Final Results

17th May 2007 07:02

National Grid PLC17 May 2007 17 May 2007 National Grid plc Results for the year ended 31 March 2007 HIGHLIGHTS • Good full year performance • Earnings per share, excluding US stranded cost recoveries, up 9% • Full year dividend up 10% • Average return on equity of 12.4% (Note A) • Delivering on strategy • UK and US Wireless infrastructure businesses sold in April for £2.7bn • £1.8bn share buy-back from Wireless sale proceeds announced • £2.3bn capital investment in 2006/07, over £14bn projected over six years to March 2012 • Significant progress towards completion of the agreed acquisition of KeySpan FINANCIAL RESULTS FOR CONTINUING OPERATIONS £ million, at actual exchange rate Year ended 31 March 2007 2006 % change---------------------------------- -------- -------- ---------Business performance (Note B) (excluding US stranded cost recoveries) Operating profit 2,031 1,968 3 Pre-tax profit 1,486 1,369 9 Earnings 1,042 998 4 Earnings per share 38.3p 35.2p 9---------------------------------- -------- -------- --------- Earnings per share (including US stranded cost recoveries) 47.7p 45.5p 5---------------------------------- -------- -------- ---------Statutory results (including US stranded cost recoveries) Operating profit 2,513 2,374 6 Pre-tax profit 1,751 1,718 2 Earnings 1,308 1,181 11 Earnings per share 48.1p 41.6p 16---------------------------------- -------- -------- ---------Dividend per share 28.7p 26.1p 10---------------------------------- -------- -------- --------- Steve Holliday, Chief Executive, said: "This is another set of good results and we are delivering on all fronts of ourstrategy. "We achieved an excellent sale price for our wireless businesses, enabling us toreturn a further £1.8bn to shareholders. Our investment programme now totalsover £14bn, including two new projects which will help safeguard UK energysupplies. We have reported new metrics that deliver on our commitment to improvetransparency on our returns. We are making significant progress towards the fullintegration of our businesses and looking forward, we are ready for thecompletion of the KeySpan deal." OUR STRATEGY Our aim is to drive shareholder value with a simple and highly focused strategy,centred on the ownership and operation of large scale asset intensivebusinesses. We will: • Focus on the electricity and gas sector • Focus on our priority markets in the UK and US. We will drive performance and value by fully integrating our operations,deploying best practice and common processes across the organisation, andmaintaining our financial discipline. We will continue to focus on the provisionof a safe, reliable, efficient and responsible service to our customers. Financing of our businesses will be consistent with maintaining an efficientbalance sheet. We will not hold surplus cash, either through assets or anunder-geared balance sheet, but will return this to shareholders. OUR DELIVERY We have made significant progress in implementing our strategy in the past year.We have delivered a good financial performance, growing earnings per share andthe dividend, with an average return on equity of 12.4% over three years. During the year we made significant progress towards the acquisition of KeySpan.With five clearances or approvals achieved in 2006, we are pleased to have madeprogress on two more key milestones in 2007. We announced in March that we hadreached agreement in principle with the Long Island Power Authority (LIPA) onthe renewal of contracts for the provision of electricity transmission anddistribution system management and operation services on Long Island. In Aprilwe announced that we had reached agreement in principle with the New HampshirePublic Utilities Commission staff and other parties on the transaction.Commission hearings on the formal filing are scheduled for the end of thismonth. Subject to that outcome, the remaining approval required for thistransaction is from the New York Public Service Commission (NYPSC). This processis taking longer than we had originally expected. In March, we entered intosettlement discussions with the NYPSC staff. These have now concluded and we arenow working to an extended procedural schedule. We expect to complete thetransaction in the autumn. In August, we completed our $575m acquisition of the Rhode Island assets of NewEngland Gas. This has added around 245,000 natural gas customers to our businessand made a positive contribution to earnings this year. We sharpened our focus on our priority markets in April, with the sale of our UKWireless business for £2.5bn to Macquarie UK Broadcast Ventures Limited.Following our announcement in November of our intent to demerge our Wirelessbusiness, various parties approached us seeking to purchase that business. TheBoard concluded, following a competitive process, that a sale represented themost attractive and certain outcome for our shareholders. We have also agreedthe sale of our US Wireless business for $290m (around £150m) in cash to WGNAcquisition LLC, a company jointly owned by M/C Venture Partners and WachoviaCapital Partners. The process of restructuring our activities into global lines of business forTransmission, Gas Distribution, Electricity Distribution, and Non-RegulatedBusinesses is now complete. We are today reporting on these business lines. TheBoard is conducting a thorough selection process for an Executive Director forElectricity Distribution, which is expected to conclude during the summer. Inaddition, our Shared Service, Global IS and Global Finance organisations are nowsubstantially in place and are providing a common framework in support of ourasset based operations. In each of our lines of business we are rolling out plans to integrate ouroperations fully. A variety of change programmes in each line of businessprovide a disciplined framework for deploying common systems and processes andbest practices across our geographies. These plans will benefit customers andshareholders through improvements in customer service, reliability, safety,environmental and financial performance. This framework provides an excellentplatform for the swift integration of KeySpan into our new lines of business andwe are well positioned to 'hit the ground running' at completion for delivery ofthe $200m identified annual synergy savings. LOOKING AHEAD We aim to build on the success of the past year and make further progress indelivering on our strategic objectives. In November we announced our intention to sell Basslink, our electricityinterconnector in Australia, and have now started a competitive sale processwhich we expect to complete in late summer 2007. The announced return of £1.8bn following the sale of our UK Wireless business,together with the planned return of the remaining US stranded asset cash flows(estimated at $1.7bn over five years), demonstrates our commitment to continuedbalance sheet optimisation. Following completion of the acquisition of KeySpan,the sale of our Wireless businesses and the associated return of capital, andthe sale of Basslink, National Grid expects to have increased gearing with netdebt of around £18bn. Investment in our existing businesses will remain a key focus. This year weinvested £2.3bn and in the six years to March 2012 we expect our investment inelectricity and gas infrastructure to total over £14bn. This investment will befinanced from internal cashflow and borrowings. In the UK electricity and gas markets, our investment is driven by changes insources of gas supply, the development of the UK Government's energy policy andthe need for asset replacement. In Transmission, our UK investment for the fiveyears to 2012 has been agreed with Ofgem and will be remunerated under theregulatory price control that came into effect on 1 April 2007. In GasDistribution we are currently in discussion with Ofgem on the regulatory pricecontrol for the five years to March 2013, and one of the key topics will be ourgas distribution investment requirements. Ofgem is expected to publish finalproposals in December 2007. By March 2012 our investment in the UK is expectedto total around £11.7bn, including £1.8bn in non-regulated projects, and weproject that the value of our UK regulatory asset base will have grown by over35%. In the US electricity and gas markets, investment is being driven by demandgrowth, customer additions, reliability, and the need for asset replacement. Ourinvestment reached a record annual level in 2006/07, and by March 2012 ourinvestment in our existing US operations is expected to total around £2.7bn. OurNew England electricity distribution and New York rate plans assume a base levelof investment, and while investment above this has the effect of suppressing ourreturns in the short term, it is necessary to deliver the levels of reliabilityand customer service required. We believe that this incremental investment willbe recognised in our rate base in future rate plan filings. Today we are reporting a series of financial return metrics that give greatertransparency on National Grid's overall performance, and our performance againstour regulatory contracts. These are the metrics by which we will judge theperformance of our various businesses and we will report against them on anannual basis. A description of how these returns are calculated can be found inthe Return Definitions section. NATIONAL GRID AND CLIMATE CHANGE Energy and climate change policy are high on the world agenda. In our view,climate change represents both a challenge and opportunity for National Grid,and society in general. We believe that utilities can help customers reduceenergy demand, while providing a reliable supply, and we see opportunities toexpand our business in ways that benefit the environment, our customers, and ourshareholders. Our approach is simple. We will: • Adopt a low carbon business model • Support the development of low carbon energy markets • Advocate the benefits of a low carbon economy. We have achieved a 35% reduction in our CO2 emissions (from our verifiedbaseline), having already met the Kyoto Agreement 2012 targets for the UK andUS. We are planning to use renewable sources of energy for all our own-useelectricity needs by 2010, and well before 2050 we aim to have reducedgreenhouse gas emissions from our processes, operations and offices by 60%. We will work with regulators, policy makers and governments to reshaperegulatory frameworks in the electricity and gas markets in which we operate.Our role at the centre of these markets allows us to support change that willbenefit our customers, our shareholders and the environment. In our operationalsystem statements in the UK and US we plan to include information on theimplications future energy demand will have for meeting climate change targets,so that our customers and market participants are better able to respond tothese drivers, and we will seek to align our incentives and revenues withactions that promote both energy efficiency and security of supply. National Grid has for many years been rated as a leader in the field ofsustainable development and corporate responsibility. Dow Jones currently ratesNational Grid as the most sustainable and responsible multi-utility in theworld. For the past four years, we have been the top utility in the UK Businessin the Community Corporate Responsibility Index and are rated as 'Platinum' anda Top 10 Global Leader. In the US, the Department of Energy's National RenewableEnergy Laboratory has named our renewable energy programme in its Top 10 rankingof utility green power programmes. DIVIDEND AND SHARE BUY-BACK The Board is recommending a final dividend of 17.8p per ordinary share ($1.7638per American Depository share (ADS)), bringing the full-year dividend to 28.7pper ordinary share ($2.7917 per American Depository share (ADS)). This is a 10%increase on the prior year dividend, in sterling. The final dividend is to bepaid on 22 August 2007 to shareholders on the register as at 8 June 2007. Under our US rate plans, cash flows from stranded assets in our ElectricityDistribution business are scheduled to end in 2011 and do not form part of ourcore on-going business. We therefore exclude them from our dividend policy, andin November we announced a share buy-back programme to return cash flows fromour US stranded assets. During the year we repurchased and cancelled 22m sharesat a cost of £169m. The balance of stranded asset cash flows through to 2011 isestimated at around $1.7bn and of this, we expect to receive and return around$300m through share buy-backs during 2007/08. Our dividend for the year is covered 1.3 times by earnings per share fromcontinuing operations, excluding earnings from our US stranded assets. During 2007/08 and the first part of 2008/09 our share buy-back programme willbe extended to return a further £1.8bn of proceeds from the sale of our Wirelessbusinesses. We maintain our aim to increase dividends per ordinary share expressed insterling by 7% in each financial year through to 31 March 2008. We will beannouncing an update to our longer term policy later in the current financialyear. FINANCIAL RESULTS PRESENTATION Unless otherwise stated, all financial commentaries are given on a businessperformance basis, at actual exchange rates. Business performance represents theresults for continuing operations before exceptional items and mark-to-marketremeasurements of commodity contracts and financial instruments that are heldfor economic hedging purposes but did not achieve hedge accounting. Commentaryprovided in respect of results after exceptional items and certainmark-to-market remeasurements is described as 'statutory'. REVIEW OF FINANCIAL RESULTS FOR CONTINUING OPERATIONS Operating profit, excluding US stranded cost recoveries, was £2,031m, up 3% onthe prior year (up 5% on a constant currency basis (Note C)). This was primarilydriven by good results in our Transmission and Electricity Distributionbusinesses, which more than offset lower operating profit in Gas Distribution. Net finance costs decreased 9% on the prior year to £547m, mainly as a result offavourable short-term cash investments and an increased pension credit. Theeffective interest rate on net debt for the year was 5.6%, and 5.95% excludingfavourable short-term cash investments. Profit before tax, excluding US strandedcost recoveries, was up 9% to £1,486m from £1,369m. The tax charge on profit,excluding US stranded cost recoveries, was £442m, £73m higher than the prioryear. The effective tax rate for the year, after US stranded cost recoveries,increased to 32%. Earnings, excluding US stranded cost recoveries, were up 4% on the prior year at£1,042m. On the same basis, earnings per share increased 9% from 35.2p last yearto 38.3p, reflecting the year-on-year impact of share consolidation followingthe return of £2bn to shareholders in August 2005, and our share buybackprogramme relating to US stranded asset cash flows. US stranded cost recoveries added 9.4p to earnings per share, with an operatingprofit contribution of £423m (£254m after tax). Including this contribution,earnings per share for the year were 47.7p. Exceptional items and remeasurements for continuing operations increasedearnings by £12m after tax. These comprised restructuring costs of £22m (£10mafter tax), a commodity remeasurement gain of £62m (£37m after tax), exceptionalfinance charges of £45m (£31m after tax) and a net financial instrumentremeasurement loss of £153m (£16m gain after tax, including a £56m tax credit inrespect of prior years). After these items and minority interests, statutoryearnings for continuing operations attributable to shareholders were £1,308m.Statutory basic earnings per share from continuing operations increased 16% to48.1p, up from 41.6p in the prior year. Profit from discontinued operations was£86m, leading to statutory basic earnings per share of 51.3p. National Grid's operating cash flows from continuing operations, beforeexceptional items and taxation, were £88m higher than the prior year at £3,176m. Organic investment in our continuing businesses increased by 23% to £2.3bn,primarily due to increased capital expenditure on new gas transmissioninfrastructure in the UK. Our net debt rose to £11.8bn at 31 March 2007 compared with £10.9bn at 31 March2006, mainly due to the increased level of capital spend, the acquisition of theRhode Island assets of New England Gas and the return of £169m through our sharebuyback programme. Our average return on equity was 12.4% over a three year period, and 14.1%in 2006/07. REVIEW OF TRANSMISSION OPERATIONS Summary results Year ended 31 March(£m) 2007 2006 % change---------------------------- ----------- ---------- -----------Revenue and other operating income 3,091 3,020 2Operating costs (1,644) (1,627) (1)Depreciation and amortisation (393) (422) 7Operating profit - actual exchange rate 1,054 971 9Operating profit - constant currency 1,054 963 9---------------------------- ----------- ---------- ----------- Operating profit by geographical segment Year ended 31 March(£m, at constant currency) 2007 2006 % change---------------------------- ----------- ---------- -----------UK 946 844 12US 108 119 (9)Operating profit 1,054 963 9---------------------------- ----------- ---------- ----------- Capital investment* Year ended 31 March(£m, at actual FX) 2007 2006 % change---------------------------- ----------- ---------- -----------UK 1,235 849 45US 108 91 19Capital investment 1,343 940 43---------------------------- ----------- ---------- ----------- * Excludes capital expenditure in relation to emissions trading in the UK. Regulatory asset value and rate base Year ended 31 March 2007 2006 % change---------------------------- ----------- ---------- -----------UK - RAV (£m)Electricity transmission 5,976 5,605 7Gas transmission 3,337 2,749 21US - rate base ($m)*New England Power** 760 790 (4)---------------------------- ----------- ---------- ----------- Returns Year ended 31 March 2007 2006---------------------------- ----------- ----------UK - operational return (real)Electricity transmission 4.7% 4.5%Gas transmission*** 7.8 % 6.3%---------------------------- ----------- ----------US - regulatory return on equity* (nominal)New England Power** 12.8% 9.5%---------------------------- ----------- ---------- * In New York, our electricity and gas, transmission and distribution activities(including our US stranded cost recoveries) make a combined regulatory filingeach calendar year. The combined New York rate base and returns are reported inour Electricity Distribution business line. ** Based on New England Power common equity excluding goodwill. *** For the year ended 31 March 2006 gas transmission and distribution returnsin the UK are reported together as a single blended return. Transmission delivered a good operational and financial performance in 2006/07.Our electricity transmission operations in the UK saw the lowest number of lossof supply incidents in the last five years and with over 99.999% of demand metfor the 16th consecutive year, our reliability performance remains among thebest in the world. Operating profit increased to £1,054m, up 9%. This was primarily driven by a 9%increase in electricity transmission allowed revenue in the UK. This followedthe one-year price control extension which came into effect on 1 April 2006 andadded £103m to operating profit. The impact of timing on the recovery of incomeled to a year-on-year adverse effect of £64m, due to the combination of a £42mover-recovery in 2005/06 and an under-recovery of £22m in 2006/07. As expected,depreciation charges were lower than in the prior year by £27m, mainly as aresult of reduced early asset write-offs. Other items, mainly non-recurringitems, increased operating profit by a net £25m compared to the prior year.Movement in exchange rates had a £8m year-on-year negative impact on operatingprofit. We measure the financial performance of our UK regulated businesses using anoperational return metric. This metric is comparable with that used by Ofgem todefine the allowed return in our regulated business (the 'vanilla' return),which is currently 5.05%. In our electricity transmission business in the UK weachieved a 4.7% operational return in 2006/07. In our gas transmissionbusiness in the UK we achieved a 7.8% operational return in 2006/07. In the US we measure our financial performance against the allowed regulatoryreturn on equity, the basis used by our regulators in the US for setting rates.In New England Power we achieved a 12.8% regulatory return on equity in2006/07. New York electricity transmission and distribution operate under asingle rate plan together with US stranded cost recoveries. Our New York ratebase and returns are reported in our Electricity Distribution business line. Capital investment in Transmission increased by 43% during the year to £1,343m,mainly driven by a more than doubling of investment in new gas transmissioninfrastructure in the UK. Projects included: • £352m on the Milford Haven to Aberdulais gas pipeline • £290m on electricity asset replacement in the UK • £232m on electricity demand connections and other load-relatedinfrastructure in the UK • £108m in electricity transmission in the US in support of improvingreliability, accomodating load growth, changing demand patterns and meetingregulatory requirements. Other smaller projects together accounted for a further £361m of investment. In December we accepted Ofgem's final proposals for the UK Transmission OwnerPrice Controls for the five years from 1 April 2007. This agreement provides forbaseline investment of £4.4bn over the period which will increase ourTransmission UK Regulatory Asset Value (RAV) to over 40% above its 1 April 2006level. Ofgem also recognised the potential for additional customer drivenload-related capital investment and provided for this through revenue drivers.These mechanisms provide for the recovery of and return on incrementalinvestment through revenue adjustments in future periods, providing significantupside potential above the baseline allowance. This regulatory contractunderpins our transmission revenues in the UK and overall will result inbaseline real revenue increases of: • 7% in electricity transmission in 2007/08 and annual increases of2% plus inflation to March 2012 • 17% in gas transmission in 2007/08 and annual inflation increasesto March 2012. In March we awarded contracts for £2.5bn of this investment with our 14transmission alliance partner organisations. These partnerships were establishedas a direct transfer of best practice from our Gas Distribution business whereour mains replacement alliances have performed very successfully. In the US, improving our electricity transmission reliability performance is asignificant driver of investment and, together with new customer connections andadditional load-related infrastructure investment, we expect capital expenditureto total around £1bn in our New England and New York transmission networks byMarch 2012. In New England, this investment is added to the rate base on amonthly basis and under FERC regulations can earn a base return on equity of10.9%. As our asset base grows we will see an associated increase in depreciationcharges in the years ahead. Additionally, in the UK, we expect to see a rise inoperating costs, principally driven by higher workload, including 'quasi-capex',the operating expenditure associated with the increased capital investmentprogramme. 'Quasi-capex' is explicitly recognised by Ofgem in the new pricecontrol period and it is treated as investment for regulatory purposes and isadded to the regulatory asset base. Over the last two years conditions in the UK electricity and gas supply marketshave driven unprecedented demand for French interconnector capacity and LNGstorage capacity and resulted in revenues more than double the historic normalin those businesses. Capacity auction results this year have indicated thatthese market conditions no longer prevail and looking ahead, we expect revenuesin those businesses to return closer to historic levels. REVIEW OF GAS DISTRIBUTION OPERATIONS Summary results Year ended 31 March(£m) 2007 2006 % change---------------------------- ----------- ---------- -----------Revenue and other operating income 1,837 1,797 2Operating costs (1,163) (1,087) (7)Depreciation and amortisation (194) (180) (8)Operating profit - actual exchange rate 480 530 (9)Operating profit - constant currency 480 527 (9)---------------------------- ----------- ---------- ----------- Operating profit by geographical segment Year ended 31 March(£m, at constant currency) 2007 2006 % change---------------------------- ----------- ---------- -----------UK 409 483 (15)US 71 44 61Operating profit 480 527 (9)---------------------------- ----------- ---------- ----------- Capital investment Year ended 31 March(£m, at actual FX) 2007 2006 % change---------------------------- ----------- ---------- -----------UK capex 157 149 5UK repex 333 295 13US 36 25 44Capital investment 526 469 12---------------------------- ----------- ---------- ----------- Regulatory asset value and rate base* Year ended 31 March 2007 2006 % change---------------------------- ----------- ---------- -----------UK - RAV (£m)Gas distribution 5,596 5,492 2---------------------------- ----------- ---------- ----------- Returns* Year ended 31 March 2007 2006---------------------------- ----------- ----------UK - operational return (real)Gas distribution** 4.4% 6.3%---------------------------- ----------- ---------- * National Grid acquired the Rhode Island gas distribution assets of New EnglandGas in August 2006. At this time, National Grid has not made any regulatoryfilings for Rhode Island gas distribution and therefore returns and rate basehave not been reported this year. In New York, our electricity and gas,transmission and distribution activities (including our US stranded costrecoveries) make a combined regulatory filing each calendar year. The combinedNew York rate base and returns are reported in our Electricity Distributionbusiness line. ** For the year ended 31 March 2006 gas transmission and gas distributionreturns in the UK are reported together as a single blended return. Operating profit from Gas Distribution, at £480m, was down 9%. Net formula income in the UK was up £4m, with the benefit of an average 9% priceincrease in October largely offset by the impact of delivery volumes beingsignificantly lower than the prior year. The average winter temperature in theUK was the second warmest since 1914, resulting in delivery volumes lower by28TWh. This, together with weather adjusted underlying volumes lower by 16TWh,led to an under-recovery of income of £42m in 2006/07 which, combined with a£10m under-recovery in 2005/06, resulted in a net year-on-year adverse timingeffect on the recovery of income of £32m. In August we completed our acquisition of the Rhode Island assets of New EnglandGas. This has added around 245,000 natural gas customers to our business andmade a £17m contribution to operating profit. The expected increase in depreciation charges in the UK further reducedoperating profit by £9m in 2006/07, following increased investment in the UK inprior years. Pass-through costs, principally business rates, were £23m higheryear-on-year and workload related costs, as expected, were £16m higher, mainlyas a result of additional maintenance, service cut-offs and changes in meteringworkload. Other items added a net £12m to operating profit. Movement in exchangerates had a £3m year-on-year negative impact on operating profit. During the year our gas distribution alliance partnerships in the UK havecontinued to deliver our mains replacement programme, with 1,850km of mainslaid, some 5% higher than the previous year, resulting in total replacementexpenditure (repex) of £333m. We have also continued to invest in networkinfrastructure projects in the UK and US, resulting in total capital expenditure(including repex) of £526m. We measure the financial performance of our UK regulated businesses using anoperational return metric. This metric is comparable with that used by Ofgem todefine the allowed return in our regulated business (the 'vanilla' return),which is currently 5.05%. In our gas distribution business in the UK we achieveda 4.4% operational return in 2006/07. In December we accepted Ofgem's final proposals for the UK Gas DistributionOne-year Price Control to March 2008, this price control came into effect on 1April 2007. The price control process reviewed our historic capital expenditureabove the level assumed when the control was set in 2001/02 and allowed 93% ofthis additional investment to be added into the regulatory asset base, fiveyears after it was incurred. In addition, Ofgem made some positive changes tothe determination of our revenue allowance. In 2007/08 shrinkage gas costs,which have historically impacted operating profit, will be principally treatedas a pass-through item. Also, in 2007/08 our revenue allowance will no longer bedependent on delivery volumes, and our pricing formula now includes a reduceddelivery volume component - a move that will improve stability in our revenues.Overall, this price control will result in an 11% increase in allowed revenue in2007/08. We are currently in discussion with Ofgem on the regulatory price control forthe five years to March 2013, and one of the key areas of discussion will be ourgas distribution investment requirements. Our submissions project a totalcapital investment of around £3.4bn (including repex of around £2.3bn, 50% ofwhich is treated as operating expenditure for regulatory purposes, but iscapitalised under IFRS). We expect that this investment will raise our GasDistribution UK Regulatory Asset Value (RAV) to around 30% above its 1 April2006 level. Ofgem is expected to publish initial proposals at the end of May2007 and final proposals in December 2007. Our Gas Distribution activities in Rhode Island currently operate under arolling rate plan. REVIEW OF ELECTRICITY DISTRIBUTION OPERATIONS Summary results Year ended 31 March(£m) 2007 2006 % change---------------------------- ----------- ---------- -----------Revenue and other operating income 3,005 3,136 (4)Operating costs (2,514) (2,693) 7Depreciation and amortisation (127) (126) (1)Operating profit - actual exchange rate 364 317 15Operating profit - constant currency 364 297 23---------------------------- ----------- ---------- -----------Stranded cost recoveries - constant 423 457 (7)currency ----------- ---------- --------------------------------------- Capital investment Year ended 31 March(£m, at actual FX) 2007 2006 % change---------------------------- ----------- ---------- -----------Capital investment 218 219 (0)---------------------------- ----------- ---------- ----------- Rate base Year ended 31 December($m) 2006 2005 % change---------------------------- ----------- ---------- -----------Massachusetts 1,318 1,269 4New York* 6,296 6,232 1---------------------------- ----------- ---------- ----------- Regulatory return on equity (nominal) Year ended 31 December 2006 2005---------------------------- ----------- ----------Massachusetts 10.5% 12.3%New York* 9.6% 11.0%---------------------------- ----------- ---------- * In New York, our electricity and gas, transmission and distribution activities(including our US stranded cost recoveries) make a combined regulatory filingeach calendar year. The combined New York rate base and returns are reportedhere for the rate years ended 31 October. Operating profit from Electricity Distribution increased by 15% to £364m in 2006/07. Revenues, excluding pass-through commodity costs, increased by £91mcompared to the prior year, principally driven by the recovery of costs incurredin previous periods through our New York deferral account. In addition, thetiming of rate adjustments for pass-through items has led to a year-on-yearbenefit of £23m, mainly due to an over-recovery of commodity costs in RhodeIsland. Depreciation and amortisation charges were £9m higher than the prioryear. Higher operational expenditure driven by our reliability enhancementprogramme, and an increase in bad debts due to higher commodity costs furtherimpacted operating profit by £19m. In 2006/07 we experienced one of the worstyears for storms in our US operational history, resulting in a £43m impact onoperating profit compared to the prior year. This was principally due to a majorsnow storm in the Buffalo area in October and a major ice storm in the Albanyarea in January. Our US rate plans have mechanisms under which we can recovercertain major storm costs and we expect to recover the majority of these costsin future periods. Other items, mainly pensions related, resulted in a net £24mincrease in operating profit. Movement in exchange rates had a £20m year-on-yearnegative impact on operating profit. Our US stranded cost recoveries delivered £423m of operating profit. Asexpected, this was lower than the prior year which included the settlementbenefit received from USGen New England Inc. following its bankruptcy filing.Additionally, movement in exchange rates had a £32m year-on-year negativeimpact. US stranded cost recoveries include certain contract settlements thathave no net impact on cashflow, and excluding these, post-tax cashflow was£157m. This cashflow was returned to shareholders as part of our £169m sharebuy-back. In accordance with our New York rate plan we make biannual filings to recoveramounts recorded in the 'deferral account', and following the last filing in2005 we received approval to recover $150m during 2007/08, the majority of whichis recovered in our Electricity Distribution line of business. In March the NewYork Public Service Commission staff completed their audit of the deferralaccount and confirmed a forecast balance of around $500m as at 31 December 2007.We will make our next deferral account filing later this year, which will updatethe forecast balance to 31 December 2009, reflecting the current approvedrecoveries and actual deferrals for the period since our 2005 filing. We measure our US financial performance against the allowed regulatory return onequity (RoE), the basis used by our regulators in the US for setting rates.These return measures are calculated on a US GAAP basis and so do not reflectcertain operating profit or cash flows as reported and measured under IFRS, forinstance recoveries from our New York deferral account. In Massachusetts, the RoE for the calendar year ending 31 December 2006 was10.5%; this rate plan is currently in the 'indexing' phase, which requires thatits delivery rates remain at 88% of an index of regional peers and as such,there is no formal allowed RoE. The RoE declined compared to the prior year,principally driven by increased bad debts combined with increased capital andoperational spending under our reliability enhancement programme. Year-on-yeardelivery volumes were lower, due to less favourable weather reducing demand, andslower regional growth. In New York, the combined regulatory RoE includes electricity transmission,electricity distribution, gas distribution and US stranded cost recoveries. Forthe rate year ending 31 October 2006 this was 9.6%, lower than the allowed RoEof 10.6%, principally as a result of an increase in the regulated equity base. Capital expenditure was in line with the prior year at £218m, with investmentunder our reliability enhancement programme up £19m year-on-year at £41m, offsetby completion of our Nantucket cable project which became operational in 2005/06. Over the next five years, our reliability enhancement programme will continue tobe a key factor in our Electricity Distribution performance. This programmeforms a significant element of our capital investment plans and also includesincreased maintenance and vegetation management spending. We aim to offset theoperating cost impact of increasing reliability spending through efficiencyimprovements driven by our Electricity Distribution Business Review, supportedby our extended labour agreements in New York and New England. Improving our reliability performance will continue to be a key driver oncapital expenditure, together with new customer connections and additionalload-related infrastructure investment. We expect capital expenditure in ourelectricity distribution networks in New England and New York to total around£1.4bn by March 2012. In both cases, our rate plans assume a base level ofinvestment and while investment above this has the effect of suppressing ourreturns in the short term, it is necessary to deliver the levels of reliabilityand customer service required. We believe that this incremental investment willbe recognised in our rate base in future rate plan filings. REVIEW OF NON-REGULATED AND OTHER ACTIVITIES Summary results Year ended 31 March(£m) 2007 2006 % change---------------------------- ----------- ----------- -----------Revenue and other operating income 638 775 (18)Operating costs (348) (465) 25Depreciation and amortisation (157) (160) 2Operating profit 133 150 (11)---------------------------- ----------- ----------- ----------- Operating profit by principal activities Year ended 31 March(£m) 2007 2006 % change---------------------------- ----------- ----------- -----------Metering 103 97 6Grain LNG 9 6 50Property 86 88 (2)Other (65) (41) (59)Operating profit 133 150 (11)---------------------------- ----------- ----------- ----------- Capital investment Year ended 31 March(£m, at actual FX) 2007 2006 % change---------------------------- ----------- ----------- -----------Metering 149 112 33Grain LNG 94 136 (31)Property 7 54 (87)Other 8 (23) -Capital investment 258 279 (8)---------------------------- ----------- ----------- ----------- Operating profit from our Non-regulated and Other activities was lower than theprior year at £133m. A good performance in our Metering and Grain LNG businesseswas more than offset by higher corporate costs and loss of income fromconnections services. Metering operating profit was up 6% at £103m. Growth in our competitive meteringbusiness, particularly in the electricity market, continues to more than offseta decline in regulated metering revenue, with 827,000 new meters installed in2006/07, an increase of over 40% on the prior year. During the year capitalinvestment in our metering business increased to £149m, and as competition andsmart metering develop, we see attractive opportunities for investment goingforward. In June 2005, Ofgem initiated an investigation under the Competition Act intocertain aspects of our domestic gas metering activities. Following this, in May2006 Ofgem issued a Statement of Objections detailing why it believed ourconduct amounted to a breach under the Act. We presented a full rebuttal inAugust 2006 and demonstrated there was no evidence relating to the originalallegations. We also showed that new entrants' share of the market for new andreplacement gas meters had developed at a remarkable rate. In April 2007, Ofgemissued a further Statement of Objections. We are working to provide a fullresponse and believe it is in the interests of all that this is brought to aswift and final conclusion. Our Grain LNG business recorded its first full year contribution from Phase Ioperations. Phase I provides an annual LNG import capacity of around 3 milliontonnes, and delivered an operating profit of £9m in 2006/07. Construction of ourPhase II capacity extension is on track, and is expected to be operational inlate 2008. Phase II adds three new LNG tanks, increasing our annual importcapacity to around 10 million tonnes. Today we are pleased to announce a furtherexpansion of the site, with investment of around £310m to add a further LNG tankand a second unloading jetty. This Phase III is expected to complete in 2010 andwill increase the total annual LNG import capacity of the terminal to around 15million tonnes, representing around 20% of total UK gas demand. Theseinvestments are all underpinned by long-term, take or pay contracts. Sales of land and property surplus to our operational requirements were in linewith the prior year, delivering an operating profit of £86m. We are close to finalising negotiations with suppliers for BritNed, a 50/50joint venture with TenneT, the Dutch electricity transmission owner, toconstruct an electricity interconnector between the electricity transmissionsystems in the UK and the Netherlands. Subject to receiving the requiredexemption from our regulators, we will invest around £200m. BritNed will make asignificant contribution to the UK's security of electricity supply fromcommissioning, expected in 2010. Looking ahead, we will continue to focus on improving operational efficiency inthese businesses, and capital investment in these niche areas within the UK andUS electricity and gas markets will continue to be a key profit driver. Intotal, capital investment in our non-regulated activities is expected to reacharound £1.8bn by March 2012. BOARD CHANGES In January 2006 we announced that Steve Holliday would take over as ChiefExecutive on 1 January 2007, following the retirement of Roger Urwin. During the year we announced three further Board changes. Mark Fairbairn wasappointed to the Board on 1 January 2007 as Executive Director responsible forGas Distribution. Mark was formerly Chief Operating Officer for Gas Distributionin the UK. Linda Adamany joined the Board as a Non-executive Director on 1November 2006. Linda is a Group Vice President of BP Refining and Marketing andhas over 25 years experience in the energy sector. Mike Jesanis stepped downfrom the Board as Executive Director responsible for US Distribution, and leftthe company on 31 December 2006. Paul Joskow, one of our Non-executive Directors, has today announced hisintention to step down from the Board after the Annual General Meeting in July.He has been a member of the Board since 2000 and his support and advice havebeen greatly valued throughout this time. RETURN DEFINITIONS The financial returns we have reported today are designed to give greatertransparency on National Grid's relative performance, and our performanceagainst regulatory contracts. These are the metrics by which we will judge theperformance of our various businesses and we will report against them on anannual basis. NATIONAL GRID RETURN ON EQUITY (NOMINAL) This metric captures the total operational and financial performance of thecompany. Calculation: IFRS adjusted profit after tax divided by the equity base • IFRS adjusted profit after tax excludes US stranded cost recoveries, and isadjusted for regulatory depreciation; capitalisation adjustment, mainly formains replacement (repex) in Gas Distribution in the UK; pensions; andindexation on UK regulated asset value. • Equity base is equal to total UK regulatory asset value; plus totalcapital invested in our US businesses; plus net assets for our non-regulated andother businesses; minus net debt as reported under IFRS. UK OPERATIONAL RETURN (REAL) (Electricity transmission - UK; Gas transmission - UK; Gas distribution - UK) This metric is comparable to the 'vanilla return' used by Ofgem. Calculation: (IFRS adjusted operating profit minus current tax) divided byregulatory asset value • IFRS adjusted operating profit is as reported on a Businessperformance (Note B) basis, adjusted for regulatory depreciation; capitalisationof mains replacement (repex) in Gas Distribution in the UK; and pensions. • Current tax is the tax charge as reported on a regulatory basis. US REGULATED RETURN ON EQUITY (NOMINAL) (Electricity transmission - New England; Electricity distribution -Massachusetts; Electricity transmission & distribution and gas distribution -New York) This metric is a US GAAP metric calculated annually (financial year to 31 Marchfor New England Power; calendar year to 31 December in Massachusetts; 12 monthperiod to 31 October in New York) and reported to our regulators for our USdistribution rate plans. Calculation: Regulated net income divided by equity rate base • Regulated net income is adjusted for earnined savings in New York. • Equity rate base for our distribution rate plans is as reported to ourregulators. For New England Power the rate base applied is the common equityexcluding goodwill. Worked examples will also be available at www.nationalgrid.com CONTACTS National Grid: InvestorsDavid Rees +44 (0)20 7004 3170 +44 (0)7901 511322(m)Richard Smith +44 (0)20 7004 3172 +44 (0)7747 006321(m)James Waite +44 (0)20 7004 3171 +44 (0)7977 440902(m) MediaClive Hawkins +44 (0)20 7004 3147 +44 (0)7836 357173(m) BrunswickPaul Scott +44 (0)20 7396 5333 +44 (0)7974 982333(m) An analyst presentation will be held at The London Stock Exchange, 10Paternoster Square, London EC4M 7LS at 9:15am (UK time) today. Live telephone coverage of the analyst presentation - password National Grid Dial in number +44 (0)20 7081 9429US dial in number +1 866 43 27 186 Telephone replay of the analyst presentation (available until 31 May 2007) Dial in number +44 (0)20 8196 1998US dial in number +1 866 583 1035Account number 869448 A live web cast of the presentation will also be available atwww.nationalgrid.com Photographs are available on www.newscast.co.uk CAUTIONARY STATEMENT This announcement contains certain statements that are neither reportedfinancial results nor other historical information. These statements areforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. These statements include information with respect to our financialcondition, our results of operations and businesses, strategy, plans andobjectives. Words such as "anticipates", "expects", "intends", "plans","believes", "seeks", "estimates", "may", "will", "continue", "project" andsimilar expressions, as well as statements in the future tense, identifyforward-looking statements. These forward-looking statements are not guaranteesof our future performance and are subject to assumptions, risks anduncertainties that could cause actual future results to differ materially fromthose expressed in or implied by such forward-looking statements. Many of theseassumptions, risks and uncertainties relate to factors that are beyond ourability to control or estimate precisely, such as delays in obtaining, oradverse conditions contained in, regulatory approvals and contractual consents,including those required to complete the proposed acquisition of KeySpan when oras planned, unseasonable weather affecting the demand for electricity and gas,competition and industry restructuring, changes in economic conditions, currencyfluctuations, changes in interest and tax rates, changes in energy marketprices, changes in historical weather patterns, changes in laws, regulations orregulatory policies, developments in legal or public policy doctrines, theimpact of changes to accounting standards and technological developments. Otherfactors that could cause actual results to differ materially from thosedescribed in this announcement include the ability to integrate the businessesrelating to announced acquisitions with our existing business to realise theexpected synergies from such integration, the availability of new acquisitionopportunities and the timing and success of future acquisition opportunities,the timing and success or other impact of the sales of our non-core businesses,the failure for any reason to achieve reductions in costs or to achieveoperational efficiencies, the failure to retain key management, the behaviour ofUK electricity market participants on system balancing, the timing of amendmentsin prices to shippers in the UK gas market, the performance of our pensionschemes and the regulatory treatment of pension costs, and any adverseconsequences arising from outages on or otherwise affecting energy networks,including gas pipelines, which we own or operate. For a more detaileddescription of some of these assumptions, risks and uncertainties, together withany other risk factors, please see our filings with and submissions to the USSecurities and Exchange Commission (the "SEC") (and in particular the "RiskFactors" and "Operating and Financial Review" sections in our most recent AnnualReport on Form 20-F). Except as may be required by law or regulation, NationalGrid undertakes no obligation to update any of its forward-looking statements.The effects of these factors are difficult to predict. New factors emerge fromtime to time and we cannot assess the potential impact of any such factor on ouractivities or the extent to which any factor, or combination of factors, maycause results to differ materially from those contained in any forward-lookingstatement. 2007 2006*CONSOLIDATED INCOME STATEMENTfor the years ended 31 March Notes £m £m =========== ===========Revenue 2a 8,695 8,868Other operating income 83 80Operating costs (6,265) (6,574) --------------- --------------- Operating profit - Before exceptional items and remeasurements 2b 2,454 2,457 - Exceptional items and remeasurements 3 59 (83)Total operating profit 2c 2,513 2,374 Interest income and similarincome 4 1,144 1,036Interest expense and other finance costs - Before exceptional items and remeasurements (1,691) (1,638) - Exceptional items and remeasurements 3 (217) (57) 4 (1,908) (1,695) Share of post-tax results ofjoint ventures 2 3 --------------- --------------- Profit before taxation - Before exceptional items and remeasurements 1,909 1,858 - Exceptional items and remeasurements 3 (158) (140)Total profit before taxation 1,751 1,718Taxation - Before exceptional items and remeasurements 5 (611) (565) - Exceptional items and remeasurements 3 170 30Total taxation (441) (535) --------------- --------------- Profit from continuing operations aftertaxation - Before exceptional items and remeasurements 1,298 1,293 - Exceptional items and remeasurements 12 (110)Profit for the year fromcontinuing operations 1,310 1,183 Profit for the year from discontinuedoperations - Before exceptional items and remeasurements 6 104 77 - Exceptional items and remeasurements 6 (18) 2,590 86 2,667 --------------- ---------------Profit for the year 1,396 3,850 =========== ===========Attributable to: - Equity shareholders of the parent 1,394 3,848 - Minority interests 2 2 --------------- --------------- 1,396 3,850 =========== =========== Earnings per share from continuingoperations - Basic 7a 48.1p 41.6p - Diluted 7b 47.8p 41.4p Earnings per share - Basic 7a 51.3p 135.6p - Diluted 7b 50.9p 135.0p =========== ===========Dividends per ordinary share:paid during the year 8 26.8p 25.4pDividends per ordinary share:approved or proposed to be paid 28.7p 26.1p =========== =========== * Comparatives have been adjusted to reclassify amounts relating to discontinuedoperations. CONSOLIDATED BALANCE SHEET at31 March 2007 2006 Note £m £m =========== ===========Non-current assetsGoodwill 1,480 2,142Other intangible assets 144 321Property, plant and equipment 18,895 18,935Investments in joint ventures 5 12Deferred tax assets - 159Other receivables 73 38Financial and other investments 132 148Derivative financial assets 380 351 --------------- ---------------Total non-current assets 21,109 22,106 --------------- ---------------Current assetsOther intangible assets 2 41Inventories 106 108Trade and other receivables 1,236 1,519Financial and other investments 2,098 384Derivative financial assets 277 314Cash and cash equivalents 1,593 1,452 --------------- ---------------Total current assets 5,312 3,818 --------------- ---------------Assets of businesses held forsale 1,968 - --------------- ---------------Total assets 28,389 25,924 --------------- ---------------Current liabilitiesBank overdrafts (6) (3)Borrowings (1,025) (2,839)Derivative financialliabilities (235) (92)Trade and other payables (1,852) (2,095)Current tax liabilities (75) (419)Provisions (167) (235) --------------- ---------------Total current liabilities (3,360) (5,683) --------------- ---------------Non-current liabilitiesBorrowings (14,686) (10,287)Derivative financialliabilities (184) (130)Other non-current liabilities (1,475) (1,719)Deferred tax liabilities (2,389) (2,161)Pensions and otherpost-retirement benefitobligations (1,282) (1,915)Provisions (427) (536) --------------- ---------------Total non-current liabilities (20,443) (16,748) --------------- ---------------Liabilities of businesses heldfor sale (450) - --------------- ---------------Total liabilities (24,253) (22,431) --------------- ---------------Net assets 4,136 3,493 =========== ===========EquityCalled up share capital 308 310Share premium account 1,332 1,316Retained earnings 7,635 6,817Other reserves (5,150) (4,961) --------------- ---------------Total parent companyshareholders' equity 4,125 3,482Minority interests 11 11 --------------- ---------------Total equity 4,136 3,493 =========== =========== Net debt (net of relatedderivative financialinstruments) included above 12 11,788 10,850 --------------- --------------- CONSOLIDATED STATEMENT OF RECOGNISED INCOME ANDEXPENSEfor the years ended 31 March 2007 2006 £m £m =========== ===========Exchange adjustments (179) 141Actuarial net gain 365 181Net gains/(losses) taken to equityin respect of cash flow hedges 47 (12)Transferred to profit or loss oncash flow hedges (45) (20)Net (losses)/gains taken to equityon available-for-sale investments (3) 4Transferred to profit or loss onsale of available-for-saleinvestments (1) (1)Tax on items taken directly to ortransferred from equity (81) (43) --------------- ---------------Net income recognised directly inequity 103 250Profit for the year 1,396 3,850 --------------- ---------------Total recognised income andexpense for the year 1,499 4,100 =========== ===========Attributable to: - Equity shareholders of the parent 1,498 4,097 - Minority interests 1 3 --------------- --------------- 1,499 4,100 =========== =========== Effect of change in accountingpolicy - IAS 39 (i) - (43) =========== =========== (i) IAS 32 'Financial Instruments: Disclosure and Presentation' and IAS 39'Financial Instruments: Recognition and Measurement' were adopted prospectivelywith effect from 1 April 2005, in accordance with the transition provisions ofIFRS1. The impact of IAS 39 attributable to minority interests was £nil. CONSOLIDATED CASH FLOW STATEMENT 2007 2006*for the years ended 31 March £m £m =========== ===========Cash flows from operating activitiesTotal operating profit 2,513 2,374Adjustments for:Exceptional items andremeasurements (59) 83Depreciation and amortisation 871 888Share-based payment charge 15 14Changes in working capital 18 (206)Changes in provisions (57) (25)Changes in pensions and otherpost-retirement benefitobligations (125) (40)Cash flows relating to exceptionalitems (86) (115) --------------- ---------------Cash flows generated fromcontinuing operations 3,090 2,973Cash flows relating todiscontinued operations 181 138 --------------- ---------------Cash generated from operations 3,271 3,111Tax paid - continuing operations (310) (103)Tax paid - discontinued operations (3) (37) --------------- ---------------Net cash inflow from operatingactivities 2,958 2,971 --------------- ---------------Cash flows from investing activitiesAcquisition of subsidiaries, netof cash acquired (269) -Sale of investments in jointventures and other investments 19 8Purchases of intangible assets (33) (15)Purchases of property, plant andequipment (2,185) (1,657)Disposals of property, plant andequipment 21 18Net movements in financialinvestments (1,725) 25Dividends received from jointventures - 2 --------------- ---------------Cash flows used in continuingoperations - investing activities (4,172) (1,619)Cash flows relating to discontinued operations - disposal proceeds 27 5,750 - other investing activities and acquisition of subsidiaries, net of cash acquired (132) (209) --------------- ---------------Net cash flow (used in)/ frominvesting activities (4,277) 3,922 --------------- ---------------Cash flows from financing activitiesProceeds from issue of sharecapital 16 54Increase/(decrease) in borrowingsand related derivatives 3,045 (2,304)Net interest paid (597) (704)Exceptional finance costs on therepayment of debt (45) (49)Dividends paid to shareholders (730) (745)Cash paid to shareholders under Bshare scheme (26) (1,957)Repurchase of share capital andpurchase of treasury shares (169) (7) --------------- ---------------Net cash flow from /(used in)financing activities 1,494 (5,712) --------------- ---------------Net increase in cash and cashequivalents 175 1,181Exchange movements (14) 14Amounts reclassified as assets ofbusinesses held for sale (23) -Net cash and cash equivalents atstart of year (i) 1,449 254 --------------- ---------------Net cash and cash equivalents atend of year (i) 1,587 1,449 =========== =========== *Comparatives have been adjusted to reclassify amounts relating to discontinuedoperations. i) Net of bank overdrafts. NOTES TO THE PRELIMINARY ANNOUNCEMENT 1. Basis of preparation The financial information contained in this announcement, which does notconstitute statutory accounts as defined in Section 240 of the Companies Act1985, has been derived from the statutory accounts for the year ended 31 March2007, which will be filed with the Registrar of Companies in due course.Statutory accounts for the year ended 31 March 2006 have been filed with theRegistrar of Companies. The auditors' report on both these statutory accountswas unqualified and did not contain a statement under Section 237(2) or (3) ofthe Companies Act 1985. The financial information included in this announcement has been prepared inaccordance with the accounting policies applicable for the year ended 31 March2007 as set out in National Grid's Annual Report and Accounts for the year ended31 March 2007. These accounting policies are consistent with those that appliedin the preparation of our accounts for the year ended 31 March 2006, as amendedfor new standards and interpretations adopted during the year ended 31 March2007. The new standards and interpretations which have been adopted by National Gridfor the year ended 31 March 2007 were as follows: • International Financial Reporting Interpretations Committee (IFRIC) 4- Determining whether an arrangement contains a lease • IFRIC 5 - Rights to Interests arising from Decommissioning,Restoration and Environmental Rehabilitation Funds • IFRIC 6 - Liabilities arising from participating in a specific market- Waste electrical and electronic equipment • IFRIC 7 - Applying the restatement approach under IAS 29, Financialreporting in hyperinflationary economies • Amendment to IAS 39 - Financial Instruments: Recognition andMeasurement: The Fair Value Option • Amendment to IAS 39 - Financial Instruments: Recognition andMeasurement, and IFRS 4 Insurance Contracts: Financial Guarantee Contracts • Amendment to IAS 21 - The Effects of Changes in Foreign ExchangeRates The adoption of new accounting standards and interpretations did not have amaterial impact on the financial results or position of the Company and itssubsidiary undertakings for the year ended 31 March 2007. The following interpretations have not been adopted for the year ended 31 March2007: IFRS 8 - Operating segments, Amendment to IAS 23 - Borrowing costs, IFRIC8 - Scope of IFRS 2, IFRIC 9 - Reassessment of Embedded Derivatives, IFRIC 10 -Interim financial reporting and impairment, IFRIC 11 - IFRS2 Group and treasuryshare transactions, and IFRIC 12 - Service concession arrangements. During the year ended 31 March 2007 our wireless infrastructure business and ourBasslink Interconnector business in Australia met the criteria to be classifiedas assets held for sale and have been presented as discontinued operations. Thecomparative results have been adjusted accordingly. This announcement was approved by the Board of Directors on 16 May 2007. 2. Segmental analysis Segmental information is presented in accordance with the managementresponsibilities and economic characteristics, including consideration of risksand returns, of business activities. The Company assesses the performance of itsbusinesses principally on the basis of operating profit before exceptional itemsand remeasurements. The primary reporting format is by business and thesecondary reporting format is by geographical area. The following table describes the main activities for each business segment:Transmission - UK High-voltage electricity transmission networks, the gas transmission network in the UK, the UK liquefied natural gas (LNG) storage activities and the French electricity interconnectorTransmission - US High-voltage electricity transmission networks in New York and New EnglandGas Distribution Four of the eight regional networks of Great Britain's gas- UK distribution systemGas Distribution Gas distribution in New York and New England- USElectricity Electricity distribution in New York and New EnglandDistribution - USUS stranded cost The recovery of stranded costs from US electricityrecoveries distribution customers as permitted by regulatory agreements---------------- --------------------------------------- Other activities primarily relate to UK-based gas metering activities; UKproperty management; a UK LNG import terminal; engineering consulting andsoftware; together with corporate activities, including business development. Discontinued operations comprise broadcast and mobile telephone infrastructuresolutions in the UK and the US and an electricity interconnector in Australia.The wireless infrastructure operations in the UK were sold on 3 April 2007. Our segments have changed from that previously reported as a consequence ofchanges in organisational and management structure; the classification ofwireless infrastructure (previously a segment) and our Australian interconnectorbusiness as discontinued; and the acquisition from Southern Union Company of itsgas distribution network in Rhode Island on 24 August 2006. In particular, ourUS electricity distribution and US gas distribution operations are now reportedas separate segments. The segment results for the year ended 31 March 2006 havebeen re-presented to reflect these changes. Discontinued operations also include the operations of the four UK gasdistribution networks that were sold on 1 June 2005. The results fordiscontinued operations are disclosed in note 6. Sales between businesses are priced having regard to the regulatory and legalrequirements to which the businesses are subject. a) Revenue Years ended 31 March 2007 2006 £m £m =========== ===========Business segments - continuing operationsTransmission - UK 2,816 2,710Transmission - US 270 310Gas Distribution - UK 1,193 1,222Gas Distribution - US 638 571Electricity Distribution - US 3,004 3,134US stranded cost recoveries 426 517Other activities 567 701Sales between businesses (219) (297) --------------- ---------------Revenue 8,695 8,868 =========== =========== Total excluding US stranded costrecoveries 8,269 8,351US stranded cost recoveries 426 517 --------------- --------------- 8,695 8,868 =========== ===========Geographical segmentsUK 4,397 4,374US 4,298 4,494 --------------- ---------------Revenue 8,695 8,868 =========== =========== b) Operating profit - before exceptional items and remeasurementsYears ended 31 March 2007 2006 £m £m =========== ===========Business segments - continuing operationsTransmission - UK 946 844Transmission - US 108 127Gas Distribution - UK 409 483Gas Distribution - US 71 47Electricity Distribution - US 364 317US stranded cost recoveries 423 489Other activities 133 150 --------------- ---------------Operating profit beforeexceptional items andremeasurements 2,454 2,457 =========== ===========Total excluding US stranded costrecoveries 2,031 1,968US stranded cost recoveries 423 489 --------------- --------------- 2,454 2,457 =========== ===========Geographical segmentsUK 1,491 1,478US 963 979 --------------- ---------------Operating profit beforeexceptional items andremeasurements 2,454 2,457 =========== =========== c) Operating profit - after exceptional items and remeasurementsYears ended 31 March 2007 2006 £m £m =========== ===========Business segments - continuing operationsTransmission - UK 936 843Transmission - US 107 127Gas Distribution - UK 412 432Gas Distribution - US 67 47Electricity Distribution - US 355 317US stranded cost recoveries 504 440Other activities 132 168 --------------- ---------------Operating profit after exceptionalitems and remeasurements 2,513 2,374 =========== ===========Total excluding US stranded costrecoveries 2,009 1,934US stranded cost recoveries 504 440 --------------- --------------- 2,513 2,374 =========== ===========Geographical segmentsUK 1,482 1,423US 1,031 930Rest of the World - 21 --------------- ---------------Operating profit after exceptionalitems and remeasurements 2,513 2,374 =========== =========== 3. Exceptional items and remeasurements Exceptional items and remeasurements are items of income and expenditure that,in the judgment of management, should be disclosed separately on the basis thatthey are material, either by their nature or their size, to an understanding ofour financial performance and significantly distort the comparability offinancial performance between periods. Items of income or expense that areconsidered by management for designation as exceptional items include such itemsas significant restructurings, write-downs or impairments of non-current assets,material changes in environmental or decommissioning provisions, integration ofacquired businesses and gains or losses on disposals of businesses orinvestments. Remeasurements comprise gains or losses recorded in the incomestatement arising from changes in the fair value of commodity contracts and ofderivative financial instruments to the extent that hedge accounting is notachieved or is not effective. Years ended 31 March 2007 2006 £m £m ============ ============ Exceptional items -restructuring costs (i) 22 55Exceptional items - profit onsale and reversal ofimpairment (ii) - (21)Remeasurements - commoditycontracts (iii) (81) 49Total exceptional items andremeasurements included withinoperating profit (59) 83 Exceptional finance costs (iv) 45 49Remeasurements - commoditycontracts (iii) 19 14Remeasurements - netlosses/(gains) on derivativefinancial instruments (v) 153 (6)Total exceptional items andremeasurements included withinfinance costs 217 57 --------------- ---------------Total exceptional items andremeasurements before taxation 158 140 ============ ============ Tax on restructuring costs (i) (12) (7)Tax on commodity contractremeasurements (iii) 25 (25)Tax on exceptional financecosts (iv) (14) (15)Tax on derivative financialinstrument remeasurements (v) (169) 17 --------------- ---------------Tax on exceptional items andremeasurements (170) (30) ============ ============Total exceptional items andremeasurements (12) 110 ============ ============ Total exceptional items aftertaxation 41 61Total commodity contractremeasurements after taxation (37) 38Total derivative financialinstrument remeasurementsafter taxation (16) 11 --------------- ---------------Total exceptional items andremeasurements after taxation (12) 110 ============ ============ i) Restructuring costs relate to planned cost reduction programmes in theUK and US (2006: UK only) businesses. For the year ended 31 March 2007,restructuring costs included pension related costs of £10m arising as a resultof redundancies (2006: £25m). ii) Reversal of a prior year impairment of £13m related to National Grid'sinvestment in Copperbelt Energy Corporation (CEC) and a gain on disposal of aninvestment in Energis Polska of £8m. iii) Remeasurements - commodity contracts represent mark-to-market movementson certain commodity contract obligations, primarily indexed-linked swapcontracts, in the US. Under the existing rate plans in the US, commodity costsare fully recovered from customers, although the pattern of recovery may differfrom the pattern of costs incurred. These movements are comprised of thoseimpacting operating profit which are based on the change in the commoditycontract liability and those impacting finance costs as a result of changingdiscount rates due to market fluctuations. iv) Exceptional finance costs for the year ended 31 March 2007 represent debtredemption costs related to the restructuring of our debt portfolio. For 2006these related to costs incurred on the early redemption of debt following thedisposal of four gas distribution networks (£39m), together with issue costsassociated with the B share scheme (£10m). v) Remeasurements - net losses/(gains) on derivative financial instrumentscomprise losses and gains arising on derivative financial instruments reportedin the income statement. These exclude gains and losses for which hedgeaccounting has been effective, which have been recognised directly in equity oroffset by adjustments to the carrying value of debt. These remeasurementsinclude a loss of £126m (2006: £nil) relating to pre-tax losses on investmentrelated derivative financial instruments that offset on a post-tax basis. Thetax credit includes a £56m adjustment in respect of prior years (2006: £nil). 4. Finance income and costs Years ended 31 March 2007 2006 £m £m =========== ===========Pensions - expected return onscheme assets 926 901Interest income on financialinstruments 218 135 --------------- ---------------Interest income and similar income 1,144 1,036 =========== =========== Pensions - interest on schemeliabilities (869) (889)Interest expense on financialliabilities (and relatedderivatives) (871) (791)Exceptional debt redemption and Bshare issue costs (45) (49)Unwinding of discounts onprovisions (21) (18)Less: interest capitalised 70 60 --------------- ---------------Interest expense (1,736) (1,687) Net losses on derivative financialinstruments and commoditycontracts (172) (8) --------------- ---------------Interest expense and other financecosts (1,908) (1,695) =========== ===========Net finance costs (764) (659) =========== ===========Comprising:Net finance costs excludingexceptional finance costs andremeasurements (547) (602)Exceptional items andremeasurements (note 3) (217) (57) --------------- --------------- (764) (659) =========== =========== 5. Taxation Years ended 31 March 2007 2006 £m £m =========== ===========United KingdomCorporation tax at 30% 66 269Adjustment in respect of prioryears (i) (28) (8)Deferred tax (ii) 177 - --------------- --------------- 215 261 =========== ===========OverseasCorporate tax 109 122Adjustment in respect of prioryears (149) 23Deferred tax (ii) 266 129 --------------- --------------- 226 274 =========== ===========Taxation 441 535 =========== ===========Comprising:Taxation excluding exceptionalitems and remeasurements 611 565Taxation exceptional items andremeasurements (note 3) (170) (30) --------------- --------------- 441 535 =========== =========== i) The UK corporation tax adjustment in respect of prior years includes £51m(2006: £nil) that relates to exceptional items and remeasurements. ii) Included within the deferred tax charge is an amount relating to prior yearsof £73m (2006: £35m tax credit) before exceptional items and remeasurements and£68m (2006: £35m tax credit) after exceptional items and remeasurementsrespectively. 6. Discontinued operations During the year, our wireless infrastructure operations in the UK and US andAustralian interconnector were reclassified as businesses held for sale in theexpectation that they will be disposed of during the year ending 31 March 2008.The wireless infrastructure business in the UK was sold on 3 April 2007. Duringthe year ended 31 March 2006, holdings in four of the eight UK gas distributionnetworks were disposed of. Results of discontinued operationsYears ended 31 March 2007 2006 £m £m =========== ===========Revenue 383 493Operating costs (321) (382) --------------- --------------- Operating profit before exceptional items 117 131Exceptional items (i) (55) (20)Total operating profit fromdiscontinued operations 62 111 Net finance costs beforeremeasurement finance income (2) (4)Remeasurement finance income (ii) 37 - --------------- ---------------Profit before tax fromdiscontinued operations 97 107 Taxation (11) (45) --------------- ---------------Profit after tax from discontinuedoperations 86 62 --------------- --------------- Gain on disposal of gasdistribution networks - 2,636Taxation - (31) --------------- ---------------Gain on disposal of discontinuedoperations - 2,605 --------------- ---------------Total profit for the year from discontinuedoperations - Before exceptional items and remeasurements 104 77 - Exceptional items and remeasurements (18) 2,590 86 2,667 =========== =========== i) The operating exceptional item for the year ended 31 March 2007 relatedto an impairment of goodwill within US wireless infrastructure operations.Operating exceptional items for the year ended 31 March 2006 related to a fine(£15m) incurred in respect of a breach of health and safety laws in 1999 and torestructuring costs (£5m). ii) Remeasurement finance income for the year ended 31 March 2007 comprised£24m relating to the recognition of gains on the termination of a hedgingarrangement and to £13m of subsequent mark-to-market gains. 7. Earnings per share a) Basic earnings per share Years ended 31March 2007 2007 2006 2006 Earnings Earnings per Earnings Earnings share £m per share £m pence pence ========== ========== ========== ==========Adjustedearnings -continuingoperations 1,296 47.7 1,291 45.5Exceptionalitems aftertaxation (41) (1.5) (61) (2.2)Commoditycontractremeasurementsafter taxation 37 1.3 (38) (1.3)Derivativefinancialinstrumentremeasurementsafter taxation 16 0.6 (11) (0.4) --------------- --------------- --------------- --------------- Earnings -continuingoperations 1,308 48.1 1,181 41.6 ========== ========== ========== ==========Adjustedearnings -discontinuedoperations 104 3.8 77 2.7Gain ondisposal ofgasdistributionnetworks aftertaxation - - 2,605 91.8Otherexceptionalitems aftertaxation (18) (0.6) (15) (0.5) --------------- --------------- --------------- --------------- Earnings -discontinuedoperations 86 3.2 2,667 94.0 ========== ========== ========== ==========Basic earnings 1,394 51.3 3,848 135.6 ========== ========== ========== ========== millions millions ========== ==========Weightedaverage numberof shares -basic 2,719 2,837 ========== ========== b) Diluted earnings per share Years ended 31March 2007 2007 2006 2006 Earnings Earnings per Earnings Earnings share £m per share £m pence pence ========== ========== ========== =========Adjusteddilutedearnings -continuingoperations 1,296 47.4 1,291 45.3Exceptionalitems aftertaxation (41) (1.5) (61) (2.2)Commoditycontractremeasurementsafter taxation 37 1.3 (38) (1.3)Derivativefinancialinstrumentremeasurementsafter taxation 16 0.6 (11) (0.4) --------------- --------------- --------------- --------------- Dilutedearnings -continuingoperations 1,308 47.8 1,181 41.4 ========== ========== ========== ==========Adjusteddilutedearnings -discontinuedoperations 104 3.8 77 2.7Gain ondisposal ofgasdistributionnetworks aftertaxation - - 2,605 91.4Otherexceptionalitems aftertaxation (18) (0.7) (15) (0.5) --------------- --------------- --------------- --------------- Dilutedearnings -discontinuedoperations 86 3.1 2,667 93.6 ========== ========== ========== ==========Dilutedearnings 1,394 50.9 3,848 135.0 ========== ========== ========== ========== millions millions ========== ==========Weightedaverage numberof shares -diluted 2,737 2,851 ========== ========= 8. Dividends The following table shows the dividends paid to equity shareholders: Years ended 31March 2007 2007 2006 2006 pence £m pence £m (per ordinary (per ordinary share) share) =========== =========== =========== ===========OrdinarydividendsInterimdividend forthe year ended31 March 2007 10.9 297 - -Final dividendfor the yearended 31 March2006 15.9 433 - -Interimdividend forthe year ended31 March 2006 - - 10.2 276Final dividendfor the yearended 31 March2005 - - 15.2 469 --------------- --------------- --------------- --------------- 26.8 730 25.4 745 =========== =========== =========== =========== In addition, the Directors are proposing a final dividend for 2007 of 17.8p pershare that will absorb £481m of shareholders' equity. It will be paid on 22August 2007 to shareholders who are on the register of members on 8 June 2007. 9. Acquisitions On 24 August 2006, the acquisition from Southern Union Company of its RhodeIsland gas distribution network was completed for total consideration of £269m,including acquisition costs of £3m. The goodwill arising on the acquisition was£144m. Goodwill principally relates to synergies, cost improvements, market andregulatory position, the assembled workforce and the potential for futuregrowth. The acquired operations form part of the Gas Distribution business and arepresented within the Gas Distribution - US segment. Fair value £m ===========Intangible assets 9Property, plant and equipment 142Inventories 19Trade and other receivables 39Deferred tax assets 11Current liabilities (20)Borrowings (48)Pensions and other post-retirement benefit obligations (19)Provisions (8) ---------------Net assets acquired 125 Goodwill arising on acquisition 144 ---------------Total consideration 269 =========== In the consolidated income statement for the year ended 31 March 2007 theoperating profit of the Rhode Island gas distribution network was £17mrepresenting the post-acquisition results for the acquired business. If theRhode Island gas distribution network had been acquired on 1 April 2006, theresults would not have been materially different. The fair values at acquisitionhave been updated from the provisional fair values reported in our half yearresults announcement. Other acquisitions that were carried out during the year ended 31 March 2007were those of telecommunications tower operations in the US. The book value andfair value of assets acquired was £72m compared with total cash consideration of£85m, giving rise to goodwill of £13m. Following the decision by management toexit our wireless infrastructure operations these acquisitions have beenreported within discontinued operations and are presented in the balance sheetas businesses held for sale. 10. Reconciliation of movements in total equity Years ended 31 March 2007 2006 £m £m ========== ==========Opening total equity 3,493 2,078 Changes in total equity for the yearNet income recognised directly inequity 103 250Profit for the year 1,396 3,850Equity dividends (730) (745)Return of capital to shareholdersthrough B share scheme - (2,009)Issue of ordinary share capital 16 28Repurchase of shares (169) -Other movements in minority interests (1) (2)Movement in shares held in employeeshare trusts - 19Share-based payment 15 17Tax on share-based payment 13 7 --------------- ---------------Closing total equity 4,136 3,493 ========== ========== 11. Reconciliation of net cash flow to movement in net debt Years ended 31 March 2007 2006 £m £m =========== ===========Movement in cash and cashequivalents 175 1,181Increase/(decrease) in financialinvestments 1,725 (25)(Increase)/decrease in borrowingsand related derivatives (i) (3,045) 2,304Cash paid to shareholders under Bshare scheme 26 1,957Net interest paid 597 704 --------------- ---------------Change in net debt resulting fromcash flows (522) 6,121Changes in fair value of financialassets and liabilities andexchange movements 331 (299)Issue of B shares - (2,009)Net interest charge (655) (660)Acquisition of subsidiaryundertaking (48) -Amounts reclassified to businessesheld for sale (42) -Other non-cash movements (2) (17) --------------- --------------- Movement in net debt (net ofrelated derivative financialinstruments) in the year (938) 3,136Net debt at start of year (10,850) (13,986) --------------- ---------------Net debt (net of relatedderivative financial instruments)at end of year (11,788) (10,850) =========== =========== i) Increase in borrowings and related derivatives for the year ended 31 March2007 comprises proceeds from loans received of £5.5bn less payments to repayloans of £2.3bn and net movement in short-term borrowings of £(0.2)bn. 12. Net debt At 31 March 2007 2006 £m £m =========== ===========Cash and cash equivalents 1,593 1,452Bank overdrafts (6) (3) --------------- ---------------Net cash and cash equivalents 1,587 1,449Financial investments 2,098 384Borrowings (15,711) (13,126) --------------- --------------- (12,026) (11,293) Net debt related derivativefinancial assets 657 665Net debt related derivativefinancial liabilities (419) (222) --------------- ---------------Net debt (net of relatedderivative financial instruments) (11,788) (10,850) =========== =========== 13. Commitments and contingencies At 31 March 2007 2006 £m £m =========== ===========Future capital expenditure contracted for but notprovided 1,554 1,343Commitments under non-cancellable operating leases 800 831Obligations to purchase energy under long-termcontracts (i) 3,731 4,675Guarantees (ii) 229 149Other commitments and contingencies (iii) 308 185 =========== =========== i) In addition, power commitments under commodity contracts recorded at fairvalue and incorporated in Trade and other payables and other non-currentliabilities were £389m (2006: £778m). ii) Details of the guarantees entered into by the Company or its subsidiaryundertakings at 31 March 2007 are shown below: a) a guarantee of £50m of the obligations of a subsidiary undertaking tomake payments in respect of any liabilities under a meter operating contractthat runs until May 2008; b) an uncapped guarantee, for which the maximum liability is estimated at£40m, to The Crown Estates in support of the transfer of the interconnectorbetween France and England to National Grid Interconnectors Limited as part ofthe Licence to Assign Lease. This is ongoing; c) a guarantee in support of the payment obligations of a subsidiaryundertaking in respect of a combined heat and power plant which will increase toapproximately £40m in February 2010. This reduces following commissioning,expected to be in February 2010, by £2m per annum until it expires in 2027; d) guarantees of £20m relating to certain property obligations ofsubsidiary undertakings. The bulk of these expire by December 2025; e) guarantees in respect of a former associate amounting to £14m, the bulkof which relates to its obligations to supply telecommunications services. Theseare open-ended; f) a guarantee of the payment obligations of a subsidiary undertaking inrespect of a power connection agreement amounting to a maximum potential payoutof £14m subject to a cap of £7m per annum. This runs until December 2024; g) indemnities estimated to be up to a maximum of £14m given to thetrustees of a defined contribution pension scheme. These are open ended; h) a guarantee of the payment obligations of a subsidiary undertaking inrespect of a nitrogen supply agreement amounting to a maximum potential payoutof £12m subject to a cap of £1m per annum. This runs until November 2019; and i) other guarantees amounting to £25m arising in the normal course ofbusiness and entered into on normal commercial terms. These guarantees run forvarying lengths of time. Subsequent to 31 March 2007, we issued letters of support to third partiescurrently amounting to approximately £193m in total relating to the Britnedproject. In addition, we entered into a guarantee in favour of a third party ofapproximately £260m with respect to the construction contract for Phase III ofthe Grain LNG import terminal. iii) Includes commitments largely relating to gas purchasing and propertyremediation of £198m (2006: £114m). The value of other commitments andcontingencies relating to businesses held for sale was £62m. KeySpan We have agreed to purchase KeySpan Corporation, a US utility company for $7.3bn(£3.7bn), conditional on regulatory approval. Amounts receivable under sublease arrangements: The total of future minimum sublease payments expected to be received undernon-cancellable subleases is £32m (2006:£26m). Litigation and claims: National Grid, together with the Environment Agency, sought judicial review toclarify the legal position with regard to the remediation of a site in Bawtry,Yorkshire, a former gas site which was not part of the assets that formed partof the gas privatisation in 1986 and therefore had never been owned by NationalGrid. On 17 May 2006, the High Court found in favour of the Environment Agency.However, the judgement concluded that the matters raised in the proceedings wereof considerable general importance and permission to apply for leave to appealdirectly to the House of Lords was granted. A hearing before the House of Lords has been set for 21 and 22 May 2007 and ajudgement is expected in the summer of 2007. We remain convinced of our casethat National Grid has no legal liability with respect to the site in Bawtry,nor for other former UK gas sites which did not form part of the assets weacquired at the time of privatisation, and believe that our position will beupheld by the House of Lords. At this stage we are unable to reliably estimatethe impact of an adverse decision. 14. Subsequent event On 3 April 2007, our wireless infrastructure operations in the UK were disposedof for cash proceeds of £2.5bn. In April 2007, we also agreed to the sale of our US wireless infrastructureoperations with completion expected in the summer of 2007 for proceeds ofapproximately $290m. 15. Exchange rates The consolidated results are affected by the exchange rates used to translatethe results of its US operations and US dollar transactions. The US dollar tosterling exchange rates used were: 31 March 2007 2006 =========== ===========Closing rate applied at year end 1.97 1.74Average rate applied for the year 1.91 1.79 =========== =========== 16. Differences between IFRS and US generally accepted accounting principles("US GAAP") Summarised financial statements on a US GAAP basis and an explanation of thedifferences between IFRS and US GAAP as applied in preparing the consolidatedaccounts are set out in the Annual Report and Accounts. Details of the principaldifferences between IFRS and US GAAP are shown below. a) Reconciliation of profit from IFRS to US GAAP The following is a summary of the material adjustments to net income that wouldhave been required if US GAAP had been applied instead of IFRS: Years ended 31 March 2007 2006 (i) £m £m ============ ============Profit for the year attributable to equityshareholders under IFRS 1,394 3,848 ------------ ------------Adjustments to conform with US GAAPPurchase accounting (124) (127)US regulatory accounting (474) (269)Pensions and other post-retirement benefits (94) (56)Financial instruments 160 (108)Severance costs and onerous lease costs 2 (63)Revenue recognition 5 (48)Discounting of provisions 3 (14)Sale and leaseback (19) -Current tax 15 -Deferred taxation 295 208Other 15 (1)Discontinued operations (32) (2,349)Discontinued operations - deferred tax - 286 ------------ ------------ (248) (2,541) ------------ ------------Net income under US GAAP 1,146 1,307 ============ ============Basic earnings per share - US GAAP 42.2p 48.2pDiluted earnings per share - US GAAP 41.9p 48.0p ============ ============ (i) Reclassified as a result of businesses qualifying as discontinued operationsin 2006/07. b) Reconciliation of shareholders' equity from IFRS to US GAAP The following is a summary of the material adjustments to shareholders' equitythat would have been required if US GAAP had been applied instead of IFRS: At 31 March 2007 2006 £m £m =========== ============Total shareholders' equity under IFRS 4,125 3,482 ------------ ------------Adjustments to conform with US GAAPPurchase accounting - property, plant andequipment 2,038 2,162Purchase accounting - goodwill 2,648 2,689US regulatory accounting 2,209 2,702Pensions and other post-retirement benefits - 886Financial instruments 10 119Revenue recognition (37) (42)Intangible assets 26 28Provisions (142) (154)Non-reversal of impairments (23) (39)Sale and leaseback (19) -Deferred taxation (1,477) (2,090)Other (28) 4 ------------ ------------ 5,205 6,265 ------------ ------------Shareholders' equity under US GAAP 9,330 9,747 =========== ============ -------------------------- (Note A) Average return over three years. A description of how this return iscalculated can be found in the Return Definitions section. (Note B) Business performance results are the primary financial performancemeasure used by National Grid, being the results for continuing operationsbefore exceptional items and remeasurements. Remeasurements are movements in thecarrying value of financial instruments and of commodity contracts that arisefrom changes in mark-to-market values or in exchange rates and are reflected inthe income statement to the extent that hedge accounting is not achieved or isnot fully effective. Further details are provided in Note 3. Areconciliation of Business performance (including US stranded cost recoveries of£423m, £254m after tax) to Statutory results is provided in the consolidatedincome statement. (Note C) 'Constant currency basis' refers to the reporting of the actual resultsagainst the prior period results which, in respect of any US$ currencydenominated activity, have been translated using the average US$ exchange ratefor the year ended 31 March 2007, which was $1.91 to £1.00. The average rate forthe year ended 31 March 2006 was $1.79 to £1.00. This information is provided by RNS The company news service from the London Stock Exchange

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