National Grid D.P.U

Boston Gas Company d/b/a National Grid D.P.U. 20-120 Attachment AG-1-11-7 Page 1 of 15 INFRASTRUCTURE AND PROJECT FINANCE

CREDIT OPINION National Grid USA 11 September 2020 Update following outlook change to negative

Update Summary The credit quality of National Grid USA (NG USA, Baa1 negative) reflects the low business risk associated with electricity transmission and electricity and gas distribution, as well as the group's diversification across four transparent and supportive regulatory regimes. Credit quality is constrained by (1) the ongoing sizeable investment programme for the RATINGS group's operating companies; (2) material levels of external debt at NG USA (commercial National Grid USA paper and assumed long-dated legacy debt), around 10-15% of the consolidated NG USA Domicile Westborough, group's external debt in recent years; and (3) NG USA's structural subordination relative to its Massachusetts, United States operating companies. Long Term Rating Baa1 Type LT Issuer Rating - Dom On 14 August 2020 we changed the outlook on NG USA to negative from stable. The Curr negative outlook reflects a combination of (1) limited financial flexibility at the current Outlook Negative rating level, accentuated by the more challenging operating environment of its regulated subsidiaries; and (2) the strong linkages and dependence with its weaker parent National Please see the ratings section at the end of this report for more information. The ratings and outlook shown Grid North Amercia Inc. (NGNA, Baa1 negative). With the increased pressure on operating reflect information as of the publication date. cash flows of its regulated subsidiaries, initially from US tax reform, this has left NG USA with limited financial flexibility against guidance for the current rating (CFO pre-WC / debt of at least 15%). NG USA's CFO pre-WC / debt has been further depressed (c. 1.3-1.9% per annum Contacts over FY2017-20) by NG USA upstreaming dividends to allow NGNA to repay intercompany Philip Cope +44.20.7772.5229 loans. Whilst these intercompany loans have now been substantial repaid, almost a third of AVP-Analyst NG USA's outstanding debt at March 2020 was advances from NGNA. [email protected]

Matthew Brown +44.20.7772.1043 Exhibit 1 Associate Analyst NG USA's credit quality closely linked to that of its weaker parent, NGNA [email protected] 50% equity credit ascribed to preferred stock dividends paid by NG USA

Neil Griffiths- +44.20.7772.5543 NG USA's CFO pre-WC (LHS) Preferred stock dividends paid by NG USA (LHS) Lambeth Advances from NGNA to NG USA (LHS) NG USA's CFO pre-WC / debt (RHS) Associate Managing Director NGNA's CFO pre-WC / debt (RHS) [email protected] 7,000 Minimum guidance for Baa1 rating (CFO pre-WC / debt ≥ 15%) 16%

6,000 14%

12% 5,000 10% 4,000 8%

$ million 3,000 6% 2,000 4%

1,000 2%

0 0% Mar-17 Mar-18 Mar-19 Mar-20

Source: Moody's Investors Service Boston Gas Company d/b/a National Grid D.P.U. 20-120 Attachment AG-1-11-7 Page 2 of 15

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Credit strengths » Low business risk associated with electricity transmission and gas and electricity distribution activities

» Modest diversification across four transparent and supportive regulatory regimes

Credit challenges » Challenging operating environment for operating subsidiaries, particularly for those in New York which account for over half of NG USA's rate base, with coronavirus outbreak accentuating these headwinds due to longer-term economic impact

» Structural subordination relative to operating subsidiaries

» Strong linkages and dependence with its weaker parent NGNA

Rating outlook The outlook on NG USA could be stabilised if (1) the outlook on NGNA were stabilised; and (2) NG USA was expected to exhibit CFO pre-WC/debt of at least 15% Factors that could lead to an upgrade » An upgrade of NG USA is currently unlikely given credit metrics that are weak for the assigned rating and strong linkages and dependence with its weaker parent, NGNA

Factors that could lead to a downgrade » If we did not expect CFO pre-WC / debt to trend above 15%

» Given the strong level linkages and dependence with NGNA, a downgrade of NGNA would also exert downward rating pressure

Key indicators

Exhibit 2 National Grid USA

Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 2021 proj. 2022 proj. CFO pre-WC + Interest / Interest 2.4x 2.9x 3.3x 2.9x 3.2x 4.6x 3.3x CFO pre-WC / Debt 10.2% 10.2% 11.7% 9.9% 10.0% 11.3% 11.1% CFO pre-WC – Dividends / Debt 6.3% 8.4% 10.0% 8.3% 8.7% 11.3% 9.7% Debt / Capitalization 42.6% 42.2% 46.1% 48.0% 51.8% 52.0% 52.4%

All figures and ratios are calculated using Moody's estimates and standard adjustments. Moody's Forecasts (f) or Projections (proj.) are Moody's opinion and do not represent the views of the issuer. Periods are financial year-end unless indicated. LTM = Last 12 months. (1) Assumes no further measures by the National Grid group to support the credit quality of the US business. Assumes NG USA pays no preferred stock dividends in FY2021 and $592 million in FY2022, ahead of NGNA making a repayment of one of the final two tranches of intercompany notes in July 2022. Source: Moody's Financial Metrics™

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

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Profile NG USA is the holding company for nine regulated subsidiaries whose activities cover electricity transmission and generation, and the sale and distribution of both natural gas and electricity in New York, Massachusetts, Long Island and Rhode Island. The combined rate base of NG USA was $25.6 billion as of 31 March 2020.

NG USA provides electricity distribution and transmission services to 1.7 million customers in upstate New York, through its subsidiary Niagara Mohawk Power Corporation (NiMo, A3 negative), and gas distribution to around 2.5 million customers across New York State through Brooklyn Union Gas Company (KEDNY, A3 ratings on review for downgrade), KeySpan Gas East Corporation (KEDLI, A3 negative) and NiMo.

In the state of Massachusetts, NG USA provides electricity distribution services to 1.4 million customers, 99% of which is through Massachusetts Electric Company (MECO, A3 negative), and gas distribution services to around 1.3 million customers, through Boston Gas Company (BGC, A3 negative) which was the surviving entity after its merger in March 2020 with its smaller sister company Colonial Gas Company.

In Rhode Island, NG USA owns Narragansett Electric Company (NECO, A3 negative), which provides electric and gas distribution services to around 0.51 million and 0.27 million customers, respectively. NECO also owns electricity transmission assets in Rhode Island, which are operated by its sister company New England Power Company (NEP, A3 stable). In addition to Rhode Island, NEP also operates electric transmission facilities in Massachusetts, New Hampshire, Maine and Vermont.

NG USA is also the owner of National Grid Generation LLC (Genco, Baa1 negative), which holds and operates electric power generation plants in Long Island, with an approximate generation capacity of 3.8 GW.

NG USA is wholly owned by National Grid plc (Baa1 negative) via intermediate holding company, NGNA. Apart from the US business, National Grid also holds a range of largely regulated businesses focusing on the ownership and operation of electricity and gas transmission networks in the United Kingdom (UK).

Exhibit 3 National Grid's simplified organisation structure for the US business

Source: Moody's Investors Service

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Detailed credit considerations Low business risk electricity and gas activities provide stable and predictable cash flow The vast majority of NG USA's rate base, around 88% as of 31 March 2020, comprised regulated utility subsidiaries that are dedicated to the distribution of electricity and natural gas to consumers within their specified geographical areas, an activity that we regard as having low business risk. This rate base is divided around equally between gas and electric utilities. Most of the remainder consists of Federal Energy Regulatory Commission (FERC) regulated electricity transmission businesses, which we also view as having very low business risk.

Exhibit 4 NG USA's rate base by asset type as of 31 March 2020

National Grid Generation Narragansett Transmission Regulated Electric Transmission New England Power KEDNY

Narragansett Electric

Massachusetts Electric/ KEDLI Nantucket Electric Regulated Gas Regulated Electric Utilities Utilities Boston Gas

Niagara Mohawk (electricity) Niagara Mohawk (gas) Narragansett Gas

Source: National Grid, Moody's Investors Service

Regulatory frameworks generally supportive of cost recovery The overall regulatory environment for US utilities has steadily improved over the past years and we expect will remain transparent, stable and predictable. Changes have occurred against a backdrop of (1) regulatory recognition that utility infrastructure requires material investment for maintenance, refurbishment and renovation and that it plays a key role in promoting wider economic growth; and (2) decreased political risk for US regulated utilities as the views of key stakeholders (regulators, politicians, consumer groups and utility companies) become increasingly aligned on the need to invest in energy infrastructure. Additionally, NG USA's ownership of a number of regulated utilities diversifies its exposure to regulatory and political risk, which can vary significantly from state to state, although it retains significant exposure to New York where political scrutiny has remained elevated and the state is pursuing ambitious decarbonsation objectives (see ESG considerations below).

Exhibit 5 Key regulatory and contractual features for NG USA's subsidiaries

Regulator NYPSC MDPU RIPUC FERC (elec tx) Contracted New Boston NECO NECO England Regulated subsidiary NiMo KEDNY KEDLI MECO Nantucket Gas distrib. transm. Power Genco Capital tracker ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Revenue decoupling ✓ ✓ ✓ ✓ ✓ ✓ ✓ N/A N/A N/A Commodity-related bad debt true-up ✓ ✓ ✓ ✓ ✓ ✓ ✓ N/A N/A N/A True-up for pension and post-retirement ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Fullybenefits forward-looking rate plan ✓ ✓ ✓ x x x x N/A N/A N/A

Source: National Grid

As of 31 March 2020, over half (57%) of the US rate base is regulated by the New York Public Service Commission (NYPSC) whose regulatory framework we regard as one of the most predictable and transparent amongst US states. The remainder of the rate base is regulated by (1) Massachusetts Department of Public Utilities (MDPU), 23%, which we view as having a less favourable, albeit improving (as reflected in MECO's settlement last year), regulatory environment with, for example, the use of a “historical test year”

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when rates are set; (2) the Federal Energy Regulatory Commission (FERC), 10%, whose framework includes several credit supportive provisions and whose allowed returns tend to be above those for state-regulated utilities; and (3) the Rhode Island Public Utilities Commission (RIPUC), 7%. The remaining 2% of rate base pertains to generation assets in Long Island under contract to the Long Island Power Authority (LIPA, A2 stable).

Performance has improved with achieved returns on equity close to allowed levels Operating performance of the regulated businesses has improved in recent years, supported by c. $1 billion of incremental revenues since FY2016 from new rates taking effect1, with consolidated achieved RoE above 90% of the allowed RoE in the last three financial years, reflecting updated rate plans.

Exhibit 6 Evolution of allowed and achieved RoEs for National Grid's US business Consolidated and entities by size, financial years 2015-16 to 2019-20

FERC Massachusetts US Operations Rhode Island New York Allowed return on equity 16%

14%

12%

10%

0% Consolidated NiMo KEDNY Boston KEDLI Mass. NEP NiMo Gas Narragansett Narragansett Narragansett Genco Canadian US Ops. Electric Gas Electric Gas Electric Transmission Inter- ($25.6bn) connector Rate Base: $5.9bn $4.6bn $3.1bn $2.9bn $2.9bn $1.8bn $1.3bn $0.9bn $0.9bn $0.8bn $0.5bn $0.1bn Proportion: 22.9% 17.8% 12.1% 11.4% 11.1% 7.2% 5.2% 3.7% 3.5% 3.1% 1.8% 0.2%

Consolidated performance calculated as a rate base weighted average. Mass. Electric comprises MECO and its much smaller sister company Nantucket Electric Company. Source: Company reports, Moody's Investors Service

But US tax reform has resulted in materially lower revenues for several of NG USA's subsidiaries Following the passage of the US Tax Cuts and Jobs Act of 2017, the regulator for each of the jurisdictions where National Grid is present initiated proceedings to address the change in the federal corporate income tax rate and other changes resulting from this act.

From an earnings perspective, the change in tax rates has no impact on regulated utilities because regulation results in the benefit of the lower tax rate being passed to customers. However, and because the utilities typically pay much less tax in cash, the legislation is credit negative.

The regulators allowed several months deferral of the effect of this tax reduction, particularly in the cases where the operating companies had ongoing rate cases. However, apart from the electricity transmission activities where a final ruling from the FERC is still pending with no timeline provide, the revenue reductions to reflect the tax decrease have already taken effect (since at least January 2019). Whilst these reductions are modest in the context of the consolidated NG USA group, the weaker cash flows for the individual operating companies come at a time they are undertaking material investment programmes, and, in the case of the New York businesses, accentuated pressure on key credit metrics.

Forthcoming regulatory determinations in New York will impact performance going forward; recent regulatory determinations of peers challenging With NG USA's operations in New York constituting over half of NG USA's rate base, the performance of these subsidiaries (NiMo, KEDLI and KEDNY) have a material impact on overall achieved RoE and NG USA's key credit metrics. Whilst we view the New York Public Service Commission (NYPSC) as one of the most predictable and transparent US state energy regulators, the body has tended to (1) offer a lower than average return on equity levels (both equity thickness, typically 48% in New York compared to at least 50% in other states that Grid operates in, and allowed RoE); and (2) follow a more mechanistic approach to setting these parameters even when external pressures on operational cash flows have arisen, such as US tax reform.

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Exhibit 7 New York provides lower than average return on equity levels compared to National Grid's main other regulated US businesses Base allowed ROE and assumed equity layer in most recent rate case order

Allowed RoE (left hand-side) Equity layer (right-hand side) 11.0% 70%

10.5% 65%

10.0% 60%

9.5% 55%

9.0% 50%

8.5% 45%

8.0% 40% NiMo elec NiMo gas KEDLI KEDNY Massachusetts Boston Gas Narragansett New England Narragansett Electric distribution Power transmission New York Massachusetts Rhode Island FERC

(1) Narragansett Electric Company (A3 negative) has both distribution (electricity and gas) and electricity transmission activities. (2) New England Power Company (A3 stable) is remunerated based on its capital structure, which has had a thicker equity layer in recent years; (3) As per latest formula rates rather than rate case settlements for FERC regulated businesses Source: National Grid; Regulatory settlements; Moody's Investors Service

Based on rate case settlements for other New York utilities in 2020, we do not expect a material change in approach in future settlements with a 48% equity layer and a fall in allowed ROE to 8.8% (from 9.0%) our central case. This, in turn, has depressed cash flow metrics with these three entities expected to have CFO pre-WC / debt in the mid-to-high teens in percentage terms under their next rate plan, with all three having rate cases pending, compared to at or above 20% for NG USA's other regulated subsidiaries.

Exhibit 8 Key decisions pending for National Grid's New York businesses Summary of past and pending rate cases

KEDLI & KEDNY Niagara Mohawk Current plan Opening request Regulator's first view Current plans Opening request Primary term Jan 2017 - Dec 19 Apr 2020 - Mar 24 Apr 2020 - Mar 24 Apr 2018 - Mar 21 July 2021 - Jun 24 Allowed RoE 9.0% 9.65% 8.2% 9.00% 9.50% Equity thickness 48% 48% rising to 50% 48% 48% 48% rising to 50% Capex over plan KEDNY: $1.9bn KEDNY: $4.2bn $1.9bn elec; $3.6bn total. In year 1: KEDLI: $1.1bn KEDLI: $2.6bn $600mn gas $672m elec; $206m gas Rate base (avg) KEDNY: $3.2bn KEDNY @ Mar 2019: $3.7bn $5.6bn elec c. $7.5bn elec KEDLI: $2.5bn KEDLI @ Mar 2019: $2.6bn $1.3bn gas c. $1.8bn gas Rate base (Y1 - Y3) KEDNY: $2.7bn > $3.7bn Elec: $5.26bn > $5.95bn By Y3 Elec: $8bn KEDNY: $2.3bn > $2.7bn Gas: $1.23bn > $1.43bn By Y3 Gas: almost $2bn Revenue increase KEDNY1 KEDNY2 KEDNY Elec3 Elec (% of operating Y1: $272m (21%) Y1: $237m (13.6%) Annual increase $30.6m Y1: $43m (1.7%) Y1: $100m (4%) revenues last year) Cumulative: $362m Cumulative: $539m (3.08% vs 11.05% Cumulative: $221m Cumulative: $353m requested) Y1 = Year 1 KEDLI1 KEDLI2 KEDLI Gas3 Gas: Y1: $112m (12%) Y1: $49m (4.1%) Annual fall $39.7m (- Y1: $14m (2.4%) Y1: $42m (6%) Cumulative: $159m Cumulative: $169m 1.43% vs 5.06% Cumulative: $56m Cumulative: $136m requested) (1) The revenue figures for KEDLI/KEDNY under its current plan represent the unlevelised annual base revenue increases. Levelisation was applied (10.9% and 6.7% were the average annual overall revenue increases for KEDNY and KEDLI respectively - or 9.3% and 6.7% post netting of a surcharge; (2) These were KEDNY and KEDLI's original requests which have subsequently been revised down; (3) Niagara Mohawk (NiMo) figures presented are after deferred credits are taken account of. The elec figures would have been Y1: $160m (cumulative: $241m) and gas would have been Y1: $46m (cumulative: $61m). Source: Company data; NYPSC; Moody's Investors Service

The operating environment for the NG USA's New York subsidiaries has become tougher on other fronts too in the last 12 months. New York Governor Cuomo made verbal and written threats to revoke the operating licenses of NG USA's downstate gas business, KEDLI

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and KEDNY, together 29% of the rate base. The intervention appears to have been triggered by natural gas moratoriums levied by the utilities for some service areas, see Threat to revoke National Grid's operating license is credit negative for utilities, November 2019 for more information. Whilst National Grid reached a settlement in November 2019, though with visibility only until September 2021, it has delayed a rate case settlement of the rate case filing made in April 2019. Settlement discussions are currently taking place, with a joint proposal expected in the next month, but new rates are now expected only to take effect on 1 December 20202 almost one year after the primary term of the current rate plans expired. NiMo has also made a rate case filing, on 31 July 2020, for new rates to be effective on 1 July 2021. We expect these determinations to contain extensive coronavirus provisions.

External debt at NG USA depresses metrics; structural subordination relative to operating companies A material proportion of consolidated external debt at NG USA resides at NG USA itself - between 9% and 16% at the end of the last four financial years. This comprises (1) the $707 million of assumed long-dated legacy debt3, maturing 2030-35; and (2) commercial paper, averaging $0.8 billion outstanding at year end over the last four financial years4 This proportion has declined in recent years with (1) National Grid only issuing new long-term holding company debt out of NG USA's immediate parent, NGNA; and (2) the higher levels of debt at the operating companies, which continue to be geared at or very slightly below regulatory assumptions, resulting from material rate base growth over this period (9.9% per annum from March 2017 - March 2020).

Exhibit 9 NG USA's operating companies have been undertaking material investment programme in recent years Compound annual growth rate over March 2017 - March 2020

Rate Base Net PP&E 20%

15%

10% National Grid's guidance for US rate base growth 2019 to 2023 ( >8% CAGR) 18.7% 14.4% 11.4% 5% 10.4% 9.5% 9.9% 9.0% 9.1% 8.3% 7.6% 7.8% 7.1% 7.6% 6.1% 6.1% 5.9% 2.6% 0% -0.5%

-5% KEDNY Boston Gas KEDLI Narragansett Mass. Electric Niagara Mohawk New England Genco US Average Source: Annual reports; Moody's Investors Service

Given the majority of the National Grid group's growth in regulated assets has come from the US from its ongoing material investment programme, with much of either mandated or included in existing rate plans, we expect National Grid to continue support the investment programme for NG USA's operating subsidiaries. Over the medium term, for NG USA's regulated subsidiaries, around 65% of gas investments are mandated and around 50% of its electricity investments are in asset health (reliability improvements account for around half of the residual in both cases).

Strong linkages and dependence with its weaker parent, NGNA As the below exhibit shows, NGNA's level of intercompany debt, in the form of intercompany loans from National Grid and other non- consolidated affiliated entities, represents a material, albeit declining, portion of the National Grid's US rate base. These intercompany loans were put in place to fund the acquisition of various entities, with the largest of these being the KeySpan group in 2007. These intercompany loans are paid by NGNA from the dividends it receives from NG USA.

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Exhibit 10 Whilst holding company debt at NGNA remains very sizeable it's share of rate base has declined Composition of debt outstanding at NGNA where NGNA is the original borrower

Intercompany notes EMTN Export Credit agreement Convertible bonds NGNA debt as % of rate base 9,000 60% 23 8,000 181 50% 7,000 561 845 129 6,000 2515 40% 1517 3447 4923 561 561 5,000 4588 449 816 30% 8470 4613

$ million 4,000 7530

3,000 6153 3542 20% 3417 5203 4903 2,000 4138 3338 10% 2538 1,000 1788 1172 972 0 0% Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

Source: Company reports; Moody's Investors Service

As Exhibit 1 shows, NG USA has typically upstreamed $592 million of preferred stock dividends per annum (which we ascribed 50% equity credit to) in order for NGNA to repay over $7 billion of intercompany loans last decade. These intercompany loans are now substantially repaid, $972 million was outstanding at March 2020, with no further principal repayments in the next 18 months (the balance falls due in two tranches, $450 million July 2022 and $522 million July 2027). Consequently, we expect dividend requirements to moderate (absent further material growth in NGNA's renewables business) over the coming years, especially if National Grid continues to take measures to bolster NGNA's balance sheet (it has provided $4.8 billion of additional equity since 2013-14).5 This, in turn, will support NG USA's CFO pre-WC / debt. We estimate NG USA's CFO pre-WC / debt has been depressed by between 1.3% and 1.9% points over the last four financial years from upstreaming preferred stock dividends.

However, NGNA still retains significant linkages with NG USA. Since 2008, NG USA has had an agreement with NGNA that it can draw, interest free, on significant advances from NGNA to meet working capital needs. Since February 2016, when the agreement was last amended and restated, the borrowing capacity has been $8 billion and at March 2020, NG USA had $6.3 billion of outstanding advances from NGNA under this agreement.6 Consequently, we believe that NG USA has strong linkages and dependence with its weaker parent, NGNA.

Further balance sheet strengthening required for NGNA to meet guidance With NGNA's New York subsidiaries weakly positioned against ratio guidance for our A3 rating, high teens in percentage terms, we expect that favourable rate case determinations in New York and/or a further reduction in holding company debt will be required for NGNA to meet our minimum CFO pre-WC / debt guidance of 15%. ESG considerations Ambitious decarbonisation agenda continues apace in states that NG USA operates in In the US, regulatory frameworks are driving the decarbonisation of the energy industry, although at different scales depending on the state. In order to deliver this decarbonisation, significant investment is needed on safety (replacing leak prone pipe) and asset health (improving system reliability, which is also required to accommodate uptake of electric vehicles), and to support the significant growth in renewables whilst keeping the affordability of tariffs. This long-term capital expenditure and resource planning is already usually incorporated into regulatory tariff setting to reflect demand expectations driven by population growth, consumption efficiency initiatives, and required investment to maintain reliability and security of supply.

Decarbonisation is also raising questions about the long-term future of gas distribution utilities in some developed countries. We view New York as of the one states that is pursuing the most aggressive decarbonisation agenda, with Massachusetts not that far behind, with increased impediments to the building of gas infrastructure, both in legislation (Climate Leadership and Community Protection Act, CLCPA)7 and recent decisions on energy policy.

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We view NG USA as having moderate exposure to carbon transition risk, in line with that of the sector. The below exhibit shows NG USA regulated operations are split broadly equally between electricity and gas in each of the states that its operating companies reside in. Whilst NG USA's gas distribution subsidiaries have seen the faster rate base growth in recent years, we expect this trend to reverse this decade as decarbonisation efforts intensify.

Exhibit 11 Breakdown of NG USA's rate base by fuel for main regulated subsidiaries Rate base as of March 2020

Gas distribution Electricity distribution Electricity transmission 100% 10% 90%

80% 40% 48% 49% 70% 38%

60%

50% 100%

40%

30% 60% 52% 51% 51% 20%

10%

0% New York Massachusetts Rhode Island FERC All US

Source: National Grid

We note KEDLI and KEDNY have yet to secure an agreement to resolve gas security of supply constraints in downstate New York. In addition, KEDNY has significant environmental remediation liabilities related to soil and water pollution, as discussed above. (See KEDNY credit opinion, August 2020, for more details)

Coronavirus outbreak likely to reduce revenue in 2020-21; vast majority recoverable in latter years and liquidity risk manageable The economic costs of the coronavirus crisis amid the near shutdown of the global economy are accumulating rapidly. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

The regulatory protections around recouping the anticipated shortfall in revenue, primarily from lower than expected electricity and gas consumption and network volumes (particularly by industrial and commercial customers), and incremental costs (balancing costs, bad debt and associated provisions) differ between jurisdictions in the US. NG USA's regulated businesses are protected against volume risk, though there is a lag in recovery (manageable given the company's good liquidity, discussed below).

Volume risk All of NG USA's businesses are protected against unexpected declines in volumes, and in turn revenues, due to them all having revenue decoupling mechanisms in rate plans (or rates for transmission entities that are regulated by the FERC).

The time lag for recovering this shortfall varies between US states. However, FERC regulated entities (New England Power Company (A3 stable) and around one third of Narragansett Electric Company's (A3 negative) rate base, together 10% of the NG USA's rate base at March 2020) have the shortest time lag for recouping these revenues due to the formulaic forward-looking rate-setting mechanism, with a monthly formula that adjusts for changes in network load that impacts demand. Collected revenues are less sensitive to throughput volumes for LDCs than electric utilities.

Revenue from NG USA's subsidiaries is around $12-13 billion per annum with bad debt expense averaging 1.5% per annum over FY2015-19. In FY2020, NG USA reported a material increase in bad debt and associated provisions in FY2020 for the distribution businesses, as shown in the Exhibits below, and guided to a further step up in FY2021. Whilst all the rate plans contain a form of bad debt true-up, the protections are not as comprehensive as the regulatory mechanisms for volume related risks.

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Exhibit 12 Exhibit 13 NG USA's bad debt expense was higher in FY2020 Bad debt expense as a % of NG USA's revenue Breakdown by state of regulated operations Breakdown by state of regulated operations

Other, includes Genco FERC (NEP) New York (KEDLI, KEDNY, NiMo) Massachusetts (Boston, MECO, Nantucket) Rhode Island (NECO) Massachusetts (Boston, MECO, Nantucket) Rhode Island (NECO) New York (KEDLI, KEDNY, NiMo) FERC (NEP) All US 300 3.5% 38 250 3.0%

2.5% 200 28 24 129 2.0% 8 150 1.5% 100 14 $ million $ 81 19 85 1.0% 100 66 64 0.5% 50 111 84 81 79 0.0% 66 52 0 -0.5% FY15 FY16 FY17 FY18 FY19 FY20 FY15 FY16 FY17 FY18 FY19 FY20 Source: Company reports; Moody's Investors Service Source: Company reports; Moody's Investors Service

We note US utilities are not provided automatic deferred accounting treatment related to uncollectible expense; however, if the uncollectible expense levels grow to a materially larger level than provided for in rates, and the utility is not overearning, then it can petition for deferral treatment and recovery. We note that the last time bad debt expenses grew materially above historic norms was in the financial crisis. Then the New York regulator instituted a proceeding to address this issue which waived the traditional deferral standards and granted utilities the right to seek a one-time deferral though no major utilities filed any subsequent petitions.

Revenue deferrals, such as the one announced for NiMo’s customers that is neutral for the company over 2020-21, are agreed by the regulator together with the utilities considering the individual company circumstances. (Deferrals can also happen into future rate case filings.) Liquidity analysis National Grid manages its financing and liquidity on a fully group basis, with a central finance committee setting the rules by which individual entities can raise capital. For the US subsidiaries, short-term liquidity requirements are managed via the group’s regulated money pool. All of the regulated subsidiaries can lend to and borrow from the pool. However, the unregulated holding companies — NGNA and NG USA — may only act as lenders. The interest rate for borrowing under the pool is determined by reference to the cost of meeting the group's funding needs, typically a mix of 30-day P-2 commercial paper and any other long- and short-term funding sources.

To support the regulated money pool, the parent holding companies have in place bilateral facilities totalling $3.8 billion, with maturity dates now ranging from May 2022 out to June 2025, for which NG plc, NGNA and NG USA are named borrowers. The facilities were undrawn as of March 2020. NGNA and NG USA also have two commercial paper programmes, denominated equally in US dollars and euros. Support for these programmes comes from the holding companies being named as borrowers under the aforementioned revolving credit facilities. As of March 2020, $483 million and $328 million were outstanding on the US and euro commercial paper programmes, respectively.

Overall, we view NG USA as having good liquidity. This reflects as positives (1) the stable and predictable cash flows generated by its regulated subsidiaries; and (2) the fact that none of the aforementioned facilities have any meaningfully restrictive covenants.8

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Rating methodology and scorecard factors We assess NG USA under the Regulated Electric and Gas Utilities rating methodology, published in June 2017. The scorecard-indicated outcome for NG USA is Baa1 under both historic and projected metrics, in line with the assigned rating.

Exhibit 14 National Grid USA - Rating Factors Grid

Moody's 12-18 Month Forward Current View Regulated Electric and Gas Utilities Industry Grid [1][2] FY 3/31/2020 As of September 2020 [3] Factor 1 : Regulatory Framework (25%) Measure Score Measure Score a) Legislative and Judicial Underpinnings of the Regulatory Framework A A A A b) Consistency and Predictability of Regulation A A A A Factor 2 : Ability to Recover Costs and Earn Returns (25%) a) Timeliness of Recovery of Operating and Capital Costs Aa Aa Aa Aa b) Sufficiency of Rates and Returns Baa Baa Baa Baa Factor 3 : Diversification (10%) a) Market Position A A A A b) Generation and Fuel Diversity N/A N/A N/A N/A Factor 4 : Financial Strength (40%) a) CFO pre-WC + Interest / Interest (3 Year Avg) 3.1x Baa 3.3x - 4.6x Baa b) CFO pre-WC / Debt (3 Year Avg) 10.5% Ba 11% - 12% Baa c) CFO pre-WC – Dividends / Debt (3 Year Avg) 9.0% Baa 9% - 12% Baa d) Debt / Capitalization (3 Year Avg) 48.8% A 51% - 53% Baa Rating: Scorecard-indicated Outcome Before Notching Adjustment A3 A3 HoldCo Structural Subordination Notching -1 -1 -1 -1 a) Scorecard-indicated Outcome from Grid Baa1 Baa1 b) Actual Rating Assigned Baa1

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. [2] As of 31 March 2020. [3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures. Source: Moody's Financial Metrics™

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Appendix

Exhibit 15 Peer comparison National Grid USA

National Grid USA National Grid North America Inc. Avangrid, Inc. Consolidated Edison, Inc.

Baa1 Negative Baa1 Negative Baa1 Negative Baa1 Negative

FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE FYE (in USD Millions) Mar-18 Mar-19 Mar-20 Mar-18 Mar-19 Mar-20 Dec-17 Dec-18 Dec-19 Dec-17 Dec-18 Dec-19

Revenue 12,173 12,815 12,211 12,173 12,815 12,259 5,963 6,478 6,338 12,033 12,337 12,574

CFO Pre - W/C 2,015 1,855 2,228 2,212 2,117 2,525 1,643 1,823 1,456 3,453 3,245 3,196

Interest Expense 849 998 1,016 745 823 863 353 384 391 799 896 1,063

Gross Debt 17,027 18,794 22,238 19,844 21,150 21,314 7,607 7,788 9,059 18,620 22,525 23,902

Net Debt 16,653 18,251 21,646 19,464 20,603 20,697 7,566 7,752 8,881 17,823 21,630 22,921

Book capitalization 36,963 39,143 42,938 37,177 39,391 39,391 24,102 24,660 26,366 39,398 44,999 48,164

(CFO Pre-W/C + Interest) / Interest 3.4x 2.9x 3.2x 4.0x 3.6x 3.9x 5.7x 5.7x 4.7x 5.3x 4.6x 4.0x

(CFO Pre-W/C) / Debt 11.8% 9.9% 10.0% 11.1% 10.0% 11.8% 21.6% 23.4% 16.1% 18.5% 14.4% 13.4%

(CFO Pre - W/C - Dividends) / Debt 10.2% 8.3% 8.7% 11.1% 10.0% 11.8% 14.6% 15.5% 9.4% 14.2% 10.7% 9.5%

Debt / Book Capitalization 46.1% 48.0% 51.8% 53.4% 53.7% 49.3% 31.6% 31.6% 34.4% 47.3% 50.1% 49.6%

All metrics are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations. FYE = Financial year-end. LTM = Last 12 months Source: Moody’s Financial Metrics™

Exhibit 16 Moody's-adjusted debt calculation National Grid USA

FYE FYE FYE FYE FYE (in USD Millions) Mar-16 Mar-17 Mar-18 Mar-19 Mar-20

As Reported Debt 12,550 13,526 15,181 16,888 19,760 Pensions 1,574 1,144 949 814 1,267 Operating Leases 647 577 407 611 764 Hybrid Securities 18 18 18 18 0 Non-Standard Adjustments 526 494 473 463 447 Moody's-Adjusted Debt 15,315 15,758 17,027 18,794 22,238

Source: Moody’s Financial Metrics™

Exhibit 17 Moody's-adjusted CFO pre-WC calculation National Grid USA

FYE FYE FYE FYE FYE (in USD Millions) Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 As Reported CFO pre-WC 1,863.0 1,649.9 2,197.0 2,061.0 2,384.0 Pensions 205.0 178.0 12.0 59.0 54.0 Operating Leases 79.0 80.3 80.4 65.2 124.6 Capitalized Interest 0.0 0.0 -30.0 -34.0 -39.0 Hybrid Securities -589.5 -296.0 -274.5 -296.0 -296.0 Moody's-Adjusted CFO pre-WC 1,557.5 1,612.2 1,984.9 1,855.2 2,227.6

Source: Moody’s Financial Metrics™

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Exhibit 18 Select historical Moody's-adjusted financial data National Grid USA

FYE FYE FYE FYE FYE (in USD Millions) Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 INCOME STATEMENT Revenue 11,008.0 11,021.0 12,173.0 12,815.0 12,211.0 EBIT 1,589.0 1,699.7 1,539.6 1,598.8 2,051.4 EBITDA 2,674.0 2,844.0 2,702.0 2,837.0 3,406.0 Interest expense 533.5 533.5 849.4 997.6 1,015.7 BALANCE SHEET Total Debt 15,135.9 15,758.5 17,027.4 18,793.6 22,238.0 Net Debt 14,251.9 15,404.5 16,653.4 18,250.6 21,646.0 Total Liabilities 30,651.9 31,909.5 34,218.4 36,549.4 40,852.0 Fixed Assets 28,111.4 29,995.0 32,280.9 34,876.1 37,815.0 Total Assets 46,282.4 47,902.0 50,930.9 53,495.1 57,800.0 CASH FLOW CFO Pre - W/C 1,695.6 1,612.2 2,014.9 1,855.2 2,227.6 Cash Dividends - Common 0.0 0.0 0.0 0.0 0.0 Cash Dividends - Preference -589.5 -296.0 -274.5 -296.0 -296.0 Capital Expenditures 2,658.6 2,826.0 3,110.3 3,573.4 -4,218.6 (CFO Pre-W/C) / Debt 10.3% 10.2% 11.8% 9.9% 10.0% (CFO Pre - W/C - Dividends) / Debt 6.4% 8.4% 10.2% 8.3% 8.7% PROFITABILITY EBIT Margin % 14.4% 15.4% 12.6% 12.5% 16.8% EBITDA Margin % 24.3% 25.8% 22.2% 22.1% 27.9% INTEREST COVERAGE (CFO Pre-W/C + Interest) / Interest 4.2x 2.9x 3.4x 2.9x 3.2x LEVERAGE Debt / EBITDA 5.7x 5.5x 6.3x 6.6x 6.5x Net Debt / EBITDA 5.3x 5.4x 6.2x 6.4x 6.4x Debt / Book Capitalization 42.3% 42.2% 46.1% 48.0% 51.8%

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Ratings

Exhibit 19 Category Moody's Rating NATIONAL GRID USA Outlook Negative Issuer Rating Baa1 Commercial Paper P-2 ULT PARENT: NATIONAL GRID PLC Outlook Negative Issuer Rating Baa1 Senior Unsecured -Dom Curr Baa1 Commercial Paper P-2 Other Short Term (P)P-2 PARENT: NATIONAL GRID NORTH AMERICA INC. Outlook Negative Issuer Rating Baa1 Senior Unsecured Baa1 Commercial Paper P-2 ST Issuer Rating P-2 Source: Moody's Investors Service

Endnotes 1 The magnitude of this increase reflects that (1) between May 2013 and the start of 2016, there was a prolonged period during which National Grid filed no new US rate cases because of problems with an IT system implementation; and (2) for most of these business, elements of cost recovery are fixed until a company refiles. 2 Though with the delays since 1 April 2020 to be trued-up over the term of the rate plan. 3 Originally issued by KeySpan Corporation. 4 NG USA may lend to the money pool, discussed below in the liquidity section, if there is a shortfall. 5 See NGNA: $2.5 billion equity injection from parent is credit positive, August 2019, for more information). 6 Amounts advanced under each of these agreements are repayable on demand and can be structured as interest or noninterest bearing subject to the demands of the lender. The advances support general working capital needs with advances and repayments executed on a daily basis. 7 Signed into law in July 2019, the CLCPA establishes a framework for reducing greenhouse gas emissions, increasing renewable electric generation and increasing energy efficiency. The CLCPA requires the PSC to establish a renewable energy program by 30 June 2021 that requires a minimum of 70% of statewide electric generation from the state's load-serving entities be generated by renewable energy systems by 2030. In addition, the CLCPA mandates that by 2040, emissions from the electricity sector be eliminated. 8 The terms of the facilities restrict the borrowing of all NGNA's US subsidiaries to $25 billion excluding intercompany indebtedness. As of March 2020, the main regulated subsidiaries had $11.4 billion of external debt outstanding.

14 11 September 2020 National Grid USA: Update following outlook change to negative Boston Gas Company d/b/a National Grid D.P.U. 20-120 Attachment AG-1-11-7 Page 15 of 15 MOODY'S INVESTORS SERVICE INFRASTRUCTURE AND PROJECT FINANCE

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15 11 September 2020 National Grid USA: Update following outlook change to negative