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Performance during the year

Growth

Investment

Capital investment

Our capital investment continues to increase as changing energy requirements and the renewal of our networks require increased investment in infrastructure and we invested £2,375 million in the form of capital investment during 2006/07, compared with £2,108 million in 2005/06 and £1,905 million in 2004/05.

In the UK, there is increasing dependency on gas imports and plans for significant expansion of renewable energy sources, as well as the need to increase the rate of asset replacement in electricity transmission as assets built in the 1960s and 1970s approach the end of their useful lives. The UK transmission price controls for the next five years include an allowance of £5.6 billion for investment in our electricity and gas networks. This investment is to respond to changing sources of energy and to replace our aging assets.

Investment is being made in New England to deliver the regional expansion plan and in upstate New York to address asset replacement requirements and to increase the safety and reliability of the network.

Bar chart demonstrating National Grid’s capital expenditure in millions of pounds between 2004/05 and 2006/07

Significant elements of our capital investment in 2006/07 included £352 million on the Milford Haven gas transmission pipeline, £290 million on asset replacement in electricity transmission, £333 million on replacement expenditure in Gas Distribution - UK and £41 million on the reliability enhancement programme in Electricity Distribution - US. We also invested £94 million in our Non-regulated Grain LNG import terminal.

Acquisitions and disposals

Significant progress towards proposed acquisition of KeySpan

In 2006, we announced the proposed acquisition of KeySpan for $7.3 billion (£3.7 billion) together with the assumption of approximately $4.5 billion (£2.3 billion) of debt. This would significantly expand our operations in the northeastern US as KeySpan is the fifth largest distributor of natural gas in the US and the largest in the northeast US, serving 2.6 million customers in New York, Massachusetts and New Hampshire. KeySpan also operates an electricity transmission and distribution network serving 1.1 million customers in New York under a long-term contract with the Long Island Power Authority. KeySpan's other interests include 6.6 GW of generation capacity, together with a small portfolio of non-regulated, energy-related services, and strategic investments in certain gas pipeline, storage and liquefied natural gas assets. The planned combination of our current US operations with those of KeySpan would result in us becoming the third largest energy utility in the US.

We have made significant progress towards completion and have achieved several important milestones. We have obtained clearances from the Federal Trade Commission in respect of the Hart-Scott-Rodino Antitrust Improvements Act, from the Committee on Foreign Investment in the US and by the Federal Energy Regulatory Commission, and we have received approval from both National Grid and KeySpan shareholders. In March 2007, we and KeySpan announced an agreement with the staff of the Long Island Power Authority in principle regarding amended contracts, which is subject to approval by the Board of the Authority and by the Comptroller and Attorney General of New York. In April 2007, the staff of the New Hampshire Public Utilities Commission announced that they would recommend approval. We have also made filings with the New York Public Service Commission and we have held extensive discussions with regulatory staff and other interested parties that have yielded significant progress toward resolution of issues important to the completion of the acquisition. We anticipate achieving a final result that will benefit investors and consumers alike by this autumn.

Approval	Filed	Cleared
Federal Trade Commission
Federal Energy Regulatory Commission
National Grid shareholders
KeySpan shareholders
New Hampshire Public Utilities Commission		Awaiting Approval
New York Public Service Commission		Awaiting Approval

Map showing National Grid’s prospective areas of operation in the US subject to the completion of the acquisition of KeySpan in Autumn 2007

Acquisition of Rhode Island gas distribution business

On 24 August 2006, we completed the acquisition from Southern Union Company of its Rhode Island gas distribution network for £269 million, including transaction costs of £3 million, together with the assumption of £48 million of debt. Goodwill arising on the acquisition was £144 million. This acquisition expanded our gas distribution operations by 245,000 customers and added over 3,000 miles of pipelines. The network substantially overlaps our existing electricity distribution service area in Rhode Island. The rates for the Rhode Island gas distribution business are set by the same state regulators that set our electricity distribution rates in Rhode Island. Both businesses have a history of performing under incentive-based rate plans, which provide substantial benefits to customers and shareholders.

Discontinued operations

As part of our strategy of focusing on energy markets in the UK and the US, we committed during 2006/07 to exit our wireless infrastructure operations in the UK and in the US and our electricity interconnector in Australia. Subsequent to the end of the 2006/07 financial year, on 3 April 2007, we completed the sale of our UK wireless infrastructure operations for proceeds of £2.5 billion and, also in April 2007, we agreed to the sale of our much smaller US wireless infrastructure operations with completion expected in the summer of 2007 for proceeds of approximately $290 million (£147 million). We continue to advance the sale of our Australian electricity interconnector. Our wireless infrastructure operations in the UK were created through the combination of National Grid's then existing wireless infrastructure business with the UK operations of Crown Castle International Corp., which was acquired for cash consideration of £1.1 billion during the year ended 31 March 2005. Our wireless infrastructure operations in the US were expanded during 2006/07 with acquisitions at a cost of £85 million. Its main operations are the construction and ownership of wireless telecommunications towers across a number of US states.

Other acquisitions and disposals

There were no other significant acquisitions completed during the years ended 31 March 2007, 2006 or 2005. On 27 October 2006, we completed the sale of our 38.5% interest in Copperbelt Energy Corporation in Zambia for net proceeds of £14 million. During the year ended 31 March 2006, we completed the sales of four of our regional gas distribution networks, comprising approximately half of the gas distribution network in Great Britain, for net cash proceeds of £5.8 billion and we also sold our interest in a joint venture, Energis Polska, for net proceeds of £8 million, while in the year ended 31 March 2005, we disposed of our investment in a joint venture, Citelec, giving rise to a gain of £13 million.

Generating value from our investments

This year we are reporting for the first time a return on equity measure, the purpose of which is to allow us to monitor how we are performing in generating value from our businesses and from the investments we make. For 2006/07, our return on equity is 14.1% and our average return on equity over the past three years was 12.4%.

Financial discipline

We have progressed on our objective of being financially disciplined by identifying surplus cash flows that can be returned to shareholders through a share buy-back programme. In 2006/07, we returned £169 million, arising from our decision to return $1.9 billion (approximately £1 billion) based on the post-tax net amounts we expect to recover from US stranded costs in the period in which they arise. In addition, we have announced the return of a further £1.8 billion in 2007/08 and 2008/09 following the sale of our wireless infrastructure operations.

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