NGG

Business Context and Reporting Period

Company: National Grid plc
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Six months ended 30 September 2010 (Unaudited)
Filing Date: 18 November 2010

National Grid plc reported strong first-half performance driven by operational improvements, regulatory progress in the US, and a completed £3.2 billion rights issue. The company operates regulated electricity and gas transmission and distribution networks in the UK and US, alongside non-regulated activities.

Key Financial Metrics

Note: Business performance results exclude exceptional items, remeasurements, and stranded cost recoveries. Statutory pre-tax profit was £971m (up 3%).

Material Changes vs. Prior Period

• Profit Growth: Pre-tax profit increased 45% to £938m, primarily driven by timing impacts (reversal of prior year under-recoveries) and strong performance across all businesses. Hot weather contributed approximately £33m in additional revenue to non-decoupled electricity distribution.
• Capital Investment: Investment rose to £1.7bn, with a significant increase in UK Transmission capex to £627m. The company is on track for a full-year capital expenditure of approximately £3.7bn.
• Debt Reduction: Net debt decreased by £2.9bn to £19.2bn, reflecting the receipt of £3.2bn from the rights issue completed in June 2010 and the repayment of approximately £900m in debt securities.
• Dividend: The interim dividend was increased by 8% to 12.90p per share (rebased), aligning with the policy of targeting 8% growth until March 2012.

Guidance, Outlook, and Risks

Management Commentary and Outlook

CEO Steve Holliday expressed confidence in the company's strategy, citing steady progress on US regulatory filings and the new RIIO regulatory regime in the UK. The company expects a substantial improvement in the Gas Distribution business for the full year. Net debt at March 2011 is expected to be significantly lower than the prior year, though the full-year financing charge is expected to be marginally below last year's figure due to inflation impacts on RPI-linked bonds offsetting lower interest rates.

Regulatory Progress

• US: New rate agreements effective for Massachusetts gas companies (awarded $58m revenue increase). Awaiting New York Public Service Commission decision on Niagara Mohawk electric rates (expected January 2011).
• UK: Encouraged by the new RIIO (Revenue = Incentives + Innovation + Outputs) framework proposed by Ofgem, which will apply from April 2013.

Risks and Contingencies

• Regulatory Reviews: Three US state commissions (Rhode Island, New York, Massachusetts) are reviewing service company cost allocations. An independent review by Liberty Consulting Group is underway.
• Legal: A class action lawsuit in the US District Court for the Southern District of New York seeks damages of at least $118 million regarding a 2006 financial swap transaction; management believes the allegations are without merit.
• Operational: Risks include network failure, unseasonable weather affecting demand, and changes in credit ratings or borrowing costs.

Investor Verification Checklist

• Timing Impacts: Verify the sustainability of the 45% pre-tax profit growth, as a significant portion is attributed to the reversal of prior-year under-recoveries and timing differences rather than organic volume growth.
• US Rate Cases: Monitor the outcome of the New York electric rate case decision expected in January 2011 and the ongoing regulatory reviews of service company costs.
• Capital Expenditure: Confirm the execution of the increased £3.7bn full-year capex program, particularly in UK Transmission, and its impact on future cash flows.
• Debt Management: Assess the impact of rising inflation on RPI-linked debt costs versus the benefits of the reduced net debt balance.
• Dividend Policy: Confirm the company's ability to maintain the targeted 8% dividend growth trajectory through March 2012.