 49.5% senior leadership diversity, up from 44.6% in the prior year;
- no material gender pay gap in the UK, and improvement in the reported gender pay gap in the US; and
- a 30% increase in logged colleague volunteering hours.
The company published our Climate Transition Plan alongside our 2021/22 Responsible Business Report, and it received shareholder support at our AGM in July. The plan sets out the detail and milestones for reaching the Group’s greenhouse gas reduction targets, with an overall pathway to net zero, and as close to ‘real zero’ as possible, by 2050. Our continued efforts in supporting the energy transition, combined with the direct actions we can take to reduce our emissions, keep us on track to meet the 2030 targets in our Climate Transition Plan.
Our short-term emissions performance is to a large degree dependent on market factors, such as energy supply and demand patterns. However, we continue to focus on our decarbonisation initiatives such as the ongoing programme to replace leak-prone methane gas pipes, energy efficiency and consumption improvements and light duty vehicle fleet electrification.
The safety and wellbeing of the 30,000 people we employ across the UK and US is a top priority for National Grid, underpinning everything we do. Our vision is to build and develop an inclusive culture and a diverse workforce that is fully representative of the communities we serve, and for everyone to be treated fairly and without discrimination. We believe that the initiatives we have implemented have kept us on track to meet our People & Culture targets, with our workforce diversity improving to 39.5% at half year compared to 38.6% in 2021/22. During the half year, National Grid has been recognised five times as a top employer globally and regionally across gender equity measures. In addition, six of our leaders have received recognition as top leaders or colleagues who drive Diversity, Equity and Inclusion in the workplace overall and specifically LGBTQ+ inclusion in the workplace.
Ensuring pay equity is another priority for the Group. We continue to meet the Real Living Wage target while participating in the Living Wage Hours accreditation in the UK, and we are at an advanced stage of securing first year accreditation of Living Wage in the US.
Finally, the proposal to increase the proportion of incentives and executive remuneration linked to ESG and progress against climate-related targets was approved at our AGM in July. This move further embeds environmental and social sustainability in our purpose, values and decision-making.
Board changes
Iain Mackay was appointed as a Non-executive Director of the Board effective 11 July 2022, joining the Remuneration and Audit & Risk Committees on appointment. Jonathan Dawson and Amanda Mesler retired from the Board on 11 July 2022.
FIVE-YEAR OUTLOOK
Our five-year financial framework includes the UK Electricity Distribution business from the date of acquisition and takes account of the sale of NECO (Rhode Island) in May 2022. It also assumes that we complete the sale of a majority stake in UK Gas Transmission & Metering by the end of this calendar year.
Capital investment and Group asset growth
Given the macroeconomic moves we have seen over the past six months, coupled with confirmed further investment, we now expect to invest up to £40 billion across our energy networks and adjacent businesses in the UK and US, over the five-year period to 2025/26. This is largely driven by changes in foreign currency and inflation expectations, as well as some acceleration of investment required for the energy transition. Of this investment, around £29 billion is considered to be aligned with the principles of the EU Taxonomy legislation as at the date of reporting.
In the UK, we now expect around £9 billion of investment in Electricity Transmission over the five years to 2025/26 for asset health, anticipatory system reinforcement to facilitate offshore generation and other new onshore system connections. We expect our Electricity Distribution network to invest around £6 billion over the five years to 2025/26 in asset replacement, reinforcement and new connections, facilitating the infrastructure for electric vehicles, heat pumps and directly connected generation.
In our US business, we expect investment of around £21 billion over the five years to 2025/26 (split £12 billion in New York and £9 billion in New England). Over half of this will be safety related projects in our gas networks with the remainder in our electric networks such as for storm hardening, other net zero investments as well as further electric transmission investment.
We expect NGV to invest around £3-4 billion over the five years to 2025/26 in completing the current interconnector programme, the Isle of Grain LNG capacity expansion project, and continued US renewable generation.
We now expect the sum of these investments (together with our transactions and the broad economic protection our businesses have against rising macroeconomic variables such as inflation) to drive group asset growth of 8- 10% CAGR through to 2025/26.
Group gearing
We expect regulatory gearing to be around 70% once all three of the transactions are completed. We remain committed to a strong, overall investment grade credit rating. Combined with the benefit of our existing hybrid debt, we expect gearing levels, and the other standard metrics we monitor, to sit within our current BBB+/Baa1 corporate rating band.
Group underlying earnings growth and dividend growth
From 2020/21 through to 2025/26, we now expect our CAGR in underlying earnings per share to be in the 6-8% range from the baseline 54.2 pence per share5 (this includes our long run average scrip uptake of 25% per annum). This will underpin our sustainable, progressive dividend policy into the future.
2022/23 FORWARD GUIDANCE
This forward guidance is based on our continuing businesses, as defined by IFRS excluding UK Gas Transmission & Metering that is held as a discontinued operation. This includes the assumption of a disposal of a 60% stake in UK Gas Transmission & Metering by the end of this calendar year (treated as a discontinued operation). From the assumed date of disposal of the 60% stake, the share of post-tax income from our 40% minority retained stake is included within continuing operations for 2022/23.
Overall, we now expect underlying earnings growth for 2022/23 in the middle of our revised 6-8% CAGR growth range (assuming £1:$1.20), and after taking into account our recently announced winter funding support (please refer to page 6 for further details). As well as the move in exchange rates, we are also seeing an improvement from higher capitalised interest and some upside in National Grid Ventures profitability.
The outlook and forward guidance contained in this statement should be viewed, together with the forwardlooking statements set out in this release, in the context of the cautionary statement. The forward guidance in this section is presented on an underlying basis and excludes remeasurements and exceptional items.
UK Electricity Transmission
Net revenue (excluding timing) is expected to decrease by around £100 million compared to 2021/22 as a result of the agreement to return to consumers payments related to Western Link construction delays and the impact on revenues of the UK capital allowance super-deductions announced in March 2021, partially offset by higher revenues driven by indexation and lower other costs. Depreciation is expected to reduce slightly due to asset write-offs in the prior year.
We expect to deliver up to 100 basis points of outperformance in the second year of RIIO-T2 in Operational Return on Equity. This is in line with our target to deliver 100 basis points of operational outperformance on average through the five-year period of the RIIO-T2 price control.
UK Electricity Distribution
The full-year impact on operating profit (excluding timing) of the acquisition of WPD6 (acquired on 14 June 2021) is around £230 million. Net revenue (excluding timing) is expected to be around £70 million higher mainly due to higher revenues driven by indexation, partially offset by slightly higher depreciation due to asset growth and commissioning. Operational Return on Equity is expected to outperform the allowed regulatory return by over 250 basis points in line with recent years. 2022/23 is the final year of the RIIO-ED1 price control.
UK Electricity System Operator (ESO)
Net revenue (excluding timing) is expected to increase by around £80 million compared to 2021/22 including higher totex funding to deliver increasing RIIO-2 outputs with an expected increase in controllable costs of around £70 million. Depreciation is expected to be broadly flat. Under the RIIO-2 price control, totex in ESO is no longer subject to the totex incentive mechanism and is instead regulated under a pass-through mechanism, with cost increases or efficiencies trued-up the following year.
New England
The sale of the Rhode Island business results in lower operating profits (excluding timing) of around $325 million. For the remaining business, we expect net revenue (excluding timing) to be around $175 million higher from expected rate increases. We expect controllable costs to be flat, due to efficiencies offsetting inflation, and higher bad debt charges following a reduction in bad debts in 2021/22. Other costs are expected to be around $75 million higher due to rate funded increases and the impact of inflation. We expect depreciation and property taxes to be slightly higher due to increased investments.
Return on Equity for New England is expected to be around 80% of the allowed return including the impact of the efficiency savings.
New York
Net Revenue (excluding timing) is expected to be around $300 million higher, including increases from rate settlements. Around half of this is expected to be offset by higher rate funded costs. Controllable costs are expected to be broadly flat with workload increases and inflation offset by efficiencies. Pensions costs are expected to be around $50 million lower following the one-off pension gain included in the first half results. We expect depreciation to be around $70 million higher in 2022/23 reflecting asset growth.
Return on Equity for New York is expected to be broadly in line with the prior year, at least 95% of the allowed RoE.
NGV and Other activities
In NGV, we expect underlying operating profit to be around £180 million higher than 2021/22 with the return to full service of IFA1 following the Sellindge converter station rebuild, first full year of operations of NSL, increased auction prices and insurance proceeds received in 2022/23 and increased profits at Isle of Grain. We expect other activities’ underlying operating profit to be broadly flat year-on-year with higher sales in our Commercial Property business (agreement for sale of a number of properties in 2022/23 following the disposal of the St William business), offset by lower gains to be realised in National Grid Partners (NGP) year on year and higher corporate costs to support our communities as part of our response to the energy crisis.
Joint Ventures and Associates
Our share of the profit after tax of joint ventures and associates is expected to be at a similar level to 2021/22. This includes higher profits in our BritNed joint venture and includes our expected share for UK Gas Transmission & Metering for the remaining 40% stake following completion of the disposal of the majority stake, offset by the disposals of our St William and Millennium joint ventures. Interest and Tax (continuing operations) Net finance costs in 2022/23 are expected to be around £350 million higher than 2021/22 (at a forecast exchange rate of $1.20) reflecting the impact of higher inflation on our inflation-linked debt, increasing rates for new issuances and increasing rates impacting our existing floating portfolio, partially offset by higher capitalised interest. For the full year 2022/23, the underlying effective tax rate excluding the share of post-tax profits from joint ventures and associates, is now expected to be around 22%.
Investment, Growth and Net Debt
Overall Group capital investment for continuing operations in 2022/23 is now expected to be around £7.5 billion, around £0.5 billion higher than the guidance provided at full year. Underlying investment is increasing by around £0.2 billion largely driven by non-cash additions for capital leases and National Grid Partners, with the remaining increase driven by currency movements on dollar related investment ($1.20 now forecast; previously $1.30).
Asset Growth is expected to be at or above the top end of our 8-10% target range, reflecting an increase in capex along with higher indexation impacting our UK regulated businesses. Depreciation is expected to increase, reflecting the impact of continued high levels of capital investment.
Cash outflow generated from continuing operations (excluding acquisitions, disposals and transaction costs) is expected to increase by around £2 billion compared to 2021/22 principally driven by increased capital investment and higher interest costs.
Net debt is expected to reduce by around £5 billion at a forecast foreign exchange rate of $1.20 (from £46.5 billion as at 30 September 2022), driven by the expected receipt of sales proceeds from the 60% stake in UK Gas Transmission & Metering, and the sale of our interest in Millennium Pipeline, partially offset by business funding requirements in the second half of the year.
Weighted average number of shares (WAV) is expected to be approximately 3,660 million in 2022/23.
FINANCIAL REVIEW – HY 2022/23
In managing the business, we focus on various non-IFRS measures which provide meaningful comparisons of performance between years, monitor the strength of the Group’s balance sheet as well as profitability, and reflect the Group’s regulatory economic arrangements. Such alternative and regulatory performance measures are supplementary to, and should not be regarded as a substitute for, IFRS measures which we refer to as statutory results. We explain the basis of these measures and reconcile these to statutory results in ‘Alternative performance measures/non-IFRS reconciliations’ on pages 57 to 60. The Group does not believe that these measures are a substitute for IFRS measures, however, the Group does believe such information is useful in assessing the performance of the business on a comparable basis. Also, we distinguish between adjusted results, which exclude exceptional items and remeasurements, and underlying results, which further take account of: (i) volumetric and other revenue timing differences arising from our regulatory contracts, and (ii) major storm costs which are recoverable in future periods, neither of which give rise to economic gains or losses.
Reconciliation of APMs for discontinued operations
Statutory operating profit for discontinued operations for the six months ended 30 September 2022 was £346 million (2021: £387 million). This included £6 million of exceptional items in the current period. Adjusted operating profit for the six months ended 30 September 2022 was £340 million (2021: £390 million), this includes a net timing under-recovery of £41 million (2021: £58 million over-recovery). Operating profit excluding timing and exceptional items for discontinued operations for the six months ended 30 September 2022 was £381 million (2021: £332 million).
Gross revenue for discontinued operations for the six months ended 30 September 2022 was £805 million (2021: £710 million). After deducting pass-through costs of £336 million (2021: £126 million), net revenue for discontinued operations for the six months ended 30 September 2022 was £469 million (2021: £590 million).
Dividend per share
This is a statutory measure with no differences to ‘underlying’ therefore no reconciliation is required as this is not considered to be an alternative performance measure.
Capital investment
Capital investment is not a statutory measure as it is not a defined term under IFRS. ‘Capital investment’ or ‘investment’ refers to additions to plant, property and equipment and intangible assets, and contributions to joint ventures and associates, other than the St William Homes LLP joint venture. We also include the Group’s investments by National Grid Partners during the period (which are classified for IFRS purposes as non-current financial assets on the Group consolidated statement of financial position).
Investments made to our St William Homes LLP arrangement were excluded based on the nature of this joint venture arrangement. We typically contributed property assets to the joint venture in exchange for cash and accordingly did not consider these transactions to be in the nature of capital investment.
