NGG

National Grid plc: Half-Year Report Summary (Six Months Ended 30 September 2007)

Business Context and Reporting Period

This Form 6-K summarizes the unaudited half-year financial results for National Grid plc for the six months ended 30 September 2007. The reporting period was significantly impacted by the completion of the KeySpan Corporation acquisition on 24 August 2007, which expanded the company's footprint in North America. Additionally, the company completed the disposals of its UK and US Wireless businesses and the Basslink interconnector in Australia, generating proceeds of £3.1 billion. The company is implementing a global operating model to integrate KeySpan and drive cost efficiencies.

Key Financial Metrics

Note: US Stranded Cost Recoveries contributed £190m to operating profit (£114m after tax) and are excluded from the primary "Business Performance" metrics as they are non-recurring cash flows returned to shareholders.

Material Changes vs. Prior Period

• Acquisitions and Disposals: The acquisition of KeySpan significantly increased the US asset base and revenue. Conversely, the sale of Wireless and Basslink businesses resulted in a £1.6 billion profit from discontinued operations, driving total statutory earnings to £2,396m (90.0p EPS) for the period.
• Segment Performance:
  • Transmission: Operating profit rose 16% to £574m, driven by higher UK regulated revenue following new price controls.
  • Gas Distribution: Operating profit surged 66% to £166m, aided by UK pricing formula changes and a full first-half contribution from Rhode Island operations.
  • Electricity Distribution & Generation: Operating profit declined 12% to £196m due to timing of rate adjustments, higher reliability enhancement costs, and the absence of a one-off pension benefit in the prior year.
• Balance Sheet: Net debt increased to £16.3 billion from £11.8 billion, primarily due to the KeySpan acquisition, capital investment, and share buy-backs, partially offset by proceeds from asset disposals.
• Exceptional Items: A £169m deferred tax credit (due to a UK corporation tax rate reduction) and £79m in restructuring costs impacted statutory results.

Guidance, Outlook, and Risks

• Outlook: Management expects the full-year outlook to remain in line with expectations. UK regulated revenue growth is expected to be a major driver, though partially offset by timing differences in revenue collection. US revenue is expected to be higher.
• Dividends: An interim dividend of 11.7p per share (7% increase) was approved, payable in January 2008. The company maintains an aim to increase dividends by 7% annually through March 2008.
• Capital Investment: The company plans to invest approximately £16 billion over six years (to March 2012). Organic investment in the current period rose 39% to £1.5 billion.
• Share Buy-backs: To date, £1,042m has been returned to shareholders via buy-backs. The company aims to return a further £900m over the next 6-12 months to complete the return of proceeds from Wireless sales and US stranded assets.
• Regulatory Risks:
  • UK: Ongoing discussions with Ofgem regarding the 2008-2013 price control for gas distribution; management believes proposed cost allowances may only deliver "bare-minimum" networks.
  • US: Preparing rate plan filings for upstate New York, Rhode Island, and New Hampshire gas networks to recover allowed returns.
• Contingencies: Ofgem has issued Statements of Objections regarding the domestic gas metering business; a decision is expected shortly. The company remains confident it has not infringed competition law.

Key Facts for Investor Verification

• KeySpan Integration: Verify the progress of integrating KeySpan operations and the realization of expected synergies, given the provisional nature of the acquisition accounting at this stage.
• Regulatory Settlements: Monitor the outcome of the UK Ofgem gas distribution price control discussions (final proposals expected December 2007) and US rate plan filings, as these directly impact future revenue and margins.
• Debt Management: Assess the impact of the increased net debt (£16.3bn) on interest cover, which management aims to manage within a 3.0–3.5x range long-term.
• Discontinued Operations: Confirm the timeline for the sale of the Ravenswood generating station (required by NY PSC) and the KeySpan communications business, expected by Q1 2008.
• Competition Investigation: Track the resolution of the Ofgem investigation into the UK gas metering business.