Chief Executive's review

Steve Holliday, Chief Executive, National Grid

I am confident that our focused strategy remains the right one to bring long-term benefits to all our stakeholders.

The energy industry in 2020 is predicted to look very different to the one we know today. Significant change will be required if we are to ensure security of supply as we move to a low carbon economy where energy efficiency and affordability go hand in hand with responsibility and sustainability. National Grid is at the heart of delivering the UK’s energy policy while, at the same time, in the US we are continuing to reset our rate plans.

Financials

Our low risk strategy, combined with our disciplined capital investment approach, continues to enable us to steer a strong path through periods of economic uncertainty. We have delivered another strong financial performance this year. Cash generated from operations was over £4.3 billion, revenue was nearly £14 billion while adjusted operating profit and adjusted earnings per share were higher by 7% and 14% respectively. We continue to deliver energy in a safe, reliable and efficient manner while maintaining our 8% dividend growth target until 2012 for our shareholders.

Controlling our costs remains an important feature benefiting both customers and investors. Last year we announced an additional metric to make our cost performance more transparent. We monitor regulated controllable operating costs. While this remains an important measure of our performance, we believe it is informative to compare those costs to our total regulated assets to measure our efficiency as the business grows. I am delighted to say that this metric has improved this year, with controllable costs falling to 7.6% of regulated assets compared with 8.0% last year.

We are now confident about both the requirement for a step up in investment, which is at the heart of delivering the UK’s energy policy, and the level of returns that this will earn. We foresee that over the next 5 years expenditure will be in the order of £22 billion compared with £14 billion during the last 5 years.

The single A ratings of our UK operating companies, together with our disciplined investment approach and proven track record of delivering large scale capital programmes, are at the core of our competitive positioning. We are announcing a £3.2 billion rights issue. We believe that by raising equity now we will be able to strengthen the Company’s long-term competitive position, and enable National Grid to take advantage of these growth opportunities, while maintaining our current credit ratings and delivering shareholder value.

Safety

Safety is paramount to National Grid. This year, we achieved a 40% improvement in our employee lost time injury frequency rate, down from 0.25 to 0.15, demonstrating what our individual and collective efforts can achieve. However, we are always mindful that we cannot rest on our success. During the year, we have become increasingly focused on process safety. We have worked to ensure that controls are in place to prevent major incidents and have made significant improvements both in understanding and measuring the associated risks. This will continue to be a major area of focus in coming years.

Strategy

Our strategy remains exactly the same – to build on our core UK and US, electricity and gas businesses, while we maintain the financial discipline to deliver sustainable growth. Last year we further developed our scenario planning models, to help us better predict where to target our investment over the next decade and beyond. It is currently expected that around 25% of existing generating plants in the UK will come offline in the next decade. Our predictions, which are aligned with others in the industry, show that there is a significant need for investment in the UK to address the ageing generation fleet, enable connection of new generation, upgrade our existing systems and replace more aged assets than ever before. What that means for National Grid is that significant investment in our gas and electricity infrastructure will continue to be essential.

Investing for growth

This year we invested £3.3 billion, a new record rate, to satisfy the needs of our customers.

I see these as very exciting times for National Grid and our shareholders. In the coming years, we expect to invest above the record level seen in 2009/10 to make sure that energy supplies are secure and that our essential infrastructure is able to handle the changing energy landscape.

We are seeking to ensure that, when we invest, we either lock in regulatory returns or underpin with long-term contracts. All investments will be evaluated against our disciplined capital investment criteria. Capital is only committed if it meets these criteria and has the ability to deliver acceptable returns.

Regulation

In the US, our focus continues to be on restoring baseline business performance principally by filing new rate plans, which we have done in 65% of our businesses. In each, we seek to establish new rates to recover the cost of running our businesses, to achieve real-time cost recovery of future investment, and to secure and earn acceptable returns.

In the UK, we continue to feed in to Ofgem’s RPI-X@20 regulatory reform effort, which seeks to determine if the traditional UK approach to network regulation is fit for the future. As a consequence of this project, the next transmission price control review has been delayed by a year and will be implemented from April 2013. We anticipate that the roll-over year will not introduce fundamentally different arrangements relative to the existing price control.

People and talent

Everything we do is delivered through our people. One of my personal priorities is to ensure National Grid is a place where our employees are able to perform and grow to the best of their abilities. We have embedded a number of tools launched last year, including: an inclusive leadership course; a training course for first line supervisors; and an enhanced course for our top talent in senior management.

In light of research we commissioned this year into the attitudes of young people towards engineering, we reviewed our education and skills programme. One resulting initiative is School Power, where our employees are leading a programme of activities designed to inspire and motivate children to learn about science and technology. As well as striving to make engineering and science an attractive and exciting career choice for young people to aspire to, we are partnering with universities in the UK and US to advance the teaching of engineering, facilitate research and development and increase the pool of potential new talent for the Company.

Looking forward

As we look towards the future, we are seeing a number of exciting UK investment opportunities that range from reinforcing our assets to investing in non-regulated opportunities that will allow us to earn acceptable returns. I am confident that our focused strategy remains the right one to bring long-term benefits to all our stakeholders.

The outlook for 2010/11 is that we will:

  • continue to meet society’s needs by delivering on our capital investment programme;
  • maintain our strong balance sheet;
  • invest in our people; and
  • continue our leadership role in key UK and US policy areas, such as regulation and raising the profile of engineering.

In the following section of this Report you will see some of the projects that are critical to shaping our future.

Steve Holliday, Chief Executive, National Grid

Steve Holliday
Chief Executive

Planned investment
in 2010/11

£3.9bn

Reduction in employee lost
time injury frequency rate

40%

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