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Delivering our strategy

We are in the process of transforming National Grid in line with our strategy.

This means creating lines of business and focusing on delivering an improved service to our customers, supported by an operating model that delivers effective and efficient shared services and information systems. We will also invest in new businesses where there is identifiable value for our shareholders.We have successfully disposed of our non-core UK and US wireless infrastructure operations, the Basslink electricity interconnector in Australia and our Advantica engineering consultancy business, resulting in substantial completion of our plans to exit non-core businesses.

Operating model

Our operating model is based on ensuring that activities are carried out at the most appropriate level, either locally, within lines of business or across National Grid.

 

We have established lines of business focused on the delivery of services to customers, able to share best practice and positioned to deliver improvements in operating and financial performance in the future.

In designing and implementing an operating model to deliver our vision of being the foremost international electricity and gas company we believe we can deliver the following by 2011/12:

• a significantly improved customer experience;
• a high performance culture;
• common front office and back office systems across National Grid;
• structural changes in the way we operate;
• long-term labour agreements that enable us to deliver improved operational performance and rewarding work for our employees;
• rationalised locations from which we operate;
• refreshed system operation technology;
• improved productivity; and
• advanced decision support tools and analytic capabilities.

Activities during the year

Lines of business

We have established Transmission, Gas Distribution and Electricity Distribution & Generation as lines of business, each led by an Executive Director. Finance and Shared Services, and other functions including information services, human resources and procurement are being organised to support our businesses in both the UK and the US.

Common functions

We have made significant progress in establishing a shared services organisation, led by an Executive Director, separate from the lines of business, but working with them to deliver an efficient service to our customers. Activities such as customer billing and cash collection, human resource services and payroll, facilities management, accounting and financial transactions processing have been transferred into our shared services organisation, supporting our businesses in the UK and the US.

As part of this transformation, we have combined formerly separate functions in the UK and the US into single functions that span National Grid to ensure that we have a common approach to the way we operate. This includes information services, human resources, corporate affairs, procurement and legal services.

Common systems and processes

Our aim is to reduce the number of systems that we have and to align processes so that there is a single National Grid method of operating. We have commenced a programme to implement a common suite of back office systems and applications, which will underpin the development of common processes and integrate with front office systems used by our businesses. While we are centralising activities we believe are common across National Grid, we are also focused on ensuring that our employees are able to deliver services to our customers locally.

Identification of best practice

We have commenced reviews within each line of business, within shared services, information services and other functions to identify best practices within different parts of our UK and US operations, so that they can be shared across National Grid.

Safety, health and environmental management

Our transformation programme includes restructuring our approach to managing safety, health and environmental issues, embedding responsibility directly into the lines of business for safety, health and environmental management, supported by safety, health and environmental expertise in support functions in the UK and the US. This means that all of our managers in National Grid will be accountable for safety, health and environmental management in their areas of operations. We are still at an early stage in this element of the transition and over the coming months we aim to develop new control structures, more clearly define responsibilities for certain cross-business accountabilities and improve the levels of documentation in line with our new operating model.

New businesses

We will consider acquiring new businesses in our core markets of electricity and gas delivery in the UK and the US. This may include generation assets where our exposure to commodity price fluctuations is limited.

We use the aggregate of consideration paid and debt assumed to monitor our investment in acquisitions. There is no numerical target as each investment is different and is considered on its own merits.

As part of our monitoring of financial performance we monitor synergy savings generated following an acquisition.

Completion of our acquisition of KeySpan

Following an extensive approval process, we completed the acquisition of KeySpan on 24 August 2007 for consideration of £3.8 billion together with the assumption of £2.2 billion of debt. Goodwill arising on the acquisition was £2.3 billion.

Approvals were received from both National Grid and KeySpan shareholders and from a number of governmental and regulatory bodies, including the Federal Trade Commission in respect of the Hart-Scott-Rodino Antitrust Improvements Act, the Committee on Foreign Ownership in the US, the Federal Energy Regulatory Commission, the New Hampshire Public Utilities Commission and the New York Public Service Commission. We and KeySpan also reached an amended agreement with the Long Island Power Authority (LIPA), which was approved by the comptroller of New York.

National Grid and KeySpan

 

The acquisition of KeySpan has significantly expanded our operations in the northeastern US as KeySpan was the fifth largest distributor of natural gas in the US and the largest in the northeastern 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 LIPA. KeySpan’s other interests included 2.5 GW of merchant electricity generation and 4.1 GW of contracted electricity generation, together with a small portfolio of non-regulated energy-related services, and strategic investments in certain gas pipelines, storage and LNG assets.

Other acquisitions

There were no other acquisitions during the years ended 31 March 2008 or 31 March 2006.

During the year ended 31 March 2007, we completed the acquisition from Southern Union Company of its Rhode Island gas distribution business for £269 million, including transaction costs of £3 million. Goodwill arising on the acquisition was £144 million. The Rhode Island gas distribution business served approximately 245,000 customers through a distribution network of over 3,000 miles of mains and substantially overlaps with our electricity distribution service area in Rhode Island.

Exit non-core businesses

Our decision to focus on our energy delivery markets in the UK and the US resulted in a commitment to exit from our wireless infrastructure operations in the UK and US and from the Basslink electricity interconnector in Australia. We are also required to dispose of the Ravenswood generation station in New York City as a condition of our acquisition of KeySpan.

Our principal objective on exiting a business is to maximise the proceeds we can generate from each sale.

Disposals

We have achieved our plans to dispose of non-core businesses:

• on 3 April 2007, we completed the sale of our UK wireless infrastructure business for proceeds of £2.5 billion;
• on 15 August 2007, we completed the sale of our US wireless infrastructure operations for £147 million;
• on 31 August 2007, we completed the sale of the Basslink electricity interconnector in Australia for £485 million; and
• on 31 March 2008, we entered into an agreement to sell the Ravenswood generation station for $2.9 billion (£1.4 billion), subject to regulatory approval.

Our wireless infrastructure business in the UK was 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 in the US. We constructed the Basslink electricity interconnector across the Bass Strait between Victoria and Tasmania.

During the year, we also completed the disposal of our Advantica engineering consultancy business for proceeds of £18 million and we entered into an agreement, subject to regulatory approval, to sell our 50% share in Intelig, a telecommunications business operating in Brazil.

On 31 March 2008, we entered into an agreement to sell the Ravenswood generation station for $2.9 billion (£1.4 billion). Its disposal was a condition of regulatory approval for the KeySpan acquisition. Subject to regulatory approvals of the proposed disposal, completion is expected to occur during the summer of 2008.

In addition to exiting non-core businesses, we will also consider selling businesses where we believe we can obtain proceeds in excess of the value we can generate ourselves. During the year we explored the possibility of selling our UK property business, however our conclusion was that we could obtain better value through retaining this business.