National Grid PLC (NG.LN, NGG) will restructure its U.S. business through a plan that aims to cut annual operating costs by $200 million, primarily by eliminating 1,200 jobs, or around 7% of its U.S. work force.

The U.K. gas and electricity network operator said the job cuts will come from management and administrative positions and represent about 70% of the targeted annual savings. The rest of the cost reductions will come from providing IT to the organization and other efficiencies, National Grid Chief Executive Steve Holliday said Monday.

The U.S. operations of National Grid deliver electricity to roughly 3.3 million customers in New York, Massachusetts, New Hampshire and Rhode Island, and delivers natural gas to 3.4 million consumers in those states.

The restructuring comes after regulators in New York granted the company a smaller-than-expected increase in electricity distribution and transmission rates in recent weeks. The U.S. unit has been struggling to rein in costs as state regulators limit the operating expenses it is allowed to pass through to customers.

"Despite an increase in revenues, operating costs in the U.S. are still higher than we are recovering through today's rates," Holliday said.

Analysts said the announcement of the U.S. restructure, which was also released with a profit-guidance that was in line with expectations.

Holliday said the restructuring of the U.S. business wasn't forced upon the company by the series of disappointing regulatory decisions in the U.S. It had been planned, and the company was waiting to complete the full cycle of regulatory filings before announcing the changes.

"It's not a knee jerk; it has been thought through for some time," Holliday said.

While a specific instance didn't drive the U.S. cuts, a favorable rate decision for its upstate New York operations would have resulted in a plan with a "significantly smaller impact" than what was released Monday, Tom King, president of National Grid's U.S. division, said.

He added that an unsustainable gap exists between the company's costs and its ability to recover those costs through rates. National Grid will be cautious about making investments in the U.S. until regulators allow more costs to be passed on.

Executives declined to say in which states the job cuts would be concentrated. Decisions will be made by the end of this summer.

New York State Public Service Commission spokesman James Denn said the agency doesn't dictate staff requirements but will closely watch the restructuring to make sure reliability and customer service aren't hurt.

In a separate announcement, the company also said it expects operating profit for 2010-11 to be significantly ahead of the same period a year ago and in line with expectations.

"The strong momentum seen in the first half has continued and has further improved, driven by cold winter weather following the hot weather in the U.S. in the summer," the company said in a statement.

National Grid is to recommend an 8% increase in its full-year dividend, also in line with previous statements.

"It helps when you announce the restructuring with a positive trading update--the two reinforce each other. But the restructure is more significant in the short term than the trading performance," said Deutsche Bank utilities analyst Martin Brough.

Deutsche Bank has a target price of 620 pence and a buy rating on the stock.

However, Citigroup analysts said in a research note that although the restructuring was "very sensible" and re-created National Grid's U.S. model that had been abandoned in 2007, it still begged the question of a sale of the U.S. assets.

"But the question that [National Grid] has not answered is this: is keeping GBP15 billion of capital tied up in the U.S. the best use of that capital given the demands for investment in the U.K.?," the note said.

National Grid shares closed up 1.2% at 552.50 pence, outperforming the U.K. power utility sector and the broader FTSE index of which it is a component.

-By Selina Williams and Naureen S. Malik, Dow Jones Newswires; +44 207 842 9262l; selina.williams@dowjones.com

--Jana Weigand contributed to this article.
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