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Rating Action:

Moody's takes rating actions on National Grid UK subsidiaries

28 Aug 2007
Moody's takes rating actions on National Grid UK subsidiaries

Holding's Baa1/P-2 ratings affirmed; outlook changed to stable from developing

London, 28 August 2007 -- Moody's Investors Service has today affirmed the Baa1 long-term issuer and senior unsecured ratings and the Prime-2 short-term ratings of National Grid Plc ("National Grid"), and has changed the outlook to stable from developing, following the group's announced completion of the acquisition of New York-based KeySpan Corporation ("KeySpan") on 24 August 2007. Moody's has also downgraded the senior unsecured ratings of National Grid's UK regulated subsidiaries, National Grid Electricity Transmission Plc ("NGET") and National Grid Gas Plc ("NGG",) to A3/Prime-2 from A2/Prime-1, and affirmed the senior unsecured ratings of the intermediate holding company National Grid Gas Holdings Plc ("NGGH") at A3 with stable outlook. The outlook on all ratings is now stable.

The rating actions complete the rating reviews on NGET and NGG initiated in January 2007 following the introduction of Moody's methodology update for European Regulated Utility Groups. They also follow the announcement in February 2006 that National Grid had agreed to acquire KeySpan in a cash transaction valued at approximately US$7.3 billion, plus US$4.5 billion of assumed debt. In separate press releases, Moody's has also announced the outcome of the rating reviews on KeySpan and its rated subsidiaries and on the rated subsidiaries of National Grid USA, the holding company for the group's US businesses.

National Grid's Baa1 ratings reflect Moody's view that the overall consolidated credit quality of the group -- after the completion of the KeySpan acquisition and also taking into account the share buy-back programme announced earlier in the year -- is in line with a rating in the low single-A category. National Grid's own senior unsecured ratings are positioned one notch lower to reflect the structural subordination of lenders at the holding company's level to lenders at the operating subsidiaries, which are closer to the cash-flow-generating assets.

Moody's believes that the group's credit quality is underpinned by its overall low business risk profile, given the relatively stable and predictable cash flow generation at its regulated operating subsidiaries in the UK and US. Moody's generally views the regulatory frameworks in the UK and US as well established and transparent, although the regulatory regimes in the US states of New York, Rhode Island and Massachusetts are seen as moderately less supportive than the UK regulatory framework. Unregulated businesses are small and linked to the regulated activities: they principally comprise a metering business in the UK and the generation assets of KeySpan in the US, which will reduce materially with the sale of the 2,500 MW Ravenswood power station required within three years by the conditions imposed by the New York Public Service Commission to authorise the acquisition of KeySpan.

However, the rating agency also notes that the consolidated ratio of Retained Cash Flow ("RCF") to Net Debt estimated at 9-10% and expected FFO Interest Cover of around 3.0x position National Grid's prospective credit metrics weakly within their rating categories and leave very little headroom for further material debt-funded acquisitions or capital returns, particularly as National Grid faces the challenges of integrating KeySpan after a protracted regulatory approval process and proving that it can extract the estimated synergies.

The A3 ratings of National Grid's operating subsidiaries NGET and NGG are capped at the consolidated credit quality of the group. The A3 ratings of the intermediate holding company NGGH reflect Moody's view that the financial debt of NGGH can be comfortably supported by its regulated subsidiary NGG, given that NGG's ratings already take into account the additional debt at the intermediate holding company, which is now backed by intercompany loans from NGGH to NGG.

Moody's notes that, following the completion of the KeySpan acquisition, National Grid's liquidity position has become relatively tight given the group's forthcoming commitments in terms of capital expenditure, debt maturities and planned share buybacks. Moody's expects the company to secure additional committed funding over the short term in order to improve flexibility; the rating agency will monitor progress in this area.

The following ratings are affected by today's announcement:

- National Grid Plc: issuer/senior unsecured ratings affirmed at Baa1/Prime-2 with outlook changed to stable from developing.

- NGG Finance Plc: senior unsecured ratings (guaranteed by National Grid Plc) affirmed at Baa1, with outlook changed to stable from developing.

- National Grid Electricity Transmission Plc: senior unsecured ratings downgraded to A3/Prime-2 with stable outlook from A2/Prime-1 on review for possible downgrade.

- National Grid Gas Plc: senior unsecured ratings downgraded to A3/Prime-2 with stable outlook from A2/Prime-1 on review for possible downgrade.

- National Grid Gas Holdings Plc: senior unsecured ratings affirmed at A3 with stable outlook.

- British Transco International Finance B.V.: senior unsecured ratings (guaranteed by National Grid Gas Plc) downgraded to A3 with stable outlook from A2 on review for possible downgrade.

- British Transco Finance Inc.: senior unsecured ratings (guaranteed by National Grid Gas Plc) downgraded to A3 with stable outlook from A2 on review for possible downgrade; shelf senior unsecured (guaranteed by National Grid Gas Plc) downgraded to (P)A3 with stable outlook from (P)A2 on review for possible downgrade.

- British Transco Capital Inc.: short-term senior unsecured ratings (guaranteed by National Grid Gas Plc) downgraded to Prime-2, stable outlook from Prime-1 on review for possible downgrade.

Headquartered in London, England, National Grid Plc is the holding company for a range of international businesses focusing on the ownership and operation of electricity and gas networks. Its two principal geographic areas of activity are the UK and the US. In the financial year ended 31 March 2007, National Grid reported revenues of approximately GBP8.7 billion.

London
Stuart Lawton
Managing Director
Corporate Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Monica Merli
Senior Vice President
Corporate Finance
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

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