National Grid PLC — Annual Report 2003

Jun 11, 2003

20-F 1 b711854-20f.htm html PUBLIC "b711854_20-f" Prepared and filed by St Ives Burrups

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 20-F

(Mark One)

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

or

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: March 31, 2003 or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-14958

NATIONAL GRID TRANSCO PLC (Exact name of Registrant as specified in its charter) England and Wales (Jurisdiction of incorporation or organization)

1-3 Strand, London WC2N 5EH, England (Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
American Depositary Shares Ordinary Shares of 10 pence each	The New York Stock Exchange The New York Stock Exchange*
* Not for trading, but only in connection
with the registration of American Depositary Shares representing Ordinary
Shares pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act: None .

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None .

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

Ordinary Shares of 10 pence each	3,076,903,379
Special Rights Redeemable Preference Share
of £1	1

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:

Yes No

Indicate by check mark which financial statement item the registrant has elected to follow:

Item 17 Item 18

Contents
Chairman’s
Statement Chief
Executive’s Review Business
Review Board of Directors Directors’ Report and Operating and Financial Review Operating and Financial Review Corporate Governance and Internal Control Directors’ Remuneration Report Risk Factors General Information Independent Auditors’ Report to the Members of
National Grid Transco plc Accounting Policies	Group
Profit and Loss Account Group Statement of Total Recognised Gains and Losses Balance Sheets Group Cash Flow Statement Notes to the Accounts Summary Group Financial Information Glossary of Terms Definitions Independent Verifier’s Report on Operating Responsibly Investor Information Cross Reference to Form 20-F Shareholder Statistics Financial Calendar Shareholder Information

National Grid Transco is one of the world’s largest utilities, focused on delivering energy safely, reliably and efficiently.

Annual Report and Accounts 2002/03

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Financial Highlights

Group turnover £9,400m

Operating profit £2,185m Adjusted* £1,736m Basic

Net cash inflow from operating activities £3,154m Adjusted † £2,826m Basic

Earnings per share 28.3p Adjusted* 12.7p Basic

Ordinary dividends 17. 20p

| 02 | Chairman’s
Statement | 60 | Group
Profit and Loss Account |
| --- | --- | --- | --- |
| 04 | Chief
Executive’s Review | 60 | Group
Statement of Total Recognised Gains and Losses |
| 10 | Business
Review | 61 | Balance
Sheets |
| 26 | Board
of Directors | 62 | Group
Cash Flow Statement |
| 29 | Directors’
Report and Operating and Financial Review | 63 | Notes
to the Accounts |
| 29 | Operating
and Financial Review | 107 | Summary
Group Financial Information |
| 41 | Corporate
Governance and Internal Control | 108 | Glossary
of Terms |
| 44 | Directors’
Remuneration Report | 109 | Definitions |
| 53 | Risk
Factors | 110 | Independent
Verifier’s Report on Operating Responsibly |
| 55 | General
Information | 111 | Investor
Information |
| 56 | Independent
Auditors’ Report to the Members of National Grid Transco plc | 118 | Cross
Reference to Form 20-F |
| | | 119 | Shareholder
Statistics |
| | | 119 | Financial
Calendar |
| 57 | Accounting
Policies | 120 | Shareholder
Information |
| Cautionary
statement | | changes
in interest and tax rates, changes in energy market prices, changes in historical
weather patterns, changes in laws, regulations or regulatory policies, developments
in legal or public policy doctrines, technological developments, the availability
of new acquisition opportunities or the timing and success of future acquisition
opportunities. Other factors that could cause actual results to differ materially
from those described in this document include the ability to integrate Niagara
Mohawk and Lattice Group plc successfully within National Grid Transco or
to realise synergies from such integration or the failure to retain key
management, unseasonal weather impacting on demand for electricity and gas,
the behaviour of UK electricity market participants on system balancing,
the timing of amendments in prices to shippers in the UK gas market, the
performance of the Group’s pension | schemes
and the regulatory treatment of pension costs, and the impact of any potential
separation and disposal by the Group of any UK gas distribution network(s).
For a more detailed description of these assumptions, risks and uncertainties,
together with any other risk factors, please see National Grid Transco’s
filings with the United States Securities and Exchange Commission (and in
particular the ‘Risk Factors’ and ‘Operating and Financial
Review’ sections of this document). Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as
of the date of this document. National Grid Transco does not undertake any
obligation to release publicly any revisions to these forward-looking statements
to reflect events or circumstances after the date of publication of this
document. |
| This
document contains certain statements that are neither reported financial
results nor other historical information. These statements are forward-looking
statements within the meaning of Section 27A of the United States Securities
Act of 1933, as amended, and Section 21E of the United States Securities
Exchange Act of 1934, as amended. Because these forward-looking statements
are subject to assumptions, risks and uncertainties, actual future results
may differ materially from those expressed in or implied by such statements.
Many of these assumptions, risks and uncertainties relate to factors that
are beyond National Grid Transco’s ability to control or estimate precisely,
such as delays in obtaining or adverse conditions contained in regulatory
approvals, competition and industry restructuring, changes in economic conditions,
currency fluctuations, | | | |
| ● | | | |

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Group Summary

National Grid Transco is an international energy delivery business. We are the UK’s largest investor-owned utility and one of the largest worldwide.

We own and operate the gas transmission and distribution systems in Britain, which deliver gas to some 21 million homes, offices and factories, and the high-voltage electricity transmission system in England and Wales.

In the US, we are a major electricity delivery company, with one of the largest electricity transmission and distribution systems in the Northeast. In addition, we operate a gas distribution system in upstate New York.

UK Distribution		UK Transmission
Gas		Electricity		Gas
●	172,000
miles of distribution pipelines	●	4,500 miles
of high-voltage overhead line and 400 miles of underground cable	●	4,100
miles of high pressure pipeline
●	Distributes
gas on behalf of gas shippers and suppliers to around 21 million consumers	●	60 entry
points to the network	●	Gas comes
ashore at six beach terminals
●	Operates the
free national gas emergency number: 0800 111 999	●	200 supply
points to distribution companies and large users	●	150 offtake
points for the eight distribution Networks
●	Around
six million calls dealt with in 2002/03	●	340 substations
at around 230 separate sites	●	Gas pumped
around the system by 24 compressors
US Transmission
and Distribution				Other businesses
Electricity		Gas
●	14,000
miles of electricity transmission network	●	Approximately
550,000 gas customers over a distribution network of 8,000 miles in upstate
New York	Non-regulated
businesses provide:
●	3.2 million electricity
customers over a distribution network of 72,000 miles in New York and New
England			●	Metering
and meter reading services
				●	Communications
infrastructure solutions
				●	Interconnectors
between national electricity networks
●

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| ● | National Grid Transco,
created from the Merger of National Grid and Lattice, brought together two
groups with world-leading reputations for operating complex energy networks.
Combined, we are the UK’s largest investor-owned utility and one of
the largest worldwide. | |
| --- | --- | --- |
| As your Chairman, may I welcome you to
this, our first Annual Report for National Grid Transco which was created
last October through the Merger of National Grid and Lattice. It brought
together two groups, both of which already had world-leading reputations
for operating complex energy networks. Combined, we are the UK’s
largest investor-owned utility and one of the largest worldwide. Uniquely, our skills and strategy are
focused on energy delivery and infrastructure. We own and operate the
major part of Britain’s gas transmission and distribution systems
and the electricity transmission system in England and Wales. We are one
of the top ten electricity delivery companies in the US and operate a
gas distribution network in upstate New York. Our vision is to develop a modern, progressive,
forward-looking company that benefits all our stakeholders. This means
continuing to operate and grow a safe and reliable electricity and gas
transmission and distribution business. We do so with the conviction that
ever greater levels of safety and efficiency, coupled with high service
standards, can be achieved through the application of technology and innovation.
In addition, under well-designed regulatory incentives, such gains benefit
shareholders and consumers alike. Delivering this vision provides a safely-managed
and stimulating environment for all our employees. We will also, very
selectively, transfer our network skills to other similar markets when
long-term value creation opportunities arise. Group results and
dividend In our first year as National Grid Transco,
we have been keenly focused on delivering against our published targets.
We have made excellent progress across the Group in meeting our key operational
goals. In both the UK and the US, our core businesses are meeting or outperforming
against targets for reducing costs. At the same time, we are maintaining
our solid record of delivering energy safely, reliably and with high standards
of customer | service
as well as effectively implementing our integration plans. Group turnover increased
during the year by 24%, from £7.6 billion to £9.4 billion,
largely due to the contribution from the New York operation (Niagara Mohawk)
of National Grid USA, which joined the Group on 31 January 2002. Total operating profit before
exceptional items and goodwill amortisation for the year increased 23%,
representing strong performance from all our regulated operations in the
UK and US and the first full-year contribution from the New York operation. Adjusted earnings per share
was 28.3 pence, down from 30.8 pence in 2001/02, the fall reflecting the
benefit of releasing tax provisions last year. The Board is recommending
a final dividend of 10.34 pence per ordinary share. This brings the total
dividend for the year to 17.20 pence per ordinary share, a 7.2% increase
compared with last year’s National Grid payment, in line with our
aim to increase dividends per ordinary share by 5% in real terms in each
financial year to 31 March
2006. The final dividend per American
Depositary Share (ADS) proposed by the Board is $0.8396, bringing the
total dividend for the year to $1.3748 per ADS. Sound
governance On both sides of the Atlantic, corporate
governance practice has recently been the subject of considerable review,
public debate and new legislation. From the outset of the Merger, the
Board has been determined to ensure that the Group has in place the highest
standards of corporate governance. We have also taken particular care
to ensure that all procedures, policies and authorities, as well as the
Board and committee structure, match these objectives. | In the UK,
the recent ‘Review of the role and effectiveness of non-executive
directors’ by Derek Higgs proposed a number of changes. It is expected
that later this year the Financial Reporting Council will confirm the
final modifications to the Combined Code. I am confident that, following
a modest number of appropriate adjustments, we will be well placed to
comply with the majority of the recommendations contained in the Higgs
Review. In the US, the passage of the Sarbanes-Oxley
Act has increased the corporate governance requirements for the Group.
Significant work has already been undertaken and will continue to ensure
we fully meet our obligations. We are committed to operating our business
and building shareholder value in a sustainable manner. As a responsible
business, we work to ensure that high standards of financial performance
are matched by social and environmental responsibility. On behalf of the
Board, responsibility for oversight of health, safety, environment and
social involvement rests with the Risk and Responsibility Committee which
is chaired by James Ross, our Deputy Chairman. The Committee works closely
with the Audit Committee to provide assurance to the Board that all significant
risks within the Group have been thoroughly assessed and are managed through
sound systems of internal control. Above all, safety is our paramount concern.
In the UK, we continue to undertake major investment in maintaining the
gas distribution infrastructure, spending over £400 million in the
year on replacing metallic pipes to ensure we deliver gas safely. It is
against this background that we deeply regret that three members of the
public died as a result of gas explosions associated with Transco’s
operations in the UK during the year. Whenever such events occur it is
important to understand the reasons and therefore we cooperate fully with
the relevant authorities in their investigations and apply any lessons
to be learned as soon as possible. |

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Energy policy Energy policy continues to be high on the agenda in the UK, Europe and US, especially over issues regarding security and diversity of supply. In February 2003, the UK Government published a White Paper outlining its proposals for future energy policy. The White Paper rightly recognises the importance of robust and flexible infrastructure for the transmission and distribution of both gas and electricity to realise the Government’s policy objectives. In the case of gas, Transco’s National Transmission System will need to adapt to the growing proportion of gas and LNG imports from a variety of landing points. For electricity, the regulatory arrangements for National Grid Company’s essential role in connecting the new sources of renewable energy to the market, and balancing their intermittency, will be crucial to delivery of the White Paper’s objectives. We are working closely with the Government to meet these new challenges. In the US, although deliberations are far from complete, Congress is currently considering comprehensive energy legislation which includes a number of provisions that are important to National Grid USA’s ongoing operations and business development efforts. Among other things, Congress is considering the repeal of the Public Utility Holding Company Act, which would streamline regulation in the US, and the enactment of several provisions that would promote electricity transmission infrastructure development. National Grid Transco people None of this year’s achievements would have been possible without the skills, dedication and enthusiasm of National Grid Transco people. I would therefore like to extend my thanks to all our employees for their commitment to delivering our success and willingness to embrace change. The Merger saw a number of changes to the Board and I am grateful to all the Directors who have served on the Boards of National Grid and Lattice throughout the year. National Grid Transco is fortunate in having a very strong and committed team of Directors, which was further strengthened by the addition of Nick Winser to the Board in April 2003 as an Executive Director. He has assumed responsibility for our UK and US transmission operations, having previously been Chief Operating Officer of our transmission operations in the US. Steve Holliday, previously responsible for our transmission operations, has taken over as Executive Director with responsibility for UK gas distribution. Rick Sergel retains responsibility for our US distribution business. Edward Astle, responsible for our non-regulated businesses, is also now responsible for business development. Outlook Our Group-wide cost reduction and synergy creation programmes are exceeding our targets. We are confident that 2003/04 will be another strong year for the Group. Sir John Parker Chairman

Sir John Parker , Chairman (seated) and Roger Urwin , Group Chief Executive

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| ● |
| --- |
| Strategy National Grid Transco is one of the world’s
leading energy delivery companies. Our core skills lie in the design,
development, operation and maintenance of complex energy networks under
performance-based regulatory incentives. We manage these networks to the
highest standards of safety, reliability and customer service. We have also transferred our network
skills to related markets in the UK and US. We aim to deliver world-class operating
and financial performance in order to provide superior returns and grow
value for shareholders. To achieve this we must: |

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| • | continue to earn our reputation for
innovation and continuous improvement to achieve leading standards of
efficiency, safety, reliability and customer service; |
| --- | --- |
| • | continue the productive and professional
conduct of regulatory relationships to deliver innovative, performance-based
agreements which provide benefits for investors and consumers; |
| • | continue to develop our unique experience
and expertise in providing the infrastructure, commercial arrangements
and related systems that provide the essential basis for competitive electricity
and gas markets; |

| • | transfer best practices across businesses
and functions and realise integration synergies in electricity and gas
transmission and distribution; |
| --- | --- |
| • | exploit our core skills, assets and scale
to pursue selected growth opportunities in infrastructure and related
services; and |
| • | manage our businesses in accordance with
the culture and behavioural values needed for the responsible, long-term
stewardship of vital infrastructure assets – our
‘Framework for Responsible Business’. |

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| ● | ● | Left Transco
is responsible for the safety of Britain’s national gas pipeline system
24 hours a day, 365 days a year. Around six million telephone calls were
made throughout the year to the three national call centres that operate
the free national gas emergency number – 0800 111 999*. |
| --- | --- | --- |
| Business performance Last year saw excellent progress in delivering
our strategy. Each of our businesses maintained aggressive cost-cutting
and improved efficiency, and we delivered over £140 million in real
savings for the year ended 31 March 2003 alone. We continue to deliver
significant outperformance in the UK electricity business and to date
we have achieved real reductions of 22%. In our UK gas business, we met
the first-year target to reduce operating costs by 6.3% in real terms.
In the US, we are progressing well in integrating the New England and
New York operations. We have already achieved a reduction of 6.5%. The Group has made good progress in securing
the savings related to the National Grid and Lattice Merger. The two previous
London headquarters were brought together on the day we completed the
Merger, and we are in the process of moving to our new operational centre
in Warwick. The combined UK gas and electricity transmission
businesses have identified savings and efficiencies above our original
targets. We are now confident of achieving at least £135 million
annualised synergy savings, the great majority of which will be achieved
by March 2004. UK gas distribution Our gas distribution business in the UK
is organised into eight regional Networks and delivers gas to around 21
million consumers. Adjusted operating profit rose by £6 million
to £554 million and controllable costs were £26 million lower
than in the previous year. The replacement expenditure (‘repex’)
on UK gas mains totalled £405 million in the year. Our performance
under the new repex incentive mechanism has been encouraging, and we earned
an estimated £15 million in the first year. Separation of Transco’s distribution
price control into eight regional price controls is well advanced, and
Ofgem is due to | publish its final proposals
shortly. We are also in detailed discussions with Ofgem on the many regulatory
issues associated with the separation and potential sale of individual
Networks. We expect Ofgem to publish a consultation document on these
issues later this summer. However, the process will require extensive
consultations across the gas industry, including detailed discussions
with the HSE, which are likely to take many months to complete. We are
committed to retaining a major presence in the UK gas distribution business
but will consider the sale of one or more individual Networks if this
were to maximise shareholder value. UK electricity and gas
transmission The UK electricity and gas transmission
business comprises National Grid Company’s electricity transmission
network in England and Wales as well as Transco’s gas transmission
network in Britain. The business continued to deliver strong performance,
achieving adjusted operating profits of £846 million, an increase
of £65 million over the previous year. Operating highlights included
further significant reductions in controllable costs and strong performance
under the electricity System Operator incentive scheme. US electricity and gas
networks National Grid USA delivers electricity
and gas in the northeastern US. It delivered good results, with cost-cutting
and favourable weather conditions offsetting the impact of the sluggish
economy, a weakened US dollar and increased pension costs. The US businesses
contributed £699 million to adjusted operating profit, compared
with £370 million for the previous year, reflecting a full-year
contribution from our New York operations. Adjusted operating profit for
electricity distribution amounted to £513 million in 2002/03, compared
with £266 million in 2001/02; electricity transmission amounted
to £128 million in 2002/03, compared with £87 million in 2001/02;
and gas distribution amounted to £58 million in 2002/03, compared
with £17 million in 2001/02. Operating profit for | 2001/02 included two months of results
for Niagara Mohawk, which was acquired on 31 January 2002. The development of regional electricity
markets and the associated electricity transmission restructuring in the
US continues to make progress. In June 2002, we announced the establishment
of GridAmerica, an independent transmission company. Following receipt
of the remaining regulatory approvals, we expect it to begin operations
in autumn 2003, managing the transmission assets of three midwestern utilities:
Ameren, First Energy and Northern Indiana Public Service Company. These
assets span over 14,000 miles of transmission lines. Non-regulated businesses Our portfolio of non-regulated businesses
in the field of infrastructure provision and related services is selectively
utilising our core skills and assets in areas such as metering, communications
infrastructure, interconnectors, gas connections and property. During
the year, we have made real progress in refocusing our non-regulated businesses
and improving their safety and operational performance. Our competitive metering business, OnStream,
was awarded four contracts by British Gas Trading (Centrica) to provide
metering services for around 11 million domestic gas and electricity customers
in Britain. We continue to make progress in developing
Gridcom which provides communications infrastructure and related services
to fibre and wireless network operators in the UK and northeastern US. We are adding to our successful interconnector
business the £300 million Basslink project, to build, own and operate
an interconnector between the Australian mainland and Tasmania. Final
approval for the project from federal and state Government in Australia
was received during the year and it is due for completion in late 2005. |
| * All calls are recorded and may be monitored | | |

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| | ● | Left National
Grid USA deals with weather extremes during both the summer and winter.
In some areas last year, temperatures ranged from a high of over 37°C
during the summer to a low of -24°C during the winter. |
| --- | --- | --- |
| Our withdrawal from altnet (alternative
telecoms network) investments is nearly complete. During the year, we
sold our stakes in Manquehue net and Silica Networks and restructured
our shareholding in Energis Polska. We also sold the assets of 186k, our
fibre optic network business. Delivering energy
– safely The electricity and gas we deliver is essential
to the countries and regions in which we operate. It is of paramount importance
to us that we do so safely and we work to safeguard the public in all
that we do. Across the Group, we have a goal of zero
injuries to employees and, for the year ended 31 March 2003, the rate
of injuries resulting in lost time decreased by up to 46% across our major
operations compared with 2001/02. In our drive for continuous improvement,
we investigate all incidents to ensure that the lessons are learned and
communicated. Last year, we also audited the progress made in safety management
since the assessment of National Grid’s operations in the UK and
US by DuPont in 2001. In January 2003, we invited DuPont to carry out
a safety assessment of Transco. In the UK, Transco has successfully completed
its demanding programme to replace 1,500 miles of medium pressure mains
made of ductile iron. We have also commenced a long-term programme to
replace all metallic mains within 30 metres of buildings with modern polyethylene
pipes that should reduce further the risk of gas leaks from the system. In the US, we have a programme under
way to replace older bare steel and cast iron gas mains that may be at
risk of deteriorating. ...with year-round
reliability We must also deliver energy reliably, especially
during extremes of weather. The winter of 2002/03 saw the highest demands
for electricity and gas ever recorded in the UK. The electricity | transmission network in
England and Wales carried a record 54.4 GW on 10 December 2002 –
up more than 5% from the previous peak and the largest percentage increase
in demand since 1995. The record maximum daily
demand for gas in Britain of 450 mcm was met on 7 January 2003. This also
represented an increase of over 5% on the previous peak. In the US, there were extremes
of both hot and cold weather, with temperatures that ranged from a high
of over 37°C during the summer to a low of -24°C during the winter.
The need for summer air conditioning and winter heating increased the
demand for energy. In the New England region, all-time peak electricity
demand records were set in both the summer and winter. The weather in the US, however,
also included a significant number of ice and snow storms that caused
outages, including a very severe ice storm in New York in early April
2003 that cut off power to more than a quarter of a million of our customers.
It is a credit to the dedication and professionalism of our employees
that we were able to restore power quickly with many tributes received
from the customers affected. and
with high service standards We have the largest integrated gas system
in the European Union. Through some 176,000 miles of pipeline we transport
gas on behalf of gas shippers and suppliers to around 21 million consumers.
We also operate the national gas emergency service. Safety-related targets
continued to be exceeded, with 99% of ‘uncontrolled’ gas escapes
(where the gas leak cannot be controlled by turning the gas supply off
at the meter) attended within one hour. 99% of ‘controlled’
gas escapes (where the gas leak can be controlled at the meter) were attended
within two hours. In the US, we also work
towards service quality standards set by the state | regulators. During the year, we had
mixed results in the area of reliability, which measures the frequency
and duration of outages. While in New York and Rhode Island we met our
targets, we fell short in Massachusetts. As a result, major construction
efforts are under way to improve reliability in the distribution infrastructure
through the upgrade of low-voltage power supply lines (feeders) in New
England and the completion of four new substations. Customer satisfaction is higher and billing
accuracy and efficiency have been improved in the US through our Automated
Meter Reading (AMR) project. AMR enables us to read up to 15,000 meters
a day using a specially equipped van, compared with approximately 400
meters per day by a meter reader. AMR provides accurate reads, which means
fewer customer calls about bills and fewer regulatory complaints. We also work closely with our customers
in the US and UK to improve their energy efficiency. Five of the programmes
offered in New England were among the 31 nominations selected as the nation’s
best by the American Council for an Energy-Efficient Economy. In Britain,
our Affordable Warmth programme is a leading contributor to the eradication
of fuel poverty – a prime Government objective. Operating responsibly The past year has seen an increasing emphasis
on the way in which companies manage their affairs and the arrangements
they have put in place to ensure effective corporate governance. Our Framework for Responsible Business,
developed with the help of our employees and external stakeholders, sets
out the principles by which we will manage our business to deliver long-term
value. It provides the context for our approach to corporate governance
and is supported by Group-wide policies addressing issues such as safety,
environment and business ethics. |

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We are proud of our achievements in this area. This year we have been listed in the top 20% of the UK Business in the Community’s Corporate Responsibility Index and the ‘Premier League’ of the associated environmental index. We have also been rated by certain fund managers as an ‘industry leader’, for our management of environmental and social issues.

This financial year has also seen us enter the FTSE4Good and Dow Jones Sustainability Indices, at a time when these issues are taking on greater importance for the investment community.

We place great emphasis on the relationships we have with the local communities we serve. We have established the National Grid Transco Foundation to bring our business expertise, knowledge and resources to

bear on social and environmental issues faced by communities. It is also the means through which our UK employees can become actively involved in community activities.

In recent years there has been a shortage of skilled engineers and technicians across the UK. The Foundation has been involved in developing a pilot scheme to address this shortage. We have trained young offenders in gas distribution and streetworks and they have found jobs with National Grid Transco and our engineering contractors.

Most encouragingly, experience shows that there is a dramatically reduced inclination to re-offend among these young people. The UK Government is therefore considering how this scheme might be applied nationwide, under the leadership of Sir John Parker.

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Last year we gave some £3.4 million ($5.4 million) to charitable causes in the US. This included support for needy populations through a fuel-assistance programme similar to our Affordable Warmth programme in Britain. It also included an educational services programme that distributed more than 200,000 instructional booklets on various energy topics to students and held more than 2,000 classroom safety presentations reaching more than 50,000 children.

A foundation for the future We have successfully established National Grid Transco as the world’s foremost company specialising in the ownership and operation of the advanced networks that provide the essential basis for competitive electricity and gas markets. Our challenge is to build on this achievement to the benefit of our employees, our shareholders and the millions of customers served by our networks.

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●
Introduction Overview of National Grid Transco In the UK, through Transco, we own, operate
and develop Britain’s natural gas transmission and distribution systems
which deliver gas to around 21 million consumers. Through National Grid
Company, we own, operate and develop the high-voltage electricity transmission
system in England and Wales. In the US, National Grid USA’s distribution
networks serve approximately 3.2 million electricity customers in the
Northeast and 550,000 gas customers in upstate New York. Other electricity interests
include interconnectors in the UK, US and under construction in Australia,
and joint ventures operating in Argentina and Zambia. We have also transferred
our network skills to related markets in the UK and US. Our UK gas distribution
operation comprises eight regional Networks in Britain. Immediately following the
Merger, the Group combined the management of National Grid’s UK electricity
and Transco’s gas transmission operations. In spring 2003, we brought
together our UK and US transmission activities. This follows the creation
of GridAmerica, which is expected to become operational in autumn 2003
and to commence management of the transmission operations of three major
power companies in the midwestern US. However, while we are reporting
separately on UK transmission, our US transmission activities are reviewed
as part of our US electricity and gas networks.	History and development of the business On the restructuring of the electricity
industry in England and Wales in 1990, National Grid Company assumed ownership
and control of the transmission network and certain parts of the interconnectors
with Scotland and France from the Central Electricity Generating Board.
National Grid Company became a wholly-owned subsidiary of National Grid
Holding plc, the predominant shareholders in which were the 12 Regional
Electricity Companies (RECs) which owned and operated the local distribution
systems. Each REC disposed of substantially all of its holding in National
Grid Holding plc in either 1995 or 1996. National Grid Holding plc was
re-named The National Grid Group plc in 1995 and in July 2000 became National
Grid Group plc. National Grid’s initial investments in electricity
activities outside the UK were in Argentina and Zambia in 1994 and 1997
respectively. National Grid entered the US electricity
market in 2000 with its acquisitions of New England Electric System (NEES)
and Eastern Utilities Associates (EUA). National Grid further expanded
its operations in the US with the completion of its merger with Niagara
Mohawk in January 2002. All these companies now form part of National
Grid USA. A new holding company for National Grid was introduced through
a scheme of arrangement to effect the merger of Niagara Mohawk. Immediately
after the scheme became effective, the new holding company was re-named
National Grid Group plc. In October 2002, National Grid Group
plc merged with Lattice Group plc and was re-named National Grid Transco
plc. Lattice was one of the three successor companies to what was formerly
British Gas plc. Its principal business was Transco, the owner and operator
of the substantial majority of Britain’s gas transportation system.
This Business Review should
be read in conjunction with the Operating and Financial Review on pages
29 to 40

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| ● | ● | Far left ‘Live line
working’ enables highly trained engineers to undertake routine maintenance
to overhead lines, minimising the need to switch off the power supply. Left Using
the latest laser guided tunnelling equipment, Transco engineers work to
replace existing gas mains with new polyethylene pipe beneath one of London’s
busiest trunk roads. The specially constructed 48-inch tunnel was used
to insert the new 450 mm pipe with minimum disruption to the public. | |
| --- | --- | --- | --- |
| The UK gas industry was nationalised
in 1948 and the British Gas Corporation was established in 1973. British
Gas was incorporated as a public limited company in April 1986 and the
Government sold substantially all of its shareholding in it to the public
in December 1986. In 1997, Centrica, which was then primarily a supplier
of gas to end users, was demerged from British Gas which was re-named
BG. BG retained the gas transportation and storage businesses, the majority
of the exploration and production business as well as the international
downstream and a number of smaller businesses. In December 1999, BG completed
a financial and restructuring programme which resulted in the creation
of a new parent company, BG Group, and involved separating its UK regulated
business, Transco, from its other businesses. This created a ‘ring-fence’
around Transco designed to ensure its financial, organisational and managerial
independence. In October 2000, Lattice was demerged from BG Group and
comprised Transco, together with start-up telecommunications and non-regulated
infrastructure services businesses. Restructuring programmes Prior to the Merger, Transco and National
Grid were each in the midst of restructuring programmes. In the UK, these
programmes were designed to meet and, where possible, outperform the regulatory
targets set by Ofgem. In the US, as part of the acquisition process, National
Grid negotiated rate settlements with regulators in the states where the
companies it acquired had substantial operations. Transco embarked on its extensive restructuring
programme following settlement of its price control review which took
effect in April 2002. Since then, controllable costs have been reduced
by 6.3% in real terms and we have delivered on our initial target of reducing
the monthly rate of operating expenditure to the corresponding regulatory
target by March 2003. | ‘Staying Ahead’
was launched in National Grid in the UK in January 2002. It set out a
vision of continuous improvement and of being world class in all aspects
of the business. It also set out the strategic context for the vision,
linking it to benefits for the business and for the individual. We have
reduced Transmission Owner controllable costs by 22% in real terms since
1 April 2001. We therefore remain confident that we will achieve the planned
30% real reduction over the period to March 2006. Following the merger of
our gas and electricity transmission operations in the UK, we have re-examined
the challenges facing this business and concluded that the Staying Ahead
vision remains valid for the combined UK transmission business. We have
therefore extended the principles of Staying Ahead across the merged UK
transmission organisation. In the US, National Grid
USA has entered into long-term rate plans that project certain synergy
savings and efficiency gains. The Group has set the goal of a 20% reduction
of controllable costs in US operations over the three-year period ending
31 March 2005. By the end of 2002/03, integration savings were being delivered
ahead of schedule, with controllable costs having been reduced by 6.5%
thus far. Merger benefits The newly merged Group has made good progress
in bringing together two businesses both focused on the efficient delivery
of energy. Our Group corporate centre functions were combined on the day
we completed the Merger, and we are in the process of moving the majority
of our UK business services staff to Warwick as we further consolidate
locations. We brought together our UK gas and electricity transmission
businesses and we are realising savings and efficiencies. We are now confident
of achieving at least £135 million annualised synergy savings, the
great majority of which will be achieved by March 2004. | UK gas distribution Background information The UK gas distribution business of National
Grid Transco is operated by Transco and comprises the majority of Britain’s
gas distribution system. The gas distribution system is organised into
eight regional Networks and consists of approximately 172,000 miles of
distribution pipelines. Gas is transported on behalf of approximately
70 active gas shippers from the National Transmission System to around
21 million consumers and also to third party pipeline systems. As well
as gas transportation, Transco is responsible for the safety, development
and maintenance of the transportation system and operates the national
gas emergency service. Regulation Transco is the holder of a gas transporter
licence for England, Wales and Scotland in respect of its gas distribution,
transmission and metering businesses. From 1 April 2002, the UK gas distribution
business became subject to a separate five-year price control formula.
The formula takes into account, among other factors, operating expenditure,
replacement expenditure, capital expenditure, cost of capital at a real
pre-tax rate of 6.25% and transportation volumes. The price control is
structured so that 65% of revenue is fixed and 35% varies with volumes.
In addition, pass-through is given in respect of some of the formula rates
the Group is liable for and Ofgem’s licence fees. We are currently
working with Ofgem on disaggregating the control into a separate price
control for each Network. In setting the price control, replacement
expenditure costs were divided 50:50 between regulatory capital and regulatory
operating expenditure. This ensures that the cost of the metallic mains
replacement programme does not fall wholly on today’s customers,
but is shared with future customers who will also stand to benefit from
the further improvements in safety and operational integrity. The regulatory
treatment of replacement expenditure | ● |

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contrasts with the accounting treatment where all such costs are expensed (see critical accounting policies – replacement expenditure on page 37).

The distribution mains replacement incentive scheme provides that if Transco outperforms cost targets, it keeps 33% of the savings as additional allowed revenues but, if it underperforms, it may recover only 50% of its additional expenditure through additional allowed revenues. In 2002/03, Transco generated an estimated additional £15 million of allowed revenues through outperformance of the cost target.

Financial performance UK gas distribution turnover for the year ended 31 March 2003 was £2,089 million compared with £2,013 million in 2001/02 and £2,070 million in 2000/01.

UK gas distribution adjusted operating profit for the year ended 31 March 2003 was £554 million, compared with £548 million in 2001/02 and £663 million in 2000/01.

| The £6
million increase in adjusted operating profit comparing 2002/03 to 2001/02
was mainly a result of the following: | |
| --- | --- |
| • | a £26
million reduction in controllable operating costs; and |
| • | an offsetting
increase in replacement expenditure of £37 million with the commencement
of the long-term programme to replace all metallic distribution mains
within 30 metres of a building (see critical accounting policies – replacement
expenditure on page 37). |
| Principal factors
behind the £115 million decrease in operating profit comparing 2001/02
to 2000/01 were: | |
| • | warmer weather
that reduced turnover by £78 million; |
| • | a £92
million increase in replacement expenditure; and |
| • | a £50
million provision for shipper related liabilities in 2000/01. |

| UK gas Transco transports gas for around 70
active shippers from coastal terminals to consumers ’ meters, delivering gas to around 21 million consumers. Transco also
operates the 24-hour 365 days a year national gas emergency service. | |
| --- | --- |
| ● | |
| Operating
performance Gas throughput was 708 TWh in 2002/03
compared with 697 TWh in 2001/02 and 733 TWh in 2000/01. If the weather
had corresponded to seasonal normal temperatures, it is estimated that
gas throughput would have been 730 TWh in 2002/03 compared with 727
TWh in 2001/02 and 726 TWh in 2000/01. While there has been underlying
growth of 2.0% in demand from domestic users (2001/02 1.0% demand growth),
2002/03 saw a 1.6% reduction in underlying demand from business and
other large | users (2001/02
1.0% reduction). This is attributed to higher relative gas prices compared
to competing fuels and to the recession in manufacturing. The Quarterback system, which provides
mobile workforce technology to field operations in the eight Networks,
is on schedule for roll-out in late summer. Cumulatively to 31 March
2003, £20 million had been spent on this system. In addition,
we have implemented in-vehicle technology (VeSaS) to manage the performance
and utilisation of our large vehicle fleet better and we are undertaking
further improvement of our supply chain |

Adjusted operating pro fi t excludes the impact of exceptional items and goodwill amortisation

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Right Construction of a new 43-mile, 48-inch high pressure pipeline between St Fergus Terminal and Aberdeen Compressor Station in Scotland is part of our investment programme to meet increased gas demand. Far right National Grid Company ’ s control room for England and Wales, where supply and demand are balanced on a second-by-second basis in what is perhaps the most sophisticated and liberalised wholesale electricity market in the world.

deliveries by reducing and rationalising our logistics network.

Investment in the network Capital expenditure on the reinforcement and extension of the gas distribution network was £380 million in 2002/03 compared with £455 million in 2001/02 and £360 million in 2000/01. During the year ended 31 March 2003, 220,000 new connections were made to the gas distribution network and there was a net increase of 60,000 in the number of consumers.

Transco has successfully completed its programme to replace certain medium pressure ductile iron mains and has now commenced the long-term programme, agreed with the HSE in 2001, to replace all metallic mains within 30 metres of buildings. This amounts to a potential 57,000 miles of mains. Ofgem has allowed £1.5 billion (2000 prices) of investment in the UK gas distribution price control, covering the fi rst fi ve years of the programme.

Fixed assets The gas distribution system in Britain comprises approximately 172,000 miles of distribution pipelines. Agreements with landowners or occupiers are only required for those pipes that cross private land, which are mainly local transmission mains. These agreements largely comprise perpetual easements or Scottish equivalents. Transco owns the freeholds of the substantial majority of its operational sites where there are larger operational plant and gas storage facilities. Around 80% of of fi ce buildings, depots and stores occupied by the UK gas distribution business are leased from another National Grid Transco company, SecondSite Property. Other of fi ces and depots, including Transco ’ s principal of fi ces at 31 and 35 Homer Road in Solihull, are leased from third parties.

UK electricity and gas transmission Background information The UK transmission business comprises the high-voltage electricity transmission

system in England and Wales and the gas transmission system in Britain. It owns and operates electricity assets consisting of approximately 4,500 miles of overhead line, about 400 miles of underground cable and some 340 substations at around 230 separate sites. Day-to-day operation of the electricity transmission system involves the continuous matching of generation output with demand, ensuring the stability and security of the power system and the maintenance of satisfactory voltage and frequency. The business also owns and operates the national gas transmission system comprising approximately 4,100 miles of high pressure pipe, six beach terminals and 24 compressor stations, connecting to Transco ’ s eight distribution Networks and third party independent systems for onward transportation of gas to end consumers.

| The UK transmission
business now comprises four separately regulated businesses: | |
| --- | --- |
| • | Electricity Transmission
Owner; |
| • | Electricity System Operator; |
| • | Gas Transmission Owner;
and |
| • | Gas System Operator. |

The Transmission Owner (TO) activity involves the ownership and maintenance of the physical assets, developing the networks to accommodate new connections/disconnections, managing a programme of asset replacement and investment to ensure the long-term reliability of the systems.

The System Operators (SO) undertake a range of activities necessary for the successful delivery in real time of secure, reliable and ef fi cient energy and the continuous balancing of supply and demand. The electricity and gas SOs are subject to a number of separate regulatory incentive schemes, many of which are rebased on an annual basis. We also own and operate the electricity interconnectors between England and Scotland and between England and France.

In February 2003, the UK Government published a White Paper outlining its proposals for future energy policy. This highlights four goals in terms of reducing carbon emissions, maintaining reliability and security of energy supplies, continuing to promote a market-based framework for the energy sector and ensuring affordable warmth for consumers. Gas is acknowledged as continuing to form a large part of the energy mix beyond 2020 and the Government sets an aspirational target of 20% renewables by 2020, as well as aiming for signi fi cant increases in energy ef fi ciency.

The White Paper recognises the importance of robust and fl exible infrastructure for the transmission and distribution of both gas and electricity to realise the Government ’ s policy objectives. In the case of gas, Transco's National Transmission System will need to adapt to the growing proportion of gas imports from a variety of landing points and LNG sources. It will further need to do so in a timescale which will accommodate new patterns of gas transmission in Continental Europe and the UK. In the case of electricity, the White Paper recognises that regulatory arrangements are crucial to the ability to deliver the necessary network infrastructure to support a major increase in renewable generation.

Under the proposed European Directives on electricity and gas liberalisation, July 2004 has been set as the deadline for the introduction of full competition in the industrial and commercial sectors of Europe ’ s gas and electricity markets; and July 2007, as the deadline for full domestic competition. Another draft Directive proposes common standards relating to the security of gas supplies and coordination of emergency arrangements in the event of a supply disruption. Work on contingency planning in the event of such incidents in the UK has already taken place.

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| ● | Left At Transco’s
national control centre, gas pressures and flows are monitored to ensure
the continuous balancing of supply and demand. |
| --- | --- |
| | TO Revenue from transmission network
use of system charges and charges for connections made before March 1990
is controlled by a revenue restriction condition set out in the transmission
licence. The current regulatory price control, which was introduced on
1 April 2001 and is expected to remain in force until 31 March 2006, takes
into account, among other factors, operating expenditure, capital expenditure
and cost of capital at a real pre-tax rate of 6.25%. National Grid Company
is permitted to set charges for connections to the transmission system
made since March 1990 to recover the costs directly or indirectly incurred
in providing connections, together with a reasonable rate of return on
such costs. SO As
System Operator, National Grid Company is responsible for the operation
of the high-voltage electricity transmission system across England and
Wales including the procurement and use of balancing services. Revenue
from charges for provision of balancing services is regulated under an
incentive scheme, where bene fi ts
of cost savings in system operation are shared with customers. Legislation
is being prepared to introduce the British Electricity Transmission and
Trading Arrangements (BETTA), following which a single system operator
for the entire GB transmission system (the ‘ GBSO ’ )
will be appointed. The Department of Trade and Industry has announced
that it is minded to award the GBSO role to National Grid Company. Gas The UK gas transmission business is undertaken
under the terms of Transco ’ s
gas transporter licence. From 1 April 2002, the UK gas transmission business
became subject to two separate fi ve-year
price control formulae in respect of its TO and SO activities. The formulae,
which last until March 2007, take into account, among other factors, operating
expenditure, capital expenditure, cost of capital at a real pre-tax rate
of 6.25% and transportation volumes. In addition, pass-through is given |
| UK electricity National Grid Company transports electricity
and balances the system on a second-by-second basis, delivering electricity
from generators and interconnectors to 12 regional electricity companies
for local distribution to over 24 million consumers and directly to a
small number of large industrial users. | |
| ● | |
| Regulation The electricity and gas TOs
are regulated by separate fi ve-year
RPI-X price controls, currently until 2006 for electricity and 2007 for
gas. Electricity National Grid Company is the sole holder
of an electricity transmission licence for England and Wales and owns
and operates the high-voltage electricity transmission system. We have
a statutory duty under the Electricity Act 1989 (as amended by the Utilities
Act 2000) to develop and maintain an ef fi cient, | coordinated and economical
system of electricity transmission and to facilitate competition in the
supply and generation of electricity. Under the terms of the transmission
licence, National Grid Company recovers costs, including a return on capital
employed, through charges to generators, distributors, suppliers and directly-connected
customers for use of and connection to the transmission system. Use of system
charges are levied in respect of the provision of transmission assets/infrastructure
(the TO activity) and for operating the system (the SO activity). |

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| ● | Left National Grid
USA’s training centre in Massachusetts
houses more than a dozen classrooms, conference rooms
and hands-on skills training areas. The centre includes
outdoor ‘laboratories’ where students train on overhead and
underground electricity distribution equipment such as
transformers, poles and a working substation. | |
| --- | --- | --- |
| in respect
of formula rates and Ofgem ’ s
licence fees attributable to the gas transmission business. The SO price control includes
a series of incentive arrangements such that if performance exceeds the
targets set in the licence, Transco retains a share of the bene fi ts, and vice versa. The incentives primarily cover the
costs of managing capacity constraints, the costs of purchasing shrinkage
gas and Transco ’ s own operating costs. Investment incentives are also included
in the licence and are expected to increase in signi fi cance
over time. Financial
performance Total adjusted operating profit for the
UK electricity and gas transmission business for the year ended 31 March
2003 was £846 million, compared with £781 million in 2001/02
and £756 million in 2000/01. For the year ended 31 March 2003, this
includes: • £551
million from electricity transmission; • £274
million from gas transmission and LNG; and • £21
million from interconnectors. UK transmission performance
last year underlines our ability to operate and manage complex transmission
networks in an incentive-based regulatory environment. Speci fi cally, we have: • earned
SO incentive scheme pro fi ts
of £49 million in electricity and £12 million in gas; and • delivered
TO controllable cost reductions of 14% in electricity. Electricity transmission Financial performance UK electricity transmission turnover for
the year ended 31 March 2003 was £1,341 million, compared with £1,285
million in 2001/02 and £1,316 million in 2000/01. UK electricity transmission adjusted
operating pro fi t
for the year ended 31 March 2003 was £551 million, compared with
£523 million in 2001/02 and £486 million in 2000/01. | The £28 million increase
in adjusted operating pro fi t
in 2002/03 was mainly as a result of the following: • reduction
in TO controllable costs of 14%, totalling 22% since the commencement
of the current price control, keeping us on track to deliver cost reductions
in excess of 30% over the price review period; and • SO
incentive scheme pro fi ts
of £49 million, including £45 million from the Balancing Services
Incentive Scheme (BSIS). The increase in adjusted
operating pro fi t
of £37 million comparing 2001/02 to 2000/01 was due to improved
SO incentive scheme performance and reductions in TO controllable costs. Operating
performance The winter of 2002/03 saw the highest demand
for electricity ever recorded on the transmission network in England and
Wales, with a record 54.4 GW on 10 December 2002. This compared with the
previous peak recorded on 3 January 2002 of 51.5 GW. We have more than halved
the electricity losses incurred due to plant failure and improved the
average annual availability of the electricity network for use from 95.4%
to 95.8%. System availability at winter peak demand was 98.8% in 2002/03,
compared with 98.3% in 2001/02. Gas transmission Financial performance UK gas transmission turnover for the year
ended 31 March 2003 was £567 million, compared with £528 million
in 2001/02 and £501 million in 2000/01. UK gas transmission adjusted
operating pro fi t
for the year ended 31 March 2003 was £274 million, compared with
£238 million in 2001/02 and £227 million in 2000/01. The £36 million increase
in adjusted operating pro fi t
in 2002/03 was mainly | as a result
of higher income from system entry capacity auctions. The £11 million increase
in adjusted operating pro fi t
comparing 2001/02 to 2000/01 was also as a result of an increase in income
from system entry capacity auctions, partly offset by an increase in the
price of gas used in operating the system. Operating performance The winter of 2002/03 also saw the highest
demand for gas, with a record maximum demand of 450 mcm on 7 January 2003.
This compared with the previous peak recorded on 2 January 2002 of 427
mcm. There has been an increase in 2002/03
of more than 17% in the mean time between compressor failures building
on the 27% increase achieved in 2001/02. We have also reduced by a third
the time compressors are taken out of service by improving the ef fi ciency
with which maintenance is carried out or enhancements made. Investment in the networks Capital investment on the reinforcement
and extension of the UK electricity transmission system and interconnectors
in 2002/03 was £391 million, compared with £381 million in
2001/02 and £364 million in 2000/01. Capital investment on the reinforcement
and extension of the gas transmission network in 2002/03 was £182
million, compared with £239 million in 2001/02 and £228 million
in 2000/01. Interconnectors Operating pro fi t
from the UK interconnectors for the year ended 31 March 2003 was £21
million, compared with £20 million in 2001/02 and £44 million
in 2000/01. Fixed assets Agreements with landowners or occupiers
are required for the overhead lines and |

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| ● — ● | ● | Far left St Fergus Terminal, Scotland, is one of six beach terminals receiving gas
and where the gas fl ow is
monitored and quality checked before it is transported throughout Britain
via Transco ’ s National Transmission System. Left Niagara
Mohawk, which serves 550,000 gas customers in upstate New York, has a programme
under way to replace older bare steel and cast iron mains that may be at
risk of corrosion. |
| --- | --- | --- |
| underground cables which make up our
electricity network in England and Wales. Approximately 80% of agreements
are in the form of terminable wayleaves. The remaining 20% are in the
form of perpetual easements under which rights have been granted in perpetuity
in return for a lump sum payment. The sites at which we have electricity
substations are split between freehold and leasehold. Of the leasehold
sites, the large majority are substations located on the premises of generators
and are held on long-term leases for nominal rental payments. Of the remaining
sites, most are held as ground rents (market price payable for land only)
from the respective landlords, who include electricity distribution companies. National Grid Company also owns the freehold
of its control centre in Berkshire and the learning and development centre
at Eakring in Nottinghamshire. It has major of fi ces in Coventry (leasehold), Warwick (leasehold) and
Leeds (freehold). The gas transmission system in Britain
comprises approximately 4,100 miles of high pressure national transmission
pipelines. Transco ’ s
interest in these pipelines is legally protected although the legal protection
is slightly different in Scotland from that in England and Wales. In England and Wales, Transco ’ s
interest in the pipelines is legally protected by both private easements,
entered into with third party landowners, and by statutory rights. 99%
of all associated sites are owned outright through a freehold purchase
process, with the remainder covered by long-term leasing arrangements. In Scotland, Transco ’ s
interest in the pipelines is protected by deeds of servitude as well as
statutory rights. 95% of all associated sites are owned outright through
a disposition purchase process. The remaining associated sites are owned
through a feudal disposition where an outright purchase has been made
but the previous owner retains speci fi ed rights, for example
mineral or forestry rights. | Transco has three Commercial
Lettings, at St Fergus to Shell and Mobil, and at Theddlethorpe to ConocoPhillips.
Any land issues impacting on normal agricultural activity local to pipelines
and their associated easement or servitude are covered by national agreements
with the National Farmers Union, the Country Land and Business Association
of England and Wales, and the Scottish Landowners Association. US electricity
and gas networks Background information In the US, National Grid Transco, operating
as National Grid USA, is one of the leading electricity distribution and
transmission service providers in the northeastern US, by reference to
energy delivered and length of transmission network, and one of the ten
largest utilities in the US, as measured by the number of electricity
distribution customers. Electricity distribution serves approximately
3.2 million customers over a network of 72,000 miles. Electricity transmission
maintains a network of 14,000 miles, which includes a high-voltage direct
current (DC) transmission line of 139 miles. Gas distribution serves around
550,000 customers over a network of 8,000 miles. National Grid USA provides
electricity distribution and transmission and gas distribution in New
York through its subsidiary Niagara Mohawk Power Corporation. It provides
electricity distribution in New England through its subsidiaries Massachusetts
Electric Company, Nantucket Electric Company, The Narragansett Electric
Company and Granite State Electric Company. It provides electricity transmission
in New England through its subsidiary New England Power Company. US regulatory environment Federal and state mandates have encouraged
the separation of generation from transmission and distribution in order
to promote competition and reduce prices to customers. National Grid USA
has divested substantially all its generation | assets and operates primarily in the
transmission and distribution sectors. The company provides electricity distribution
in upstate New York and New England and gas distribution in upstate New
York. The company also provides electricity transmission in upstate New
York and New England. Broadly speaking, distribution service is regulated
by a state ’ s
public utilities authority and transmission service is regulated by the
Federal Energy Regulatory Commission (FERC). As a result of our ownership of several
US public utility companies, National Grid Transco is a registered public
utility holding company under PUHCA – the Public Utility Holding Company Act of 1935. The implications
of registration as a holding company include, among other things, various
conditions and limitations relating to fi nancing, subsidiary company transactions, ownership of
non-utility businesses and the requirement for SEC consent for further
US utility acquisitions. The non-US operations of the Group are exempt
from full regulation under PUHCA. Distribution rate regulation Multi-year rate plans cover substantially
all the company ’ s
gas and electricity distribution revenue. National Grid USA ’ s rate plan
for a given jurisdiction is set with that state ’ s
public utilities authority. Although each state operates independently
and the rate plans are different, the plans have common elements. Key
among them is the fl ow-through
to customers of the commodity costs of generation, along with the recovery
of costs associated with the divestment of generating assets, called ‘ stranded
costs ’ . Comprehensive
service quality standards are a feature of the company ’ s
rate plans, with the risk of penalties for failure to meet certain goals
and, in some cases, the potential for reward if services exceed standards.
Efforts to control costs are rewarded through shared savings mechanisms
that allow the company to retain a portion of the savings achieved. In
certain |

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| | ● | Left National Grid USA performs regular maintenance on a 72,000-mile distribution
network in order to maintain reliable electricity services to 3.2 million
customers in the northeastern US. |
| --- | --- | --- |
| jurisdictions, earnings are
shared with customers upon reaching a particular percentage return on
equity. The plans permit National Grid USA, or the relevant state, to
seek adjustments to rates in the case of extraordinary events. Massachusetts distribution
rates (Massachusetts Electric Company and Nantucket Electric Company) Under the Massachusetts Electric distribution
rate plan approved by the Massachusetts Department of Telecommunications
and Energy, distribution rates were reduced by $10 million on 1 May 2000
and will remain frozen until the end of February 2005. From March 2005
to the end of December 2009, distribution rates will be indexed to the
average of distribution rates of similarly unbundled investor-owned utilities
in New England, New York, New Jersey and Pennsylvania. Massachusetts Electric
has agreed that increases in its distribution rates will initially be
capped at 90% of the regional average. Based on a predetermined formula,
annual savings related to Massachusetts Electric ’ s acquisition by
National Grid that are achieved up to the end of 2009 will be calculated
and shared equitably with customers from January 2010 until May 2020. Nantucket Electric ’ s
distribution rates are linked to Massachusetts Electric ’ s rates and became effective on 1 May 2000. Rhode Island distribution
rates (The Narragansett Electric Company) Under the rate plan for Narragansett Electric
approved by the Rhode Island Public Utilities Commission (RIPUC), distribution
rates were reduced by approximately $13 million on 1 May 2000 and will
remain frozen until 31 December 2004. During the rate freeze, Narragansett
Electric is permitted to retain earnings up to 12% return on equity. Any
earnings between 12% and 13% will be shared equally with customers. If
earnings exceed 13%, the excess will be divided between customers and
the company, with customers receiving 75%. | From 1 January
2005, distribution rates will be set by the RIPUC in accordance with Narragansett
Electric ’ s
cost of service. From that date until the end of 2019, the company will
be able to include in its cost of service half of any proven savings achieved
since the merger of two former distribution companies that belonged to
Eastern Utilities Associates (EUA – which became part
of the Group in 2000) with Narragansett Electric. Narragansett Electric
will fi le
evidence of the EUA merger savings with the RIPUC in 2003 and these savings
will be subject to further veri fi cation
in 2007. New Hampshire
distribution rates (Granite State Electric Company) The current rates for Granite State Electric
are subject to regulation by the New Hampshire Public Utilities Commission
and became effective in July 1998. New York
distribution rates (Niagara Mohawk Power
Corporation) Niagara Mohawk ’ s
distribution rates are regulated by the New York State Public Service
Commission (NYPSC). As part of the regulatory
approval process for the acquisition of Niagara Mohawk, a 10-year rate
plan was approved by the NYPSC on 28 November 2001, which became effective
on 31 January 2002. Electricity delivery rates were reduced by $152 million
and are subject to only limited adjustments for a period of 10 years.
However, Niagara Mohawk will continue to be able to adjust rates to recover
the full commodity costs of generation. Under the plan, after re fl ecting
its share of savings related to the acquisition, Niagara Mohawk may earn
a return on equity of up to 11.75%, or 12.0% if certain customer education
targets are met. Returns above this level are then subject to a sharing
mechanism with customers. The 10-year rate plan also
provides for a freeze on gas delivery rates until the end of 2004, but
permits Niagara Mohawk to pass through to customers gas commodity and
transportation costs. | Niagara Mohawk may earn a
threshold return on equity of up to 10%, or 12% if certain customer migration
and education goals are met, and is required to share with customers earnings
above this threshold. Transmission rate regulation A portion of the electricity transmission
business is regulated at the federal level by the FERC where the company
is allowed to recover the costs of providing transmission services, with
a return on capital. In New York, the transmission business is regulated
by the state with provisions similar to the distribution regulation outlined
in the distribution rate regulation section on page 16. Regional Transmission
Organisations (RTOs) The transmission sector in the US is undergoing
fundamental structural change. In its Order 2000, the FERC required electricity
utilities to file proposals for transferring to RTOs the management of transmission
assets and the tariffs setting out the rates, terms and conditions of
transmission service. National Grid USA is currently a member of two independent
system operators (ISOs), ISO New England Inc. and New York ISO, which
administer the markets and provide oversight of transmission in their
respective regions. The FERC has not yet determined the shape of the RTO
or RTOs that will cover the New England and New York regions. Within the
New England and New York regions, National Grid USA is discussing with
other transmission owners the possible formation of an independent transmission
company (ITC) within an RTO. This ITC would manage transmission assets
and tariffs within a for-pro fi t
business model, as opposed to a typically not-for-pro fi t
RTO. In other regions of the US, National Grid USA ’ s
participation may involve the acquisition and operation of the transmission
assets of participants in RTOs. The electricity markets and transmission
grid in the midwestern US are currently managed by the Midwest Independent |

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System Operator Inc. (MISO), which has been approved by the FERC to operate as an RTO. In June 2002, National Grid USA announced the formation of GridAmerica as a result of an agreement with Ameren, First Energy, Northern Indiana Public Service Company and MISO. Under the agreement, GridAmerica is to act as an ITC within MISO, managing the transmission assets of the companies within MISO on an annual fee basis. The agreement allows the transmission-owning companies to sell their assets to GridAmerica for cash and stock. Pending fi nal federal and state approvals, the company expects to begin managing the transmission systems of the three utilities in autumn 2003.

| Financial performance The following average exchange
rates have been used in translating
the US financial results for the following
periods: — 2002/03 | £1 = | $1.590 |
| --- | --- | --- |
| 2001/02 | £1 = | $1.440 |
| 2000/01 | £1 = | $1.483 |

Turnover for National Grid USA was as follows:
•	electricity distribution: £3,446 million in 2002/03, compared with £2,282 million in 2001/02 and £1,854 million in 2000/01;
•	electricity transmission: £407 million in 2002/03, compared with £278 million in 2001/02 and £243 million in 2000/01; and
•	gas distribution: £446 million in 2002/03, compared with £104 million in 2001/02 and none in 2000/01.

The summary above includes two months of results for Niagara Mohawk (this acquisition was completed on 31 January 2002) in the comparative fi gures for the year ended 31 March 2002.

Adjusted operating pro fi t for National Grid USA was as follows:

Group undertakings:
•	electricity distribution:
£513 million in 2002/03, compared with £266 million in 2001/02
and £215 million in 2000/01;

| • | electricity transmission:
£128 million in 2002/03, compared with £87 million in 2001/02
and £72 million in 2000/01; and |
| --- | --- |
| • | gas distribution: £58
million in 2002/03, compared with £17 million in 2001/02 and none
in 2000/01. |

| Joint ventures
and associate: | |
| --- | --- |
| • | Nuclear generation and other
joint ventures: £2 million in 2002/03, compared with £6 million
in 2001/02 and £8 million in 2000/01. |

The summary above includes two months of results for Niagara Mohawk (this acquisition was completed on 31 January 2002) in the comparative fi gures for the year ended 31 March 2002.

Operating pro fi t increased by £363 million (net of exchange rate) in 2002/03 over 2001/02 primarily due to the fi rst full year of results from the Niagara Mohawk acquisition. Exchange rate impact on the 2002/03 results was a loss of £34 million based on the 2001/02 average exchange rate. This analysis excludes ten months of Niagara Mohawk operating pro fi t since there are no comparable fi gures for the prior year.

Operating pro fi t increased by £72 million (net of exchange rate) in 2001/02 over 2000/01 primarily due to the fi rst two months of results from the Niagara Mohawk acquisition. Exchange rate impact on the 2001/02 results was a gain of £11 million based on the 2000/01 average exchange rate.

National Grid Transco’s electricity deliveries grew in the US, normalising for weather and billing days, in 2002/03 by 0.6% and in 2001/02 by 0.3%. This was despite a weak economy that has seen companies in many industries reduce in size or even close down, resulting in a downturn in commercial demand for energy which is expected to continue. In 2002/03, the Group was aided by weather that was hotter than normal during the summer and

colder than normal during the winter, causing an increase in energy use to run air conditioning and heating systems. This amounted to £34 million more turnover than normal in the 2002/03 financial year. By contrast, 2001/02 weather was cooler than normal during the summer and warmer than normal during the winter, causing a decrease in energy use to run air conditioning and heating systems. This amounted to £2 million less turnover than normal in 2001/02 exclusive of Niagara Mohawk.

Pension and post-retirement health costs adversely impacted the 2002/03 results, increasing by £8 million over 2001/02 exclusive of Niagara Mohawk.

Beginning with the acquisition of Niagara Mohawk, the Group developed a goal for its US operation to reduce controllable costs by 20% in real terms by the 2004/05 financial year. Substantial progress was made in 2002/03, reducing these costs by 6.5% in real terms.

Operating performance We work toward service quality standards that the state regulators expect us to achieve. If we fall below a prescribed standard, we can incur a penalty. If we do better than the standard, we can in certain cases achieve an incentive. In the area of reliability, which measures the frequency and duration of outages, we had mixed results, with Niagara Mohawk and Narragansett Electric meeting their targets but Massachusetts Electric falling short and incurring a £3 million penalty. Massachusetts Electric, however, partially offset the penalty with £0.7 million in incentives for above average performance related to customer service.

On the other hand, gains in customer satisfaction, and billing accuracy and ef fi ciency have been realised through the Automated Meter Reading (AMR) project. With AMR the company is now able to read a customer ’ s meter automatically using

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Left National Grid USA has introduced Automated Meter Reading (AMR), which allows customers ’ meters to be read using radio signals transmitted to a computer in a company van. This enables up to 15,000 meters to be read compared with 400 meters per day by a meter reader.

radio signals transmitted to a computer in a company van, rather than walking to every meter. AMR enables up to 15,000 meters to be read compared with 400 meters per day by a meter reader. New England distribution completed its AMR installations in December 2002. New York distribution began its AMR installations in October 2002. AMR provides accurate monthly reads, which means fewer customer calls about bills, fewer regulatory complaints and fewer re-reads of meters.

| Investment in
the networks | |
| --- | --- |
| Capital investment on the reinforcement and
extension of the electricity and gas networks
in 2002/03 was: | |
| • | electricity distribution: £209 million, compared
with £141 million in 2001/02 and
£94 million in 2000/01; |
| • | electricity transmission: £49 million, compared with £38 million in 2001/02 and
£30 million in 2000/01; and |
| • | gas distribution: £40 million, compared with
£3 million in 2001/02 and none in 2000/01. |

Electricity distribution included spending to establish AMR of £39 million in 2002/03 compared to £29 million in 2001/02.

The summary above includes two months for Niagara Mohawk in 2001/02.

Nuclear facilities National Grid USA no longer holds an ownership interest in any operating nuclear facility. During the past fi nancial year, the Group sold its interests in the Seabrook Nuclear Generating Station and the Vermont Yankee Nuclear Generating Station. As part of these transactions, the respective buyers assumed the decommissioning liability for these plants. The majority of the net proceeds from the sales will be credited to customers through contract termination charges.

National Grid USA holds minority interests in three nuclear power companies (the Yankees): Yankee Atomic Electric Company, Maine Yankee Atomic Power Company and Connecticut Yankee Atomic Power Company. Each of the Yankees owns a nuclear generating unit, all of which have been permanently shut down. The company is liable for its share of the decommissioning costs of these shut down nuclear generating units. Decommissioning costs include the costs of decontaminating and dismantling the units, spent fuel storage, security, insurance and other costs. National Grid USA pays its share of these projected costs through power purchase agreements with the operators. It is permitted to recover prudently incurred decommissioning costs from its customers through contract termination charges.

Although the US Department of Energy is responsible for the disposal of spent nuclear fuel, it has not established a depository for it, nor has it estimated a date by which it will. Many utilities, including the Yankees, are plaintiffs in ongoing litigation related to the Department of Energy ’ s failure to accept spent nuclear fuel. Any recovery from the proceedings, after litigation expenses and taxes, will be returned to customers through contract termination charges.

Fixed assets Substantially all National Grid USA ’ s properties and franchises are subject to the liens of indentures under which mortgage bonds have been issued. The majority of transmission lines are located on rights of way that the National Grid USA companies maintain under perpetual easements or fee ownership (freehold). Substations are principally located on properties owned in fee. National Grid USA owns in fee the of fi ces in Westborough and Northborough, Massachusetts and in Syracuse and Albany, New York.

Other businesses The Group has successfully exited from most of its alternative telecoms network (altnet) businesses during 2002/03. Signi fi cant progress has also been made in re-focusing the portfolio of other non-regulated businesses.

The adjusted operating pro fi t for Group undertakings within other activities for the year ended 31 March 2003 was £117 million compared with £179 million in 2001/02 and £203 million in 2000/01. Included within the other activities are the businesses below.

Metering Our UK Metering businesses provide installation, maintenance and meter reading services to gas shippers, including British Gas. The businesses have a national footprint and established skills in managing a large asset base and workforce.

The major focus during 2002/03 has been to respond to the challenges of competition, which is developing in the UK metering market. Currently, nearly all Britain ’ s approximately 20 million domestic gas meters are owned by Transco, which receives revenue regulated under its price control. In the competitive market, newly installed meters are provided by the metering companies that install them.

Our priorities are to continue to provide the services for our currently installed base of gas meters, and to take advantage of the opportunities in the emerging competitive market for new gas and electricity meters.

In January 2003, National Grid Transco announced that its Metering business, OnStream, had been awarded a fi ve-year contract with British Gas Trading (Centrica) to provide competitive metering services in four UK regions for around 11 million domestic gas and electricity customers.

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| ● | ● | Left Gridcom ’ s
towers can accommodate multiple telecommunications operators by site sharing.
It actively promotes such site sharing to UK mobile operators to prevent
a proliferation of masts and lessen the impact on the environment. |
| --- | --- | --- |
| Gridcom Gridcom provides communications infrastructure
solutions to fi bre
and wireless network operators in the UK and northeastern US. In the UK,
the merger of the mobile infrastructure activities of National Grid and
Lattice has been successfully completed. In the US, the newly established
Gridcom business and NEESCom are now operating under the same management
team. Gridcom builds, leases and operates sites
for the base stations and radio masts needed by mobile operators, leveraging
the Group ’ s
project management skills and electricity and gas infrastructure. In the
US, it also offers dark fi bre
and related facilities to telecoms operators. Demand has been depressed during 2002/03
in both UK and US markets, because of delays in the roll-out of 3G (third
generation) mobile phones and the operators ’ major reductions in capital expenditure. Fulcrum Connections Fulcrum Connections was established in
July 2001 in response to Ofgem ’ s
drive to introduce competition into the gas connections market. During
2002/03, it has provided gas connection services on behalf of Transco
to around 130,000 new domestic and industrial consumers. Fulcrum ’ s
short-term objectives are to improve performance against its contract
with Transco in readiness for the development of competition. Transco
is | working with Ofgem to remove
the barriers to the development of competition in the connections market.
In view of this, the management of Fulcrum has begun a programme to reduce fi xed costs and improve
management controls. SecondSite Property SecondSite Property ’ s
principal activity is the management, clean-up and disposal of surplus
non-operational properties (including former Transco and National Grid
sites in the UK), largely comprising contaminated former gas works. SecondSite
aims to tackle the historic legacy of gas manufacture on our sites so
that they can be reclaimed and returned to bene fi cial community use. During the year ended 31
March 2003, SecondSite Property Portfolio Ltd disposed of 66 properties
and generated £85 million in disposal proceeds, compared with 67
properties and £107 million in 2001/02 and 75 properties and £140
million in 2000/01. Advantica Advantica provides technology-based solutions
to Transco, other utilities and pipeline operators worldwide. Following
last year ’ s
acquisition of software and technology company Stoner, the company now
operates in the US as well as Europe. After a review, Advantica
has been de fi ned
as non-core and its management has taken action to reduce costs, prepare
the company for disposal and to seek a purchaser for the business. | Discontinued operations Exit from altnet businesses During 2002/03, we successfully completed
our exit from a number of altnet businesses in the UK and South America – 186k, Silica Networks and Manquehue net. We reduced our interest in Energis
Polska and progressed our exit from Intelig, Urband and Bulldog. We will
not provide any additional funding to these businesses over and above
existing provisions and remain con fi dent that we
will complete our exit from them within the provisions that we have announced. Sales During 2002/03, we sold The Leasing Group
and put Lattice Energy Services up for sale. Connections +, which formed
part of Lattice Energy Services, was sold in April 2003. |

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| Operating
responsibly | |
| --- | --- |
| Achievements | |
| • | Introduction of Framework
for Responsible Business |
| • | Top quintile in BitC ’ s
1st Corporate Responsibility Index |
| • | Constituent
of FTSE4Good and Dow Jones Sustainability Indices |

In merging National Grid and Lattice we recognised that it was essential to build on the approach to corporate responsibility that both companies had been developing in recent years. In doing so, we have implemented an approach which represents a step change in how companies can operate responsibly. Our approach has gained external recognition through our listing in the top fi fth of Business in the Community ’ s (BitC ’ s) 1st Corporate Responsibility Index and the FTSE4Good and Dow Jones Sustainability Indices.

We recognise that as one of the world ’ s largest utilities we have long-term responsibilities that form an important part of our wish to create value for our shareholders. We believe it is important to inform our shareholders and the wider community, not just about what we do as a business but how we do business. In this section of the Annual Report and Accounts we include material on the non- fi nancial components of our business. Fuller details of policies and materials referred to in this section can be accessed via our website, www.ngtgroup.com. The material in this section of the report has been independently veri fi ed by an external consultant, URS Veri fi cation Ltd, and their veri fi cation statement is published on page 110.

Our Framework for Responsible Business Our Framework for Responsible Business (the ‘ Framework ’ ) de fi nes the sort of business we are, sets the context in which we operate, and helps us achieve the right balance between economic, environmental and social factors.

We have built our Framework around three goals that clearly de fi ne our desire to be a company with a long-term future:

| Sustainable
growth | |
| --- | --- |
| • | We are constantly looking
to expand and grow our business by transferring our skills to new markets.
Growth needs to be sustainable if we are to bring long-term value to our
shareholders and others. |
| Profits with
responsibility | |
| • | For our business to be sustainable,
we must be pro fi table.
However, increasing our pro fi tability at any cost
is neither sustainable nor acceptable. We therefore have to be responsible
in the way in which we generate our pro fi ts. |
| Investing
in the future | |
| • | As a responsible business,
our commercial success enables us to invest in the future in a way that
bene fi ts
our shareholders, our employees, the environment and society. This investment
is a re fl ection
of our desire to be a long-term business. |
| Driving our
governance | |

Achievements
•	Governance approach linked
to Framework for Responsible Business
•	Implementation of new Group-wide
policies
•	Establishment of new Board
Risk and Responsibility Committee

In a climate where the governance arrangements in large companies are increasingly under scrutiny, the Board has implemented a transparent approach, driven by our Framework and underpinned by a suite of policies. Our assurance processes are intended to provide the Board with a rigorous assessment of the robustness of management controls.

Our Group-wide policies In December 2002, the Board approved Group-wide policies, procedures and an external position statement, on electric and magnetic fi elds, supporting key areas of

Far Left Schoolchildren visiting National Grid Company’s recently renovated Bramley Frith Environmental Education Centre near Basingstoke in Hampshire, UK, where they learn about environmental issues and biodiversity. The new facilities include a number of energy-efficient features, plus offices, a library and a staff workroom. Left Paper-making at National Grid Company ’s Pelham Centre for the Environment, Hertfordshire, UK. In addition to term-time visits, schoolchildren can attend holiday play schemes where activities boost their awareness of the natural world.

| the Framework.
The policies establish common principles by which we will manage these
issues across all our operating businesses. Where we are involved in a
joint venture, we will encourage our partners to adopt policies and practices
consistent with the principles we have established. | |
| --- | --- |
| Board
Risk and Responsibility Committee Overall responsibility for matters
of corporate responsibility rests with the Board which has established
the Risk and Responsibility Committee chaired by James Ross, Deputy Chairman,
to ensure that these areas are reviewed in appropriate depth. The Committee
has responsibility for reviewing the non- fi nancial risks, strategies,
policies, management, targets and performance of the Group, and where
appropriate our suppliers and contractors, in the following areas: | |
| • | Occupational and public
safety |
| • | Occupational health |
| • | Environment |
| • | Equality and diversity |
| • | Human rights |
| • | Business ethics |
| • | Role of the Group in society |
| The Risk and
Responsibility Committee works closely with the Audit Committee to enable
the latter to provide assurance to the Board that all risks to the Group
have been thoroughly assessed and managed through sound systems of internal
control. Independent external advisors support the Committee on matters
of safety and the environment. | |
| Providing
assurance Assurance is provided through a number of related routes. Central to this
is the integration of risk management within the Group. Further details
are provided in the section on Corporate Governance and Internal Control
on page 41. | |
| We have also
established a Group-wide safety and environmental audit programme. This
programme assesses the robustness of management controls | |

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put in place to ensure our safety and environmental performance is in line with our policies. Progress in implementing this programme is reviewed quarterly by the Risk and Responsibility Committee.

In addition, the Board and the Executive Directors separately receive a monthly report on the safety and environmental performance of the businesses in the Group. This report also highlights any emerging risks where Executive action may be warranted.

At the year end, our Directors and senior managers sign a formal letter providing their personal assessment of compliance with Group-wide policies, the extent to which risks are being managed and any weaknesses in management controls that may have been identi fi ed.

A safe way of working

Achievements
•	Group-wide Safety and Occupational
Health policy now in place
•	Independent review of safety
management in all major operations completed
•	Signi fi cant
reduction in rate of Lost Time Injuries compared with 2001/02

We believe that safety is paramount and that all work-related injuries and illnesses are preventable. We strive to safeguard the public in all we do. A new Group-wide Safety and Occupational Health policy was approved by the Board in December 2002. The policy establishes our strategic aims and each of our businesses will be audited to ensure it is transferring the policy into practice.

Our management of safety During 2002/03, our operations have not resulted in any fatalities to our employees or contractors, and the rate of injuries resulting in lost time has decreased by up to 46% across our major operations compared with 2001/02. However, 269 of our employees were involved in accidents which led to their taking time off work.

As with all our incidents, these are being investigated to ensure that lessons are learned and communicated throughout the Company. We monitor Lost Time Injuries across the Group and report the data monthly to the Executive Committee and Board.

We recognise that to deliver the Group goal of zero injuries we need to create a safety culture where everyone is able to challenge constructively unsafe behaviours wherever they occur.

We have audited the progress made in safety management since the review of our National Grid operations in New England and the UK by DuPont Safety Resources in 2001.

In both organisations, strong management commitment to safety has clearly been recognised by employees and improvements can be seen in most of the elements of safety management. The goal of zero injuries is widely recognised. Nearly all employees involved in the audit stated that they could in fl uence their own health and safety and the safety of others, and that they participate in decisions concerning safety. It was concluded that the businesses need to refocus efforts in some key areas such as learning through accident investigations and reporting near misses, but that the steps taken are beginning to have a positive in fl uence on attitudes to safety.

We invited DuPont to carry out a safety assessment on Transco in January 2003. DuPont noted a number of areas where best practice could be rolled out across other businesses and other areas where further work is required. They recognised areas of good safety governance involving employees from different staff grades and sound contractor management in our gas transmission business. The Risk and Responsibility Committee will review the progress we have made during 2003/04. DuPont will be carrying out a similar review of Fulcrum Connections ’ safety management systems in 2003. We are

now well placed to drive forward best practice across the Group against standard benchmark measures.

Protecting the public We believe safety is paramount, and we aim to safeguard the public in everything we do. We keep our approach to safe working under continuous review. We continue to invest signi fi cant capital resources in maintaining the gas distribution infrastructure in the UK. Our long-term programme aimed at replacing metallic mains with modern polyethylene pipes should reduce further the risk of gas leaks from the network. We also make signi fi cant resources available to the public in both the UK and US to explain the risks associated with both gas and electricity and to ensure the public uses both sources of energy safely.

Despite our best efforts, regrettably three members of the public died as a result of gas explosions associated with Transco ’ s operations in the UK during the year. The verdict at the inquest into the explosion at Clitheroe on 1 April 2002 in which one person died was one of accidental death. On 3 October 2002, an explosion at West Bridgford, Nottingham resulted in the deaths of two people. HSE investigations are continuing.

In December 2002, an explosion occurred at a property in Hedgerley injuring one person. In January 2003, an explosion damaged a property in Chipping Norton. The HSE has indicated that it is minded to prosecute Fulcrum Connections following a gas explosion damaging a property in Breist fi eld, Yorkshire in August 2002.

As a result of a fatal accident in Larkhall, Lanarkshire in December 1999 in which four people died, the Crown Of fi ce in Scotland served an indictment on Transco in February 2003. This charges that company with culpable homicide with an alternative charge of a contravention of Sections 3 and 33 of the Health and Safety at Work Act 1974.

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Charging the company with culpable homicide is unprecedented under Scots law and therefore before a full trial can proceed, a number of fundamental legal issues associated with the indictment are required to be resolved.

Working with contractors Contractors are selected from an approved vendor list that requires submission to a safety and environmental review.

For the purpose of safety management, contractors are treated like, and receive safety brie fi ngs alongside, direct employees. Our contractors recognise that we have high safety standards and, especially for large projects, safety is at the forefront from tender to project completion.

We encourage the sharing of best practice between our major engineering contractors. Our UK gas transmission contractors have established a ‘ Pipeline construction group health and safety forum ’ . The forum is chaired by a director of one of the member companies.

We have, during the fi nancial year, removed contractors from jobs because of our concerns over their ability to operate safely.

Environment

Achievements
•	Group-wide Environment policy
and a position statement on EMF now in place
•	In ‘ Premier
League ’ of
7th BiE environmental index
•	Group-wide environmental
audit programme implemented

As a result of the Merger we took the opportunity to review our Environment policy. It sets the principles by which we manage our key environmental risks. Our businesses differ in the impact they may have on the environment, so each is establishing a plan through which it will manage the environmental risks relevant to its operations. In March 2003, we were one of 18 companies (out of over 200)

placed in the ‘ Premier League ’ of Business in the Community ’ s 7th BiE Index of Corporate Environmental Engagement.

Our approach to environmental management We were not prosecuted by any environmental regulatory body for an environmental offence during this fi nancial year.

The operation of environmental management systems (EMSs) in our businesses provides the Executive Directors with direct assurance that our approach is robust and properly focused on signi fi cant environmental risks and liabilities. In the US, our New England electricity transmission system is certi fi ed to ISO 14001 and our New York electricity transmission system conforms to ISO 14001 and will receive a registration audit in June 2003. Our US electricity and gas distribution businesses have developed EMSs that conform to ISO 14001. We are evaluating the merits of seeking ISO 14001 registration for our US distribution businesses. The majority of our UK operations are certi fi ed to ISO 14001. Over 80% of our employees operate with ISO 14001 certi fi ed or compatible systems.

Electric and magnetic fi elds All electrical equipment and appliances produce electric and magnetic fi elds (EMFs). This includes household appliances as well as the power lines used in transmission and distribution of electricity. At higher frequencies, mobile phones and the masts used for transmission also produce EMFs.

In December 2002, we published our position statement on EMFs making a clear commitment to playing a constructive and proactive role on this issue. The balance of scienti fi c evidence indicates that EMFs do not lead to adverse health effects. However, we recognise that some people have concerns about EMFs and we make information and advice available whenever requested. We comply

with the standards, guidelines and regulations in force on EMFs in the countries and states in which we operate.

Contaminated land We continue to manage our inherited portfolio of potentially contaminated land. This contamination has mainly arisen from the historic manufacture of gas from coal and oil, and from older electrical substations where there is a risk that the ground may have been contaminated with oil in the past through accidental spillage or leakage from equipment. The sites of former manufactured gas plants can sometimes have a complex mix of contamination dating back to the 19th century.

In the US, we have responsibility for 135 contaminated sites and are actively conducting environmental assessments and, where necessary, remediations at more than 80 of these locations. In the last year, we have completed remediations at two sites and implemented risk reduction measures at 29 other locations. Sites are prioritised through the application of state and federal regulatory requirements, which typically focus on preventing human or environmental exposures.

In the UK, we operate one of the largest clean up programmes in the country through SecondSite Property. With around 525 sites to reclaim, not all sites can be cleaned up at once. We apply a rigorous approach to the identi fi cation, assessment, control and remediation of these sites. SecondSite Property, therefore, sets its priorities with care, following a national approach presented to the Environment Agency and communicated to the relevant local authorities. We continue to give priority to addressing statutory obligations on our sites and seek agreement with environmental regulators on standards and timetables. Over the past fi ve years, we have spent £190 million on site clean up in the UK.

Over the past year, we have completed remediation work at 32 sites in the UK.

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Climate change We actively manage our activities to reduce their impact on climate change.

Across our operations the largest source of greenhouse gas emissions is methane leakage from the Transco distribution network. Most leakage is associated with the joints on older cast iron parts of the low pressure gas network. Cast iron currently makes up 37% of the distribution system and, as this pipe is replaced by polyethylene, the level of methane emissions will be gradually reduced.

Methane emissions arising from leakage and venting from our UK and US gas networks account for approximately 56% of our greenhouse gas emissions. A detailed analysis of our greenhouse gas emissions is available on our website.

Sulphur Hexafluoride (SF 6 ) is an extremely effective electrical insulant and has very signi fi cant advantages over alternative materials. It is non- fl ammable, a critical requirement in the high-voltage applications for which we use it, and because of its effectiveness, takes up less volume than an equivalent insulating volume of an oil alternative. We have some 431 tonnes of SF 6 in our electrical equipment and until a new proven technology becomes available our use of this material will continue. Equipment filled with SF 6 can leak and requires replacement. We estimate that the loss of SF 6 to the atmosphere over the last year was 21.6 tonnes, equivalent to approximately 517,000 tonnes CO 2 . Through monitoring SF 6 losses we are able to prioritise our repair programme.

While not a signi fi cant contributor to our overall greenhouse gas emissions inventory, we consider transport to be a key sustainability issue of strategic and operational importance. During the year, our fl eet mileage (including contractor movements for SecondSite Property) was approximately 211 million miles, equivalent to 47.7 million litres of fuel. We encourage our businesses to consider actively the

alternatives to business travel, such as videoconferencing and teleconferencing. Both these technologies are applied widely across the Group. Our total mileage was equivalent to some 143,000 tonnes CO 2 .

Our people

Achievements
•	Group-wide Human Resources
policy now in place
•	Whistleblowing policy and
arrangements in place
•	Group intranet site launched

We have reviewed our Human Resources policies and condensed them into a high level Group-wide policy. We aim to foster a learning environment where all our employees can realise their full potential. Each business is updating procedures to cover the areas of Diversity, Learning & Development, Performance Management, Reward Framework, Recruitment & Selection and Flexible Working. Whilst achieving the standards set in the Group policy, these procedures will re fl ect local cultures and practices.

We have established, through e-mails, intranets, cascade brie fi ngs and in-house magazines, effective methods for communicating with employees on matters of concern to them. Regular consultation with staff and their trade union representatives takes place using both formal and informal mechanisms.

Restructuring our business Prior to the Merger, both National Grid and Transco were undergoing substantial restructuring. Alongside this, as part of the Merger process, we have combined our Corporate Centres, and our UK operational headquarters. As stated in our Framework, we wish to ensure we have the right number of people to deliver our business in the long term. Throughout this process, we have consulted with trade union representatives and our employees and we aim wherever possible to achieve redundancies through early retirement or voluntarily.

In the US, restructuring as a result of the merger between National Grid and Niagara Mohawk in 2002 was accomplished using a competency-based selection model. Employees were assessed on eight competencies that closely aligned with our US business objectives and company values. Displaced employees were provided with comprehensive outplacement assistance.

Ethical standards National Grid USA ’ s existing Standards of Conduct will be matched by a UK Code of Conduct. These document our employees ’ responsibilities with regard to ethical and legal issues. We provide our employees with a con fi dential helpline through which they can discuss any concerns or report behaviour that does not align with our standards.

Our US Ethics Of fi ce has responsibility for answering questions about the Standards of Conduct, receiving and evaluating reports of misconduct and ensuring that allegations are fully and promptly investigated. We aim to adopt this approach in the UK.

Equality and diversity We are committed to being an equal opportunity employer, encouraging diversity and avoiding any discrimination on the grounds of race, colour, religion, political opinion, nationality, gender, disability, sexual orientation, age, social status and origin, indigenous status or other status unrelated to the individual ’ s ability to perform his or her work.

We are currently considering the reporting processes that will enable us to ensure our approach to equality and diversity is operating in practice.

Employee share ownership We encourage share ownership among our employees as a means of aligning employee and shareholder objectives. We operate a Sharesave Scheme in the UK. Approximately 81% of eligible employees participated in the scheme in 2002.

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Approximately 84% of US employees are investors in the Group through the employee incentive thrift plans.

Working with others

Achievements
•	Helped our customers save
2 billion kWh of electricity in the US
•	74,500 children visited
our environmental centres
•	40% reduction in complaints
received from Transco ’ s
consumers

National Grid Transco has a diverse range of external stakeholders including customers, consumers, suppliers, contractors, Government, non-governmental organisations, regulators, grantors and action groups. In our dealings with external audiences we strive to be open and constructive. In this section, we report on how we have developed our relationships with a number of these key audiences over the past year.

Our customers In the US, we work closely with our customers to improve their energy ef fi ciency and fi ve of the programmes offered by our New England electricity distribution companies were among the 31 nominations selected as the nation ’ s best by the American Council for an Energy-Ef fi cient Economy. The programmes were recognised for their effectiveness and innovation in helping customers achieve greater levels of energy ef fi ciency in their homes, businesses and facilities. During 2002, National Grid USA ’ s customers have saved more than 2 billion kWh of electricity as a result of participating in these programmes.

In the UK, Transco has continued to focus on service delivery to the 21 million gas consumers. Throughout 2002, Transco has surveyed and measured consumer views on its key consumer products and services. This indicates that consumers are generally satis fi ed with the quality of service being provided. The introduction of a complaint management improvement

package, supported by information from the consumer satisfaction programme, has continued to support our focus on reducing levels of complaints received from consumers.

Our suppliers As a Group with a capital programme of over £1.5 billion we recognise the positive impact that good procurement practices and standards can have on the quality of our supply chain. We aim to create strategic supplier relationships. These provide the opportunity to work with suppliers to improve their performance and provide key suppliers with an appreciation of our business needs, while maintaining or improving safety standards. The safety, health, environmental and quality performance of suppliers is considered as part of the tendering process. Where possible we aggregate and maximise our Group-wide collective buying power. In 2002/03, savings of some £17 million and £10 million were achieved in our supply chain in the UK and US respectively.

Governments We engage actively with the Governments in our countries of operation. Over the past year in the UK we have provided written and oral evidence to a number of Commons Select Committees on subjects such as: ‘ Towards a non-carbon fuel economy ’ ; pre-legislative scrutiny of the Electricity (Trading and Transmission) Bill; and the Impact of Streetworks legislation. In addition, pre-Merger, both National Grid and Lattice provided submissions to the UK Government Review of Energy Policy and hosted an industry conference to discuss infrastructure and security of supply issues.

Local communities We believe it is possible to create both shareholder value and social value – these aims need not be in con fl ict. We place great emphasis on the relationships we have with the local communities we serve and the wider social needs of the societies in which we operate. Investing in projects that have a social value is important to the

Left In a pilot project with the children ’ s charity NCH, National Grid Transco Foundation aims to raise the educational achievements of young people in care. At an NCH Family Centre in London, the Foundation has installed self-contained learning workstations for cared for children.

Group but we are not able to support all the projects and programmes proposed to us. The principal focus of our investment is on three themes:
•	Regenerating local communities
•	Improving the environment
•	Education and skills

Following the Merger, we undertook a review of our community investment in the UK against our three themes to ensure the balance of activities is appropriate for the new Group. The US community investment programme will be reviewed against the three themes over the coming year.

In the UK, we have established the National Grid Transco Foundation as a focus for bringing our business expertise, knowledge and resources to bear on pressing social and environmental issues faced by communities throughout the UK. It is also the vehicle through which our UK employees can become actively involved in working in partnership with communities and voluntary organisations at local, regional and national levels.

During 2002/03, we invested about £5.5 million and about £3.4 million respectively in the UK and US in our community investment programmes.

Grantors The continued safe and reliable operation of a national infrastructure, such as the electricity transmission network in England and Wales, involves maintaining good working relationships with the owners and occupiers of land on which our assets are installed and over, or under, whose land our lines cross. The owners and occupiers provide us with rights to enable us to operate, inspect, maintain, repair, replace and remove our equipment. We have more than 19,000 different land owners and occupiers throughout the country – whom we call ‘ grantors ’ . We provide a point of contact for all grantors and our quarterly grantors newsletter ‘ Gridline ’ provides them with timely and relevant information.

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| Board
of Directors | |
| --- | --- |
| ● | |
| 01 Sir
John Parker Chairman (appointed October 2002) (N) Sir John Parker became Chairman
of the Group following the Merger, having been Chairman of Lattice Group
since its Demerger from BG Group in 2000. He had previously been a Non-executive
Director of BG from 1997. Sir John ’ s
career has encompassed the engineering, shipbuilding and defence industries.
He is Chairman of RMC Group plc and a Non-executive Director of Brambles
Industries plc and Carnival plc. Sir John is a former Chairman and Chief
Executive of Harland & Wolff plc and Babcock International Group PLC.
He is a Fellow of the Royal Academy of Engineering. (Age 61) | 02 James
Ross Deputy Chairman
and Senior Independent Director ( fi rst
appointed March 1999) (R&R) James Ross was appointed as Non-executive Director and Deputy Chairman
of National Grid in March 1999, becoming Chairman in July 1999. Following
the Merger, he became Deputy Chairman and Senior Independent Director.
He is a Non-executive Director of McGraw Hill and of Datacard, both based
in the US, and of Schneider Electric based in France. He was Chairman
of Littlewoods plc from 1996 to April 2002 and was Chief Executive of
Cable and Wireless plc from 1992 to 1995. Previously, he was Managing
Director of the British Petroleum Company plc and Chairman and CEO of
BP America. At BP he had responsibility for its activities in North and
South America and Africa as well as the company ’ s environmental policies. (Age 64) |

●
03 Roger
Urwin Group Chief
Executive (first appointed November 1995)
(E*, F) Roger Urwin was appointed as a Director of National Grid in November 1995,
becoming Group Chief Executive in April 2001. He was previously Chief
Executive of London Electricity plc. Earlier, he held a number of appointments
within the Central Electricity Generating Board before joining the Midlands
Electricity Board as Director of Engineering. He is a Non-executive Director
of The Special Utilities Investment Trust PLC and is a Fellow of the Royal
Academy of Engineering. (Age 57)	04 Steve
Lucas Group Finance
Director (appointed October 2002) (E, F) Steve Lucas joined the Board following the Merger in October 2002. He
had been Executive Director, Finance of Lattice Group since its Demerger
from BG Group in 2000. Previously, he was Treasurer of BG Group having
joined British Gas plc in 1994. A Chartered Accountant, he worked in private
practice in the City of London until 1983. He then joined Shell International
Petroleum Company, occupying a number of finance management positions
and treasury roles, including seven years in Africa and the Far East.
(Age 49)
05 Steve
Holliday Group Director (appointed March 2001) (E) Steve Holliday joined National Grid as Group Director, UK and Europe at
the end of March 2001. Following the Merger, he was principally responsible
for the Group ’ s transmission businesses and is now Group Director responsible
for UK Gas Distribution and Business Services. He was formerly an Executive
Director of British Borneo Oil and Gas. Previously, he spent 19 years
with the Exxon Group, where he held senior positions in the international
gas business and operational areas such as re fi ning
and shipping. His international experience includes a four-year spell
in the US. He also worked developing business opportunities in countries
as diverse as Russia, Australia, Japan, Brazil and China. (Age 46)	06 Edward
Astle Group Director (appointed September 2001) (E) Edward Astle joined National Grid as Group Director, Telecommunications
in September 2001 and is now Group Director responsible for Unregulated
Business and leads the Group’s Business Development and Strategy.
He was Managing Director of BICC Communications from 1997 to 1999 and
between 1989 and 1997 he held a variety of positions with Cable and Wireless
(C&W). He was Regional Director Europe, CEO of its global networks
and marine divisions, and in 1995 joined the C&W Board as Executive
Director – Global Businesses. He is a Non-executive Director of Intec
Telecom Systems plc. (Age 49) 07 Rick
Sergel Group Director (appointed March 2000) (E) Rick Sergel was appointed as a Director of National Grid following the
acquisition of New England Electric System (NEES) in March 2000. He
is President, Chief Executive Officer and a Director of National Grid
USA and has Board responsibility for US Gas and Electricity Distribution.
Between February 1998 and March 2000 he served as President and Chief
Executive Officer of NEES. His previous positions with NEES included
Senior Vice President in charge of retail operations and unregulated
ventures, Vice President and Treasurer. He is a Non-executive Director
of State Street Corporation. (Age 53)

Board Committees: A Audit E Executive F Finance N Nominations R Remuneration R&R Risk and Responsibility (* denotes chairman of the committee)

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08 Nick Winser Group Director (appointed April 2003) (E) Nick Winser joined the Board in April 2003 as Group Director responsible for UK and US Transmission operations. He was previously Chief Operating Officer of US Transmission for National Grid Transco. He had joined National Grid Company in 1993, becoming Director of Engineering in 2001. Prior to this he had been with PowerGen since 1991 as principal negotiator on commercial matters having joined the Central Electricity Generating Board in 1983 where he served in a variety of technical engineering roles. (Age 42) 09 John Wybrew Group Corporate Affairs Director (appointed October 2002) (E) John Wybrew joined the Board following the Merger in October 2002. At Lattice Group he was Executive Director responsible for corporate affairs, human resources and health, safety, security and environment. He had joined the Board of British Gas in 1996 and then served as an Executive Director of BG Group. He previously had a career with the Royal Dutch/Shell Group spanning more than 30 years and was Corporate Affairs Director for Shell UK Ltd before joining BG. In the mid 1980s he was seconded to the Prime Minster’s Policy Unit, advising Mrs Thatcher on energy and transport policies. (Age 61)

12 Kenneth Harvey Non-executive Director (appointed October 2002) (A, N, R) Kenneth Harvey joined the Board following the Merger in October 2002, having been appointed to the Lattice Group Board in September 2000. He is Chairman of Pennon Group plc (which includes South West Water). He is also Non-executive Chairman of The Intercare Group plc and of Beaufort Group plc. A Chartered Engineer, he is a former Chairman of Norweb plc and of Comax Holdings Ltd. (Age 62) 13 Stephen Pettit Non-executive Director (appointed October 2002) (F, R&R) Stephen Pettit was appointed to the Board following the Merger, having been appointed to the Lattice Group Board in 2001. He is Chairman of Damovo, the privately owned network integration company and Chairman of Norwood Systems. He is also a Non-executive Director of National Air Traffic Services and KBC Advanced Technologies plc. He is a former Executive Director of Cable and Wireless plc. Before joining Cable and Wireless, he was Chief Executive, Petrochemicals at British Petroleum. (Age 52)

| 10 Bonnie
Hill Non-executive Director (appointed February 2002) (R,
R&R) Bonnie Hill was appointed a Director of National Grid in February 2002 following
the acquisition of Niagara Mohawk, where she had been a Director. She is
President of B.Hill Enterprises, LLC, a consulting firm, and Chief Operating
Officer of Icon Blue, a brand marketing company. She is also involved in
a variety of civic, educational and community bodies and serves on the boards
of AK Steel Corporation, Hershey Foods Corporation and The Home Depot, Inc.
Before 2001, she was President and Chief Executive Officer of The Time Mirror
Foundation and was also Senior Vice President of the Los Angeles Times newspaper.
(Age 61) |
| --- |
| Helen Mahy Group Company
Secretary (appointed October 2002) Helen Mahy
was appointed as Group Company Secretary following the Merger, having been
Company Secretary at Lattice Group since March 2002. She was appointed a
Non-executive Director of Aga Foodservice Group plc in March 2003. She is
a Barrister and an Associate of the Chartered Insurance Institute. Previously,
she was Group General Counsel and Company Secretary at Babcock International
Group PLC. (Age 42) |

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Contents to the fi nancial section
29	Directors ’ Report and Operating and Financial Review
29	Operating and Financial Review
41	Corporate Governance and Internal Control
44	Directors ’ Remuneration Report
53	Risk Factors
55	General Information
56	Independent Auditors ’ Report to the Members of National Grid Transco plc
57	Accounting Policies
60	Group Pro fi t and Loss Account
60	Group Statement of Total Recognised Gains and Losses

61	Balance Sheets
62	Group Cash Flow Statement
63	Notes to the Accounts
107	Summary Group Financial
Information
108	Glossary of Terms
109	De fi nitions
110	Independent Veri fi er ’ s Report on Operating
Responsibly
111	Investor Information
118	Cross Reference to Form
20-F
119	Shareholder Statistics
119	Financial Calendar
120	Shareholder Information

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Directors’ Report and Operating and Financial Review Operating and Financial Review

References to adjusted operating profit, adjusted profit before taxation, adjusted earnings (profit/(loss) for the year) and adjusted earnings per share are stated before exceptional items and goodwill amortisation. A reconciliation of operating profit to adjusted operating profit is shown on the face of the profit and loss account on page 60, while a reconciliation of adjusted profit before taxation, adjusted earnings and adjusted earnings per share is shown in note 11 to the accounts on page 73.

The Directors believe that use of the adjusted measures described above give a better indication of the underlying business performance of the Group than the unadjusted measures.

Adjusted total operating profit for 2002/03 was £2,185 million (2001/02: £1,783 million; 2000/01: £1,780 million) and excludes operating exceptional items relating to continuing and discontinued operations and goodwill amortisation. Exceptional items for 2002/03 relating to continuing and discontinued operations amounted to £308 million (2001/02: £285 million; 2000/01: £88 million) and £39 million (2001/02: £1,042 million; 2000/01: £nil) respectively, and goodwill amortisation amounted to £102 million (2001/02: £97 million; 2000/01: £85 million). These items can be seen on the face of the profit and loss account on page 60, reconciling to total operating profit for 2002/03 of £1,736 million (2001/02: £359 million; 2000/01: £1,607 million).

Merger of National Grid and Lattice On 21 October 2002, the merger of National Grid and Lattice was completed and National Grid was renamed National Grid Transco. In accordance with UK Generally Accepted Accounting Principles (GAAP), the Merger has been accounted for using merger accounting principles, as explained in note 1 to the accounts on page 63. As a consequence, the results of the merged entity together with the financial review associated with the UK GAAP results are presented as if the Group had been in existence for all of the financial years presented. The results for all years are presented on the basis of uniform accounting policies.

Under US GAAP, the business combination of National Grid and Lattice must be accounted for as an acquisition in accordance with acquisition accounting principles (‘purchase accounting’). A discussion of the impact of US GAAP accounting principles is shown below, and details of the principal differences between UK and US GAAP are shown in note 34 to the accounts on page 100.

Segmental reporting As a result of the Merger, National Grid Transco has reported its audited results for the first time and reporting segments have been aligned to reflect the management responsibilities and economic characteristics of the Group’s business activities. As an example, management responsibility for ‘electricity and gas transmission’ in the UK resides with an Executive Director and these activities share long-term economic characteristics. Such characteristics include the fact that they are both subject to similar regulatory environments, and income is derived from the provision of transmission services, with limited exposure to commodity risk.

The choice of segments has also had regard to the level of materiality of some of the Group’s activities and to ensure that the disclosures are not overly detailed.

Segmental information is disclosed in note 2 to the accounts on pages 63 to 65, and a review of the performance of these businesses is contained on pages 10 to 20. Additional financial and performance information relating to the reporting segments is also included in the business review.

The presentation of segment information is based on the management responsibilities that existed at 31 March 2003.

The segments that existed at 31 March 2003 comprised UK distribution; UK electricity and gas transmission; US transmission; US electricity distribution (including recovery of stranded costs); US gas; and other activities.

Management responsibilities have changed with effect from 28 April 2003, and, as a result, in future presentations of the Group’s results segmental reporting will be aligned to reflect these changes in responsibilities.

Financial year ended 31 March 2003 (2002/03) compared with financial year ended 31 March 2002 (2001/02) Group turnover Group turnover for 2002/03 increased by £1,846 million over 2001/02 to £9,400 million, reflecting a full year’s turnover being recorded in respect of Niagara Mohawk, which was acquired by the Group on 31 January 2002.

Group operating profit Group total operating profit rose by £1,377 million to £1,736 million in 2002/03, primarily reflecting a movement in the total operating exceptional net charges relating to both continuing and discontinued operations, which fell from £1,327 million in 2001/02 to £347 million in 2002/03.

A separate discussion of exceptional items is shown below.

Group total adjusted operating profit rose by £402 million to £2,185 million, primarily reflecting increased adjusted operating profit from US electricity transmission and US electricity distribution which have reported a full year’s contribution from the acquisition of Niagara Mohawk in January 2002. As a result, the contribution of US electricity transmission and US electricity distribution rose from £353 million in 2001/02 to £641 million in 2002/03, an increase of £288 million, accounting for 72% of the total increase.

Total operating profit from Group undertakings included losses of £194 million relating to discontinued operations compared with £496 million for 2001/02, as a result of the sale of, or exit by the Group from, certain business activities during the year. The principal businesses included The Leasing Group and 186k, a UK-based fibre optic telecommunications company.

Group operating profit also included a profit of £109 million compared with losses of £672 million in 2001/02 relating to the discontinued activities of joint ventures and the associate. A discussion of the impact the activities of discontinued joint ventures and the associate have had on the results is shown below.

Associate and joint ventures On 16 July 2002, Energis plc (‘Energis’) went into administration. As a direct result of this event, Energis ceased to be an associate of the Group from that date. The results for 2002/03 have not been affected by this change in status, because the Group’s investment in Energis had been fully written down during 2001/02 and Energis had not publicly declared any results since reporting its results for the six months ended 30 September 2001.

The Group ceased equity accounting for Intelig, its Brazilian telecoms joint venture, with effect from 30 September 2002. This arose as a result of the Group’s share of net assets falling to zero and the Group declaring its intention not to fund this business any further while pursuing a withdrawal strategy.

The Group’s interests in Energis Polska, Manquehue net and Silica Networks have been disposed of or, in the case of Energis Polska, the interest reduced to a level where the Group has no significant influence on the activities of these businesses. As a result, these entities are no longer equity accounted for, and any loss arising from the disposal or reduction in interest has been reflected in exceptional items.

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Operating and Financial Review continued

As explained in ‘Exceptional items’ below, the total operating profit for 2002/03 of joint ventures (discontinued operations) included an exceptional pre-tax credit amounting to £129 million. The £129 million credit represents the partial release of impairment provisions charged in the year ended 31 March 2002 to match the recognition of retained losses arising from these joint ventures, and is recorded within the net £109 million credit relating to the Group’s ‘share of joint ventures’ and associate’s operating profit/(loss) – discontinued operations’.

The retained losses of the joint ventures against which the provisions are being released are reflected in the profit and loss account according to their nature, for example: share of operating loss; share of net interest; and share of tax, the principal element being an exceptional net interest charge of £92 million (before and after tax) relating to the Group’s share of exchange losses incurred on foreign exchange borrowings at Intelig.

Operating losses of £672 million recorded in 2001/02 in respect of the discontinued activities of joint ventures and associate reflect the very significant level of impairment charges incurred during that year.

Operating results for all the above associate and joint ventures have been reflected in the accounts within ‘share of joint ventures’ and associate’s operating profit/(loss) – discontinued operations’.

Goodwill amortisation Goodwill amortisation for 2002/03 rose from £97 million to £102 million. This increase reflects a full year’s amortisation of goodwill relating to the prior year’s acquisition of Niagara Mohawk, partially offset by the following:

| • | no recognition of the Group’s
share of goodwill amortisation in the year in respect of Energis; and |
| --- | --- |
| • | the reduced sterling cost
of US dollar denominated goodwill amortisation as a result of the weakening
of the US dollar. |

Exceptional items The results for the year ended 31 March 2003 included total net exceptional pre-tax charges of £477 million (£349 million post-tax). Pre-tax charges are made up of pre-tax net charges of £308 million and £39 million of operating exceptional items relating to continuing and discontinued operations respectively; £99 million of non-operating exceptional items (note 4(b) to the accounts on page 66); and £31 million of financing-related exceptional charges. In addition, the Group reflected

£28 million of exceptional minority interest charge. These net charges, including minority interest effect, comprise:

| • | costs arising from the Merger
of £184 million (£147 million after tax) relating to transaction
costs of the Merger, together with related employee share scheme costs
amounting to £79 million and other property and employee costs of
£105 million; |
| --- | --- |
| • | restructuring costs principally
arising from business related efficiency programmes of £209 million
(£165 million after tax). These costs are mainly severance-related; |
| • | an impairment charge relating
to the Group’s telecoms assets held by 186k of £168 million
(£143 million after tax); |
| • | a £135 million credit
(£155 million after tax) in respect of Intelig and other telecoms
joint ventures of which £129 million has been reflected in ‘share
of joint ventures’ and associate’s operating profit/(loss) –
discontinued operations’ – see above; |
| • | an exceptional net interest
loss of £31 million (before and after tax). This relates to the
Group’s share of exchange losses incurred on foreign exchange borrowings
of £98 million (£92 million of which related to Intelig) partially
offset by a gain on net monetary liabilities of £67 million as a
result of the adoption of hyper-inflationary accounting, under UK GAAP,
relating to Citelec, the Group’s Argentinian joint venture –
see ‘Exchange rates and hyper-inflation’ below; |
| • | a £28 million minority
interest charge being a share of the £61 million net exceptional
credit related to the Argentinian joint venture – see ‘Exchange
rates and hyper-inflation’ below; |
| • | a £68 million loss
(before and after tax) arising from the sale of the Group’s leasing
business, The Leasing Group, and loss on termination of 186k’s operations;
and |
| • | net profit on the disposal
of tangible fixed assets of £48 million (£50 million after
tax). |

Interest Net interest rose from £799 million in 2001/02 to £970 million in 2002/03. Both years included exceptional financing costs amounting to £142 million and £31 million in 2001/02 and 2002/03 respectively. A separate discussion of exceptional financing costs is contained in ‘Exceptional items’ when comparing the results for each year.

Net interest, excluding exceptional items, rose from £657 million in 2001/02 to

£939 million for 2002/03, as shown in note 8 to the accounts on page 71. This increase is explained by a full year’s interest charge in respect of the acquisition of Niagara Mohawk and foreign exchange movements.

Taxation The net tax charge for 2002/03 of £245 million included an exceptional tax credit on pre-tax exceptional items of £128 million. Excluding the exceptional tax items from the tax charge, the effective tax rate for 2002/03 based on adjusted profit before taxation was 29.9% compared with the standard corporation tax rate in the UK of 30%. The effective tax rate for 2002/03 based on profit before taxation before exceptional items was 32.6%. Note 9 to the accounts on page 72 shows a reconciliation of the main components giving rise to the difference between the relevant effective tax rate and the UK standard corporation tax rate.

Exchange rates and hyper-inflation Exchange rate movements have had an adverse effect on the translation of US dollar adjusted operating profit for 2002/03 compared with 2001/02. US dollar adjusted operating profit was translated at a weighted average rate of £1.00 = $1.59 during 2002/03 as compared with £1.00 = $1.44 for 2001/02. If the rate that applied during 2001/02 had been used, sterling operating profit and adjusted operating profit for 2002/03 would have been higher by around £57 million and £74 million respectively.

The above analysis does not take into account the fact that Niagara Mohawk only impacted on Group results for two months in 2001/02. On page 18, taking into account this factor, it is estimated that adjusted operating profit would have been higher by around £34 million.

The reduced adjusted operating profit and operating profit is largely offset by the reduced sterling cost of US dollar debt taken out to finance US dollar denominated investments and the reduced sterling cost of US taxes. As a result, the impact of the higher US dollar rate on National Grid USA’s results has not had a significant effect on adjusted earnings per share or earnings per share.

Exchange rates have marginally affected the Group’s recognition of operating losses arising in respect of Intelig, the Group’s Brazilian telecoms joint venture. This reflected sterling’s continued strengthening against the Brazilian currency in the period that the Group equity accounted for Intelig – see ‘Associate and joint ventures’ above. The Group estimates that, as compared with the average exchange rate for 2001/02, this effect has reduced our share of operating losses by around £2 million.

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The Group’s joint venture in Argentina, Citelec, is currently considered to be operating within a hyper-inflationary economy. In accordance with UK GAAP, the accounts of the joint venture, which includes Transener, a transmission company, have been prepared using hyper-inflationary accounting principles. This has resulted in all entries in the joint venture’s accounts being measured at current purchasing price.

The fall in the Argentinian exchange rate has given rise to the recognition of the Group’s share of exchange losses arising on the joint venture’s US dollar denominated debt, amounting to £6 million. This loss is more than offset by the Group’s share of a gain on net monetary liabilities of £67 million, arising as a result of inflating these liabilities as part of the hyper-inflationary adjustments referred to above. Together with the minority interest’s share of these items, all of these effects have been reflected as exceptional in the profit and loss account.

Retirement arrangements Following the Merger, the Group now operates two major UK occupational pension schemes – the National Grid Company Group of the Electricity Supply Pension Scheme (the National Grid Scheme) and the Lattice Group Pension Scheme (the Lattice Scheme).

The National Grid Scheme is a defined benefit pension scheme. The Lattice Scheme has a defined benefit section which is effectively closed to new entrants and a defined contribution section. There are no current plans to merge the two schemes.

In addition to the UK schemes, employees of National Grid USA are eligible to receive retirement income benefits through defined benefit arrangements. Post-retirement healthcare and life insurance benefit are also provided to qualifying retirees.

The next actuarial valuation of the Lattice Scheme is being carried out as at 31 March 2003, while the National Grid Scheme actuarial valuation will be carried out as at 31 March 2004.

In respect of the US-based pension schemes, the latest full actuarial valuations were carried out as at 31 March 2002. These valuations were updated using assumptions and market values at 31 March 2003.

In respect of the healthcare and life insurance schemes, the latest actuarial valuations were carried out at 31 March 2002 in respect of the New England and New York schemes. Updated valuations of these schemes were carried out at 31 March 2003.

Note 7 to the accounts on pages 68 to 70 provides more information on the Group’s retirement arrangements.

Pension accounting The Group continues to account for pensions under UK GAAP in accordance with Statement of Standard Accounting Practice 24 (SSAP 24) and, consistent with that statement, the Group had been spreading pension surpluses and deficits over the remaining service lives of employees based on the information contained in the last formal actuarial valuations.

The Board is of the view that, in light of the performance of the world’s stock markets over the past year, if a formal actuarial valuation of both the UK pension funds were conducted, this would in all likelihood reveal a deficit in both schemes. The continuing recognition of a surplus is incompatible with this position, and until the next formal actuarial valuations are undertaken, the decision to suspend the recognition of any further pension surplus has been taken in respect of both schemes. Consequently, with effect from 1 October 2002, the spreading of pension surpluses in respect of the UK defined benefit schemes, based on their last formal actuarial valuations at 31 March 2001, was suspended.

Adjusted operating profit and net interest included £21 million and £12 million respectively in respect of the recognition of the UK pension schemes’ surplus up to 30 September 2002, totalling £33 million (£23 million net of tax). As a result of the suspension of the recognition of any further pension surplus since that date, adjusted operating profit and net interest have been reduced and increased by £21 million and £10 million respectively compared with the ongoing recognition of a surplus. Accordingly, adjusted profit before tax has been reduced by around £31 million (£22 million net of tax).

The Group does not account for pension costs under Financial Reporting Standard 17 ‘Retirement benefits’ (FRS 17), but has provided the required transitional pension scheme disclosures as shown in note 7 to the accounts on pages 68 to 70.

Application of UK GAAP accounting policies As explained above, the application of UK GAAP to the business combination of Lattice and National Grid has resulted in the transaction being treated as a merger. As a result, the financial information presented for all years has been prepared on the basis of common accounting policies as if the Group had always applied those accounting policies.

There have been no new UK GAAP accounting pronouncements issued during the year that have had any significant impact on the Group.

Accounting policies adopted by Lattice that were changed to accord with the accounting policies adopted by the Group were deferred taxation and the classification of the amortisation of a pension surplus in the profit and loss account. Full details of these changes are given in note 29 to the accounts on page 90.

In addition, National Grid adopted, as a merger adjustment, the accounting treatment relating to capital contributions to the cost of tangible fixed assets (‘capital contributions’) as previously applied by Lattice. As a result, the net book value of capital contributions included in National Grid’s accounts at 31 March 2002 of £90 million has been transferred from tangible fixed assets to creditors as part of the Merger adjustments to arrive at the opening balances for creditors and tangible fixed assets at 31 March 2002 – see note 29 to the accounts on page 90.

Earnings per share Adjusted basic earnings per share for 2002/03 were 28.3 pence compared with 30.8 pence for 2001/02. Basic earnings per share for 2002/03 rose from a loss per share of 11.3 pence in 2001/02 to earnings of 12.7 pence per share, reflecting a reduction in net exceptional charges between the two years.

A reconciliation of the movement from basic earnings per share to adjusted basic earnings per share is shown in note 11 to the accounts on page 73.

Ordinary dividends The total ordinary dividend for 2002/03 (£530 million) amounted to 17.20 pence per ordinary share. This represents an increase of 7.2% (5% in real terms) over the previous year’s National Grid ordinary dividend per share, as this is the most appropriate dividend comparison for the reason explained in ‘Dividend policy’ below. The total ordinary dividend per share is covered 1.6 times by adjusted earnings per ordinary share and 0.7 times by basic earnings per ordinary share.

Dividends The table on the following page (‘dividend table’) shows the ordinary dividends paid or payable by National Grid Transco or National Grid, as appropriate (see ‘Dividend policy’ below), for the last five most recent financial years. These dividends do not include any associated UK tax credit in respect of such dividends.

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Operating and Financial Review continued — Dividends	2002/03	2001/02	2000/01	1999/00	1998/99
	p	p	p	p	p
Interim	6.86	6.46	6.05	5.59	5.25
Final	10.34	9.58	9.03	8.35	7.82
Total ordinary dividends	17.20	16.04	15.08	13.94	13.07
US dollar per ADS	2002/03	2001/02	2000/01	1999/00	1998/99
	$	$	$	$	$
Interim	0.54	0.47	0.45	0.46	0.44
Final	0.84	0.73	0.65	0.63	0.61
Total ordinary dividends	1.38	1.20	1.10	1.09	1.05

Dividends expressed in US dollars per ADS in the dividend table reflect the actual amount paid to ADS holders, expressed to two decimal places, with respect to all amounts with the exception of the final ordinary dividend for 2002/03. The final ordinary dividend per ADS for 2002/03 reflects the declared US$ amount expressed to two decimal places.

Dividend policy As announced on 22 April 2002, on completion of the Merger, National Grid Transco adopted National Grid’s dividend policy and, as a consequence, any historical comparison of dividends paid or payable by National Grid Transco in 2002/03 and beyond should be made by reference to National Grid’s dividends.

National Grid Transco’s dividend policy is to aim to increase dividends per share (as expressed in pounds sterling) by a real rate of 5% in each of the financial years to March 2006.

Financial year ended 31 March 2002 (2001/02) compared with financial year ended 31 March 2001 (2000/01) Acquisition of Niagara Mohawk On 31 January 2002, the Group successfully completed the acquisition of Niagara Mohawk, for a consideration of £2,186 million satisfied by the issue of shares amounting to £1,270 million and cash of £916 million, including £45 million relating to the costs of acquisition. The net assets acquired had a provisional fair value of £1,376 million, subsequently revised to £1,294 million resulting in goodwill of £892 million being recognised and amortised over 20 years. Details of the acquisition are contained in note 28 to the accounts on page 89.

Niagara Mohawk contributed £83 million to adjusted operating profit and £2 million to operating profit for the period from the date of acquisition to 31 March 2002.

Group turnover Group turnover increased from £6,891 million in 2000/01 to £7,554 million

in 2001/02, substantially reflecting the acquisition of Niagara Mohawk, which accounted for over 70% of the increase. The remaining increases are substantially explained by higher distribution turnover for National Grid USA as a result of higher energy prices, which are substantially passed through to customers, and EnMo, partially offset by reduced turnover from UK electricity and gas transmission and UK gas distribution.

Group total operating profit Total operating profit fell from £1,607 million to £359 million in 2001/02, primarily as a result of the high level of exceptional charges incurred during 2001/02. For a separate discussion of the impact of exceptional items on the results for the year, see ‘Exceptional items’ below.

Total adjusted operating profit rose by £3 million to £1,783 million reflecting higher adjusted contributions from:

| • | Niagara Mohawk amounting
to £83 million. This contribution is reflected in the US electricity
transmission, US electricity distribution and US gas segments; |
| --- | --- |
| • | UK electricity and gas transmission,
which increased its contribution to £781 million from £756
million in 2000/01; and |
| • | Intelig, reflecting an adjusted
operating loss of £36 million for 2001/02 as compared with £118
million for 2000/01 reflected in discontinued operations of joint ventures
and associate. |

| These were substantially
offset by lower adjusted contributions from: | |
| --- | --- |
| • | UK gas distribution, where
adjusted operating profit fell by £115 million to £548 million; |
| • | other activities of Group
undertakings (continuing operations) where adjusted operating profit fell
from £203 million in 2000/01 to £179 million in 2001/02; |
| • | other discontinued operations
of Group undertakings that recorded adjusted |

| | operating losses of £60
million in 2001/02 compared with £39 million for 2000/01; and |
| --- | --- |
| • | other discontinued activities
of an associate and joint ventures (excluding Intelig) that recorded adjusted
losses of £18 million in 2001/02 compared with adjusted profit of
£2 million in 2000/01. |

Goodwill amortisation Goodwill amortisation for 2001/02 rose by £12 million to £97 million. This increase mainly reflects the amortisation of goodwill relating to the acquisition of Niagara Mohawk and a full year’s amortisation of goodwill relating to the acquisition of Eastern Utilities Associates (EUA).

Exceptional items The results for 2001/02 included net exceptional pre-tax losses of £1,313 million (£1,147 million post-tax).

Pre-tax net exceptional charges are made up of £285 million and £1,042 million of operating exceptional items relating to continuing and discontinued operations respectively; £142 million of financing-related exceptional charges; partially offset by non-operating exceptional credits of £156 million (note 4b to the accounts on page 66). In addition, the Group reflected £50 million of exceptional minority interest credit. These net charges comprise:

| • | an impairment of the Group’s
associate and joint venture investments amounting to £792 million
pre-tax (£775 million post-tax); |
| --- | --- |
| • | an impairment of assets
in 186k, a telecoms subsidiary, amounting to £250 million (£175
million post-tax); |
| • | the Group’s share of
the pre- and post-tax exceptional charge of a telecoms joint venture (SST)
amounting to £48 million, reflecting the write-down of an investment
and goodwill in that joint venture, prior to the acquisition of all of
the issued ordinary share capital of this entity by the Group; |
| • | an impairment of the Group’s
LNG storage assets of £50 million (£35 million post-tax),
reflecting a reduction in the expected future cash flows under the current
regulatory arrangements; |
| • | restructuring and integration
costs within the UK businesses and the integration of Niagara Mohawk,
amounting to £187 million pre-tax (£130 million post-tax);
and |
| • | the Group’s share of
Citelec’s foreign exchange pre- and post-tax financing charge amounting
to £142 million relating to the devaluation of the Argentine peso. |

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| These exceptional
losses were partially offset by: | |
| --- | --- |
| • | pre-tax profits amounting
to £94 million (£96 million post-tax) relating to the sale
of tangible fixed assets; |
| • | a £31 million pre-
and post-tax gain on the sale of BG Group shares by the Lattice ‘All
Employee Share Ownership Plan’; |
| • | an exceptional pre- and
post-tax profit of £31 million relating to the gain on disposal
of investments; and |
| • | a credit of £50 million
relating to the Group’s share of the minority interest’s share
of the foreign exchange financing charge referred to above. |

Interest Net interest rose from £635 million in 2000/01 to £799 million in 2001/02. 2000/01 included exceptional financing costs of £142 million. A separate discussion of exceptional financing costs is contained in ‘Exceptional items’ above.

Net interest, excluding exceptional items as shown in note 8 to the accounts on page 71, rose from £635 million to £657 million for 2001/02. This increase is a result of the acquisition of Niagara Mohawk and an increase in the Group’s share of associated undertakings net interest charge, partially offset by interest rate reductions.

Taxation The net tax charge of £85 million for 2001/02, includes a net credit relating to exceptional items amounting to £166 million as shown in note 9 to the accounts on page 71. If these exceptional items are excluded, the adjusted tax charge for 2001/02 was £251 million, including a £73 million tax credit arising from an adjustment to prior year’s tax. Excluding the exceptional tax items from the tax charge, the effective tax rate on adjusted profit before taxation for 2001/02 was 28.6%. The effective tax rate on profit before taxation before exceptional items for 2001/02 was 24.4%. Note 9 to the accounts on page 72 shows a reconciliation of the main components giving rise to the difference between the relevant effective tax rate and the UK standard corporation tax rate.

Exchange rates Exchange rate movements had a beneficial effect on the translation of US dollar adjusted operating profit for 2001/02 compared with 2000/01. US dollar adjusted operating profit was translated at a weighted average rate of £1.00 = $1.44 during 2001/02 compared with £1.00 = $1.483 for 2000/01. If the rate

that applied during 2000/01 had been used, sterling adjusted operating profit and operating profit for 2001/02 would have been lower by about £11 million and £7 million respectively.

The increased operating profit was largely offset by the increased sterling cost of US dollar debt taken out to finance US dollar denominated investments and the increased sterling cost of US taxes. As a result, the impact of the lower US dollar rate on National Grid USA’s results did not have a significant effect on Group earnings per share. Similarly, the impact of exchange rates on US dollar debt and taxes means that there was no significant impact on Group adjusted earnings per share.

Exchange rate movements have favourably impacted on the Group’s share of operating losses in Intelig as sterling strengthened against the Brazilian currency during 2001/02. We estimate that, compared with the average exchange rate for 2000/01, this impact reduced our share of operating losses by approximately £10 million.

As a result of the devaluation of the Argentine peso, the Group reflected its share of an exceptional foreign exchange financing charge relating to a joint venture (Citelec) of £142 million, partially offset by the minority interest’s share amounting to £50 million as shown in ‘Exceptional items’ above.

Earnings/(loss) per share The adjusted basic earnings per share for 2001/02 were 30.8 pence compared with 26.9 pence in the previous year. Basic earnings per share for 2001/02 fell from an earnings per share of 40.5 pence in 2000/01 to a loss of 11.3 pence per share, reflecting the very significant level of net exceptional losses in 2001/02. A reconciliation of the movement from basic earnings per share to adjusted earnings per share is shown in note 11 to the accounts on page 73.

Ordinary dividends As shown in the dividend table on page 32, the total National Grid ordinary dividend for 2001/02 amounted to 16.04 pence per ordinary share. This represented an increase of 6.4% over the previous year.

Liquidity, resources and capital expenditure Cash flow Net cash inflow from operations in 2002/03 was £2,826 million compared with £2,291 million in 2001/02 and £2,353 million in 2000/01. Included within net cash inflow from operations were exceptional cash outflows of £328 million; £103 million; and £129 million in 2002/03; 2001/02; and 2000/01 respectively.

Net cash inflow from operations before exceptional items was £3,154 million in 2002/03 compared with £2,394 million in 2001/02 and £2,482 million in 2000/01. The 2002/03 increase in net cash flow from operations before exceptional items reflected the first full year contribution from Niagara Mohawk. The 2001/02 reduction in net cash flow from operations arose for a number of reasons: reduced adjusted operating profit from UK gas distribution; a special pension payment to the Lattice pension fund of £275 million; with these partially offset by the collection of under-recovered power costs relating to 2000/01 in the US; the recovery of NETA-related development costs in the UK; and the first contribution from Niagara Mohawk.

Details of the components of net cash inflow from operations before exceptional items are set out in note 27(a) to the accounts on page 87.

Exceptional cash flows in 2002/03 principally relate to cash flows arising from restructuring initiatives, Merger-related costs and environmental expenditure. In respect of 2001/02, exceptional cash outflows related to environmental and restructuring costs. In respect of 2000/01, such cash outflows related to environmental, restructuring and other costs relating to the demerger of Lattice from BG Group.

Payments to the providers of finance, in the form of dividends and interest, totalled £1,483 million (net) in 2002/03, compared with £1,183 million in 2001/02 and £1,027 million in 2000/01. Net interest cash outflows increased from £687 million and £696 million in 2000/01 and 2001/02 respectively to £901 million in 2002/03. The increase between 2001/02 and 2002/03 primarily reflects the additional net interest expense incurred for a full year following the acquisition of Niagara Mohawk on 31 January 2002.

Net corporate tax payments amounted to £112 million in 2002/03 compared with £212 million in 2001/02 and £350 million in 2000/01. Net corporate tax payments in 2002/03 were lower than in 2001/02, mainly as a result of:

| • | the cessation of trade in
186k creating balancing allowances that reduced UK corporation tax payable
in 2002/03 by around £60 million; and |
| --- | --- |
| • | the interaction of the timing
of UK corporation tax payments on account and the Lattice Group post-tax
exceptional charge in 2002/03 resulting in a reduction of around £40
million as compared with 2001/02. |

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Operating and Financial Review continued

| Net corporate
tax payments in 2001/02 were lower than in 2000/01, for two main reasons: | |
| --- | --- |
| • | as a result of the realisation
for tax purposes of capital losses arising from Group restructurings,
UK corporation tax repayments of approximately £65 million were
received in 2001/02 in respect of payments previously made in 1999/2000
on the partial disposal of Energis in that year; and |
| • | UK corporation tax payments
in 2000/01 included amounts relating to the previous year of £61
million. |

Net purchases of tangible and intangible fixed assets absorbed cash of £1,407 million in 2002/03, compared with £1,543 million in 2001/02 and £1,206 million in 2000/01. The reduction in net cash outflow in 2002/03 primarily reflects reductions in UK gas distribution; UK electricity and gas transmission; the disposal of The Leasing Group which purchased commercial vehicles and other assets for the Group; reduced expenditure on 186k assets; partially offset by increased capital expenditure arising from the acquisition of Niagara Mohawk. The increase in net expenditure in 2001/02 mainly relates to the purchase of new National Transmission System and other high pressure gas pipeline projects.

Cash outflow in 2002/03 relating to the acquisition of Group undertakings and other investments amounted to £165 million, of which £153 million related to expected contractual funding obligations in respect of joint ventures. Cash outflow in 2001/02 relating to the acquisition of Group undertakings and other investments amounted to £1,006 million, of which £932 million (including overdrafts acquired) related to the acquisition of Niagara Mohawk. This compares with cash outflows relating to the acquisition of Group undertakings and other investments amounting to £783 million in 2000/01. The 2000/01 cash outflows substantially related to the acquisition of EUA and an additional investment in Intelig.

Cash inflow from the disposal of investments in 2002/03 amounted to £328 million. This relates primarily to the receipt of £157 million in respect of the full settlement of deferred payment arrangements arising from the sale of nuclear plant conducted before the completion of the acquisition of Niagara Mohawk, £53 million from the sale of other nuclear assets and £92 million from the sale of The Leasing Group.

During 2002/03, the Group purchased for cancellation 24.2 million shares resulting in a cash outflow of £97 million.

Equity shareholders’ funds Equity shareholders’ funds fell from £1,690 million at 31 March 2002 to £1,152 million at 31 March 2003. This reduction is primarily explained by net foreign exchange adjustments amounting to £322 million; share buy-backs amounting to £97 million; and retained losses for the year amounting to £139 million.

Capital expenditure Capital expenditure in 2002/03 was £1,520 million, compared with £1,847 million in 2001/02 and £1,504 million in 2000/01. The lower level of capital expenditure for 2002/03 as compared with 2001/02 reflects a lower level of capital expenditure relating to UK gas distribution and UK electricity and gas transmission and reduced capital expenditure relating to discontinued operations. An analysis of capital expenditure by segment is contained in note 2(d) to the accounts on page 65.

The business review contains details of significant capital expenditure programmes.

Net debt and gearing Net debt fell from £14,299 million at 31 March 2002 to £13,878 million at 31 March 2003, primarily as a result of exchange adjustments. Gearing at 31 March 2003, calculated as net debt at that date expressed as a percentage of net debt plus net assets shown by the balance sheet amounted to 92%, up from 89% at the start of the year. By comparison, the gearing ratio, adjusted for the inclusion of UK businesses at their estimated regulatory asset values (‘adjusted gearing ratio’), amounted to 59%, at both 31 March 2003 and 31 March 2002.

The Group believes this adjusted ratio is a more relevant measure of ‘gearing’ than one based on book values alone, because the book values do not reflect the economic value of those assets.

A reconciliation of the adjustments necessary to calculate adjusted net assets is shown in the table below:

	£m	£m
Net assets per balance sheet	1,236	1,784
Adjustment for increase in UK business
regulatory values	8,570	8,072
Adjusted net assets	9,806	9,856
Adjustments to net assets	2003	2002

An analysis of debt is provided in note 20 to the accounts on page 77, and a reconciliation of the movement in net debt from 1 April 2002 to 31 March 2003 is provided in note 27(d)/(e) to the accounts on page 88.

Both short- and long-term cash flow forecasts are produced frequently to assist in identifying the liquidity requirements of the Group. These are supplemented by a financial headroom position that is supplied to the Finance Committee of the Board regularly to demonstrate funding adequacy for at least a 12-month period. The Group also maintains a minimum level of committed facilities in support of that objective.

Credit facilities and unutilised Commercial Paper and Medium Term Note Programmes As at 31 March 2003, National Grid Transco had a US$2.0 billion US Commercial Paper Programme (US$1.1 billion unutilised); National Grid Company had a £250 million Sterling Commercial Paper Programme (unutilised); and National Grid Transco and National Grid Company had a joint Euro Medium Term Note Programme of € 4 billion ( € 3.6 billion unissued). Transco plc had a US$1.25 billion Euro Commercial Paper Programme (unutilised); a US$2.5 billion US Commercial Paper Programme (unutilised); a US$0.5 billion Extendible Commercial Note Programme (unutilised); and a Euro Medium Term Note Programme of € 7.0 billion ( € 2.3 billion unissued).

At 31 March 2003, the Group had £0.62 billion of short-term (364 day) committed facilities (undrawn); £0.6 billion and $2.1 billion of long-term committed facilities (undrawn); and £1.33 billion (£0.9 billion undrawn) of uncommitted borrowing facilities.

Companies within the National Grid USA group, excluding the Niagara Mohawk subgroup, had committed facilities of $419 million (£264 million), all of which were undrawn at 31 March 2003. Companies within the Niagara Mohawk sub-group had committed bank facilities of $424 million (£267 million) which were also all undrawn at the year-end. Of these undrawn amounts, $843 million was providing support to debt issuance programmes within the US group.

Treasury policy The funding and treasury risk management of the Group is carried out by a central department operating under policies and guidelines approved by the Board. The Finance Committee, a committee of the Board, is responsible for regular review and monitoring of treasury activity and for approval of specific transactions, the authority for which may be delegated. The Group has a Treasury function that raises all of the funding for the Group and manages interest rate and foreign exchange rate risk.

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The Group has separate financing programmes for each of the main Group companies. All funding programmes are approved by the Finance Committee of the Board and the Finance Committee of the appropriate Group undertaking.

The Treasury function is not operated as a profit centre. Debt and treasury positions are managed in a non-speculative manner, such that all transactions in financial instruments or products are matched to an underlying current or anticipated business requirement. The use of derivative financial instruments is controlled by policy guidelines set by the Board. Derivatives entered into in respect of gas and electricity commodities are used in support of the business’ operational requirements and the policy regarding their use is explained below.

As a registered holding company, under the US Public Utility Holding Company Act of 1935 (PUHCA), National Grid Transco operates under certain regulatory restrictions applied by the SEC. As a result, the scope of the financing activity of the Group is limited to specific areas which are authorised from time to time, such authorisation being currently set sufficient to cover all normal requirements. In addition, the Company is required to maintain its consolidated common stock equity as a percentage of its total consolidated capitalisation (defined in general, as common stock equity plus preferred stock plus gross debt) measured on a book value US GAAP basis at 30% or above. At 31 March 2003, this ratio stood at 38.4%.

As a result of PUHCA and other US regulatory limits applicable to certain US companies in the Group, the freedom of these companies to provide financing amongst themselves is restricted. Nevertheless, external financings or other arrangements are in place to ensure that Group companies have adequate access to short-term liquidity.

Details of the maturity, currency and interest rate profile of the Group’s borrowings as at 31 March 2003 are shown in notes 20 and 21 to the accounts on pages 77 to 81.

The Group’s financial position enables it to borrow on the wholesale capital and money markets and most of its borrowings are through public bonds and commercial paper.

The Group places surplus funds on the money markets usually in the form of short-term fixed deposits which are invested with approved banks and counterparties. Details relating to the Group’s cash, short-term investments and other financial assets as at 31 March 2003 are shown in note 21 to the accounts on page 80.

There exist within the Group different credit rated entities. For example, National Grid Company has a credit rating of A2/A. Transco has a credit rating of A2/A. Transco Holdings plc has been separately rated A3/A-. It is a condition of the regulatory ring-fences around National Grid Company, Transco and Transco Holdings plc that they use reasonable endeavours to maintain an investment grade credit rating. It is also an SEC requirement that National Grid Transco maintains an investment grade credit rating. By maintaining these ratings the principal borrowing entities of the Group should have ready access to the capital and money markets for future funding when necessary.

The main risks arising from the Group’s financing activities are set out below. The Board and the Finance Committee reviews and agrees policies for managing each risk and they are summarised below.

Refinancing risk management The Board mainly controls refinancing risk by limiting the amount of financing obligations (both principal and interest) arising on borrowings in any 12-month and 36-month period. This policy restricts the Group from having an excessively large amount of debt to refinance in a given time-frame. During the year, a mixture of short-term and long-term debt was issued.

Interest rate risk management The interest rate exposure of the Group arising from its borrowings and deposits is managed by the use of fixed and floating rate debt, interest rate swaps, swaptions and forward rate agreements. The Group’s interest rate risk management policy is to seek to minimise total financing costs (ie interest costs and changes in the market value of debt) subject to constraints so that, even with large movements in interest rates, neither the interest cost nor the total financing cost can exceed pre-set limits. Some of the bonds in issue from National Grid Company and Transco Holdings plc are index-linked, ie their cost is linked to changes in the UK Retail Price Index (RPI). The Group believes these bonds provide a good hedge for revenues which are also RPI-linked under the price control formula.

The performance of the Treasury function in interest rate risk management is measured by comparing the actual total financing costs of its debt with those of a passively-managed benchmark portfolio.

Foreign exchange risk management The Group has a policy of hedging certain contractually committed foreign exchange transactions over a prescribed minimum size. It covers 75% of such transactions expected to occur up to six months in advance and

50% of transactions in the six to 12 month period in advance. Cover generally takes the form of forward sale or purchase of foreign currencies and must always relate to underlying operational cash flows.

The principal foreign exchange risk to which the Group is exposed arises from assets and liabilities not denominated in sterling. In relation to these, the objective is to match the US dollar proportion of the Group’s financial liabilities to the proportion of its cash flow that arises in dollars and is available to service those liabilities.

Foreign exchange fluctuations will affect the translated value of overseas earnings. This translation has no impact on the cash flow of the Group, and accordingly is not hedged other than indirectly through the natural hedge of having foreign currency interest expense arising on currency denominated liabilities. Dividend flows may be hedged through matching with interest flows or by forward foreign exchange deals and options.

The currency composition of the Group’s financial assets and liabilities is shown in note 21 to the accounts on pages 79 and 80.

Counterparty risk management Counterparty risk arises from the investment of surplus funds and from the use of derivative instruments. The Finance Committee has agreed a policy for managing such risk, which is controlled through credit limits, approvals and monitoring procedures.

Derivative financial instruments held for purposes other than trading As part of its business operations, the Group is exposed to risks arising from fluctuations in interest rates and exchange rates. The Group uses off-balance sheet derivative financial instruments (derivatives) to manage exposures of this type and as such they are a useful tool in reducing risk. The Group’s policy is not to use derivatives for trading purposes. Derivative transactions can, to varying degrees, carry both counterparty and market risk.

The Group enters into interest rate swaps to manage the composition of floating and fixed rate debt, and so hedge the exposure of borrowings to interest rate movements. The Group enters into foreign currency swaps to manage the currency composition of borrowings and so hedge the exposure to exchange rate movements. Certain agreements are combined foreign currency and interest rate swap transactions. Such agreements are known as cross-currency swaps.

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The Group enters into forward rate agreements to hedge interest rate risk on short-term debt and money market investments. Forward rate agreements are commitments to fix an interest rate that is to be paid or received on a notional deposit of specified maturity, starting at a future specified date.

Valuation and sensitivity analysis The Group calculates the fair value of debt and derivative instruments by discounting all future cash flows by the market yield curve at the balance sheet date. In the case of instruments with optionality, the Black’s variation of the Black-Scholes model is used to calculate fair value.

For debt and derivative instruments held, the Group utilises a sensitivity analysis technique to evaluate the effect that changes in relevant rates or prices will have on the market value of such instruments.

At 31 March 2003, the potential change in the fair value of the aggregation of long-term debt and derivative instruments was £274 million and £474 million respectively assuming a 10% change in the level of interest rates and exchange rates.

Commodity price hedging In the normal course of business the Group is party to commodity derivatives. These include indexed swap contracts, gas futures, electricity swaps, gas options, gas forwards, gas basis swaps and oil commodity swaps that are principally used to manage commodity prices associated with its gas and electricity delivery operations. This includes the buying back of capacity rights already sold in accordance with the Group’s UK Gas Transporters’ Licence and Network Code obligations.

These financial exposures are monitored and managed as an integral part of the Group’s financial risk management policy. At the core of this policy is a condition that the Group will engage in activities at risk only to the extent that those activities fall within commodities and financial markets to which it has a physical market exposure in terms and volumes consistent with its core business. The Group does not issue or intend to hold derivative instruments for trading purposes, and holds such instruments consistent with its various licence and regulatory obligations in the UK and US.

As a result of the restructuring of the electricity industry in New York State during 1998, Niagara Mohawk entered into indexed swap contracts that expire in June 2008. These contracts replaced the existing power purchase arrangements on terms and conditions that were more favourable to Niagara Mohawk than that allowed under

the existing arrangements. Another three swap contracts that expire in June and September 2003 resulted from the sale of Niagara Mohawk’s fossil fuel generating stations. The indexed swaps and fossil fuel plant swaps are the subject of regulatory rulings that allow the gains and losses to be passed on to customers.

At 31 March 2003, the Group had liabilities of £502 million in respect of these contracts and has recorded a corresponding regulatory asset. The asset and liability will be amortised over the remaining term of the swaps as nominal energy quantities are settled and will be adjusted as periodic reassessments are made of energy prices. A 10% movement in the market price of electricity would result in a £48 million movement in the value of the indexed swap contracts. There would be no impact on earnings as a result of a corresponding movement in the book value of the related regulatory asset.

Payments made by Niagara Mohawk under indexed swap contracts are affected by the price of natural gas. Niagara Mohawk uses New York Mercantile Exchange (NYMEX) gas futures as hedges to mitigate this impact. The futures contracts are derivative instruments with gains and losses deferred as an offset to the corresponding increases and decreases in the swap payments. Gains relating to these contracts at 31 March 2003 were not material and, as a result of regulatory treatments, have no impact on earnings.

Niagara Mohawk’s gas rate agreement allows for collection of the commodity cost of natural gas sold to customers. The regulator also requires that actions be taken to limit the volatility in gas prices passed on to customers. Niagara Mohawk meets this requirement through the use of NYMEX gas futures and combinations of NYMEX call and put options structured as ‘collars’. These contracts are hedges of Niagara Mohawk’s natural gas purchases. Gains and losses are deferred until the month that the hedged contract settles. At 31 March 2003, deferred gains on these contracts were immaterial in the context of the Group as a whole.

UK transmission is obliged to offer for sale through a series of auctions a predetermined quantity of entry capacity for every day in the year at pre-defined locations. Where, on the day, the gas transmission system’s capability is constrained, such that gas is prevented from entering the system for which entry capacity rights have been sold, then UK transmission is required to buy back those entry capacity rights sold in excess of system capability. Forward and option contracts are used to

reduce the risk and exposure to on-the-day entry capacity prices.

UK transmission operations have also entered into electricity options, pursuant to its requirement to stabilise the electricity market in England and Wales through the operation of the new electricity trading arrangements (NETA). The options are for varying terms and have been entered into so that the Group has the ability to deliver electricity as required to meet its obligations under the electricity Transmission Licence. The Group has not and does not expect to enter into any significant derivatives in connection with its NETA role.

Commitments, contingencies and litigation Commitments and contingencies The Group’s commitments and contingencies outstanding at 31 March are summarised in the table below:

Commitments and contingencies	2003	2002
	£m	£m
Future capital expenditure contracted for but not provided	664	550
Total operating lease commitments	476	387
Power
commitments	6,329	7,312
Third
party contingencies	27	455
Other commitments and contingencies	194	202

The Group proposes to meet these commitments from operating cash flows and from existing credit facilities, as necessary. Details of the nature of the commitments and contingencies, including an analysis of the ageing of commitments, where they can be reasonably estimated, is shown in note 31 to the accounts on pages 91 to 93.

Details of material litigation to which the Group was a party as at 31 March 2003 As a result of a fatal accident in Larkhall, Lanarkshire in December 1999 in which four people died, the Crown Office in Scotland served an indictment on Transco on 5 February 2003. This charged the company with culpable homicide, with an alternative charge of a contravention of Sections 3 and 33 of the Health and Safety at Work Act 1974. Charging the company with culpable homicide is unprecedented under Scots law and therefore before a full trial can proceed, a number of fundamental legal issues associated with the indictment are required to be resolved. At a preliminary hearing in March 2003 to determine issues as to the competency and relevancy and other associated matters in relation to the charges, judgement was issued in favour of the Crown. Transco has appealed against this decision and the appeal hearing commenced on 20 May 2003. On

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indictment, the maximum penalties for both culpable homicide and contravention of Sections 3 and 33 are unlimited fines.

Regulatory authorities from Rhode Island, New Hampshire and Massachusetts have expressed an intent to challenge the reasonableness of a transaction entered into by National Grid USA, in connection with the sale of its interest in the Millstone 3 nuclear unit. Further details of the nature of this intent are contained in note 31 to the accounts on page 92.

The Group has received notification of violations of US air pollution laws relating to the operation of two coal-fired generation plants, formerly owned by Niagara Mohawk. As a consequence, the Group has been notified that US regulatory authorities are seeking substantial fines against the Group and the current owners of these generation plants. The Group is resisting these claims. Further details of this litigation are contained within note 31 to the accounts on page 93.

Critical accounting policies The Group accounts are prepared in accordance with UK GAAP. The Group’s accounting policies are described on pages 57 to 59 of the accounts. Management are required to make estimates and assumptions that may affect the reported amounts of assets, liabilities, revenue, expenses and the disclosure of contingent assets and liabilities in the accounts. The following matters are considered to have a critical impact on the accounting policies adopted by the Group:

Estimated asset economic lives – the adoption of particular asset economic lives in respect of goodwill and tangible fixed assets can materially affect the reported amounts for goodwill amortisation and depreciation of tangible fixed assets.

Goodwill, under UK GAAP, is principally being amortised over 20 years, and the economic lives of tangible fixed assets are disclosed in ‘Accounting policies – e) Tangible fixed assets and depreciation’. The adoption of particular economic lives involves the exercise of judgement, and can materially impact on the profit and loss account. For the year ended 31 March 2003, the Group profit and loss account reflected goodwill amortisation and depreciation of tangible fixed assets amounting to £102 million and £851 million respectively.

Goodwill is not amortised under US GAAP, but is subject to regular impairment reviews.

Impairment of fixed assets – goodwill, fixed asset investments and tangible fixed

assets are reviewed for impairment in accordance with UK GAAP. Future events could cause these assets to be impaired, resulting in an adverse effect on the future results of the Group.

Reviews for impairments are carried out under UK GAAP in the event that circumstances or events indicate the carrying value of fixed assets may not be recoverable. Examples of circumstances or events that might indicate that impairment had occurred include: a pattern of losses involving the fixed asset; a decline in the market value for a particular fixed asset; and an adverse change in the business or market in which the fixed asset is involved.

When a review for impairment is carried out under UK GAAP, the carrying value of the asset, or group of assets if it is not reasonably practicable to identify cash flows arising from an individual fixed asset, are compared to the recoverable amount of that asset or group of assets. The recoverable amount is determined as being the higher of the expected net realisable value or the present value of the expected cash flows attributable to that asset or assets. The discount rate used to determine the present value is an estimate of the rate the market would expect on an equally risky investment, and is calculated on a pre-tax basis. Estimates of future cash flows relating to particular assets or groups of assets involve exercising a significant amount of judgement.

During the year ended 31 March 2003, reviews for impairments were carried out in respect of goodwill and other assets – telecoms, LNG, interconnector and metering. Net impairment charges were recorded in respect of telecoms assets – shown as ‘exceptional’ and discussed under Exceptional items on page 30.

Replacement expenditure represents the cost of planned maintenance on gas mains and services assets, the vast majority relating to the Group’s UK gas distribution business. This expenditure is principally undertaken to maintain the safety of the gas network in the UK and is written off to the profit and loss account as incurred, because such expenditure does not enhance the performance of those assets. If such expenditure in the future were considered to enhance these assets, it would be capitalised and treated as an addition to tangible fixed assets, thereby significantly affecting the reporting of future results.

The total amount charged to the profit and loss account in respect of replacement expenditure during the year ended 31 March 2003 was £405 million. This

accounting policy only materially affects the results of the UK gas distribution segment.

Under US GAAP, this expenditure is capitalised. The US GAAP accounting policy is shown in note 34 to the accounts ‘Fixed assets – impact of Lattice purchase accounting and replacement expenditure’ on page 104.

Regulatory assets are recorded in the accounts under UK GAAP in accordance with the principles of SFAS 71 ‘Accounting for the Effects of Certain Types of Regulation’, a US GAAP accounting standard. If the principles of SFAS 71 were not applicable, it would result in the non-recognition of these assets, and thereby materially alter the view given by the accounts.

In applying the principles of SFAS 71, UK GAAP measurement principles are followed in the preparation of the Group’s UK GAAP results. Regulatory assets under UK GAAP are only recognised if a US GAAP regulatory asset has already been recognised, but UK GAAP measurement principles are followed with only those regulatory assets arising as a result of a past transaction or event being recorded. Regulatory assets are only recognised in respect of US activities, and primarily relate to the US electricity distribution segment.

The total carrying value of regulatory assets, under UK GAAP, at 31 March 2003 amounted to £3,743 million.

Turnover includes an assessment of energy and transportation services supplied to customers between the date of the last meter reading and the year end. Changes to the estimate of the energy or transportation services supplied during this period would have an impact on the reported results of the Group.

Estimates of energy supplied are made based on a combination of known energy purchases and historical pattern of billings information. These estimates only affect US electricity transmission, US electricity distribution and US gas activities.

Turnover in respect of transportation services supplied comprises amounts invoiced to shippers plus an estimate for transportation services supplied but not yet invoiced, which substantially represented the transportation services supplied in respect of the last month of the year. The estimated element of turnover is determined as the total of commodity services supplied, calculated from the actual volume of gas transported at estimated weighted average prices, based on recent history

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Operating and Financial Review continued

and the value of capacity services supplied, which are contracted amounts. This estimate affects the UK gas distribution and UK electricity and gas transmission segments.

Under UK GAAP, the Group is not permitted to and has not recognised any liability for amounts received or receivable from customers in excess of the maximum amount allowed for the year under regulatory agreements that will result in an adjustment to future prices. Under US GAAP such liabilities are recognised.

Pensions and other post-retirement benefits – the cost of providing pensions and other post-retirement benefits is charged to the profit and loss account on a systematic basis over the service lives of the employees in the scheme in accordance with SSAP 24. As explained in note 7 to the accounts on page 69, a new UK accounting standard (FRS 17) will replace existing GAAP and significantly change the measurement and disclosure of pension and other post-retirement costs in the Group accounts.

Pension and other post-retirement benefits are inherently long term, and future experience may differ from the actuarial assumptions used to determine the net charge for ‘pension and other post-retirement charges’. As explained on page 31 in ‘Pension accounting’, as a result of the deterioration of world stock markets, illustrating that the Group’s actual experience has differed from actuarial assumptions, the Directors have suspended the continuing amortisation of pension surpluses relating to UK pension schemes with effect from 1 October 2002.

Note 7 to the accounts on page 68 describes the principal assumptions that have been used to determine the pension and post-retirement charges in accordance with current UK GAAP. The calculation of any charge relating to ‘pensions and other post-retirement benefits’ is clearly dependent on the assumptions used, which reflects the exercise of judgement. Management exercises that judgement having regard to independent actuarial advice.

As shown in note 7 to the accounts on pages 69 and 70, the application of the measurement principles of FRS 17 would significantly affect the results of the Group, reducing the pre-exceptional net charge for ‘pensions and other post-retirement benefits’ by £61 million (pre-tax).

Restructuring costs – the application of UK GAAP measurement principles results in the recognition of restructuring costs, mainly redundancy related, when the

Group is irrevocably committed to the expenditure, with the main features of any restructuring plan being communicated to affected employees. If material, these costs are recognised as exceptional.

Restructuring costs recognised by the Group are referred to in ‘Exceptional items’ for each year discussed above.

Derivative financial instruments – derivatives are used by the Group to manage its interest rate, foreign currency and commodity price risks in respect of expected energy usage. All such transactions are undertaken to provide a commercial hedge of risks entered into by the Group.

With the exception of indexed-linked swap contracts, UK GAAP applies an ‘historical cost’ and ‘hedge accounting’ model to these derivatives. Substantially, this model results in gains and losses arising on derivatives being recognised in the profit and loss account or statement of total recognised gains and losses at the same time as the gain or loss on the item being hedged is recognised.

The application of a ‘fair value’ model would result in derivatives being marked to market. Gains or losses relating to these derivatives may or may not be recognised in the profit and loss account or statement of total recognised gains and losses at the same time as any related gains or losses on underlying economic exposures, depending upon whether the derivatives are deemed to have a hedging relationship.

Note 21 to the accounts on pages 79 to 81 gives a significant amount of detail relating to the Group’s financial instruments. This includes the identification of the difference between the ‘carrying value’ and fair value of the Group’s financial instruments, including derivatives.

Environmental liabilities – provision is made for liabilities arising from environmental restoration and remediation costs relating to various sites owned by the Group. The calculation of this provision is based on estimated cash flows relating to these costs discounted at an appropriate rate where the impact of discounting is material. The total costs and timing of cash flows relating to environmental liabilities are based on management estimates, and include the use of external consultants. There may be variances from these amounts that could materially affect future results.

Related party transactions The Group provides services to and receives services from its related parties. In the year ended 31 March 2003, the Group charged £21 million and received charges

of £72 million from its related parties. Amounts charged to and by Energis, the Group’s former associate, amounted to £19 million and £20 million respectively.

Amounts charged to Energis were primarily in respect of enhancements to and maintenance of the Energis telecoms infrastructure, while amounts charged by Energis relate to telecoms services provided. Amounts charged to Energis also include £11 million in respect of a finance lease.

On 12 October 2002, the Group sold its subsidiary, The Leasing Group, which consequently became treated as a related party from that date until the year end.

Amounts charged to and by The Leasing Group during this period amounted to £nil and £13 million respectively.

During the year, amounts were paid to or in respect of joint ventures, arising from the Group’s obligations from its decision to exit from these investments, totalling £153 million, all of which had been provided for at 31 March 2002.

Further details relating to related parties is contained within note 30 to the accounts on page 91.

Changes and developments Any significant changes and developments that have occurred since 31 March 2003 have been noted in this Annual Report and Accounts 2002/03. Otherwise, there have been no significant changes or developments since 31 March 2003.

Going concern Having made enquiries, the Directors consider that the Company and the Group have adequate resources to continue in business for the foreseeable future and that it is therefore appropriate to adopt the going concern basis in preparing the accounts.

US GAAP The accounts have been prepared in accordance with UK GAAP which differs in certain significant respects from US GAAP. The US GAAP accounting information in note 34 to the accounts on pages 100 to 106 gives a summary of the main differences between the amounts determined in accordance with the Group’s accounting policies (based on UK GAAP) and those determined in accordance with US GAAP. In addition, summary income statements, summary balance sheets, summary cash flows and a reconciliation of net income and equity shareholders’ funds from UK to US GAAP are provided in note 33 to the accounts on pages 93 to 100.

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As referred to earlier, UK GAAP merger accounting principles have been adopted in accounting for the business combination of National Grid and Lattice. Under US GAAP, acquisition accounting principles have been applied to the business combination, which is a fundamentally different method of accounting from merger accounting.

Under US GAAP, National Grid is viewed as the acquirer of Lattice, and as a result the separately identifiable net assets attributable to Lattice have been fair valued at the date of acquisition on 21 October 2002. Note 34 to the accounts on pages 100 and 101 details the fair value of the separately identifiable net assets acquired, together with the principal adjustments made to the book values at that date.

A further consequence of acquisition accounting, in contrast to merger accounting, is that the results of the Group under US GAAP only include the results of Lattice with effect from the date of acquisition. Therefore, under US GAAP, in respect of the Group results for the three years ended 31 March 2003, Lattice results only feature in the period 21 October 2002 to 31 March 2003. In addition, because fair values have been attributed to Lattice’s separately identifiable net assets rather than the book values as used in merger accounting, goodwill is recognised.

Net income from continuing operations for 2002/03 under US GAAP was £790 million (2001/02: £690 million; 2000/01: £423 million). The US GAAP results for 2002/03, 2001/02 and 2000/01 include losses (profits) relating to discontinued operations amounting to £39 million; £857 million; and £387 million (profits) respectively. Consequently, net income for 2002/03 under US GAAP was £751 million (2001/02: £167 million (net loss); 2000/01: £810 million). This compares with the net income (loss) under UK GAAP for 2002/03, 2001/02 and 2000/01 of £391 million; £321 million (loss); and £1,124 million respectively. Equity shareholders’ funds under US GAAP at 31 March 2003 were £9,426 million (31 March 2002: £3,759 million) compared with £1,152 million (31 March 2002: £1,690 million) under UK GAAP.

Because the application of merger accounting principles under UK GAAP has fundamentally affected the comparison of UK GAAP results with US GAAP results, the following is a discussion of the impact the application of US GAAP has had on the results, which should be read in conjunction with the review of the business results given on pages 10 to 20 and the rest of this financial review.

The treatment of Lattice as an acquisition under US GAAP has significantly impacted on the UK electricity and gas transmission segment, UK gas distribution segment, and ‘Other’, as compared with the treatment under UK GAAP. The remaining segments are unaffected by differences caused as a result of differences between merger and acquisition accounting principles. Consequently, this has impacted on the results of the segments, as follows:

| • | The results of the UK electricity
and gas transmission segment for 2000/01 and 2001/02 under US GAAP relate
solely to UK electricity activities, excluding the impact of any gas transmission
activity, which is shown under UK GAAP. UK gas transmission has only impacted
on the UK electricity and gas transmission in 2002/03 since the date of
acquisition on 21 October 2002 and contributed £96 million to operating
profit since that date; |
| --- | --- |
| • | UK gas distribution is a
new segment created as a result of the acquisition of Lattice. As a result,
there is no impact on the operating result of UK gas distribution for
2001/02 or 2000/01 but the segment contributed £567 million to operating
profit for 2002/03; and |
| • | Similarly, the operating
loss for ‘Other’ in respect of 2000/01 and 2001/02 relates solely
to the activities of National Grid, which related primarily to the activities
of EnMo, contracting activities and other costs incurred that were not
attributable to business segments. In 2002/03, the operating loss of ‘Other’
amounted to £60 million, including a loss of £26 million arising
from the acquisition of Lattice. |

A full tabulation of the operating results and other segmental information under US GAAP is shown in note 33 to the accounts on page 98.

Note 33 to the accounts on pages 93 to 100 show a summary income statement for 2002/03; 2001/02; and 2000/01 under US GAAP. These statements have reconciled the impact that all material US GAAP adjustments have had on the UK GAAP income statement, including the impact of the elimination of all merger accounting (pooling of interests) adjustments under UK GAAP, and the inclusion of acquisition (purchase accounting) adjustments under US GAAP. The adjustments eliminating the pre-acquisition UK GAAP results impacting on turnover and operating costs are much larger in 2000/01 and 2001/02 than in 2002/03, as the adjustments do not eliminate post-acquisition results of Lattice since the date of acquisition.

Some of the adjustments included within the US GAAP summary income statements and balance sheet substantially reflect reclassifications of items that are treated differently under UK GAAP and US GAAP, but that do not significantly impact on net income or net assets.

Under UK GAAP, the operating results of discontinued operations are classified as part of total operating profit, whereas under US GAAP these amounts are shown net of any related interest and tax and shown as ‘net income from discontinued operations’. Similarly, under UK GAAP, the share of equity affiliate’s operating profit/(loss); net interest; taxation; and minority interests are accounted for separately, whereas under US GAAP all these amounts are accounted for within ‘interest in equity accounted affiliates’. The principal adjustments to UK GAAP net income that have had a net impact in arriving at US GAAP net income are shown in note 33 to the accounts on page 99. Explanations for the principal reasons giving rise to differences between UK and US GAAP are shown in note 34 to the accounts on pages 100 to 106.

The treatment of the business combination of Lattice as an acquisition by National Grid has resulted in the recognition of provisional goodwill amounting to £3,813 million as a result of allocating provisional fair values to the separately identifiable net assets of Lattice at the date of acquisition. The fair values attributed to the net assets of Lattice, together with a description of the purchase allocation process undertaken, is shown in note 34 to the accounts on pages 100 and 101. The application of acquisition accounting principles explains the vast majority of the increase in equity shareholders’ funds at 31 March 2003 from £1,152 million under UK GAAP to £9,426 million under US GAAP.

A summary US GAAP balance sheet at 31 March 2002 and 31 March 2003 is shown in note 33 to the accounts on page 97. The balance sheet at 31 March 2003 reflects the impact of the incorporation of Lattice-related net assets at fair value on the date of acquisition.

During 2002/03, as a result of the decline in the market value of pension scheme assets and in accordance with the requirements of SFAS 87, the Group has recognised an additional minimum pension liability of £1,583 million, of which £1,301 million (pre-tax) has been reflected through other comprehensive income. A reconciliation of the funded status of the Group pension and other post-retirement schemes is shown in note 34 to the accounts on page 103.

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Operating and Financial Review continued

| During 2002/03,
the Group adopted the following US GAAP accounting standards: — • | SFAS 144 ‘Accounting
for the Impairment or Disposal of Long-Lived Assets’; | |
| --- | --- | --- |
| • | SFAS 145 ‘Recession
of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.13 and Technical Corrections’; | |
| • | SFAS 146 ‘Accounting
for Costs Associated with Exit or Disposal Activities’; | |
| • | SFAS 148 ‘Accounting
for Stock-Based Compensation – Transition and Disclosure | |
| | – | An Amendment of FAS No.123’;
and |
| • | FASB Interpretation
(FIN) 45 ‘Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others’. | |
| Details of the
effect of adopting these accounting standards can be seen in note 34 to
the accounts on page 106. | | |
| Other
matters Inflation In the UK, the Group’s operating costs may be affected by inflation
both in terms of potential cost increases and in terms of the regulatory
revenue control, which is influenced by, amongst other things, | | |

movements in the UK Retail Price Index. While higher inflation would tend to increase the Group’s cost base, this impact would be more than offset by increased revenue allowed under the Group’s regulated revenue controls.

Higher inflation would increase the cost base of the Group’s US businesses. However, if there is a significant change in the rate of inflation, as measured by the change in the Gross Domestic Product Implicit Price Deflator, the regulatory settlements in Massachusetts, Rhode Island and New York allow for additional distribution revenue to be recovered from customers.

In recent years, inflation in the UK and US has been relatively stable and has not significantly affected the period under review.

Seasonality Although demand for electricity and gas can vary on a seasonal basis, the Group’s UK transmission turnover and adjusted earnings are not, generally speaking, subject to substantial seasonal variations, because the largest elements of UK transmission turnover relate to customers’ use of the transmission systems. Customers are charged for these services in a number of ways, some giving rise to

variation in income over a financial year, but overall this typically provides for a relatively constant revenue stream over the course of the financial year.

UK gas distribution is subject to regulatory agreements governing the maximum revenue that should be billed in a financial year. But the timings of the recognition of these revenues are such that typically 60% of total revenue would be recognised in the second half of the year.

US electricity transmission would normally provide for a relatively constant revenue stream over the course of a financial year.

US electricity distribution and US gas would usually expect total revenues in the second half of the year to be higher than the first half, as a result of a higher demand for energy in the winter months.

Euro In January 2002, the euro was introduced as the cash currency in 12 European Union countries. This has had minimal impact on the operations of the Group. The UK may introduce the euro at a later date requiring sterling to convert irrevocably into the euro. The Group will continue to monitor and upgrade the progress already made on assessing the implications of the introduction of the euro for the Group.

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Directors’ Report and Operating and Financial Review Corporate Governance and Internal Control

Corporate Governance Compliance Corporate Governance is essentially the way companies are directed and controlled. Shareholders are responsible for appointing the directors and the directors are then responsible for the governance of the company. The Annual Report is the main way the directors can report back to shareholders on the system of corporate governance they have put in place.

The following section should allow shareholders to understand how corporate governance operates at National Grid Transco. This explanation is required by the Listing Rules of the UK Listing Authority and must set out how the Principles of Good Governance of the Combined Code, which is attached to the Listing Rules, have been applied.

As part of the Merger process, the Board carried out a thorough governance review. It considered all procedures, policies and authorities as well as board and committee structures to ensure that these were appropriate for the newly merged Group. The aim of the Board is that the Company has in place the highest standards of corporate governance. The explanation of National Grid Transco’s corporate governance (as set out below) relates to the principles adopted following the Merger.

The Combined Code also contains a Code of Best Practice. Companies are required to state whether or not they have complied with its provisions and provide explanations where they have not. National Grid Transco complied with all the provisions during the year except that requiring the appointment of a senior independent director. It was only following the Merger that James Ross, previously Chairman of National Grid Group, was nominated as the Senior Independent Director. Prior to this, it was felt that the Chairman and Group Chief Executive were the appropriate points of contact for shareholders with any concerns. This provides shareholders with a further point of contact in the event they wish to raise issues that they do not wish to discuss with the Chairman or Group Chief Executive.

Shareholders may be aware of the recent ‘Review of the role and effectiveness of non-executive directors’ by Derek Higgs. The review suggested a number of changes to the Combined Code. National Grid Transco considers that, following a modest number of appropriate changes, it will be well placed to comply with the majority of the recommendations contained in the Higgs Review.

Relations with shareholders National Grid Transco has regular meetings

with institutional investors, fund managers and financial analysts throughout the year. These meetings are used to discuss information made public by the Company.

Twice a year, following the publication of results, the general views of institutional shareholders prepared by the Company’s brokers are discussed with the Board. This ensures that each of the Directors, including the Non-executive Directors, is fully aware of shareholders’ views and any outstanding issues.

The Annual General Meeting (AGM) is the principal meeting at which National Grid Transco communicates directly with its many individual shareholders. This meeting is used to present the year’s results to shareholders and allows any shareholder to ask questions of the Directors, all of whom will normally attend the AGM.

National Grid Transco will also continue the programme offered by National Grid that allowed shareholders to visit the Company, see operations at first hand and speak to senior members of staff and Directors about the business. For more information on Shareholder networking see page 120.

Directors The Board of Directors is responsible for managing the Company’s business and for establishing and overseeing its governance framework. This is based on National Grid Transco’s Framework for Responsible Business, which contains statements on sustainable growth, profits with responsibility, investing in the future and behavioural values. This statement ties together elements of National Grid Transco’s governance framework which includes Board Committee Terms of Reference, Delegations of Authority and the Share Dealing Code.

National Grid Transco’s Board consists of the Chairman, the Group Chief Executive, six Executive Directors and seven Non-executive Directors (including the Deputy Chairman). The biographies of each of the Directors, setting out their current roles and previous experience, are on pages 26 and 27.

The Board considers that each of the Non-executive Directors is independent. This means that in the view of the Board they have no links to the Executive Directors and other managers and no business or other relationship with the Company that could interfere with their judgement.

To ensure its effectiveness, the Board has a number of matters reserved to it. By controlling these selected items, for example approving the Group’s financial

policy and establishing Board committees, the Board ensures that it maintains control on the corporate governance of the Company. The Board is also in the process of adopting an internal procedure to evaluate the performance of the whole Board, each Committee, the Chairman and each individual Director.

During the year, the Board met formally 15 times, excluding separate strategy meetings. For each scheduled meeting the Company Secretary, on behalf of the Chairman, collates the relevant papers and circulates them to all Directors, aiming to provide papers a minimum of four working days in advance of any meeting. All papers are considered at a senior level, often being considered first by the Group Executive Committee, and must receive support from a relevant Director.

All Directors are required to be re-elected by shareholders at the AGM following their appointment by the Board and then at least once every three years. To ensure that a representative number of Directors are re-elected by shareholders, each year one-third of the Board (excluding new Directors) must stand for re-election at each AGM.

Nominations Committee The main role of the Nominations Committee is to review the structure, size and composition of the Board, nominating candidates where vacancies arise. It consists of the Chairman and four Non-executive Directors who consider the appointment of any new Director or Company Secretary and make recommendations to the Board. The Nominations Committee, which has clearly defined terms of reference, also considers the periodic re-election of the Non-executive Directors.

Remuneration Committee A Remuneration Committee, consisting exclusively of Non-executive Directors, ensures that the Company has an appropriate remuneration policy for its Executive Directors and certain senior managers. The Remuneration Committee acts under clear terms of reference and aims to ensure that rewards are linked to performance. A full report on Directors’ remuneration, reviewed and approved by the Remuneration Committee, is on pages 44 to 52 of this report.

Audit Committee An Audit Committee is in place, with clear terms of reference, to keep under review and report to the Board on the effectiveness of the Company’s financial reporting, internal control policies and procedures for risk management and internal audit. The Audit Committee consists entirely of independent

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Corporate Governance and Internal Control continued

| Non-executive
Directors and meets at least four times during the year. The Audit Committee
will also meet separately with the external auditors and is responsible
for their appointment and compensation. | |
| --- | --- |
| The Audit Committee
is also responsible for managing the relationship with the external auditors
including: | |
| • | ensuring the independence
and objectivity of the external auditors; |
| • | considering the level of
audit fees (value for money) and fees paid to external auditors in respect
of non-audit services; and |
| • | discussions with the external
auditors concerning compliance issues. |
| In relation
to non-audit work by the external auditors, the Audit Committee must approve
all such work in advance. Details of both the audit fees and the fees
paid for non-audit services are given in note 3 to the accounts on page
65. | |
| Risk and
Responsibility Committee The Risk and Responsibility
Committee consists of three Non-executive Directors, including the Deputy
Chairman, and meets at least four times a year. | |
| The main duties
of this Committee, as set out in its terms of reference, are to review
proactively the strategies, policies, management, initiatives, targets
and performance of the Company, and where appropriate our suppliers and
contractors, in relation to occupational and public safety, occupational
health, environment, equality and diversity, human rights and business
ethics and the role of the Company in society. | |
| Finance Committee The Finance Committee is made
up of the Group Chief Executive, the Group Finance Director and two independent
Non-executive Directors. It is chaired by a Non-executive Director. | |
| The Finance
Committee meets at least four times a year to consider and set finance
policies and make recommendations to the Board relating to items such
as pensions and Company tax strategy. | |
| Executive
Committee The Board has essentially delegated authority for the day-to-day running
of the Company to the Executive Committee. As noted above, the Board retains
certain responsibilities but delegates to the Executive Committee tasks
such as the development of Group strategy for Board discussion and approval
and the implementation of Board strategy. | |

| The Executive
Committee is chaired by the Group Chief Executive and comprises each of
the other Executive Directors, Fiona Smith, the Group General Counsel
and Mike Jesanis, the Chief Operating Officer of National Grid USA. The
Executive Committee meets monthly and additionally as necessary. | |
| --- | --- |
| Internal
Control National Grid Transco’s
system of internal control helps to safeguard shareholders’ investment
and the Group’s assets and is designed to manage, rather than eliminate,
material risks to the achievement of business objectives. The Board is
responsible for the Group’s system of internal control and for reviewing
its effectiveness, recognising that any such system can provide only reasonable,
and not absolute, assurance against material misstatement or loss. Following
the Merger, the National Grid Transco Board has approved a new governance
framework for the new organisation recognising that this is a key element
of internal control. | |
| In response
to the requirements of the Sarbanes-Oxley Act 2002, National Grid Transco
has constituted several disclosure committees. The Group disclosure committee
is chaired by the Group Finance Director. The main purpose of the committee
is to ensure that when disclosing information the Company represents itself
completely, fairly and accurately to its security holders and that it
complies with applicable laws and stock exchange requirements. | |
| Up to the point
of Merger, both National Grid and Lattice had ongoing processes in place
for identifying, evaluating and managing the significant risks faced by
the respective groups. Both of these processes were compliant with the
Turnbull working party guidance (published September 1999) and the ABI
Disclosure Guidelines on Socially Responsible Investment (published October
2001) which focus on Social, Ethical and Environmental risks. While National
Grid Transco has continued to utilise those same processes for the remainder
of the financial year, work has commenced to identify and pull together
the best risk management practices from across the new Group. Subsequently,
a new integrated approach that compares favourably with external perspectives
of best practice will be rolled out to the new organisation in 2003/04.
Notwithstanding this, the risk management process adopted for year-end
reporting has promoted both a top-down and bottom-up assessment of risk. | |
| • | The top-down assessment
has involved the Executive Directors and a number of senior executives
from the businesses |

| | and Corporate Centre. It
has resulted in a balanced and robust identification and consideration
of cross-organisation risks that have been clearly aligned to National
Grid Transco’s key strategic and operational objectives. |
| --- | --- |
| • | The bottom-up assessment,
undertaken in accordance with interim risk assessment and reporting guidance,
has resulted in the detailed analysis of risks by the individual businesses
and corporate functions captured in the form of risk registers. |
| Subsequently,
both elements have been pulled together through the production of a Schedule
of Board-level risks. That Schedule has been presented to and discussed
with both the Audit Committee and the Risk and Responsibility Committee. | |
| Any material
changes to the risks and associated controls and actions contained in
the Schedule of Board-level risks and business risk registers are reported
through the monthly operational business performance reports to the Executive
Committee. In addition, quarterly meetings are held with Executive Directors
specifically to review and discuss key changes in risk profiles. | |
| National Grid
Transco recognises that the implementation of risk management is an iterative
process and subject to continuing improvement. During the year, National
Grid USA and Niagara Mohawk (which was acquired in January 2002) have
integrated their risk management practices. After the Merger, the process
of introducing a compliance management process that seeks to raise visibility
and awareness around the ever-expanding compliance obligations has been
introduced. By utilising a top-down view of compliance obligations developed
by Group Legal, the businesses have: | |
| • | identified their key compliance
obligations and the potential impacts of non-compliance; |
| • | identified existing controls,
designed and implemented in the first instance to ensure compliance or
flag instances of non-compliance should they occur; |
| • | self-assessed the effectiveness
of those existing controls and identified improvement actions; and |
| • | discussed their findings
with their respective management teams. |
| The Group is
committed to continuing to raise the visibility and robustness of compliance
management throughout the organisation. | |

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Following the Merger, the National Grid Transco Board has approved, as part of the new governance framework, its process for reviewing the effectiveness of internal control. That process recognises that assurance over the effectiveness of internal control including risk management flows through two main sources, namely line managers and independent assurance providers. The Board, through the Executive Committee and the Audit Committee (the latter complemented by the Risk and Responsibility Committee), regularly reviews the effectiveness of internal control, including the process for identifying, evaluating and managing significant risks and compliance obligations through the assurance mechanisms detailed below. Any material matters arising are reported to the Board.

| Throughout
the year: | |
| --- | --- |
| The Executive
Committee considers: | |
| • | monthly safety and environmental
performance reports; |
| • | monthly operational business
performance reports; |
| • | the Group’s annual
business plan, including the capital programme and the annual operating
budget; |
| • | proposals for new business
development and significant project expenditure; |
| • | half-yearly self-certifications
on the completeness and accuracy of financial statements and associated
disclosures; |
| • | half-yearly reviews of risk
and compliance registers; and |
| • | on an exceptions basis,
reports on the results of internal audits, safety and environmental audits
and occupational health reviews. |
| The Audit
Committee considers: | |
| • | external and internal audit
work plans; |
| • | summary reports from external
and internal audit on significant financial matters arising; |

| • | key risks and compliance
obligations and the extent to which risk and compliance management is
being embedded in the organisation; |
| --- | --- |
| • | specific reports from management
on the actions taken to manage key risk areas and, if applicable, to address
material control weaknesses and any instances of ethical misconduct and
matters investigated as a result of whistleblowing; and |
| • | the performance of the external
auditors and internal audit. |
| The Risk
and Responsibility Committee considers: | |
| • | key risks of a non-financial
nature; |
| • | safety, health and environmental
audit plans; |
| • | summary reports from assurance
providers on significant non-financial matters arising; and |
| • | specific reports from management
on the actions taken to manage certain key non-financial risk areas and,
if applicable, to address relevant material control weaknesses and any
instances of ethical misconduct and matters investigated as a result of
whistleblowing. |
| At the end
of each financial year: | |
| The Board: | |
| • | receives the Group Chief
Executive’s Letter of Assurance which seeks to confirm compliance
with all major internal and external requirements, the existence of appropriate
internal controls and risk management processes and provides details of
material risks and any control weaknesses; and |
| • | confirms that it has conducted
a formal review of the effectiveness of internal control based on the
information and assurances provided to it. |
| The Audit
Committee considers: | |
| • | the effectiveness of the
Annual Letter of |

| Assurance process
and the assurances provided by the Group Chief Executive to the Board; | |
| --- | --- |
| • | a report from the Group
disclosure committee; |
| • | a report from the Group
Head of Audit on internal audit issues and the effectiveness of the control
framework including fraud and malpractice occurances; |
| • | specific reports on significant
corporate governance and legal issues and risk management; and |
| • | external audit issues. |
| The Risk
and Responsibility Committee considers: | |
| • | specific reports on safety,
health, environment and corporate responsibility; |
| • | specific reports on significant
corporate governance and legal issues and risk management. |
| Evaluation
of disclosure controls and procedures Within the 90 day period prior to the filing date of this report, the
Company carried out an evaluation under the supervision and with the participation
of its management, including the Group Chief Executive and Group Finance
Director, of the effectiveness of the design and operation of the Group’s
disclosure controls and procedures. Based upon and as of that evaluation,
the Group Chief Executive and Group Finance Director concluded that the
disclosure controls and procedures are effective in all material respects
to ensure that the information required to be disclosed in the reports
that National Grid Transco files and submits under the US Securities Exchange
Act of 1934, as amended, is recorded, processed, summarised and reported
as and when required. | |
| There have been
no significant changes in the Company’s internal controls or in other
factors that could significantly affect these controls subsequent to the
date of their evaluation. | |

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| ● — Remuneration
Committee Role of the Remuneration Committee and
its Terms of Reference The Remuneration Committee is responsible
for developing Group policy on executive remuneration, and for determining
the remuneration of Executive Directors and the executives below Board
level who report directly to the Chief Executive. It also monitors the
remuneration of other senior employees of the Group and has oversight
of the operation of all the Group’s share and share option plans.
The Remuneration Committee operates within terms of reference agreed by
the Board. The Board has accepted all of the recommendations
made by the Remuneration Committee during the year. Composition of the Remuneration Committee The Remuneration Committee is made up entirely
of independent Non-executive Directors. The members of the Remuneration
Committee have been as follows: John Grant (Chairman of the National
Grid Transco Remuneration Committee since the Merger, and member of the
National Grid Remuneration Committee until then) Kenneth Harvey (appointed to the National
Grid Transco Remuneration Committee since the Merger) Dr Bonnie Hill (appointed to the National
Grid Transco Remuneration Committee since the Merger) George Rose (appointed to the National
Grid Transco Remuneration Committee since the Merger) Bob Faircloth (Chairman of the National
Grid Remuneration Committee until the Merger) Richard Reynolds (member of the National
Grid Remuneration Committee until the Merger). The Group Chairman, Deputy Chairman,
Chief Executive and Group Director for Human Resources (Pat Fulker) are
invited to attend meetings to provide advice on remuneration policies
and practices. Mark Johnson, former Director of Human Resources at National
Grid, also assisted the National Grid Remuneration Committee in its consideration
of Directors’ remuneration before the Merger. No Director participates
in any discussion on his or her own remuneration. The Remuneration Committee also drew
on advice from the following external independent remuneration consultants: | Ernst &
Young LLP – appointed by the Remuneration Committee in February 2003
as independent remuneration advisors to the Committee New Bridge Street Consultants
– appointed by the Company with the agreement of the Remuneration
Committee to provide advice on share schemes until the Merger Towers Perrin UK –
appointed by the Company with the agreement of the Remuneration Committee
as independent remuneration advisors to it until February 2003. In the year to 31 March
2003, the advisors to the Remuneration Committee provided other services
to the Company in the UK on the following basis: Ernst & Young LLP: assistance
on International Accounting Standard
(IAS) 39 ‘Financial Instruments: Recognition and Measurement’
and SFAS 133 – compliance of Treasury Portfolios; corporate finance
consultancy; international assignee tax advice; financial modelling. Towers
Perrin: incentive scheme advice for non-regulated subsidiary; provision
of market remuneration data in the UK – ongoing; provision of market
remuneration data in the UK and remuneration consultancy in the US –
ongoing. Remuneration
policy The Remuneration Committee reviewed the
Company’s executive remuneration policy and practice following the
Merger to ensure close alignment with the strategy of the new organisation.
The Remuneration Committee determines remuneration policies and practices
with the aim of attracting, motivating and retaining high calibre Directors
who will deliver success for shareholders and high levels of customer
service, safety and environmental performance. It is intended that this
policy should conform to best practice standards in the markets in which
the Group operates. The policy, which will be applied in 2003/04, and
is currently intended to be applied in subsequent years, is framed around
the following key principles: Total rewards should be
set at levels that are competitive in the relevant market; A significant proportion
of the Executive Directors’ total rewards will be performance-based.
Performance-based rewards will be earned through the achievement of demanding
targets for short-term business performance and long-term shareholder
value creation, consistent with the Group’s Framework for Responsible
Business (see page 21); | For higher levels of performance,
rewards should be substantial but not excessive. Incentive plans, performance measures
and targets should be structured to operate soundly throughout the business
cycle. They should be prudent and not expose shareholders to unreasonable
risk. During the year, the Committee Chairman
and the relevant consultants acting on his behalf consulted with representatives
of the principal investors in the Group on a variety of issues relating
to this policy and its implementation. Executive Directors’ remuneration Remuneration packages for Executive Directors
consist of the following elements: Base salary; annual bonus with share
matching plan; long-term incentives; all-employee share plans; pensions;
and non-cash benefits. Excluding pensions and non-cash benefits,
the balance of these elements is such that for all Executive Directors
achieving ‘target performance’, base salary represents 49% of
the remuneration package while at ‘stretch’ performance, base
salary represents approximately 31% of the package. The policy relating to each component
of remuneration is summarised below: Base salary: Base
salaries are reviewed annually and targeted at the median position against
the relevant market. In determining the relevant market, the Committee
takes account of the regulated nature of the majority of the Group’s
operating activities, along with the business’ size, complexity and
international scope. For UK Executive Directors, a UK market is used,
while base salary for US Executive Directors is benchmarked against practice
in the appropriate US market. In setting individual base salary levels,
the Remuneration Committee takes into account business and personal performance
and the employment and salary practices prevailing for other employees
in the Group. Annual bonus and Share Matching Plan: Annual bonuses are based on a combination
of demanding corporate, individual and, where applicable, divisional targets.
The principal corporate measures are Earnings Per Share (EPS) and cash
flow; the main divisional measure is operating profit. Individual targets
are set in relation to key operating and strategic objectives and, where
appropriate, include safety and customer service measures. The Remuneration
Committee reviews performance against targets at the end of the year and
may use its discretion to adjust |
| --- | --- | --- |

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payments in view of operating circumstances during the year. For the financial year 2003/04, the target and maximum bonus levels for UK-based Executive Directors are 50% and 75% of salary respectively. Rick Sergel has lower target and maximum bonus levels of 41.7% and 62.5% of base salary respectively. Rick Sergel also participates in the USA Goals Program, an all-employee bonus plan that can pay up to 4.5% of base salary on the achievement of certain earnings and performance targets. In line with US market practice, Rick Sergel’s cash bonuses are pensionable.

A predetermined part of each Director’s bonus entitlement is automatically deferred (net of tax) into National Grid Transco shares, and a matching award may be made under the Share Matching Plan. Currently, UK-based Executive Directors are required to defer one third of any cash annual bonus into shares in this way. At the end of three years, provided the Director is still employed by the Group, additional matching shares equal in value at the date of deferral to the pre-tax value of the amount of bonus deferred are released to the individual. US executives, including Rick Sergel, participate in this plan on a slightly different basis, in that an award calculated as a proportion of their cash annual bonus (currently 60% for Rick Sergel) is paid under this plan in National Grid Transco shares or American Depository Shares (ADSs) subject to a minimum three-year vesting period. The total target and maximum values of the annual bonus plan, including deferral and matching, are therefore 67% and 100% of base salary respectively for all Executive Directors. The participant also receives a cash payment equal to the dividends that have been paid on the matching shares over the three-year holding period.

The Remuneration Committee believes that operation of the Share Matching Plan as part of the annual bonus plan allows National Grid Transco to maintain competitiveness in annual bonus levels, while ensuring that Executive Directors hold a significant proportion of their remuneration in shares. Requiring Executive Directors to invest in the Group increases the proportion of rewards linked to both short-term performance and longer-term total shareholder returns. The bonus deferral and share match also acts as a retention tool and ensures that Executive Directors share a significant level of personal risk with the Company’s shareholders.

Long-term incentives: The long-term incentive plans currently approved by shareholders are the National Grid Transco Performance Share Plan (PSP), the National Grid Executive Share Option Plan (ESOP) and the National Grid Group Share Matching

Plan described above. National Grid Transco has made a commitment to shareholders to make grants under no more than two long-term incentive plans to any one Director in any year. For the year to 31 March 2004, the Remuneration Committee has decided to make grants under the PSP and the Share Matching Plan. The PSP has been selected in preference to the ESOP because the Remuneration Committee believes rewards from the PSP are likely to be less volatile, and less influenced by general stock market movements, than would be the case with the ESOP.

Under the PSP, Executive Directors, and certain other employees who have significant influence over the Group’s ability to meet its strategic objectives, receive notional allocations of shares worth up to a maximum of 125% of base salary. Shares vest after three years, subject to the satisfaction of the relevant performance criteria, set by the Remuneration Committee at the date of grant. Shares must then be held for a further year, after which they are released, subject to the Executive Director’s continuing employment with the Group.

The performance criterion for grants in the year to 31 March 2004 is Total Shareholder Return (TSR) relative to a comparator group as follows:

Ameren Corporation AWG plc Centrica plc Consolidated Edison, Inc. Dominion Resources, Inc. E.ON AG Electrabel SA Endesa SA Enel SpA Exelon Corporation FirstEnergy Corporation FPL Group, Inc. Gas Natural SDG SA Iberdrola SA International Power plc Kelda Group plc Pennon Group plc RWE AG Scottish Power plc Scottish & Southern Energy plc Severn Trent plc The Southern Company, Inc. Suez SA United Utilities plc Viridian Group plc

This comparator group has been selected to include companies in the energy distribution sector, against which National Grid Transco benchmarks its performance for business purposes, and other UK and international utilities. The Remuneration Committee believes that this comparator

| group sets a
stretching target for the long-term performance of the Group. Under the
terms of the PSP, the Remuneration Committee may allow shares to vest
early to departing executives, and may amend the list of comparator companies
if circumstances make this necessary (for example, as a result of takeovers
or mergers of comparator companies). | |
| --- | --- |
| TSR has been
chosen for the performance criterion as a direct measure of shareholder
value creation. In calculating TSR, it is assumed that all dividends are
reinvested. In assessing whether this performance condition has been met,
data purchased from Alithos Limited will be used. No shares will be released
if the Group’s TSR over the three-year performance period, when ranked
against that of each of the comparator companies, falls below the median.
For TSR at the median, 30% of the shares awarded will be released. 100%
of the shares awarded will be released for TSR ranking at the upper quartile
or above. For performance between median and upper quartile against the
comparator group, the number of shares released is calculated on a straight-line
basis. | |
| No grants are
planned to be made under the ESOP in 2003/04, unless required for recruitment
purposes or to fulfil existing contractual commitments. A commitment outstanding
to Edward Astle will be satisfied by a grant of options to the value of
1.5 times his base salary, after the announcement of the final results
for 2002/03. Details of outstanding options granted to Directors under
the ESOP, including full details of the performance conditions attaching
to these options, are set out in table 3 on page 49. The TSR performance
condition attaching to these outstanding options was chosen on the same
basis as set out for the PSP above and will be calculated in the same
way. | |
| All-employee
share plans: | |
| • | Sharesave: Executive
Directors resident in the UK are eligible to participate in all-employee
Sharesave schemes (subject to eligibility based on service). |
| • | US Incentive Thrift Plan: Executive Directors resident
in the US are eligible to participate in a tax-advantaged savings plan
(commonly referred to as a 401(k) plan) provided for employees of National
Grid USA. |
| • | Share Incentive Plan
(SIP): The Remuneration Committee
intends to implement a SIP during the year to 31 March 2004. Employees resident in the UK, including Executive Directors,
will be encouraged to participate in the SIP (subject to eligibility). |

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| Executive Directors who were
formerly directors of Lattice Group plc participate in the defined benefit
section of the Lattice Group Pension Scheme which is a tax-approved pension
scheme. Base salary only is pensionable. All participating Executive Directors
are subject to the earnings cap. They also participate in the Lattice Group
Supplementary Benefits Scheme, an unfunded unapproved arrangement which
increases retirement benefits to at least the level which would otherwise
have been provided in the Lattice Group Pension Scheme, had they not been
subject to the earnings cap. The provisions for participating Executive
Directors are designed to give two thirds of salary (which may be restricted
by remuneration averaged over three years) at retirement age, inclusive
of any pension rights earned in previous employment. Normal retirement age
is 65. With the employer’s consent, provided 10 years’ service
has been completed with National Grid Transco (which includes pensionable
service transferred from previous employment), the accrued pension can be
paid from age 55 with no actuarial reduction in benefit. A dependant’s
pension is payable on death in service of a participating Executive Director
based on potential service to normal retirement age. On death in retirement,
a dependant’s pension is payable equal to two thirds of the participating
Executive Director’s pension, prior to exchanging any of it for a cash
lump sum. Pensions in | payment are
increased in line with price inflation. Provision has been made in the accounts
in respect of unfunded obligations for post-retirement benefits. Non-cash benefits: The
Company provides competitive benefits to Executive Directors, such as
a fully expensed car or cash alternative in lieu of car, chauffeur, financial
advice, private medical insurance and life assurance. UK-based Executive
Directors with less than five years continuous service, who were previously
directors of National Grid, are provided with long-term ill health insurance.
Business expenses incurred are reimbursed in such a way as to give rise
to no material benefit to the Director. Share ownership guidelines: Executive
Directors are encouraged to build up and retain a shareholding of at least
one times annual base salary. As a minimum, this should be achieved by
retaining 50% of the after-tax gain on any options exercised or shares
received through the long-term incentive or all-employee share plans. Share dilution through the operation
of share-based incentive plans: Where
shares are issued to satisfy incentives, the aggregate dilution resulting
from executive incentives will not exceed 5% in any ten-year period, and
dilution resulting from all | | |
| --- | --- | --- | --- |
| | Date of contract | Notice period | (i) |
| Executive Directors | | | |
| Roger Urwin | 17 November 1995 | 12 months | |
| Steve Lucas | 13 June 2002 | 12 months | |
| Edward Astle | 27 July 2001 | | (ii) |
| Steve Holliday | 6 March 2001 | 12 months | |
| Rick Sergel | 22 March 2000 | 12 months | |
| John Wybrew | 13 June 2002 | 12 months | |
| Stephen Box (resigned 21/10/2002) | | | |
| William Davis (resigned 21/10/2002) | | | |
| | Date of contract/letter of appointment | Notice period End of period of appointment | (i) |
| Non-executive Directors | | | |
| Sir John Parker | 13 June 2002 | 12 months | |
| James Ross | 24 October 2001 | 2004 AGM | |
| John Grant | 24 October 2001 | 2004 AGM | |
| Kenneth Harvey | 11 June 2002 | 2006 AGM | |
| Bonnie Hill | 11 February 2002 | 2005 AGM | |
| Paul Joskow | 24 October 2001 | 2005 AGM | |
| Stephen Pettit | 11 June 2002 | 2006 AGM | |
| George Rose | 11 June 2002 | 2006 AGM | |
| Bob Faircloth (resigned 21/10/2002) | | | |
| Richard Reynolds (resigned
21/10/2002) | | | |
| (i) | The contracts for the Chairman,
Sir John Parker, and all current Executive Directors are for rolling 12-month
periods. | | |
| (ii) | Edward Astle’s contract
commenced with effect from 1 September 2001. For the first year, the notice
period was two years. For the second year, the notice period declines on
a straight-line basis until with effect from 1 September 2003, his notice
period will be 12 months. | | |

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incentives, including all-employee incentives, will not exceed 10% in any ten-year period. The Remuneration Committee reviews dilution against these limits regularly.

Non-executive Directors’ remuneration: Non-executive Directors’ fees are determined by the Executive Directors, or by a Committee authorised by the Board, subject to the limits applied by National Grid Transco’s Articles of Association. Non-executive Directors’ remuneration is built up from an annual fee, a fee for each Board meeting attended (with a higher fee for meetings held outside their country of residence), and an additional fee payable for Committee chairmanship.

Directors’ service contracts: Service contracts for Executive Directors are set at one year’s notice. The application of longer contract periods at appointment, reducing after an initial period, may be used in exceptional circumstances if considered appropriate by the Remuneration Committee to recruit certain key executives. The service contract of Nick Winser (appointed to the Board with effect from 28 April 2003) will be set at one year’s notice.

Sir John Parker’s contract provides for a liquidated damages payment of one year’s salary if his contract is terminated within one year of a change of control of the Company. The contracts of Steve Lucas and John Wybrew provide for a liquidated damages payment of one year’s salary plus a credit of one year’s pensionable service if their contracts are terminated within one year of a change of control of the Company. Rick Sergel’s contract provides for compensation following the termination of his contract either without cause or within two years following a change of control of one year’s salary, annual bonus (including share matching) at target level and the maintenance, at the Company’s expense, of his benefit programmes for three years.

The Remuneration Committee, in determining any other such payments will give due regard to the comments and recommendations of the Combined Code, the UK Listing Authority’s Listing Rules and associated guidance and other requirements of legislation, regulation and good governance.

Directors’ letters of appointment: The terms of engagement of Non-executive Directors (excluding Sir John Parker) are set out in letters of appointment. The initial appointment and any subsequent re-appointment is subject to election or re-election by shareholders. The letters of appointment do not contain provision for termination payments.

Performance graph

The graph above represents the comparative TSR performance of the Group from 31 March 1998 to 31 March 2003. For the period before the Merger of National Grid Group and Lattice, the TSR shown is that of National Grid Group.

This graph shows the Group’s performance against the performance of the FTSE 100 index, which is considered an appropriate comparator as it is a broad equity market index of which National Grid Transco is a constituent. This graph has been produced in accordance with the requirements of the Directors’ Remuneration Report Regulations 2002.

In drawing this graph it has been assumed that all dividends paid have been reinvested. The TSR level shown at 31 March each year is the average of the closing daily TSR levels for the 30-day period up to and including that date.

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Directors’ Remuneration Report continued

Remuneration outcomes during the year ended 31 March 2003 Tables 1A, 1B, 2, 3 and 4 comprise the ‘auditable’ part of the Directors’ Remuneration Report, being the information required by part 3 of schedule 7A to the Companies Act 1985.

1. Directors’ emoluments The following tables set out an analysis of the pre-tax remuneration during the years ended 31 March 2003 and 2002, including bonuses but excluding pensions, for individual Directors who held office in National Grid Transco and National Grid during the year ended 31 March 2003.

Table 1A Executive Directors

	Year ended 31 March 2003 — Base salary £000	Annual bonus £ 000	Termination payments £000	Benefits in kind £000	Total £000	Year ended 31 March 2002 — Total £000
Roger Urwin	600	300	–	24	924	794
Steve Lucas	315	164	–	18	497	423
Edward Astle (iii)	325	266	–	15	606	284
Steve Holliday	325	169	–	23	517	444
Rick Sergel	519	219	–	17	755	728
John Wybrew	360	176	–	28	564	500
Stephen Box (resigned 21/10/2002) (iv)	233	111	4	13	361	532
William Davis (resigned 21/10/2002)	301	10	–	5	316	139
Totals	2,978	1,415	4	143	4,540	3,844

(i)	Benefits in kind comprise benefits such as a fully expensed car or cash alternative in lieu of car, chauffeur, private medical insurance and life assurance.
(ii)	Totals for the year ended 31 March 2002 for Steve Lucas and John Wybrew include bonus payments in respect of the 15-month period 1 January 2001 to 31 March 2002.
(iii)	Edward Astle’s annual bonus figure includes a payment of £50,000 in June 2002 and a further payment of £50,000 in August 2002 in respect of special bonus arrangements agreed at the
time of his original contract. He was appointed to the Board of National Grid on 1 September 2001.
(iv)	Stephen Box resigned from the Board with effect from 21 October 2002 but remained an employee until 30 November 2002 when he retired on health grounds. He received his salary to 30 November 2002 and
his bonus was pro-rated for eight months of the year. An ex-gratia payment of £3,957 will be made to Stephen Box equal to the dividends which would have been earned on those shares subject to his matching options under the Share Matching
Plan.

Table 1B Non-executive Directors

| | Year
ended 31 March 2003 — Fees £000 | Other emoluments £000 | Total £000 | Year
ended 31 March 2002 — Total £000 |
| --- | --- | --- | --- | --- |
| Sir John Parker (i) | 386 | 26 | 412 | 343 |
| James Ross | 175 | 22 | 197 | 165 |
| John Grant | 38 | – | 38 | 35 |
| Kenneth Harvey | 30 | – | 30 | 30 |
| Bonnie Hill (ii) | 32 | – | 32 | 4 |
| Paul Joskow (iii) | 50 | – | 50 | 57 |
| Stephen Pettit | 25 | – | 25 | 10 |
| George Rose | 30 | – | 30 | 30 |
| Bob Faircloth (resigned 21/10/2002) | 21 | – | 21 | 42 |
| Richard Reynolds (resigned 21/10/2002) (iv) | 32 | – | 32 | 55 |
| Totals | 819 | 48 | 867 | 771 |

| (i) | Sir John Parker’s fees include a supplement of £23,000 per month from 22 November 2001 to the date of the Merger while temporarily acting as Chief Executive of Lattice Group plc. This
supplement totalled £161,000 (2001/02: £98,000). |
| --- | --- |
| (ii) | Appointed to the Board of National Grid on 11 February 2002. |
| (iii) | Paul Joskow’s fees include US$22,500 (2001/02: US$30,000) paid in respect of strategic advice provided on regulatory issues to National Grid USA. |
| (iv) | Richard Reynolds’ fees include a fee at the rate of £25,000 per annum (2001/02: £25,000 per annum) in respect of additional duties as a member of the Supervisory Board of
Intelig. |

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2. Directors’ pensions The table below gives details of the Executive Directors’ pension benefits in accordance with both the Directors’ Remuneration Report Regulations and the Listing Rules.

| Table 2 — Executive
Directors | Additional benefit earned (excluding inflation) during the year ended 31 March 2003 Pension £000 pa | Accrued entitlement as at 31 March 2003 Pension £000 pa | | | Increase in transfer value less Director’s contributions £000 | | Additional accrued pension earned in the year (excluding inflation) £000 pa | Transfer
value of increase in accrued pension (excluding Director’s contributions and inflation) £000 |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | | Transfer
value of accrued benefits as at 31 March
(i) | | | | | |
| | | | 2003 £000 | 2002 £000 | | | | |
| Roger Urwin | 70 | 370 | 6,291 | 4,717 | 1,556 | | 65 | 1,090 |
| Steve Lucas (ii),(iii) | 18 | 99 | 951 | 958 | (17 | ) | 16 | 147 |
| Edward Astle | 11 | 17 | 189 | 65 | 114 | | 11 | 112 |
| Steve Holliday | 13 | 22 | 214 | 87 | 116 | | 13 | 113 |
| Rick Sergel | 60 | 377 | 2,259 | 1,454 | 805 | | 60 | 360 |
| John Wybrew (ii) | 17 | 105 | 1,981 | 1,595 | 375 | | 16 | 284 |
| Stephen Box (resigned 21/10/2002) (iv) | 92 | 146 | 3,297 | 663 | 2,627 | | 91 | 1,977 |
| William Davis (resigned 21/10/2002) (v) | 15 | 37 | 359 | 281 | 78 | | 15 | 21 |

| (i) | The transfer values shown at 31 March 2002
and 2003 represent the value of each Executive Director’s accrued
pension based on total service completed to the relevant date. The transfer
values for the UK Executive Directors have been calculated in accordance
with guidance note ‘GN11’ issued by the Institute of Actuaries
and the Faculty of Actuaries. The transfer value given above for Stephen
Box at 31 March 2003 relates to his pension after reduction for commutation,
plus the commutation lump sum of £329,000 and pension payments of
£39,700 made during the year. The transfer values for the US Executive
Directors have been calculated using discount rates based on high yield
US corporate bonds and associated yields at the relevant dates. |
| --- | --- |
| (ii) | Steve Lucas and John Wybrew became Executive
Directors on 21 October 2002 and were previously Executive Directors of
Lattice Group plc. The information provided is for the full year to 31
March 2003. |
| (iii) | Due to clarification of remuneration since
31 March 2002, the accrued annual pension as at 31 March 2002 should have
been £81,300 and not £71,400 as previously stated in the Lattice
Group accounts. |
| (iv) | The accrued pension figures for Stephen
Box are before commutation, although in practice he retired on ill health
grounds on 30 November 2002 and took a lump sum of £329,000 by commutation,
leaving a residual pension of £119,000 per annum. |
| (v) | William Davis retired on 31 March 2003 with
an annual pension of £36,695. His non-qualified benefits under Niagara
Mohawk’s Supplemental Executive Retirement Plan were paid to him
by way of a lump sum payment of £6,265,202 in January 2002. |

3. Directors’ interests in share options

| Table 3 | Options
held at 1 April 2002 or on appointment | Options
exercised or lapsed during the yea r | Options granted during the year | Options
held at 31 March 2003 or on resignation | Exercise
price per share (pence) | Normal exercise period | |
| --- | --- | --- | --- | --- | --- | --- | --- |
| Roger Urwin | | | | | | | |
| Executive | 169,340 | – | – | 169,340 | 280.50 | Sep
2000 | Sep
2007 |
| | 91,656 | – | – | 91,656 | 375.75 | June
2001 | June
2008 |
| | 22,098 | – | – | 22,098 | 455.25 | June
2002 | June
2009 |
| | 33,867 | – | – | 33,867 | 531.50 | June
2003 | June
2010 |
| | 133,214 | – | – | 133,214 | 563.00 | June
2004 | June
2011 |
| | – | – | 186,915 | 186,915 | 481.50 | June
2005 | June
2012 |
| Share Match | 4,047 | – | – | 4,047 | 100
in total | June
2001 | June
2005 |
| | 3,884 | – | – | 3,884 | 100
in total | Jan
2002 | June
2006 |
| | 3,859 | – | – | 3,859 | 100
in total | Jan
2002 | June
2007 |
| | 5,635 | – | – | 5,635 | 100
in total | June
2004 | June
2008 |
| | – | – | 18,644 | 18,644 | 100
in total | June
2005 | June
2012 |
| Sharesave | 3,692 | – | – | 3,692 | 457.00 | Sep
2006 | Feb
2007 |
| Total | 471,292 | – | 205,559 | 676,851 | | | |
| Edward Astle | | | | | | | |
| Executive | 193,952 | – | – | 193,952 | 479.50 | Sep
2004 | Sep
2011 |
| | – | – | 101,246 | 101,246 | 481.50 | June
2005 | June
2012 |
| | – | – | 112,262 | 112,262 | 434.25 | Dec
2005 | Dec
2012 |
| Share Match | – | – | 6,553 | 6,553 | 100
in total | June
2005 | June
2012 |
| Sharesave | – | – | 2,392 | 2,392 | 397.00 | Sep
2005 | Feb
2006 |
| Total | 193,952 | – | 222,453 | 416,405 | | | |

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Directors’ Remuneration Report continued

| 3. Directors’ interests
in share options continued | Options held | * | Options exercised | Options
granted | | Options held | † | Exercise price | Normal
exercise | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | at 1 April 2002 | | or lapsed | | | at 31 March 2003 | | per share | | |
| | or on appointment | | during the year | during the year | | or on resignation | | (pence) | period | |
| Stephen Box | | | | | | | | | | |
| (resigned from the Board | | | | | | | | | | |
| on 21 October 2002) | | | | | | | | | | |
| Executive | 160,427 | | – | – | | 160,427 | † | 280.50 | Sep 2000 | Sep 2007 |
| | 93,147 | | – | – | | 93,147 | † | 375.75 | June 2001 | June 2008 |
| | 43,931 | | – | – | | 43,931 | † | 455.25 | June 2002 | June 2009 |
| | 37,630 | | – | – | | 37,630 | † | 531.50 | June 2003 | June 2010 |
| | 93,250 | | – | – | | 93,250 | † | 563.00 | June 2004 | June 2011 |
| Share Match | 3,844 | | – | – | | 3,844 | † | 100 in total | Jan 2002 | June 2006 |
| | 4,122 | | – | – | | 4,122 | † | 100 in total | Jan 2002 | June 2007 |
| | 6,134 | | – | – | | 6,134 | † | 100 in total | June 2004 | June 2008 |
| Total | 442,485 | | – | – | | 442,485 | | | | |
| Steve Holliday | | | | | | | | | | |
| Executive | 150,000 | | – | – | | 150,000 | | 540.00 | Mar 2004 | Mar 2011 |
| | 71,936 | | – | – | | 71,936 | | 563.00 | June 2004 | June 2011 |
| | – | | – | 101,246 | | 101,246 | | 481.50 | June 2005 | June 2012 |
| Share Match | – | | – | 10,350 | | 10,350 | | 100 in total | June 2005 | June 2012 |
| Sharesave | 3,692 | (i) | – | 4,692 | (i) | 4,692 | | 350.00 | Mar 2008 | Aug 2008 |
| Total | 225,628 | | – | 116,288 | | 338,224 | | | | |

(i) During the year, Steve Holliday elected to cancel his sharesave option over 3,692 shares at an option price of 457p. He was granted a new sharesave option over 4,692 shares during the year.

Rick Sergel (ii) — Executive	201,845	–	–	201,845	566.50	Mar 2003	Mar 2010
	134,321	–	–	134,321	563.00	June 2004	June 2011
	–	–	172,836	172,836	481.50	June 2005	June 2012
Total	336,166	–	172,836	509,002

(ii) Rick Sergel’s participation in the Share Matching Plan is in the form of phantom ADSs. He was awarded 5,332 phantom ADSs in June 2002 which vest in June 2005, and 4,240 phantom ADSs in June 2001 which vest in June 2004. The value of an ADS at 31 March 2003 was US$30.75.

John Wybrew
(appointed to the Board
on 21 October 2002)
Executive	–		–	62,262	62,262	434.25	Dec 2005	Dec 2012
Sharesave	3,078	* (iii)	–	–	3,078	314.50	Mar 2004	Aug 2004
Total	3,078	*	–	62,262	65,340

(iii) Pursuant to the Merger proposals, John Wybrew elected to release his existing sharesave option over Lattice Group shares in exchange for a new sharesave option over National Grid Transco shares. The replacement option was granted under the Lattice Group Sharesave Scheme and has the same maturity date as the original option.

Steve Lucas
(appointed to the Board
on 21 October 2002)
Executive	–	–	54,404	54,404		434.25	Dec 2005	Dec 2012
Sharesave	–	–	2,700	2,700		350.00	Mar 2006	Aug 2006
Total	–	–	57,104	57,104
William Davis (iv)
(resigned from the Board
on 21 October 2002)
Executive	–	–	179,791	179,791	†	481.50	June 2005	June 2012
Total	–	–	179,791	179,791

(iv) William Davis’ participation in the Share Matching Plan was in the form of phantom ADSs. He was awarded 1,083 phantom ADSs in June 2002 which vested upon his retirement on 31 March 2003. The value of an ADS at 31 March 2003 was US$30.75.

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Executive Share Option Plan (ESOP) An option will normally be exercisable between the third and tenth anniversaries of its date of grant, subject to performance conditions. The performance conditions attaching to outstanding ESOP options are set out below. If the performance condition is not satisfied after the first three years, it will be re-tested as indicated.

The options granted to Directors in September 1997 and June 1998 have vested. For options granted in June 1999 and March 2000 to become fully exercisable, the Company must achieve EPS growth over three years of RPI plus 3% per annum. Only half the option will be exercisable if EPS growth over three years equals RPI plus 2% per annum. The performance condition will be re-tested throughout the lifetime of the option.

For options granted from June 2000, options worth up to one times an optionholder’s base salary will become exercisable in full if Total Shareholder Return (TSR) measured over a period of three years, beginning with the financial year in which the option is granted, is at least median compared with a comparator group of companies (such comparator group being in compliance with the performance condition).

Grants in excess of 100% of salary vest on a sliding scale, becoming fully exercisable if the Company’s TSR is in the top quartile. The performance condition attaching to options granted in June 2000 is tested annually throughout the lifetime of the option. For options granted from March 2001 the same TSR test is used but the performance condition can only be re-tested in years 4 and 5.

The comparator group was revised in June 2002 to reflect, inter alia, consolidation in the marketplace, the acquisition of Niagara Mohawk and the proposed Merger with Lattice Group plc. The revised comparator group was used for options granted in June and December 2002 and is set out below.

Allegheny Energy, Inc.	Energy East Corporation	NSTAR Corporation	Scottish Power plc
BG Group plc	Exelon Corporation	Potomac Electric Power Company	The Southern Company, Inc.
British Energy plc	FirstEnergy Corporation	Powergen Limited	TXU, Inc.
Centrica plc	FPL Group, Inc.	Progress Energy, Inc.	United Utilities plc
Consolidated Edison, Inc.	International Power plc	Public Service Enterprise Group, Inc.	Xcel Energy, Inc.
Duke Energy Corporation	Northeast Utilities Corporation	Scottish & Southern Energy plc

Details of the closing price of National Grid Transco shares as at 31 March 2003 and the high and low prices during the year are shown in table 5 Directors’ beneficial interests. Details of the 1999 Lattice LTIS awards rolled over into options are set out in table 4 below.

4. Lattice Long Term Incentive Scheme (LTIS) The following Lattice LTIS awards were rolled over at the time of the Merger by John Wybrew and Steve Lucas and were still held at the end of the last financial year. The market value of National Grid Transco shares on Merger (21 October 2002) was 459.625p.

Table 4

John Wybrew

| 1999 award (converted to an option on
Merger) | 114,380 | Date
award vests/option becomes exercisable — Oct 2003 |
| --- | --- | --- |
| Dividend reinvested on shares held in
trust | 1,799 | Oct 2003 |
| 2000 award | 95,597 | Nov 2004 |
| 2001 award | 112,687 | Nov 2005 |
| Total | 324,463 | |
| Steve Lucas | | |
| | | Date
award vests/option becomes exercisable |
| 1999 award (converted to an option on
Merger) | 31,237 | Oct 2003 |
| Dividend reinvested on shares held in
trust | 491 | Oct 2003 |
| 2000 award | 79,902 | Nov 2004 |
| 2001 award | 96,589 | Nov 2005 |
| Total | 208,219 | |

Under the terms of the Lattice LTIS notional allocations of shares were made to key individuals. The allocations were subject to a three-year performance period set out below and a further retention period of one year. The number of shares actually released to participants depends on the Company’s TSR compared with that of other regulated utility companies operating in a similar environment.

No awards will be made if the Company’s TSR when compared with that of other companies in the comparator group over the performance period falls below the median. Between the median company and the upper quartile of companies the proportion of shares which may be transferred is pro-rated on a straight-line basis between 40% and 100%.

The Remuneration Committee will decide that shares should be released only if the Company’s TSR also reflects sound underlying financial performance.

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Directors’ Remuneration Report continued

Pursuant to the Merger proposals, John Wybrew and Steve Lucas agreed to roll over their existing LTIS awards over Lattice Group shares for LTIS awards or options over National Grid Transco shares. Consequently, on 21 October 2002, the 2000 and 2001 LTIS awards held by John Wybrew and Steve Lucas continued over the number of National Grid Transco shares shown above and remain subject to the rules of the Lattice LTIS except that (i) since 21 October 2002, the performance target measures the Company’s total shareholder return against the original comparator group of each award; and (ii) the awards will not be forfeit on John Wybrew or Steve Lucas ceasing employment unless the Remuneration Committee decides otherwise.

The comparator group for the 2000 and 2001 LTIS awards is set out below:

Powergen Limited	Pennon Group plc	Centrica plc	British Energy plc
Kelda Group plc	United Utilities plc	Scottish Power plc	BT Group plc
Scottish & Southern Energy plc	Severn Trent plc	Viridian Group plc	Railtrack plc (2000 only)
BAA plc	AWG plc	International Power plc	Thames Water plc (2000 only)

For the roll-over of the 1999 LTIS awards, John Wybrew and Steve Lucas have each been granted a £1 option by the Trustee of the Lattice Group Employees Share Trust over the number of shares which would otherwise be subject to their 1999 awards. The options will become exercisable on 1 October 2003, when the shares subject to the original 1999 awards would have been released to John Wybrew and Steve Lucas.

5. Directors’ beneficial interests The Directors’ beneficial interests (which include those of their families) in the ordinary shares of National Grid Transco (which from 1 April 2002 to 21 October 2002 was National Grid Group) of 10p each are shown below:

| | Ordinary shares
at 31 March 2003 or on resignation | (i) † | Ordinary shares
at 1 April 2002
or on appointment | * | Options
over ordinary shares
at 31 March 2003 or on resignation | † | Options
over ordinary shares at 1 April 2002 or on appointment | * |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Sir John Parker | 17,429 | | 4,729 | * | – | | – | |
| James Ross | 19,000 | | 19,000 | | – | | – | |
| Roger Urwin (ii) | 159,518 | | 147,920 | | 676,851 | | 471,292 | |
| Edward Astle (ii) | 3,932 | | - | | 416,405 | | 193,952 | |
| Stephen Box | 18,459 | † | 18,459 | | 442,485 | † | 442,485 | |
| William Davis | 11,755 | † | 11,520 | | 179,791 | † | – | |
| Bob Faircloth | – | | – | | – | | – | |
| John Grant | 10,000 | | 10,000 | | – | | – | |
| Ken Harvey | 1,874 | | 1,861 | * | – | | – | |
| Bonnie Hill | 2,930 | | 2,930 | | – | | – | |
| Steve Holliday (ii) | 6,210 | | – | | 338,224 | | 225,628 | |
| Paul Joskow | 5,000 | | 5,000 | | – | | – | |
| Steve Lucas (ii),(iii),(iv),(v) | 23,789 | | 23,471 | * | 265,323 | | 207,728 | * |
| Stephen Pettit | 1,875 | | 1,875 | * | – | | – | |
| Richard Reynolds | 10,000 | † | 10,000 | | – | | – | |
| George Rose | 5,025 | | 5,025 | * | – | | – | |
| Rick Sergel (ii) | 2,928 | | 2,763 | | 509,002 | | 336,166 | |
| John Wybrew (ii),(iii),(iv),(v) | 62,344 | | 62,025 | * | 389,803 | | 325,742 | * |

| (i) | There have been no other changes in the
beneficial interests of the Directors in the ordinary shares of National
Grid Transco between 1 April 2003 and 20 May 2003. |
| --- | --- |
| (ii) | Each of the Executive Directors of National
Grid Transco was, for Companies Act 1985 purposes, deemed to be a potential
beneficiary under the National Grid Qualifying Employee Share Ownership Trust (‘QUEST’)
and the National Grid 1996 Employee Benefit Trust and thereby to have
an interest in the 9,040,718 National Grid Transco shares held by the
QUEST and the 440,618 National Grid Transco shares held by the 1996 Employee
Benefit Trust as at 31 March 2003. |
| (iii) | Each of the former Lattice Executive
Directors of National Grid Transco (Steve Lucas and John Wybrew) was,
for Companies Act 1985 purposes, deemed to be a potential beneficiary
in the 1,069,339 National Grid Transco shares held by Mourant and Co.
Trustees as Trustee of the Lattice Group Employees Share Trust operated
in conjunction with the Lattice LTIS and the 127,992 National Grid Transco
shares held by Lattice Group Trustees Limited as Trustee of the Lattice
Group Employee Share Ownership Trust. |
| (iv) | Beneficial interest includes shares acquired
pursuant to the Lattice AESOP and the BG Group Employee Profit Sharing
Scheme. |
| (v) | Including the Lattice LTIS award detailed
above. |
| Nick Winser was appointed
to the Board on 28 April 2003 and on that date had a beneficial interest
in 17,489 National Grid Transco shares and held options over a further
150,225 National Grid Transco shares. | |
| All of the shares held under
the former Lattice AESOP have been allocated and are beneficially owned
by participants of the plan. The closing price of a National Grid Transco
share on 31 March 2003 was 387.5p. The range during the year was 511.5p
(high) and 365.75p (low). Please note the Register of Directors’
Interests contains full details of shareholdings and options held by Directors
as at 31 March 2003. | |

On behalf of the Board

Helen Mahy Group Company Secretary 20 May 2003

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Directors’ Report and Operating and Financial Review Risk Factors

National Grid Transco has established an internal process for the review of and response to actual and potential risks facing the Group. More information on this process is set out in the section of this document entitled ‘Internal Control’ on pages 42 to 43. The following are the significant risks the Group is aware of as a consequence of this process that could have a materially adverse effect on its business, turnover, profits, assets, liquidity, capital resources and/or reputation. Any forward-looking statements contained in this document should be considered in light of these risk factors and the cautionary statement set out on the inside front cover.

Law and regulation Most of National Grid Transco’s businesses are utilities subject to the laws of and regulation by government and/or regulatory authorities in the UK, the US, the European Union or other jurisdictions. Changes in law or regulation in the countries and/or states in which the Group’s businesses operate could have an adverse effect on those businesses. Decisions by regulators and/or regulatory authorities concerning, for example, whether licences/concessions/ approvals to operate those utilities are renewed or not, the level of permitted revenues, the allowance of pass-through of costs such as the cost of funding pension schemes, allowed rates of return for these businesses, market trading arrangements, the facilitation of competition in markets in which the Group operates and proposed business development activities could have an adverse impact on the Group’s results of operations, cash flow, financial condition and the ability to develop those businesses in the future. The introduction of the British Electricity Transmission and Trading Arrangements (BETTA) could affect financial returns for the Group depending upon the terms of the relevant regulations. For more information concerning BETTA, see page 14 of the ‘Business Review’ section of this document. The requirement for the Group’s businesses in the UK, particularly Transco, to conduct working practices so as to comply with the New Road and Streetworks Act 1991 or to meet any liabilities for breach could increase operational costs and thereby affect business performance. The development of GridAmerica is subject to, amongst other things, regulation by the FERC and relevant US state regulators. The timing and content of regulatory decisions by those organisations could adversely affect the development of and/or financial return from GridAmerica’s business. The Group is also subject to law and regulation arising from its issue of securities, such as those recently introduced and/or in the course of introduction by the Sarbanes-Oxley Act of 2002.

Safety and environment Aspects of the Group’s business are inherently dangerous, such as the operation and maintenance of electricity lines and the transmission and distribution of natural gas. Electricity and gas utilities typically use and generate in their operations a range of potentially hazardous products and byproducts. The Group is subject to numerous laws and regulations in each of the jurisdictions in which it operates relating to pollution, the protection of the environment, the generation, storage, handling, transportation, treatment, disposal and remediation of hazardous substances and waste materials, and the health and safety of employees and the general public. Breach of these laws and regulations, or any safety or environmental incident without a breach, could expose the Group to claims for financial compensation, to adverse regulatory consequences and/or otherwise damage the Group’s relationship with its stakeholders. This area of the Group’s business is subject to increasing regulation and/or changes in the legal requirements within which it operates.

Operational performance The Group may suffer a major transmission or distribution network failure and/or may not be able to carry out critical non-network operations. Electricity and gas utilities are subject to certain risks that are largely outside their control such as the weather or possible security breaches. Weather conditions can affect financial performance, particularly in the US. In addition, severe weather that causes outages or damages infrastructure will adversely affect operational and business performance. Terrorist attack or sabotage may also physically damage one or more of the Group’s businesses or otherwise significantly affect its corporate activities. Other risks to operational performance could include inadequate record keeping, failure to maintain the health of the system or network and/or inadequate forecasting of demand.

Business performance Earnings maintenance and growth from the UK regulated gas and electricity industry are dependent upon outperforming regulatory efficiency targets set by Ofgem. Generally, over time, the continued ability to make efficiency improvements will decline. National Grid Transco has published cost and efficiency savings targets for its UK regulated businesses. To meet these targets National Grid Transco must continue to improve management and operational performance. Under the US state rate plans, earnings from the US regulated businesses of the Group will be affected by the ability to deliver integration savings. To

meet National Grid Transco’s announced savings targets for its acquisition of Niagara Mohawk and in relation to the Merger, the Group must improve the efficiency and reduce the costs of those businesses. US earnings are also dependent on meeting service quality standards set by state regulators. To meet such standards, the Group must improve service reliability and customer service. National Grid Transco’s unregulated businesses may also fail to reach the Group’s financial targets because of market conditions or other reasons. For example, Gridcom may be adversely affected by a deterioration in the mobile telecommunications market. The achievement of the Group’s objectives will be influenced by general economic conditions in the jurisdictions in which the Group operates and, in particular, in the US. Other factors include potential increases in business and property taxes/rates in the US and the UK which could adversely affect the Group’s results. The performance of the Group’s businesses may also be affected by human resource issues such as the loss of key management or strikes, ‘working to rule’ and other industrial action by its employees. The insolvency or administration of a key customer, such as Centrica plc, or a key supplier to a core business could have an adverse financial impact on the Group.

Commodity risk and security of supply The costs incurred by National Grid Transco’s electricity businesses in purchasing electricity are subject to movements in underlying commodity prices, particularly of oil and gas. Regulatory arrangements in the UK and US provide the ability to pass through some and in certain cases virtually all the increased costs related to commodity prices by way of higher prices. For more information, see the Business Review section of this document.

In the UK, any shortfall in the availability of gas (unless arising as a result of a failure in the Group’s transmission or distribution networks) is not the responsibility of Transco. However, the Group may suffer reputational consequences if consumers of gas suffer disruption to their supply.

Internal controls The Group’s systems and processes, including its internal control policies, are designed to ensure that the operational risks associated with its activities, the risk of loss of focus by management and the other risks that the Group is exposed to are, to the extent reasonably practicable, appropriately controlled, but any

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Risk factors continued

weakness in these systems and processes could have a negative impact on its results of operations.

Business development The Group is subject to the risk that any business development activity, such as an acquisition, will be based on incorrect assumptions or conclusions or that substantial liabilities will be overlooked. The Group may also fail to achieve its targets for integration savings arising from the Niagara Mohawk merger in the US, the Merger and other subsequent transactions.

Financial management The Group is subject to certain covenants and limits in relation to its listed debt and bank lending facilities. Such limits may hinder the Group in the servicing of current businesses or the financing of new businesses. The debt of National Grid Transco and certain of its subsidiaries is rated by credit rating agencies and changes in these ratings may affect both the borrowing capacity of the Group as a whole and the cost of those borrowings. The effective rate of tax paid by the Group may be influenced by a number of factors including changes in law and regulation or the Group’s approach to such matters the result of which could increase or decrease that rate.

Interest rates A proportion of National Grid Transco’s borrowings is subject to interest rates that may fluctuate with changes to prevailing interest rates. Increases in these interest rates will result in increased costs for the Group. For further information see ‘Interest rate risk management’ on page 35.

Foreign currency exchange/foreign operations National Grid Transco has significant international operations and conducts business in a number of currencies. These operations are subject to the risks normally associated with international businesses, including the need to translate foreign currency denominated assets and profits into National Grid Transco’s reporting currency. For example, fluctuations in the value of the US dollar could have a significant impact on the Company because of the size of the Group’s businesses in the US.

Other risks of international operations include trade barriers, tariffs, exchange controls, national and regional labour strikes, social and political risks, general economic risks, required compliance with a variety of foreign laws, including tax laws, and the need to enforce agreements and collect receivables through foreign legal systems. The Group’s investment in Transener, for example, has been and continues to be affected by the devaluation of the Argentine peso and the deterioration of the economy in Argentina. For further information see ‘Foreign exchange risk management’ on page 35.

Technological change National Grid Transco’s businesses involved in the transmission and distribution of energy are vulnerable to certain types of technological changes. Examples of possible changes are the growth in distributed generation, renewable energy sources, fuel cells and the introduction of an alternative power carrier. Adapting to technological changes may be costly and there is no guarantee that the Group may foresee or be able to adequately respond to such changes.

Joint ventures The Group’s investments in joint ventures are subject to risks normally associated with ventures that are not majority owned. The Group is not able to exercise complete control over a joint venture’s operations and may be dependent on the actions of the other parties to a joint venture regarding decisions such as continued funding or interest in the business. The success of any joint venture is also dependent upon the financial health and strategies of the other joint venture partners.

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Directors’ Report and Operating and Financial Review General Information

Incorporation National Grid Transco plc is incorporated in England and Wales with its registered office at 1-3 Strand, London WC2N 5EH (telephone +44 (0) 20 7004 3000). The Company was incorporated on 11 July 2000.

The Company’s agent in the US is Lawrence J Reilly, National Grid USA, 25 Research Drive, Westborough, MA 01582. Dividends An interim dividend of 6.86 pence per ordinary share (US$0.5352 per ADS) was paid on 21 January 2003. The Directors are recommending a final dividend of 10.34 pence per ordinary share (US$0.8396 per ADS). Subject to approval by shareholders at the Annual General Meeting, the final dividend will be paid on 20 August 2003 and will bring the total dividend for the year to 17.20 pence per ordinary share (US$1.3748 per ADS).

Share buy-back In common with most other companies, National Grid Transco has shareholder authority to repurchase its own shares. During the year, the Directors used this authority to repurchase and cancel 24,225,000 ordinary shares, each with a nominal value of 10 pence, at an average cost of 401.5 pence per share.

These shares represented approximately 0.8% of the total issued share capital before repurchases. The aggregate value of repurchases was approximately £97 million.

The Directors considered that the repurchases were in the best interests of the Company given market conditions at the time.

Research and development Expenditure on research and development in 2002/03 was £18.2 million, compared with £16.0 million for 2001/02.

Payment to suppliers National Grid Transco is a signatory to the Confederation of British Industry (CBI) Prompt Payment Code and has procedures to ensure the payment of bills in accordance with contract terms. Copies of the CBI Prompt Payment Code may be obtained from the CBI, Centre Point, 103 New Oxford Street, London WC1A 1DU.

The average creditor payment period at 31 March 2003 for the Group’s operations in the UK was 25 days.

Donations In the UK, charitable donations of £1,209,500 were made in 2002/03.

In the US, charitable donations of approximately US$3,000,000 (£1,887,000) were made in 2002/03.

In addition to these contributions, National Grid Transco provides financial and in-kind support to many other organisations through its community involvement programme.

No donations were made in the UK and EU for the purposes of the Political Parties, Elections and Referendums Act 2000.

During 2002/03, aggregate contributions of US$86,950 (£54,690) were made in the US to state and national political party and campaign committees and for ballot question advocacy. Of these contributions US$61,950 were made by National Grid USA’s political action committees, which are funded entirely by voluntary employee contributions. National Grid USA’s contributions are in compliance with US state and Federal law.

Material interests At no time during the year has any Director had any material interest in a contract within the Group, being a contract of any significance in relation to the Group’s business.

Substantial shareholders Details of substantial shareholdings in National Grid Transco are given on page 119.

Employee policy Information on National Grid Transco’s employee policies is included on page 24, under the heading Our People.

Future developments An outline of future developments is included in the Chief Executive’s Review.

Auditors During the year, National Grid Transco’s Auditors, PricewaterhouseCoopers, converted to a Limited Liability Partnership. PricewaterhouseCoopers therefore resigned on 21 February 2003 and the Board appointed PricewaterhouseCoopers LLP to fill the vacancy. Special notice having been given, a resolution for their reappointment will be proposed at the Annual General Meeting.

Statement of Directors’ responsibilities for preparing the accounts The Directors are required by the Companies Act 1985 to prepare accounts for each financial year which give a true and fair view of the state of affairs of the Company and of the Group as at the end of the financial year and of the profit or loss of the Group for the financial year.

The Directors consider that in preparing the accounts (detailed in the following sections: Principal Accounting Policies, Accounts and Notes to the Accounts) the Company has used appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates, and all applicable accounting standards have been followed.

The Directors have responsibility for ensuring that the Company keeps accounting records which disclose with reasonable accuracy the financial position of the Company and of the Group and which enable them to ensure that the accounts comply with the Companies Act 1985.

The Directors have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and to detect fraud and other irregularities.

The Directors, having prepared the accounts, have requested the Auditors to take whatever steps and to undertake whatever inspections they consider to be appropriate for the purposes of enabling them to give their audit report.

The Directors confirm that the Audit Committee continues to review the adequacy of the system of internal financial controls adopted by the Group.

Annual General Meeting National Grid Transco’s Annual General Meeting will be held on Monday 21 July 2003. Details are set out in the separate Notice of Annual General Meeting.

On behalf of the Board

Helen Mahy Group Company Secretary 20 May 2003

Registered office: 1-3 Strand, London WC2N 5EH

Registered in England and Wales No. 4031152

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| ● — We have audited the accounts
which comprise the Group Profit and Loss Account, the Balance Sheets,
the Group Cash Flow Statement, the Group Statement of Total Recognised
Gains and Losses and the related notes. We have also audited the disclosures
required by Part 3 of Schedule 7A to the Companies Act 1985 contained
in the Directors’ Remuneration Report (‘the auditable part’). Respective responsibilities of Directors
and Auditors The Directors’ responsibilities for
preparing the Annual Report, the Form 20-F, the Directors’ remuneration
report and the accounts in accordance with applicable United Kingdom law
and accounting standards and the requirements of the US Securities and
Exchange Commission are set out in the Statement of Directors’ responsibilities. Our responsibility is to audit the accounts
and the auditable part of the Directors’ Remuneration Report in accordance
with relevant legal and regulatory requirements and United Kingdom Auditing
Standards issued by the Auditing Practices Board and Auditing Standards
generally accepted in the United States. We report to you our opinion as to whether
the accounts give a true and fair view and whether the accounts and the
auditable part of the Directors’ Remuneration Report have been properly
prepared in accordance with the Companies Act 1985. We also report to
you if, in our opinion, the Directors’ Report is not consistent with
the accounts, if the Company has not kept proper accounting records, if
we have not received all the information and explanations we require for
our audit, or if information specified by law regarding directors’
remuneration and transactions is not disclosed. | We read the
other information contained in the Annual Report and consider the implications
for our report if we become aware of any apparent misstatements or material
inconsistencies with the accounts. The other information comprises only
the Directors’ Report, the unaudited part of the Directors’
Remuneration Report, the Chairman’s statement, Chief Executive’s
Review, and the Operating and Financial Review. We review whether the corporate
governance statement reflects the Company’s compliance with the seven
provisions of the Combined Code specified for our review by the Listing
Rules of the Financial Services Authority, and we report if it does not.
We are not required to consider whether the Board’s statements on
internal control cover all risks and controls, or to form an opinion on
the effectiveness of the Group’s corporate governance procedures
or its risk and control procedures. Basis of audit opinion We conducted our audit in accordance with
auditing standards issued by the Auditing Practices Board and with auditing
standards generally accepted in the United States. An audit includes examination,
on a test basis, of evidence relevant to the amounts and disclosures in
the accounts and the auditable part of the Directors’ Remuneration
Report. It also includes an assessment of the significant estimates and
judgements made by the Directors in the preparation of the accounts, and
of whether the accounting policies are appropriate to the Group circumstances,
consistently applied and adequately disclosed. We planned and performed
our audit so as to obtain all the information and explanations which we
considered necessary in order to provide us with sufficient evidence to
give reasonable assurance that the accounts and the auditable part of
the Directors’ Remuneration Report are free from material misstatement,
whether caused by fraud or other irregularity or error. In forming our
opinion we also evaluated the overall adequacy of the presentation of
information in the accounts. | United Kingdom opinion In our opinion the accounts give a true
and fair view of the state of affairs of the Company and the Group at
31 March 2003 and of the profit and cash flows of the Group for the year
then ended and have been properly prepared in accordance with the Companies
Act 1985; those parts of the Directors’ Remuneration Report required
by Part 3 of Schedule 7A to the Companies Act 1985 have been properly
prepared in accordance with the Companies Act 1985. United States opinion In our opinion the accounts present fairly,
in all material aspects, the consolidated financial position of the Group
at 31 March 2003 and 2002 and the results of its operations and its cash
flows for the years ended 31 March 2003, 31 March 2002 and 31 March 2001
all expressed in pounds sterling in conformity with accounting principles
generally accepted in the United Kingdom. Accounting principles generally accepted
in the United Kingdom differ in certain significant respects from accounting
principles generally accepted in the United States. The application of
the latter would have affected the determination of the net income for
the years ended 31 March 2003, 31 March 2002 and 31 March 2001, and consolidated
shareholders’ equity at 31 March 2003 and 31 March 2002, all expressed
in pounds sterling, as shown in the summary of differences between United
Kingdom and United States generally accepted accounting principles set
out in note 34 to the accounts. PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors London 20 May 2003 |
| --- | --- | --- |

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Accounting Policies

a) Basis of preparation of accounts The accounts are prepared under the historical cost convention and in accordance with applicable UK accounting and financial reporting standards.

The accounts have been prepared in accordance with UK GAAP, which differs in certain respects to US GAAP. A summary of the results under US GAAP is shown in note 33 to the accounts and explanation of the main differences between UK and US GAAP is set out in note 34.

The preparation of accounts in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

The Group is following the transitional arrangements of FRS 17 ‘Retirement Benefits’. The required disclosures are shown in note 7. Full adoption of the standard is required by the year ended 31 March 2006.

b) Basis of consolidation The Group accounts include the accounts of the Company and all its subsidiary undertakings, (‘Group undertakings’), together with the Group’s share of the results and net assets of its associate and joint ventures (‘associated undertakings’), less any provision for impairment. An associated undertaking is an entity in which the Group has a participating interest and over which it exercises a significant influence. The accounts of Group and associated undertakings used for consolidation are generally made up to 31 March. However, where this has not been practical, the results of certain Group undertakings and joint ventures have been based on their accounts to 31 December.

The results of newly acquired Group and associated undertakings are included in the Group accounts from the date the Group acquires control or, in respect of associated undertakings, an equity interest which enables it to exercise a significant influence. The results of Group and associated undertakings are included in the Group accounts up to the date that control or the exercise of significant influence, as appropriate, is relinquished.

In translating into sterling the Group’s share of the net assets and results of a joint venture operating in a hyper-inflationary economy for the year ended 31 March 2003, adjustments have been made to

reflect current price levels. Such adjustments have been reflected through the Group profit and loss account or statement of total recognised gains and losses as appropriate. The Group’s share of the gain on net monetary liabilities has been credited to the Group profit and loss account through ‘net interest’, and is shown as part of the Group’s exceptional financing costs – note 4(c). The accounting treatment for the merger of National Grid and Lattice is set out in note 1. Further disclosures regarding the Merger are given in note 29. c) Goodwill Goodwill, representing the excess of the fair value of the consideration given over the fair value of the identifiable net assets acquired, is capitalised and amortised on a straight-line basis, through the profit and loss account over its estimated useful economic life, principally 20 years. d) Foreign currencies The results of the Group’s overseas operations are generally translated into sterling at weighted average rates of exchange for the period the overseas operations are included within the Group accounts. In certain limited circumstances, where the use of a weighted average rate would distort material transactions, those transactions are separately translated at the rates of exchange relevant to the dates on which the transactions occurred. Assets and liabilities in foreign currencies are generally translated at the rates of exchange ruling at the balance sheet date. In respect of certain assets or liabilities that are matched by an exact and directly related forward exchange derivative, then the relevant asset or liability is translated at the rate of exchange under the related derivative. Exchange differences arising on the translation of the opening net assets of overseas operations, the re-translation of the retained earnings of overseas operations from average to closing rates of exchange and the translation of foreign currency borrowings or derivatives taken to hedge overseas assets are taken directly to reserves. Tax charges or credits arising on such items are also taken directly to reserves. All other exchange differences and related tax charges or credits are taken to the profit and loss account and disclosed separately where deemed exceptional. e) Tangible fixed assets and depreciation Tangible fixed assets are included in the balance sheet at their cost less accumulated depreciation. Cost includes payroll and finance costs incurred which are directly attributable to the construction of tangible fixed assets. Tangible fixed assets include assets in which the Group’s interest comprises legally protected statutory or contractual rights of use. Additions represent the purchase or construction of new assets, extensions to or significant increases in the capacity of tangible fixed assets. Contributions received towards the cost of tangible fixed assets are included in creditors as deferred income and credited on a straight-line basis to the profit and loss account over the estimated economic lives of the assets. No depreciation is provided on freehold land and assets in the course of construction. Other tangible fixed assets are depreciated, principally on a straight-line basis, at rates estimated to write off their book values over their estimated useful economic lives. In assessing estimated useful economic lives, which are reviewed on a regular basis, consideration is given to any contractual arrangements and operational requirements relating to particular assets. Unless otherwise determined by operational requirements, the depreciation periods for the principal categories of tangible fixed assets are, in general, as shown below:

| Depreciation periods for categories
of tangible fixed assets | Years |
| --- | --- |
| Plant and machinery | |
| Electricity transmission
plant | 15 to 60 |
| Electricity distribution
plant | 15 to 60 |
| Interconnector
plant | 15 to 25 |
| Gas plant –
mains, services and regulating equipment | 35 to 65 |
| Gas plant –
storage | 40 |
| Gas plant –
meters | 10 to 33 |
| Freehold and leasehold buildings | up to 65 |
| Motor vehicles and office equipment | up to 10 |

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Accounting policies continued

f) Impairment of fixed assets Impairments of fixed assets are calculated as the difference between the carrying values of the net assets of income generating units, including, where appropriate, investments and goodwill and their recoverable amounts. Recoverable amount is defined as the higher of net realisable value or estimated value in use at the date the impairment review is undertaken. Net realisable value represents the net amount that can be generated through sale of the assets. Value in use represents the present value of expected future cash flows discounted on a pre-tax basis, using the estimated cost of capital of the income generating unit.

Impairment reviews are carried out if there is some indication that an impairment may have occurred, or, where otherwise required, to ensure that fixed assets are not carried above their estimated recoverable amounts.

Impairments are recognised in the profit and loss account, and where material are disclosed as exceptional.

g) Replacement expenditure Replacement expenditure represents the cost of planned maintenance of the UK’s gas mains and services assets by replacing or lining sections of pipe. This expenditure is principally undertaken to repair and to maintain the safety of the network and is written off as incurred. Expenditure that enhances the performance of the mains and services assets is treated as an addition to tangible fixed assets.

h) Deferred taxation and investment tax credits Deferred taxation is provided in full on all material timing differences, with certain exceptions. No provision for deferred taxation is made for any timing differences on non-monetary assets arising from fair value adjustments, except where there is a binding agreement to sell the assets concerned. However, no provision is made where it is more likely than not that any taxable gain will be rolled over into replacement assets.

Deferred tax balances have not been discounted.

Investment tax credits are amortised over the economic life of the asset giving rise to the credits.

i) Stocks Stocks are carried at cost less provision for deterioration and obsolescence.

j) Regulatory assets The US Statement of Financial Accounting Standards 71 ‘Accounting for the Effects of Certain Types of Regulation’ (SFAS 71) establishes US GAAP for utilities whose regulators have the power to approve and/or regulate rates that may be charged to customers. Provided that through the regulatory process the utility is substantially assured of recovering its allowable costs by the collection of revenue from its customers, such costs not yet recovered are deferred as regulatory assets. Due to the different regulatory environment, no equivalent accounting standard applies in the UK.

Under UK GAAP, regulatory assets established in accordance with the principles of SFAS 71 are recognised in debtors where they comprise rights or other access to future economic benefits which arise as a result of past transactions or events which have created an obligation to transfer economic benefit to a third party. Measurement of the past transaction or event and hence of the regulatory asset is determined in accordance with UK GAAP. Regulatory assets primarily relate to the right to recover from customers the liabilities recognised in respect of purchased power obligations (notes 18 and 19), the decommissioning provision (note 22) and the under-recovery of power costs incurred.

k) Decommissioning and environmental costs Decommissioning and environmental costs, based on discounted future estimated expenditures expected to be incurred, are provided for in full and where appropriate a corresponding tangible fixed asset or regulatory asset is also recognised. The unwinding of the discount is included within the profit and loss account as a financing charge net of the unwinding of the discount on any related regulatory asset.

l) Turnover Turnover primarily represents the amounts derived from the supply, transmission and distribution of energy and the provision of related services, including the recovery of stranded costs. Turnover includes an assessment of energy and transportation services supplied to customers between the date of the last meter reading and the

year-end, excludes inter-business and inter-company transactions, and is stated net of value added tax and similar sales-based taxes. Where revenues received or receivable exceed the maximum amount permitted by regulatory agreement and adjustments will be made to future prices to reflect this over-recovery, no liability is recognised.

m) Pensions and other post-retirement benefits The cost of providing pensions and other post-retirement benefits is charged to the profit and loss account on a systematic basis over the service lives of the employees in the schemes. Variations from the regular pension cost are allocated over the estimated average remaining service lives of current employees, with the interest component of any variation being reflected in net interest and the other component reflected through staff costs.

n) Leases Finance lease income is allocated to accounting periods so as to give a constant rate of return on the net investment in the lease. The net investment in a finance lease is included in debtors and represents the total rentals receivable, net of finance charges, relating to future periods. Operating lease payments are charged to the profit and loss account on a straight-line basis over the term of the lease.

o) Financial instruments Derivative financial instruments (‘derivatives’) are used by the Group mainly for the management of its interest rate and foreign currency exposures and commodity price risks in respect of expected energy usage. The principal derivatives used include interest rate swaps, currency swaps, forward foreign currency agreements, interest rate swaptions and indexed swap contracts relating to the purchase of energy.

All transactions are undertaken or maintained to provide a commercial hedge of the interest, currency or commodity price risks associated with the Group’s underlying business activities and the financing of those activities. Amounts payable or receivable in respect of interest rate swaps are recognised in the profit and loss account over the economic lives of the agreements or underlying position being hedged, either within net interest or disclosed separately where deemed exceptional.

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o) Financial instruments (continued) Termination payments made or received in respect of derivatives are spread over the shorter of the life of the original instrument or the life of the underlying exposure in cases where the underlying exposure continues to exist. Where the underlying exposure ceases to exist, any termination payments are taken to the profit and loss account.

Currency swaps and forward currency agreements are retranslated at the rate of exchange prevailing at the balance sheet date with the corresponding exchange adjustment being dealt with in reserves or the profit and loss account as appropriate.

Those derivatives, relating both to interest rates and/or currency exchange, that are directly associated with a specific transaction and exactly match the underlying cash flows relating to the transaction are accounted for on the basis of the combined economic result of the transaction including the related derivative.

Indexed-linked swap contracts relating to the purchase of energy are marked to market and a corresponding movement in the value of a related regulatory asset is also recognised.

p) Restructuring costs Costs arising from Group restructuring programmes primarily relate to redundancy costs. Redundancy costs are charged to the profit and loss account in the period in which the Group becomes irrevocably committed to incurring the costs and the main features of the restructuring plan have been announced to affected employees.

q) Research and development All research and development expenditure is written off as incurred except for laboratory buildings, equipment used for research and development and capitalised software. These are capitalised and depreciated in accordance with the depreciation policies set out above.

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Group Profit and Loss Account for the years ended 31 March

	Notes	2003 — £m		2002 — £m		2001 — £m
Turnover, including share of joint ventures		9,566		7,821		7,103
Less: share of joint ventures’ turnover
– continuing operations		(99	)	(141	)	(114	)
Less: share of joint ventures’ and
associate’s turnover – discontinued operations		(67	)	(126	)	(98	)
Group turnover – continuing operations		9,363		7,471		6,845
Group turnover – discontinued operations		37		83		46
Group turnover	2(a)	9,400		7,554		6,891
Operating costs	3	(7,788	)	(6,494	)	(5,179	)
Operating profit of Group undertakings
– continuing operations	2(b)	1,806		1,556		1,751
Operating loss of Group undertakings
– discontinued operations	2(b)	(194	)	(496	)	(39	)
		1,612		1,060		1,712
Share of joint ventures’ operating
profit/(loss) – continuing operations	2(b)	15		(29	)	26
Share of joint ventures’ and associate’s
operating profit/(loss) – discontinued operations	2(b)	109		(672	)	(131	)
		124		(701	)	(105	)
Operating profit
– Before exceptional items and goodwill
amortisation	2(b)	2,185		1,783		1,780
– Exceptional items – continuing
operations	4(a)	(308	)	(285	)	(88	)
– Exceptional items – discontinued
operations	4(a)	(39	)	(1,042	)	–
– Goodwill amortisation		(102	)	(97	)	(85	)
Total operating profit	2(b)	1,736		359		1,607
Merger costs – continuing operations	4(b)	(79	)	–		–
Profit on disposal of tangible fixed
assets – continuing operations	4(b)	48		94		24
Gain on sale of shares by employee share
plan – continuing operations	4(b)	–		31		19
Loss on sale or termination of operations
– discontinued operations	4(b)	(68	)	–		–
Profit on disposal of investments –
discontinued operations	4(b)	–		31		263
Net interest
– Excluding exceptional items	8	(939	)	(657	)	(635	)
– Exceptional items	4(c),8	(31	)	(142	)	–
	8	(970	)	(799	)	(635	)
Profit/(loss) on ordinary activities
before taxation		667		(284	)	1,278
Taxation
– Excluding exceptional items	9	(373	)	(251	)	(390	)
– Exceptional items	4(d),9	128		166		243
	9	(245	)	(85	)	(147	)
Profit/(loss) on ordinary activities
after taxation		422		(369	)	1,131
Minority interests
– Excluding exceptional items		(3	)	(2	)	(7	)
– Exceptional items	4(e)	(28	)	50		–
		(31	)	48		(7	)
Profit/(loss) for the year		391		(321	)	1,124
Dividends	10	(530	)	(580	)	(469	)
(Loss)/profit transferred (from)/to
profit and loss account reserve	24	(139	)	(901	)	655
Earnings/(loss) per ordinary share
– Basic, including exceptional items
and goodwill amortisation	11	12.7	p	(11.3	)p	40.5	p
– Adjusted basic, excluding exceptional
items and goodwill amortisation	11	28.3	p	30.8	p	26.9	p
– Diluted, including exceptional
items and goodwill amortisation	11	12.8	p	(10.1	)p	39.4	p
– Adjusted diluted, excluding exceptional
items and goodwill amortisation	11	27.9	p	30.2	p	26.4	p

Group Statement of Total Recognised Gains and Losses for the years ended 31 March

Profit/(loss) for the year	2003 £m — 391		2002 £m — (321	)	2001 £m — 1,124
Exchange adjustments	(322	)	(58	)	(15	)
Tax on exchange adjustments	12		21		32
Reduction in revaluation reserve on reclassification
of investment properties	–		(50	)	–
Unrealised gain on transfer of fixed
assets to a joint venture (net of tax)	6		7		19
Total recognised gains and losses	87		(401	)	1,160

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Balance Sheets at 31 March

	Notes	Group				Company
		2003 £m		2002 £m		2003 £m		2002 £m
Fixed assets
Intangible assets	12	1,893		2,107		–		–
Tangible assets	13	16,847		17,210		–		–
Investments in joint ventures
– Share of gross assets		542		882		–		–
– Share of gross liabilities		(498	)	(678	)	–		–
– Share of net assets		44		204		–		–
– Loans to joint ventures		–		87		–		–
– Impairment of investments in joint
ventures		–		(230	)	–		–
Investments in joint ventures (net of
impairment)		44		61		–		–
Other investments		209		257		2,225		2,080
Total investments	14	253		318		2,225		2,080
		18,993		19,635		2,225		2,080
Current assets
Stocks	15	126		125		–		–
Debtors (amounts falling due within one
year)	16	1,811		1,889		2,664		2,029
Debtors (amounts falling due after more
than one year)	16	3,395		4,058		–		–
Assets held for exchange	17	17		17		–		–
Investment held for resale	28	–		15		–		–
Current asset investments		482		354		123		–
Cash at bank and in hand		119		110		1		4
		5,950		6,568		2,788		2,033
Creditors (amounts falling due within
one year)
Borrowings		(2,246	)	(2,050	)	(557	)	(604	)
Other creditors		(2,800	)	(2,838	)	(1,764	)	(1,513	)
	18	(5,046	)	(4,888	)	(2,321	)	(2,117	)
Net current assets/(liabilities)		904		1,680		467		(84	)
Total assets less current liabilities		19,897		21,315		2,692		1,996
Creditors (amounts falling due after
more than one year)
Convertible bonds		(502	)	(491	)	–		–
Other borrowings		(11,731	)	(12,222	)	–		–
Other creditors		(2,022	)	(2,155	)	–		–
	19	(14,255	)	(14,868	)	–		–
Provisions for liabilities and charges
Joint ventures
– Share of gross assets		–		296		–		–
– Share of gross liabilities		–		(333	)	–		–
Share of net liabilities		–		(37	)	–		–
Other provisions		(4,406	)	(4,626	)	–		(77	)
	22	(4,406	)	(4,663	)	–		(77	)
Net assets employed		1,236		1,784		2,692		1,919
Capital and reserves
Called up share capital	23	308		310		308		178
Share premium account	24	1,247		1,243		1,247		1,243
Other reserves	24	(5,131	)	(5,139	)	2		–
Profit and loss account	24	4,728		5,276		1,135		498
Equity shareholders’ funds		1,152		1,690		2,692		1,919
Minority interests
Equity		15		15		–		–
Non-equity	25	69		79		–		–
		84		94		–		–
		1,236		1,784		2,692		1,919

Commitments and contingencies are shown in note 31.

The accounts on pages 57 to 106 inclusive were approved by the Board of Directors on 20 May 2003 and were signed on its behalf by:

Sir John Parker Chairman

Steve Lucas Group Finance Director

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Group Cash Flow Statement for the years ended 31 March

| Net cash inflow from operating activities
before exceptional items | Notes — 27 | (a) | 2003 £m — 3,154 | | 2002 £m — 2,394 | | 2001 £m — 2,482 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Expenditure relating to exceptional items | | | (328 | ) | (103 | ) | (129 | ) |
| Net cash inflow from operating activities | | | 2,826 | | 2,291 | | 2,353 | |
| Dividends from joint ventures | | | 11 | | 13 | | 20 | |
| Returns on investments and servicing
of finance | | | | | | | | |
| Interest received and similar income | | | 56 | | 88 | | 112 | |
| Interest paid and similar charges | | | (957 | ) | (784 | ) | (799 | ) |
| Dividends paid to minority interests | | | (11 | ) | (9 | ) | (4 | ) |
| Net cash outflow for returns on investments
and servicing of finance | | | (912 | ) | (705 | ) | (691 | ) |
| Taxation | | | | | | | | |
| Corporate tax paid | | | (112 | ) | (212 | ) | (350 | ) |
| Capital expenditure and financial
investment | | | | | | | | |
| Net payments to acquire intangible and
tangible fixed assets | | | (1,518 | ) | (1,734 | ) | (1,343 | ) |
| Receipts from disposals of tangible fixed
assets | | | 111 | | 191 | | 137 | |
| Receipts from disposals of shares by
an employee share plan | | | – | | 50 | | 28 | |
| Other | | | – | | 10 | | (1 | ) |
| Net cash outflow for capital expenditure
and financial investment | | | (1,407 | ) | (1,483 | ) | (1,179 | ) |
| Acquisitions and disposals | | | | | | | | |
| Payments to acquire investments | | | (165 | ) | (56 | ) | (342 | ) |
| Receipts from disposals of investments | 27 | (b) | 328 | | 37 | | 196 | |
| Acquisition of Group undertaking | 27 | (c) | – | | (950 | ) | (441 | ) |
| Net cash inflow/(outflow) for acquisitions
and disposals | | | 163 | | (969 | ) | (587 | ) |
| Equity
dividends paid | | | (571 | ) | (478 | ) | (336 | ) |
| Net cash outflow before the management
of liquid resources and financing | | | (2 | ) | (1,543 | ) | (770 | ) |
| Management of liquid resources | | | | | | | | |
| (Increase)/decrease in short-term deposits | | | (138 | ) | 347 | | 696 | |
| Net cash (outflow)/inflow from the
management of liquid resources | 27(d) | ,(e) | (138 | ) | 347 | | 696 | |
| Financing | | | | | | | | |
| Issue of ordinary shares | | | 4 | | 12 | | 7 | |
| Payments to repurchase ordinary shares | | | (97 | ) | – | | – | |
| Increase/(decrease) in borrowings | 27(d) | ,(e) | 267 | | 1,206 | | (208 | ) |
| Funding movement on Demerger of Lattice
from BG Group plc | | | – | | – | | 260 | |
| Net cash inflow from financing | | | 174 | | 1,218 | | 59 | |
| Movement
in cash and overdrafts | 27(d) | ,(e) | 34 | | 22 | | (15 | ) |

Included in the cash flows above are cash flows for discontinued operations as set out below:

| Net cash (outflow)/inflow from operating
activities | 2003 £m — (71 | ) | 2002 £m — 52 | | 2001 £m — (4 | ) |
| --- | --- | --- | --- | --- | --- | --- |
| Net cash (outflow)/inflow for returns
on investments and servicing of finance | (14 | ) | (3 | ) | 5 | |
| Net cash (outflow)/inflow for taxation | (1 | ) | 13 | | (2 | ) |
| Net cash outflow for capital expenditure
and financial investment | (123 | ) | (342 | ) | (145 | ) |
| Net cash outflow for acquisitions and
disposals | (3 | ) | (12 | ) | (9 | ) |
| Net
cash outflow before the management of liquid resources and financing | (212 | ) | (292 | ) | (155 | ) |

Liquid resources comprise money market deposits, equities and gilts.

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Notes to the Accounts

| 1. | Merger of
National Grid and Lattice The business combination of National Grid and Lattice meets the merger
accounting criteria under UK GAAP and the Companies Act 1985 and therefore
the transaction has been accounted for as a merger. The consolidated
accounts have been presented as if National Grid and Lattice had always
comprised the Group. The combined accounts have been adjusted for the
issue on Merger of 1,323m shares with a nominal value of £132m
and for the elimination of balances between the former groups. An adjustment to other reserves of £221m
has been made for all years presented (note 24). The adjustment represents
the difference between the £132m nominal value of the shares issued
on Merger by National Grid and the called up share capital of Lattice
at 21 October 2002. Further details relating to the Merger
are shown in note 29. |
| --- | --- |
| 2. | Segmental
analysis The basis for the preparation of
segmental information is set out on page 29. The US electricity distribution segment
shown below includes the recovery of stranded costs. Continuing operations – ‘Other
activities’ primarily relates to gas metering activities; EnMo
which provides the on-the-day commodity market for gas trading in Great
Britain; Advantica which provides advanced technology and systems solutions
for energy and utility companies worldwide; and Gridcom which provides
telecommunications infrastructure to operators in Great Britain and
the US. In the 2001/02 segmental analysis of
turnover and operating profit, the repayment of £267m of surplus
entry capacity auction revenue, that was rebated to shippers through
distribution tariffs, has been reported within the UK electricity and
gas transmission segment. |

| a)
Turnover | Total sales 2003 £m | | Sales between businesses 2003 £m | Sales to third parties 2003 £m | | Total sales 2002 £m | | Sales between businesses 2002 £m | Sales to third parties 2002 £m | | Total sales 2001 £m | | Sales between businesses 2001 £m | Sales to third parties 2001 £m | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Turnover, including share of joint ventures | | | | | | | | | | | | | | | |
| – continuing
operations | 9,793 | | 331 | 9,462 | | 7,857 | | 245 | 7,612 | | 7,044 | | 85 | 6,959 | |
| – discontinued
operations | 123 | | 19 | 104 | | 246 | | 37 | 209 | | 185 | | 41 | 144 | |
| Less: share of
joint ventures’ turnover | | | | | | | | | | | | | | | |
| – continuing
operations | (99 | ) | – | (99 | ) | (141 | ) | – | (141 | ) | (114 | ) | – | (114 | ) |
| – discontinued
operations | (67 | ) | – | (67 | ) | (126 | ) | – | (126 | ) | (98 | ) | – | (98 | ) |
| Group turnover | 9,750 | | 350 | 9,400 | | 7,836 | | 282 | 7,554 | | 7,017 | | 126 | 6,891 | |
| Continuing operations | | | | | | | | | | | | | | | |
| UK gas distribution | 2,089 | | 47 | 2,042 | | 2,013 | | – | 2,013 | | 2,070 | | – | 2,070 | |
| UK electricity and gas transmission | 1,948 | | 8 | 1,940 | | 1,850 | | 21 | 1,829 | | 1,948 | | 5 | 1,943 | |
| US electricity transmission | 407 | | 5 | 402 | | 278 | | 1 | 277 | | 243 | | 3 | 240 | |
| US electricity distribution | 3,446 | | 1 | 3,445 | | 2,282 | | 5 | 2,277 | | 1,854 | | 1 | 1,853 | |
| US gas | 446 | | – | 446 | | 104 | | – | 104 | | – | | – | – | |
| Other activities | 1,358 | | 270 | 1,088 | | 1,189 | | 218 | 971 | | 815 | | 76 | 739 | |
| | 9,694 | | 331 | 9,363 | | 7,716 | | 245 | 7,471 | | 6,930 | | 85 | 6,845 | |
| Discontinued operations | 56 | | 19 | 37 | | 120 | | 37 | 83 | | 87 | | 41 | 46 | |
| Group turnover | 9,750 | | 350 | 9,400 | | 7,836 | | 282 | 7,554 | | 7,017 | | 126 | 6,891 | |
| Europe | | | | 5,096 | | | | | 4,865 | | | | | 4,786 | |
| North America | | | | 4,304 | | | | | 2,689 | | | | | 2,105 | |
| | | | | 9,400 | | | | | 7,554 | | | | | 6,891 | |
| The analysis of turnover
by geographical area is on the basis of origin. Turnover on a destination
basis would not be materially different. | | | | | | | | | | | | | | | |
| Approximately 16% of the
Group’s turnover for the year ended 31 March 2003 amounting to approximately
£1.5bn derives from a single customer, the Centrica Group. The majority
of this turnover is in the UK gas distribution segment with lesser amounts
in other activities and the UK electricity and gas transmission segment. | | | | | | | | | | | | | | | |

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| Notes to the
accounts continued | |
| --- | --- |
| 2. | Segmental analysis (continued) b) Operating profit |

| | Operating
profit | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | Before
exceptional items and goodwill amortisation | | | | | | After
exceptional items and goodwill amortisation | | | | | |
| | 2003 £m | | 2002 £m | | 2001 £m | | 2003 £m | | 2002 £m | | 2001 £m | |
| Group undertakings – continuing
operations | | | | | | | | | | | | |
| UK gas distribution | 554 | | 548 | | 663 | | 443 | | 504 | | 631 | |
| UK electricity and gas transmission | 846 | | 781 | | 756 | | 800 | | 688 | | 750 | |
| US electricity transmission | 128 | | 87 | | 72 | | 103 | | 64 | | 60 | |
| US electricity distribution | 513 | | 266 | | 215 | | 413 | | 149 | | 118 | |
| US gas | 58 | | 17 | | – | | 49 | | 8 | | – | |
| Other activities | 117 | | 179 | | 203 | | (2 | ) | 143 | | 192 | |
| | 2,216 | | 1,878 | | 1,909 | | 1,806 | | 1,556 | | 1,751 | |
| Discontinued
operations | (26 | ) | (60 | ) | (39 | ) | (194 | ) | (496 | ) | (39 | ) |
| Operating
profit of Group undertakings | 2,190 | | 1,818 | | 1,870 | | 1,612 | | 1,060 | | 1,712 | |
| Joint ventures and associate – continuing
operations | | | | | | | | | | | | |
| Electricity activities | 15 | | 36 | | 35 | | 15 | | 36 | | 35 | |
| Other activities | – | | (17 | ) | (9 | ) | – | | (65 | ) | (9 | ) |
| | 15 | | 19 | | 26 | | 15 | | (29 | ) | 26 | |
| Discontinued
operations | (20 | ) | (54 | ) | (116 | ) | 109 | | (672 | ) | (131 | ) |
| Operating
(loss)/profit of joint ventures and associate | (5 | ) | (35 | ) | (90 | ) | 124 | | (701 | ) | (105 | ) |
| Total
operating profit | 2,185 | | 1,783 | | 1,780 | | 1,736 | | 359 | | 1,607 | |
| Europe | 1,481 | | 1,420 | | 1,588 | | 1,051 | | 440 | | 1,530 | |
| North America | 704 | | 377 | | 286 | | 549 | | 224 | | 171 | |
| Latin America | (7 | ) | (19 | ) | (98 | ) | 128 | | (310 | ) | (98 | ) |
| Rest of the World | 7 | | 5 | | 4 | | 8 | | 5 | | 4 | |
| | 2,185 | | 1,783 | | 1,780 | | 1,736 | | 359 | | 1,607 | |

c) Total and net assets
	Total
assets		Net
assets
	2003 £m	2002 £m	2003 £m		2002 £m
Group undertakings – continuing
operations
UK gas distribution	4,998	4,736	3,480		3,394
UK electricity and gas transmission	5,951	5,694	5,200		4,871
US electricity transmission	1,736	1,914	1,656		1,805
US electricity distribution	8,507	9,986	6,405		7,292
US gas	930	972	778		845
Other activities	2,075	1,776	1,154		1,240
	24,197	25,078	18,673		19,447
Discontinued
operations	9	320	(3	)	190
Group
undertakings	24,206	25,398	18,670		19,637
Joint ventures and associate – continuing
operations
Electricity activities	42	57	42		20
Other activities	2	4	2		4
Joint ventures and associate	44	61	44		24
Unallocated	693	744	(17,478	)	(17,877	)
	24,943	26,203	1,236		1,784
Europe	12,974	12,370	9,774		9,183
North America	11,209	13,057	8,873		10,484
Latin America	–	–	–		(37	)
Rest of the World	67	32	67		31
Unallocated	693	744	(17,478	)	(17,877	)
	24,943	26,203	1,236		1,784

The analysis of total assets and net assets by business segment includes all attributable goodwill and excludes inter-business balances. Unallocated total assets include investment in own shares, assets held for exchange, current asset investments, cash and taxation related regulatory assets. Unallocated net liabilities include net borrowings, taxation, interest, dividends, investment in own shares, assets held for exchange and taxation related regulatory assets.

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1. Segmental analysis (continued) d) Other segmental information

| | Capital
expenditure — 2003 £m | 2002 £m | 2001 £m | Depreciation
and amortisation — 2003 £m | 2002 £m | 2001 £m |
| --- | --- | --- | --- | --- | --- | --- |
| Group undertakings – continuing
operations | | | | | | |
| UK gas distribution | 380 | 455 | 360 | 185 | 176 | 179 |
| UK electricity and gas transmission | 573 | 620 | 592 | 261 | 252 | 225 |
| US electricity transmission | 49 | 38 | 30 | 71 | 46 | 39 |
| US electricity distribution | 209 | 141 | 94 | 359 | 192 | 170 |
| US gas | 40 | 3 | – | 34 | 6 | – |
| Other activities | 174 | 199 | 228 | 152 | 153 | 123 |
| | 1,425 | 1,456 | 1,304 | 1,062 | 825 | 736 |
| Discontinued operations | 95 | 391 | 200 | 26 | 51 | 33 |
| Group undertakings | 1,520 | 1,847 | 1,504 | 1,088 | 876 | 769 |
| Europe | 1,172 | 1,638 | 1,347 | 613 | 619 | 552 |
| North America | 298 | 203 | 154 | 475 | 257 | 217 |
| Rest of the World | 50 | 6 | 3 | – | – | – |
| | 1,520 | 1,847 | 1,504 | 1,088 | 876 | 769 |

Capital expenditure comprises additions to tangible and intangible fixed assets (excluding goodwill) amounting to £1,519m (2002: £1,840m; 2001: £1,504m) and £1m (2002: £7m; 2001: £nil) respectively.

1. Operating costs

| | Continuing
operations — 2003 £m | | 2002 £m | | 2001 £m | | Discontinued
operations — 2003 £m | 2002 £m | | 2001 £m | Total — 2003 £m | | 2002 £m | | 2001 £m | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Total operating costs | 7,557 | | 5,916 | | 5,094 | | 250 | 616 | | 126 | 7,807 | | 6,532 | | 5,220 | |
| Charged from: | | | | | | | | | | | | | | | | |
| –
continuing operations | – | | – | | – | | – | (1 | ) | – | – | | (1 | ) | – | |
| –
discontinued operations | (19 | ) | (37 | ) | (41 | ) | – | – | | – | (19 | ) | (37 | ) | (41 | ) |
| External operating costs | 7,538 | | 5,879 | | 5,053 | | 250 | 615 | | 126 | 7,788 | | 6,494 | | 5,179 | |
| Depreciation | 825 | | 700 | | 630 | | 26 | 50 | | 35 | 851 | | 750 | | 665 | |
| Payroll costs (note 5(a)) | 1,093 | | 907 | | 723 | | 14 | 39 | | 13 | 1,107 | | 946 | | 736 | |
| Purchases of electricity | 1,901 | | 1,410 | | 1,248 | | – | – | | – | 1,901 | | 1,410 | | 1,248 | |
| Purchases of gas | 357 | | 171 | | 98 | | – | – | | – | 357 | | 171 | | 98 | |
| Rates and property taxes | 537 | | 422 | | 389 | | – | 2 | | 1 | 537 | | 424 | | 390 | |
| Electricity transmission services scheme direct costs | 252 | | 204 | | 220 | | – | – | | – | 252 | | 204 | | 220 | |
| EnMo direct costs | 530 | | 395 | | 201 | | – | – | | – | 530 | | 395 | | 201 | |
| Replacement expenditure | 405 | | 368 | | 276 | | – | – | | – | 405 | | 368 | | 276 | |
| Exceptional operating items | 308 | | 237 | | 88 | | 168 | 436 | | – | 476 | | 673 | | 88 | |
| Other non-exceptional operating charges | 1,330 | | 1,065 | | 1,180 | | 42 | 88 | | 77 | 1,372 | | 1,153 | | 1,257 | |
| | 7,538 | | 5,879 | | 5,053 | | 250 | 615 | | 126 | 7,788 | | 6,494 | | 5,179 | |
| Operating costs include: | | | | | | | | | | | | | | | | |
| Research and development costs | | | | | | | | | | | 18 | | 16 | | 26 | |
| Operating lease rentals | | | | | | | | | | | | | | | | |
| –
Plant and machinery | | | | | | | | | | | 16 | | 8 | | 4 | |
| –
Other | | | | | | | | | | | 52 | | 22 | | 27 | |
| Amortisation of goodwill (i) | | | | | | | | | | | 102 | | 85 | | 70 | |
| Amortisation of regulatory assets | | | | | | | | | | | 132 | | 35 | | 33 | |
| Other amortisation | | | | | | | | | | | 3 | | 6 | | 1 | |
| Auditors’ remuneration (ii) | | | | | | | | | | | | | | | | |
| Statutory audit services | | | | | | | | | | | | | | | | |
| –
Annual audit (audit fee for the Company was £8,500 (2002: £8,000)) | | | | | | | | | | | 3 | | 4 | | 3 | |
| –
Regulatory reporting | | | | | | | | | | | 1 | | 1 | | 1 | |
| Further audit related services (iii) | | | | | | | | | | | 3 | | 2 | | – | |
| Tax advisory services | | | | | | | | | | | 3 | | 1 | | 1 | |
| Other non-audit services (iv) | | | | | | | | | | | 3 | | 6 | | 4 | |

| (i) | Includes the amortisation
of negative goodwill of £4m (2002 and 2001: £nil) and excludes
the amortisation of goodwill of £nil (2002: £12m; 2001: £15m)
relating to joint ventures and associate. |
| --- | --- |
| (ii) | In addition to the fees
included above, fees of: a) £nil (2002: £2m; 2001: £2m)
incurred in respect of acquisitions have been capitalised; and b) £nil
(2002: £nil; 2001: £1m) incurred in respect of disposals have
been charged at arriving at profit on disposal on investments. |
| (iii) | Included within further
audit related services are £2m of fees relating to the Merger which
have been included within non-operating exceptional items. |
| (iv) | For the year ended 31 March
2003, other non-audit services include £2m (2002: £6m; 2001:
£3m) in relation to services provided by the consulting business
unit of PricewaterhouseCoopers which was sold to IBM United Kingdom Limited
on 30 September 2002. |

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| Exceptional
items | |
| --- | --- |
| a) | Operating |

	2003 £m		2002 £m	2001 £m
Continuing operations
Restructuring costs (i)	203		187	45
Merger costs (ii)	105		–	–
Impairment of assets (iii)	–		50	–
Demerger costs (iv)	–		–	43
Share of exceptional operating items
of joint venture (v)	–		48	–
	308		285	88
Discontinued operations
Restructuring costs (i)	6		–	–
Impairment of business (vi)	168		250	–
Impairment of investments in joint ventures
and associate (vii)	(135	)	792	–
	39		1,042	–
Total operating exceptional
items	347		1,327	88

| (i) | Relates to costs incurred
in business reorganisations in the UK and US businesses (2003: £165m
after tax; 2002: £130m after tax; 2001: £39m after tax). |
| --- | --- |
| (ii) | Represents employee and
property costs associated with the Merger (£76m after tax). |
| (iii) | The impairment charge for
2002 relates to a review of the carrying value of LNG storage assets,
which resulted in a charge to operating profit amounting to £50m
(£35m after tax). In the LNG review, future cash flows were determined
based on a five-year business plan projected out to 20 years and discounted
at a pre-tax rate of 6.25%. |
| (iv) | 2001 results include £43m
(£36m after tax) of costs that arose as a direct result of the Demerger
of Lattice from BG Group plc. |
| (v) | Share of exceptional operating
items of a joint venture in 2002 represents the Group’s share of
the write-off of an investment and the write-down of goodwill in a joint
venture prior to it becoming a wholly owned subsidiary of the Group (£48m
after tax). The write-down of goodwill followed an impairment review which
applied a discount rate of 15%. The review used growth rates over a plan
period covering nine years. The assumptions of the plan were consistent
with management views of the market and the joint venture’s performance
therein. |
| (vi) | Following a review of the
carrying value of certain of the Group’s telecom assets, the Group
has incurred impairment charges resulting in the write-down of those assets
to their estimated recoverable amounts and the recognition of other related
costs (2003: £143m after tax; 2002: £175m after tax; 2001:
£nil after tax). |
| (vii) | The 2003 credits relate
to Intelig and other telecom joint ventures (£155m after tax). The
exceptional credits arising in 2003 substantially represent the reversal
of the Group’s share of retained losses incurred by these joint ventures
during the period from 1 April 2002 to the date of disposal or the date
that equity accounting ceased. £129m of the pre-tax exceptional
credits have been reflected in ‘Share of joint ventures’ and
associate’s operating profit/(loss) – discontinued operations’.
The 2002 exceptional charge of £792m (£775m after tax) relates
to the write-down of the Group’s investment in its joint ventures
and associate. This charge comprised a write-down of the carrying value
of the investments of £606m (£589m after tax) to their estimated
recoverable amounts, and the recognition of related liabilities of £186m
(£186m after tax). |

b)	2003 £m		2002 £m		2001 £m
Continuing operations
Merger costs (viii)	79		–		–
Profit on disposal of tangible
fixed assets (ix)	(48	)	(94	)	(24	)
Gain on sale of shares by
an employee share plan (x)	–		(31	)	(19	)
	31		(125	)	(43	)
Discontinued operations
Loss on sale or termination
of operations (xi)	68		–		–
Profit on disposal of investments
(xii)	–		(31	)	(263	)
	68		(31	)	(263	)
Total non-operating exceptional
items	99		(156	)	(306	)

| (viii) | The after tax transaction
cost of the Merger was £71m. |
| --- | --- |
| (ix) | The after tax profit on
disposal of tangible fixed assets was £50m (2002: £96m; 2001:
£24m). |
| (x) | The after tax gain on sale
of shares by an employee share plan was £nil (2002: £31m;
2001: £19m). |
| (xi) | Relates to the loss on sale
of The Leasing Group of £45m and loss on closure of 186k of £23m.
The after tax loss relating to the sale and closure amounted to £68m. |
| (xii) | The after tax profit on
disposal of investments was £nil (2002: £31m; 2001: £263m). |

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4.	Exceptional items (continued)
	c) Financing costs The exceptional net interest cost of £31m (2002: £142m; 2001:
£nil) (2003: £31m after tax; 2002: £142m after tax; 2001:
£nil after tax) relates to the Group’s share of foreign exchange
losses incurred on foreign currency borrowings by joint ventures amounting
to £98m (2002: £142m; 2001: £nil), partially offset by
the Group’s share of a gain on net monetary liabilities of £67m
(2002 and 2001: £nil). The gain on the net monetary liabilities relates
to Citelec, a joint venture operating in Argentina, and reflects the net
gain arising on net monetary liabilities that are financing the operation
in a hyper-inflationary economy.
	d)
Tax credit Included in the 2001 net exceptional
tax credit of £243m is a tax credit of £230m (note 9), which
represents the reversal of a 2000 exceptional tax charge relating to an
exceptional profit on the disposal of investments, arising from the realisation
of capital losses for tax purposes as a result of Group restructurings.
	e)
Minority interests The 2003 exceptional minority interest charge of £28m relates to the
Group’s share of the minority interest in the after taxation exceptional
items of Citelec, a joint venture, and primarily reflects the minority interest’s
share of the gain on net monetary liabilities referred to above (note 4(c)).
	The 2002 exceptional
minority interest credit of £50m relates to the Group’s share
of the minority interest in the after taxation exceptional items of Citelec,
a joint venture, and primarily relates to foreign exchange losses incurred
on foreign currency borrowings.
5.	Payroll costs and
employees

	2003 £m		2002 £m		2001 £m
a) Payroll costs
Wages and salaries	1,124		940		836
Social security costs	84		73		67
Other pension costs/(credits)	117		90		(17	)
	1,325		1,103		886
Less: Amounts capitalised	(158	)	(129	)	(116	)
Payroll
costs included in replacement and research and development expenditure	(60	)	(28	)	(14	)
Payroll
costs included in exceptional items	–		–		(20	)
	1,107		946		736

| | 31
March 2003 Number | Average 2003 Number | Average 2002 Number | Average 2001 Number |
| --- | --- | --- | --- | --- |
| b) Number of employees | | | | |
| Europe | 17,333 | 18,399 | 19,227 | 19,015 |
| North America | 9,939 | 10,120 | 5,094 | 3,839 |
| Rest of the World | 15 | 14 | 25 | 25 |
| Continuing operations | 27,287 | 28,533 | 24,346 | 22,879 |
| Discontinued operations | 21 | 407 | 768 | 318 |
| | 27,308 | 28,940 | 25,114 | 23,197 |

| | The vast majority
of employees in: — – | Europe
are either directly or indirectly employed in the transmission and distribution
of gas and the transmission of electricity in the UK. |
| --- | --- | --- |
| | – | North America
are either directly or indirectly employed in the transmission and distribution
of electricity and the distribution of gas in the US. |
| 6. | Directors’
emoluments | |
| | Details
of Directors’ emoluments are contained in the auditable part of the
Directors’ Remuneration Report on pages 48 to 52. | |

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| Notes to the
accounts continued | |
| --- | --- |
| 7. | Pensions and post-retirement
benefits |
| | UK post-retirement
schemes Substantially all of the Group’s UK employees are members of either
the Electricity Supply Pension Scheme or the Lattice Group Pension Scheme. |
| | Electricity Supply
Pension Scheme The Electricity Supply Pension Scheme provides final salary defined benefits
on a funded basis. The assets of the scheme are held in a separate trustee
administered fund. The scheme is divided into sections, one of which is
the Group’s section. It is subject to independent valuations at least
every three years, on the basis of which the qualified actuary certifies
the rate of employers’ contributions which, together with the specified
contributions payable by the employees and proceeds from the scheme’s
assets, are expected to be sufficient to fund the benefits payable under
the scheme. The latest full actuarial valuation of the Group’s section
of the scheme was carried out by Bacon & Woodrow, Consulting Actuaries
(now Hewitt, Bacon and Woodrow), at 31 March 2001. |
| | The projected unit method
was used for the last valuation and the principal actuarial assumptions
adopted were that the real annual rates of return on investments held
in respect of pre-retirement members would average 4.5% and on investments
held in respect of post-retirement members would average 3.5%; that the
annual rate of inflation would average 2.3%; that the real annual increase
in salary would average 1.0%; and that pensions would increase at a real
annual rate of 0.2%. The market value of the assets relating to the Group’s
section of the scheme at 31 March 2001 was £1,336m and the actuarial
value of the assets represented approximately 118.3% of the actuarial
value of the benefits that had accrued to members measured on a past service
basis. The agreed employers’ and employees’ contribution rates
for the forthcoming year are 12% and 6% respectively. These contribution
rates will be reviewed when the next independent actuarial valuation is
carried out, which will be at 31 March 2004. |
| | Lattice Group
Pension Scheme The Lattice Group Pension Scheme provides final salary defined benefits
for employees who joined the Lattice Group prior to 31 March 2002. A defined
contribution section was added to the scheme from 1 April 2002 for employees
joining Lattice Group from that date. The scheme is self-administered
and funded to cover pension liabilities in respect of service up to the
balance sheet date. It is subject to independent valuations at least every
three years, on the basis of which the qualified actuary certifies the
rate of employers’ contributions which, together with the specified
contributions payable by the employees and proceeds from the scheme’s
assets, are expected to be sufficient to fund the benefits payable under
the scheme. |
| | The latest full actuarial
valuation of the scheme was carried out by Watson Wyatt LLP at 31 March
2001. The projected unit method was used and the principal actuarial assumptions
adopted were that the annual rate of inflation and pensions increases
would be 2.3%; that future real increases in pensionable earnings would
be 1.9%; that the annual real rate of return on existing investments would
be 2.9%; and that the real annual rate of return on future contributions
would be 3.7%. Excluding assets and liabilities attributable to BG Group
members who left the scheme on 4 July 2001, the aggregate market value
of the scheme’s assets was £11,963m and the value of the assets
represented approximately 104% of the actuarial value of benefits due
to members calculated on the basis of pensionable earnings and service
at 31 March 2001 on an ongoing basis and allowing for projected increases
in pensionable earnings and pensions. |
| | The results of the actuarial
valuation carried out at 31 March 2001 showed that based on long-term
financial assumptions the contribution rate required to meet the future
benefit accrual was 26.6% of pensionable earnings (23.6% employers and
3% employees) though employers’ contributions could have been maintained
at the level of 3% until March 2004. Employers’ contributions were,
however, increased from 3% to 8.5% with effect from1 January
2002. This contribution rate will be reviewed when the next independent
actuarial valuation is carried out, which will be at 31 March 2003. |
| | US post-retirement
schemes Pension Substantially all of the Group’s US employees are members of defined
benefit plans. The assets of the plans are held in separate trustee administered
funds. The latest full actuarial valuations were carried out by Hewitt
Associates LLC at 31 March 2002 and were used to calculate the pension
cost for the year ended 31 March 2003. These valuations have been updated
using assumptions and market values at 31 March 2003. The projected unit
method was used for the updated valuations and the principal actuarial
assumptions adopted were that the real annual rate of return on investments
would average 5.5% for New York schemes and 4.5% for other US schemes;
that real annual increases in salary would average 0.25% for New York
schemes and 0.5% for other US schemes; that inflation would average 3.0%
for New York schemes and 3.5% for other US schemes; and that nominal increases
in pensions would be nil. The market value of the assets relating to the
Group’s US defined benefit plans at 31 March 2003 totalled US$1,607m
and the actuarial value of the assets represented 67% of the actuarial
value of the benefits that had accrued to members, after allowing for
future salary increases. There are no formally agreed contribution rates
for the US plans. |
| | Healthcare and life
insurance – retirees In the US, the Group provides healthcare and life insurance to eligible
retired US employees. Eligibility is based on certain age and length of
service requirements and in some cases retirees must contribute to the
cost of their coverage. The latest full actuarial valuations were carried
out at 31 March 2002. These valuations have been updated using assumptions
and market values at 31 March 2003. The principal assumptions adopted
were a discount rate of 6.25% and that medical costs would increase by
10.0% per annum, decreasing to 5.0% by 2008 and remain at this rate thereafter. |
| | The cost of providing
healthcare and life insurance to retired US employees for the year ended
31 March 2003 amounted to £37m (2002: £9m; 2001: £7m). |
| | Pension cost,
prepayment and provisions for liabilities and charges The pension cost charged to operating
profit for the year ended 31 March 2003 was £117m (2002: £90m;
2001: £17m credit). This represents defined contribution scheme
costs of £1m (2002 and 2001: £nil), and defined benefit regular
pension costs of £136m (2002: £127m; 2001: £88m) less
a variation from the regular pension cost totalling £20m (2002:
£37m; 2001: £105m), of which £2m (2002: £2m; 2001:
£2m) relates to the partial release of a pension provision. In addition,
net interest includes a credit of £3m (2002: £30m; 2001: £63m)
in respect of the notional interest element of the variation from the
regular pension cost. |
| | As a result of the deterioration
in world stock markets, if formal actuarial valuations of the UK pension
funds were carried out, this would in all likelihood reveal deficits.
The continuing recognition of a surplus in these circumstances is incompatible
with this position. Consequently, the Group has suspended the recognition
of any further UK pension surplus amortisation with effect from 1 October
2002. As a result of this action, operating profit and net interest charge
are reduced and increased by £21m and £10m respectively compared
with the ongoing recognition of such a surplus. |
| | Included in debtors at
31 March 2003 is a pension prepayment of £37m (2002: £35m). |
| | Included within provisions
for liabilities and charges at 31 March 2003 is a pension and other post-retirement
benefits provision of £551m (2002: £681m) – see note
22. |

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| 7. |
| --- |
| FRS 17 Retirement benefits On 20 November 2000, the Accounting Standards Board introduced a new
accounting standard, FRS 17 ‘Retirement Benefits’, replacing
SSAP 24 ‘Accounting for Pension Costs’. FRS 17 is fully effective
for periods beginning on or after 1 January 2005, though disclosures are
required in the financial years prior to its full implementation. Disclosures
showing the impact on the Group’s profit and loss account and balance
sheet, together with other disclosures required by FRS 17, are set out
below. |
| The disclosures have been
prepared by updating the results of the aforementioned valuations by independent
qualified actuaries using the projected unit method of valuation on the
basis of the following assumptions. |

	2003 — UK Pensions	US Pensions	US Other post- retirement benefits	2002 — UK Pensions	US Pension	US Other post- retirement benefits
Rate of increase in salaries (i)	3.5	4.0	–	4.7	4.0	–
Rate of increase in pensions in payment
and deferred pensions	2.6	–	–	2.8	–	–
Discount rate for liabilities	5.4	6.3	6.3	5.8	7.5	7.5
Rate of increase in Retail Price Index
or equivalent	2.5	3.2	–	2.8	3.5	–
Initial healthcare cost trend rate	–	–	10.0	–	–	10.0
Ultimate healthcare cost trend rate	–	–	5.0	–	–	5.0

(i) A promotional age-related scale has also been used where appropriate.

An analysis of the assets held in the various pension and other post-retirement benefit schemes and the expected rates of return at 31 March 2003 and 31 March 2002 were as follows:

	UK –
Pensions		US –
Pensions		retirement
benefits
	Long-term rate of return expected at 31 March 2003 %	Value at 31 March 2003 £m	Long-term rate of return expected at 31 March 2003 %	Value at 31 March 2003 £m	Long-term rate of return expected at 31 March 2003 %	Value at 31 March 2003 £m
Equities	8.5	4,590	11.0	586	11.0	158
Bonds	4.6	5,436	5.1	395	5.0	157
Property	6.5	901	9.0	8	–	–
Other	4.0	171	6.8	28	3.5	58
Total market value of assets		11,098		1,017		373
Present value of scheme liabilities		(13,269	)	(1,617	)	(1,003	)
Deficit in schemes		(2,171	)	(600	)	(630	)
Related deferred tax asset		651		238		250
Net liability		(1,520	)	(362	)	(380	)

	UK –
Pensions		US –
Pensions		retirement
benefits
	Long-term rate
of return expected at 31
March 2002 %	Value
at 31 March 2002 £m	Long-term rate
of return expected at 31
March 2002 %	Value
at 31 March 2002 £m	Long-term rate
of return expected at 31
March 2002 %	Value
at 31 March 2002 £m
Equities	7.5	7,462	10.2	902	10.3	236
Bonds	5.4	4,115	6.4	476	5.9	160
Property	6.5	852	8.0	11	–	–
Other	4.4	520	5.6	48	5.9	1
Total market value of assets		12,949		1,437		397
Present value of scheme liabilities		(12,642	)	(1,623	)	(884	)
Surplus/(deficit) in the schemes		307		(186	)	(487	)
Related deferred tax (liability)/asset		(93	)	74		193
Net asset/(liability)		214		(112	)	(294	)

The net liability/asset for UK – Pensions comprises net pension liabilities relating to funded schemes in deficit of £1,503m (2002: £36m), net pension assets relating to funded schemes in surplus of £nil (2002: £261m) and net pension liabilities relating to unfunded schemes of £17m (2002: £11m).

The net liability for US – Pensions comprises net pension liabilities relating to funded schemes in deficit of £319m (2002: £98m), net pension assets relating to funded schemes in surplus of £nil (2002: £31m) and net pension liabilities relating to unfunded schemes of £43m (2002: £45m).

The net liability for US – Other post-retirement benefits relates to funded schemes for both years presented.

An increase of 0.1% in the discount rate would decrease the present value of liabilities for all schemes by around £235m and decrease the liability net of deferred tax by £161m and vice versa.

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Notes to the accounts continued

| 7. |
| --- |
| If the FRS 17 position
had been recognised in the Group’s accounts, the Group’s net
assets employed at 31 March would have been as follows: |

	2003 — £m		2002 — £m
Net assets employed excluding net SSAP
24 liabilities and related impact on regulatory assets	1,481		2,097
Net FRS 17 liabilities	(2,262	)	(192	)
Net
(liabilities)/assets including net FRS 17 liabilities	(781	)	1,905
The impact of the implementation
of FRS 17 on net (liabilities)/assets employed, as shown above, would
be reflected within the profit and loss account reserve.
The pension and other post-retirement
deficit has moved during the year ended 31 March 2003 as set out below:

At 1 April 2002	£m — (366	)
Current service cost	(171	)
Past service cost	(8	)
Net loss on settlements or curtailments	(118	)
Contributions	317
Other financial income	89
Actuarial losses	(3,208	)
Exchange adjustments	64
At
31 March 2003	(3,401	)
If FRS 17 had been implemented
for the year ended 31 March 2003, the following amounts would have been
charged to the profit and loss account in respect of pensions and other
post-retirement benefits for the year.

	£m
Operating charge
Current service cost	171
Past service cost	8
Net loss on settlements or curtailments	118
Total
charge to operating profit	297
Other financial (income)/costs
Expected return on scheme assets	(977	)
Interest on scheme liabilities	888
Impact
on financial income	(89	)
Net
profit and loss charge before taxation	208
As the Lattice scheme is
a closed scheme, under the projected unit method of valuation, the current
service cost will increase as the members of the scheme approach retirement.
If the Group was to prepare
its accounts under FRS 17, the net loss on settlements or curtailments
above would be reported as part of exceptional items. The net FRS 17 profit
and loss account impact before tax excluding these exceptional items amounts
to £90m and would compare to the current UK GAAP charge in respect
of pensions and other post-retirement benefits amounting to £151m.
The pre-exceptional profit and loss account charge (pre-tax) would therefore
decrease by £61m.
In addition, the following
pre-tax amounts would have been recognised in the statement of total recognised
gains and losses.

| Difference between actual and expected
return on scheme assets | £m — (2,529 | ) |
| --- | --- | --- |
| Experience gains arising on scheme liabilities | 11 | |
| Changes in assumptions | (690 | ) |
| Actuarial losses | (3,208 | ) |
| Exchange adjustments | 64 | |
| Net
charge to the statement of total recognised gains and losses | (3,144 | ) |
| History of experience gains
and losses that would be recognised on an FRS 17 basis is set out below: | | |

| Difference between actual and expected
return on scheme assets (£m) | (2,529 | ) |
| --- | --- | --- |
| – percentage of scheme assets | (20% | ) |
| Experience gains arising on scheme liabilities
(£m) | 11 | |
| – percentage of present value of
scheme liabilities | – | |
| Actuarial losses (£m) | (3,208 | ) |
| – percentage of present value of
scheme liabilities | (20% | ) |

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1. Net interest

	2003 — £m		2002 — £m		2001 — £m
Bank loans and overdrafts	257		143		142
Other	724		612		649
Interest payable and similar charges	981		755		791
Unwinding of discount on provisions	13		17		19
Interest capitalised	(28	)	(38	)	(21	)
Interest payable and similar charges
net of interest capitalised	966		734		789
Interest receivable and similar income	(55	)	(123	)	(192	)
	911		611		597
Joint
ventures (including exceptional net interest of £31m (2002: £142m;
2001: £nil), net of interest capitalised £1m (2002: £10m; 2001: £19m))	59		172		12
Associate	–		16		26
	59		188		38
	970		799		635
Comprising:
Net interest, excluding exceptional net
interest	939		657		635
Exceptional net interest (note 4(c))	31		142		–
Net interest, including
exceptional net interest	970		799		635

Interest on the funding attributable to assets in the course of construction was capitalised during the year at a rate of 5.9% (2002: 6.2% to 7.0%; 2001: 6.7%).

Interest payable and similar charges for 2001 includes £21m of losses arising from the valuation at maturity of US dollar interest rate swaptions that provided an economic hedge against dollar borrowings, but which did not qualify as hedges for accounting purposes. Interest receivable and similar income for 2001 includes a £17m gain on closing out sterling fixed interest rate swaps that were originally entered into as hedges for sterling borrowings.

Interest payable and similar charges includes £12m (2002: £3m; 2001: £nil) relating to the loss incurred on the repurchase of debt during the year.

1. Taxation

	2003 — £m		2002 — £m		2001 — £m
United Kingdom
– Corporation tax at 30%	12		153		(2	)
– Adjustment in respect of prior
years	–		(78	)	(20	)
– Deferred tax: timing differences	107		(26	)	68
– Adjustment in respect of prior
years	–		4		18
	119		53		64
Overseas
– Corporate tax	27		73		27
– Adjustment in respect of prior
years	–		1		–
– Deferred tax: timing differences	94		(48	)	44
	121		26		71
	240		79		135
Joint ventures	5		6		4
Associate	–		–		8
	245		85		147
Comprising:
Taxation – excluding exceptional
items	373		251		390
Taxation – exceptional tax credit
(note 4(d))	–		–		(230	)
Taxation – exceptional items	(128	)	(166	)	(13	)
	(128	)	(166	)	(243	)
	245		85		147

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| Notes to the
accounts continued | |
| --- | --- |
| 9. | Taxation (continued) |
| | A reconciliation of the
UK corporation tax rate to the effective tax rate of the Group is as follow |

| | % of profit
before taxation — 2003 | | 2002 | | 2001 | |
| --- | --- | --- | --- | --- | --- | --- |
| UK corporation tax rate | 30.0 | | 30.0 | | 30.0 | |
| Effect on tax charge of: | | | | | | |
| Origination and reversal of timing differences | (12.3 | ) | (4.6 | ) | (10.6 | ) |
| Permanent differences | 2.1 | | 1.2 | | 1.8 | |
| Overseas income taxed at other than UK
statutory rate | (2.5 | ) | (5.2 | ) | (2.8 | ) |
| Other | 0.3 | | 2.6 | | 5.6 | |
| Current tax charge | 17.6 | | 24.0 | | 24.0 | |
| Deferred taxation: origination and reversal
of timing differences | 12.3 | | 4.6 | | 10.6 | |
| Effective tax rate before goodwill amortisation,
prior year adjustments and exceptional items | 29.9 | | 28.6 | | 34.6 | |
| Effect of goodwill amortisation | 2.7 | | 2.8 | | 2.4 | |
| Effective tax rate before prior year
adjustments and exceptional items | 32.6 | | 31.4 | | 37.0 | |
| Adjustment in respect of prior years | – | | (7.0 | ) | (0.2 | ) |
| Effective tax rate after adjustments
in respect of prior years and before exceptional items | 32.6 | | 24.4 | | 36.8 | |
| Exceptional items | 4.1 | | (54.3 | ) | (25.3 | ) |
| Effective
tax rate after exceptional items | 36.7 | | (29.9 | ) | 11.5 | |

| | Factors that
may affect future tax charges |
| --- | --- |
| | The Group
has brought forward non-trading debits of £75m (2002: £75m;
2001: £78m), which may reduce taxable profits in future years. |
| | No provision has been made
for deferred tax on gains recognised on the sale of properties where potentially
taxable gains have been rolled over into replacement assets. Such tax
would become payable only if the replacement assets were sold without
it being possible to claim roll-over relief. The total amount unprovided
for is £58m (2002: £56m; 2001: £52m). At present, it
is not envisaged that any tax will become payable in the foreseeable future. |
| 10. | Dividends |
| | The following table shows
the dividends paid or proposed by National Grid Transco for the year ended
31 March 2003: |

	2003
	pence
	(per
ordinary	2003
	share)	£m
National Grid Transco
Ordinary dividends
– Interim	6.86	213
– Proposed final	10.34	317
	17.20	530

The following disclosures relate to National Grid and Lattice prior to the Merger:

	2002 — pence	2001 — pence
	(per
ordinary	(per
ordinary	2002	2001
	share)	share)	£m	£m
National Grid
Ordinary dividends
– Interim	6.46	6.05	96	89
– Final	9.58	9.03	169	134
	16.04	15.08	265	223
Lattice
Ordinary dividends
– Interim	3.60	3.50	126	123
– Second interim	5.40	–	189	–
– Final	–	3.50	–	123
	9.00	7.00	315	246
Total
pre-Merger dividends	n/a	n/a	580	469

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11.
a) Earnings
per share

| | Earnings per share 2003 pence | | Profit for
the year 2003 £m | | Weighted average number shares 2003 million | (Loss)/ earnings per share 2002 pence | | (Loss)/profit for the year 2002 £m | | Weighted average number shares 2002 million | Earnings per share 2001 pence | | Profit for the year 2001 £m | | Weighted average number shares 2001 million |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Basic, including
exceptional items and goodwill
amortisation | 12.7 | | 391 | | 3,078 | (11.3 | ) | (321 | ) | 2,832 | 40.5 | | 1,124 | | 2,777 |
| Exceptional operating items (note 4(a)) | 11.3 | | 347 | | – | 46.9 | | 1,327 | | – | 3.2 | | 88 | | – |
| Exceptional non-operating items (note
4(b)) | 3.2 | | 99 | | – | (5.5 | ) | (156 | ) | – | (11.0 | ) | (306 | ) | – |
| Exceptional financing charge (note 4(c)) | 1.0 | | 31 | | – | 5.0 | | 142 | | – | – | | – | | – |
| Exceptional tax credit (note 4(d)) | (4.1 | ) | (128 | ) | – | (5.9 | ) | (166 | ) | – | (8.8 | ) | (243 | ) | – |
| Exceptional minority interest (note 4(e)) | 0.9 | | 28 | | – | (1.8 | ) | (50 | ) | – | – | | – | | – |
| Goodwill amortisation | 3.3 | | 102 | | – | 3.4 | | 97 | | – | 3.0 | | 85 | | – |
| Adjusted basic,
excluding exceptional items and
goodwill amortisation | 28.3 | | 870 | | 3,078 | 30.8 | | 873 | | 2,832 | 26.9 | | 748 | | 2,777 |
| Dilutive impact of employee share options | (0.1 | ) | – | | 10 | (0.2 | ) | – | | 21 | (0.2 | ) | – | | 18 |
| Dilutive impact of 4.25% Exchangeable
Bonds | (0.3 | ) | 22 | | 110 | (0.4 | ) | 22 | | 110 | (0.3 | ) | 21 | | 110 |
| Adjusted diluted,
excluding exceptional items and
goodwill amortisation | 27.9 | | 892 | | 3,198 | 30.2 | | 895 | | 2,963 | 26.4 | | 769 | | 2,905 |
| Exceptional operating items (note 4(a)) | (10.9 | ) | (347 | ) | – | (44.8 | ) | (1,327 | ) | – | (3.0 | ) | (88 | ) | – |
| Exceptional non-operating items (note
4(b)) | (3.1 | ) | (99 | ) | – | 5.3 | | 156 | | – | 10.5 | | 306 | | – |
| Exceptional financing charge (note 4(c)) | (1.0 | ) | (31 | ) | – | (4.8 | ) | (142 | ) | – | – | | – | | – |
| Exceptional tax credit (note 4(d)) | 4.0 | | 128 | | – | 5.6 | | 166 | | – | 8.4 | | 243 | | – |
| Exceptional minority interest (note 4(e)) | (0.9 | ) | (28 | ) | – | 1.7 | | 50 | | – | – | | – | | – |
| Goodwill amortisation | (3.2 | ) | (102 | ) | – | (3.3 | ) | (97 | ) | – | (2.9 | ) | (85 | ) | – |
| Diluted, including
exceptional items and goodwill
amortisation | 12.8 | | 413 | | 3,198 | (10.1 | ) | (299 | ) | 2,963 | 39.4 | | 1,145 | | 2,905 |

Earnings per ordinary share, excluding exceptional items and goodwill amortisation, are provided in order to reflect the underlying performance of the Group.

In respect of the years ended 31 March 2003 and 31 March 2002, the potential ordinary shares related to the 4.25% Exchangeable Bonds are dilutive, as they would decrease earnings from continuing operations. Consequently, the diluted earnings per share are higher than basic earnings per share because of the effect of losses arising from discontinued operations.

b) Adjusted profit on ordinary activities before taxation The following table reconciles profit before taxation on ordinary activities to adjusted profit on ordinary activities before taxation. Adjusted profit on ordinary activities before taxation excludes exceptional items and goodwill amortisation and is provided to reflect the underlying pre-tax performance of the Group.

	2003 — £m	2002 — £m		2001 — £m
Profit/(loss) on ordinary activities
before taxation	667	(284	)	1,278
Exceptional operating items (note 4(a))	347	1,327		88
Exceptional non-operating items (note
4(b))	99	(156	)	(306	)
Exceptional financing charge (note 4(c))	31	142		–
Goodwill amortisation	102	97		85
Adjusted profit on
ordinary activities before taxation	1,246	1,126		1,145

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Notes to the accounts continued
12.	Intangible fixed assets

Group — Cost at 1 April 2002	Goodwill £m — 2,295		Negative goodwill £m — (37	)	Other £m — 11		Total £m — 2,269
Exchange adjustments	(238	)	–		(1	)	(239	)
Adjustment to provisional fair value
at acquisition (note 28)	82		–		–		82
Additions	–		–		1		1
Disposals	(4	)	–		–		(4	)
Cost
at 31 March 2003	2,135		(37	)	11		2,109
Amortisation at 1 April 2002	160		–		2		162
Exchange adjustments	(14	)	–		–		(14	)
Charge/(credit) for the year	106		(4	)	3		105
Release relating to asset impairment
(note 13)	–		(33	)	–		(33	)
Disposals	(4	)	–		–		(4	)
Amortisation
at 31 March 2003	248		(37	)	5		216
Net
book value at 31 March 2003	1,887		–		6		1,893
Net
book value at 31 March 2002	2,135		(37	)	9		2,107

1. Tangible fixed assets

Group — Cost at 1 April 2002	Land and buildings £m — 1,240		Plant and machinery £m — 22,918		Assets in the course of construction £m — 881		Motor vehicles and office equipment £m — 1,190		Total £m — 26,229
Exchange adjustments	(63	)	(774	)	(15	)	(5	)	(857	)
Adjustment to provisional fair value
at acquisition (note 28)	–		(14	)	–		–		(14	)
Additions	62		292		1,016		149		1,519
Disposal of Group undertakings	(82	)	(193	)	(2	)	(246	)	(523	)
Other disposals	(123	)	(390	)	–		(234	)	(747	)
Reclassifications	3		826		(845	)	16		–
Cost
at 31 March 2003	1,037		22,665		1,035		870		25,607
Depreciation at 1 April 2002	386		7,953		–		680		9,019
Exchange adjustments	(17	)	(289	)	–		(2	)	(308	)
Charge for the year	20		691		–		140		851
Impairment write-down	108		19		–		41		168
Disposal of Group undertakings	(75	)	(184	)	–		(65	)	(324	)
Other disposals	(79	)	(372	)	–		(195	)	(646	)
Depreciation
at 31 March 2003	343		7,818		–		599		8,760
Net
book value at 31 March 2003	694		14,847		1,035		271		16,847
Net
book value at 31 March 2002	854		14,965		881		510		17,210

| The net book value of land and buildings
comprises: | 2003 £m | 2002 £m |
| --- | --- | --- |
| Freehold | 653 | 763 |
| Long leasehold (over 50 years) | 32 | 33 |
| Short leasehold (under 50 years) | 9 | 58 |
| | 694 | 854 |
| Included within the impairment
write-down of £168m, is a write-down of tangible fixed assets amounting
to £33m, which has been matched by an equivalent release of related
negative goodwill – see note 12. | | |
| Included within creditors
(amounts falling due within one year) and creditors (amounts falling due
after more than one year) are contributions to the cost of tangible fixed
assets amounting to £32m (2002: £33m) and £1,079m (2002:
£1,117m) respectively. | | |

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1. Fixed asset investments

	Group												Company
	Unlisted
joint ventures				Associate
	Share
of net assets £m		Loans £m		Share
of net assets £m		Own shares £m		Other investments £m		Total £m		Group undertakings £m
At 1 April 2002	204		87		392		53		204		940		2,080
Exchange adjustments	(24	)	(8	)	–		–		(20	)	(52	)	–
Additions	2		–		–		–		8		10		188
Disposals	(60	)	–		–		(14	)	(18	)	(92	)	(43	)
Share of retained loss	(112	)	–		–		–		–		(112	)	–
Reclassification	70		(70	)	–		–		–		–		–
Write-off	(9	)	(9	)	(392	)	–		(4	)	(414	)	–
Transfer from provisions	(27	)	–		–		–		–		(27	)	–
At 31
March 2003	44		–		–		39		170		253		2,225
Impairment at 1 April
2002	143		87		392		–		–		622		–
Exchange adjustments	(17	)	(8	)	–		–		–		(25	)	–
Charge for the year	2		–		–		–		–		2		–
Utilised	(129	)	–		–		–		–		(129	)	–
Disposals	(60	)	–		–		–		–		(60	)	–
Write-off	(9	)	(9	)	(392	)	–		–		(410	)	–
Reclassification	70		(70	)	–		–		–		–		–
Impairment
at 31 March 2003	–		–		–		–		–		–		–
Net
book value at 31 March 2003	44		–		–		39		170		253		2,225
Net
book value at 31 March 2002	61		–		–		53		204		318		2,080

At 31 March 2002, the associate (Energis plc) was a listed company and the Group’s investment had a market value of £16m at that date. The associate’s shares are no longer listed.

Own shares at 31 March 2003 related to 10m 10p ordinary shares in National Grid Transco plc, held by employee share trusts for the purpose of satisfying certain obligations under the various share option schemes operated by the Group. The carrying value of £39m (market value £37m at 31 March 2003) represented the exercise amounts receivable in respect of those shares which were issued at market value by the Company and the cost in respect of those shares purchased in the open market.

Funding is provided to the trusts by Group undertakings. The trusts have waived their rights to dividends on these shares.

Own shares at 31 March 2002 related to 13m 10p ordinary shares in National Grid (book value £46m) and 33m 10p ordinary shares in Lattice (book value £7m), prior to the Merger.

At 31 March 2002, the 13m 10p ordinary shares in National Grid were held by employee share trusts for the purpose of satisfying certain obligations under the various share option schemes operated by National Grid. The carrying value of £46m (market value £61m at 31 March 2002) represented the exercise amounts receivable in respect of those shares which were issued at market value by National Grid and the cost in respect of those shares purchased in the open market.

At 31 March 2002, the 33m 10p ordinary shares in Lattice were held by an All Employee Share Ownership Plan (AESOP) for future employee share schemes which were dependent on performance targets. The carrying value of the shares at 31 March 2002 was £7m (market value £57m at 31 March 2002).

The names of the principal Group undertakings and joint ventures are included in note 32.

1. Stocks

	Group — 2003 £m	2002 £m
Raw materials and consumables	60	78
Work in progress	53	34
Fuel stocks	13	13
	126	125

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Notes to the accounts continued
16.	Debtors

	Group — 2003	2002	Company — 2003	2002
	£m	£m	£m	£m
Amounts falling due within one year:
Trade debtors	628	668	–	–
Amounts owed by Group undertakings	–	–	2,652	2,023
Amounts owed by a former associate (i)	6	22	–	–
Regulatory assets	406	444	–	–
Prepayments and accrued income	396	395	–	–
Other debtors	375	360	12	6
	1,811	1,889	2,664	2,029
Amounts falling due after more than one
year:
Amounts owed by a former associate (i)	44	40	–	–
Regulatory assets	3,337	3,970	–	–
Other debtors	14	48	–	–
	3,395	4,058	–	–
Total debtors	5,206	5,947	2,664	2,029
				Group
Provision for doubtful debts				£m
At 1 April 2002				72
Adjustments to provisional fair value
at acquisition (note 28)				42
Charge for the year				24
Uncollectable amounts written off net
of recoveries				(22	)
At 31 March 2003				116

| | (i) Comparative figures reflect status
as an associate. |
| --- | --- |
| | Other debtors include
tax recoverable of £62m (2002: £6m) and debtors arising on
the sale of nuclear plant of £nil (2002: £176m). |
| | The amounts owed by a former
associate (2002: associate) include a net investment in a finance lease
amounting to £50m (2002: £45m) comprising total rentals receivable
of £71m (2002: £65m) less unearned income of £21m (2002:
£20m), of which £6m (2002: £5m) falls due within one
year and £44m (2002: £40m) falls due after more than one year.
Rentals received and receivable in the year amounted to £11m (2002:
£9m). At 31 March 2003, the minimum lease payments for each of the
five years ending 31 March 2008 are £11m. |
| 17. | Assets
held for exchange |
| | The assets held for exchange
of £17m (2002: £17m) represent the carrying value of 74m (2002:
74m) shares in Energis plc which are held to satisfy obligations under
the 6% Mandatorily Exchangeable Bonds 2003, as explained in note 20. The
voting rights in respect of 61m (2002: 61m) of these shares are vested
in the bondholders. |
| 18. | Creditors (amounts falling due within one year) |

	Group — 2003	2002	Company — 2003	2002
	£m	£m	£m	£m
Borrowings (note 20)	2,246	2,050	557	604
Trade creditors and accruals	1,249	1,133	–	–
Amounts owed to Group undertakings	–	–	1,439	1,340
Amounts owed to a former associate (i)	–	5	–	–
Purchased power obligations	68	102	–	–
Corporate tax	–	30	–	–
Social security and other taxes	203	194	–	–
Proposed dividend	317	358	317	169
Liability for index-linked swap contracts	121	53	–	–
Other creditors	589	687	8	4
Deferred income	253	276	–	–
	5,046	4,888	2,321	2,117
(i) Comparative figures reflect status
as an associate.
Other creditors include interest payable
of £269m (2002: £310m).

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1. Creditors (amounts falling due after more than one year)

	Group — 2003	2002	Company — 2003	2002
	£m	£m	£m	£m
Borrowings (note 20)	12,233	12,713	–	–
Purchased power obligations	253	362	–	–
Liability for index-linked swap contracts	381	408	–	–
Other creditors	309	268	–	–
Deferred income	1,079	1,117	–	–
	14,255	14,868	–	–

| | Purchased power
obligations As part of the sale of substantially all of its non-nuclear generating
business, National Grid USA entered into purchased power transfer agreements
with the purchasers whereby the purchasers took over a number of long-term
contracts between National Grid USA and owners of various generating units.
In exchange, National Grid USA committed to make fixed monthly payments
to the purchasers towards the above-market cost of the contracts. The
creditor relating to purchased power obligations, which is also reflected
in regulatory assets (note 16), represents the net present value of these
monthly payments discounted at 2.78%. At 31 March 2003, amounts falling
due after more than five years totalled £15m (2002: £65m). |
| --- | --- |
| | Liability for
index-linked swap contracts National Grid USA has entered into
indexed swap contracts that expire in 2008 and a further three swap contracts
that expire in June and September 2003. National Grid USA has recorded
a liability in respect of these contractual obligations and recorded a
corresponding regulatory asset as losses on these instruments will be
recovered from customers. The amount of the liability and regulatory asset
will fluctuate over the remaining terms of the swaps as nominal energy
quantities are settled and may be adjusted as periodic assessments are
made of energy prices. |
| 20. | Borrowings |
| | The
following table analyses the Group’s total borrowings after taking
account of currency and interest rate swaps: |

	Group — 2003	2002	Company — 2003	2002
	£m	£m	£m	£m
Amounts falling due within one year:
Bank loans and overdrafts	484	180	–	–
Commercial paper	557	642	557	604
6% Mandatorily Exchangeable Bonds 2003	243	243	–	–
Other bonds	730	889	–	–
Other loans	232	96	–	–
	2,246	2,050	557	604
Amounts falling due after more than one
year:
Bank loans	613	318	–	–
4.25% Exchangeable Bonds 2008	502	491	–	–
Other bonds	10,881	11,627	–	–
Other loans	237	277	–	–
	12,233	12,713	–	–
Total borrowings	14,479	14,763	557	604
Total borrowings are repayable as follows:
In one year or less	2,246	2,050	557	604
In more than one year, but not
more than two years	1,031	1,212	–	–
In more than two years, but not
more than three years	834	954	–	–
In more than three years, but
not more than four years	1,924	742	–	–
In more than four years, but
not more than five years	882	2,005	–	–
In more than five years
– by instalments	46	56	–	–
– other than by instalments	7,516	7,744	–	–
	14,479	14,763	557	604

At 31 March 2003, borrowings totalling £1,415m (2002: £1,889m) were secured by charges over property, plant and other assets of the Group.

In February 1999, National Grid Holdings One plc issued 14.7m Equity Plus Income Convertible Securities (‘EPICs’) in the form of 6% Mandatorily Exchangeable Bonds 2003 (‘exchangeable bonds’) in the aggregate principal amount of US$401m. The EPICs were exchangeable, subject to certain exceptions, on or prior to 26 April 2003 at the option of the holder of the bonds (‘bondholders’) into ordinary shares of Energis plc, a company which prior to 16 July 2002 was an associated undertaking. On 16 July 2002, trading in the shares of Energis plc were suspended and on 6 May 2003, five Energis shares for each EPICs were delivered by the Group to bondholders in satisfaction of the bonds outstanding at 31 March 2003.

The notional amount at maturity of the Group’s debt portfolio is £15,621m (2002: £15,954m).

Back to Contents

| Notes to the
accounts continued | |
| --- | --- |
| 20. | Borrowings (continued) |
| | The 4.25% Exchangeable Bonds
2008 (‘the Bonds’) are exchangeable on or prior to 8 February
2008 at the option of the holder into 110,302,907 ordinary shares of the
Company at the exchange price of 417p per ordinary share. After 17 February
2003, the Group has the right to redeem the Bonds at any time in whole
(but not in part) at the principal amount outstanding, including any redemption
premium. Unless earlier redeemed, exchanged or purchased, the Bonds will
be redeemed on 17 February 2008 at their principal amount plus a premium
(together the Redemption Price, being £1,209.31 per £1,000
principal amount of Bonds). When a bondholder elects to exchange Bonds
for ordinary shares, the Group has the option to pay an amount equal to
the cash value of the ordinary shares that would otherwise have been issued
by the Company. For the purposes of the maturity analysis of borrowings
shown above, early exchange of the Bonds has not been anticipated and
the Bonds have been classified as repayable in more than four years but
not more than five years. |
| | The principal items included
within Other bonds are listed below. Unless otherwise indicated, these
instruments were outstanding as at both 31 March 2003 and 31 March 2002. |

| Issuer | Description of instrument
(notional amount) |
| --- | --- |
| British Transco Finance
(No5) Limited | GBP 115 million Floating
Rate Instruments due 2006 |
| British Transco Finance
Inc. | USD 300 million 6.625% Fixed
Rate Instruments due 2018 |
| British Transco International
Finance BV | USD 500 million 6.125% Fixed
Rate Instruments due 2003 |
| British Transco International
Finance BV | ITL 150,000 million 10.75%
Fixed Rate Instruments due 2003 |
| British Transco International
Finance BV | USD 250 million 6.25% Fixed
Rate Instruments due 2003 |
| British Transco International
Finance BV | USD 300 million 6.0% Fixed
Rate Instruments due 2004 |
| British Transco International
Finance BV | USD 350 million 6.625% Fixed
Rate Instruments due 2004 |
| British Transco International
Finance BV | ITL 250,000 million 5.25%
Fixed Rate Instruments due 2005 |
| British Transco International
Finance BV | USD 350 million 7.0% Fixed
Rate Instruments due 2006 |
| British Transco International
Finance BV | FRF 2,000 million 5.125%
Fixed Rate Instruments due 2009 |
| British Transco International
Finance BV | USD 1,500 million Zero Coupon
Bond due 2021 |
| National Grid Company plc
(i) | GBP 26.2 million Zero Coupon
Bond due 2002 |
| National Grid Company plc | GBP 240 million 8.0% Fixed
Rate Instruments due 2006 |
| National Grid Company plc
(ii) | GBP 250 million 4.75% Fixed
Rate Instruments due 2010 |
| National Grid Company plc
(ii) | GBP 300 million 2.983% Guaranteed
Retail Price Index-Linked Instruments due 2018 |
| National Grid Company plc
(iii) | GBP 220 million 3.806% Retail
Price Index-Linked Instruments due 2020 |
| National Grid Company plc | GBP 450 million 5.875% Fixed
Rate Instruments due 2024 |
| National Grid Company plc | GBP 360 million 6.5% Fixed
Rate Instruments due 2028 |
| National Grid Company plc
(iii) | GBP 70 million 3.589% Limited
Retail Price Index-Linked Instruments due 2030 |
| National Grid Company plc
(ii) | GBP 50 million 2.817% Guaranteed
Limited Retail Price Index-Linked Instruments due 2032 |
| NGG Finance plc | EUR 1,250 million 5.25%
Fixed Rate Instruments due 2006 |
| NGG Finance plc | EUR 750 million 6.125% Fixed
Rate Instruments due 2011 |
| Niagara Mohawk Power Corporation
(i) | USD 230 million 5.875% Taxable
First Mortgage Bonds due 2002 |
| Niagara Mohawk Power Corporation
(i) | USD 400 million 7.25% Senior
Notes due 2002 |
| Niagara Mohawk Power Corporation | USD 400 million 7.375% Senior
Notes due 2003 |
| Niagara Mohawk Power Corporation | USD 220 million 7.375% Taxable
First Mortgage Bonds due 2003 |
| Niagara Mohawk Power Corporation | USD 300 million 8.0% Taxable
First Mortgage Bonds due 2004 |
| Niagara Mohawk Power Corporation | USD 300 million 5.375% Senior
Notes due 2004 |
| Niagara Mohawk Power Corporation | USD 110 million 6.625% Taxable
First Mortgage Bonds due 2005 |
| Niagara Mohawk Power Corporation | USD 400 million 7.625% Senior
Notes due 2005 |
| Niagara Mohawk Power Corporation | USD 150 million 9.75% Taxable
First Mortgage Bonds due 2005 |
| Niagara Mohawk Power Corporation | USD 275 million 7.75% Taxable
First Mortgage Bonds due 2006 |
| Niagara Mohawk Power Corporation | USD 200 million 8.875% Senior
Notes due 2007 |
| Niagara Mohawk Power Corporation | USD 600 million 7.75% Senior
Notes due 2008 |
| Niagara Mohawk Power Corporation | USD 500 million 8.5% Senior
Notes due 2010 |
| Niagara Mohawk Power Corporation
(iv) | USD 165 million 8.5% Taxable
First Mortgage Bonds due 2023 |
| Niagara Mohawk Power Corporation | USD 210 million 7.875% Taxable
First Mortgage Bonds due 2024 |
| Niagara Mohawk Power Corporation | USD 115.71 million 7.2%
Tax-Exempt First Mortgage Bonds due 2029 |
| Transco Holdings plc | GBP 503.078 million Floating
Rate Instruments due 2009 |
| Transco Holdings plc | GBP 503.078 million 4.1875%
Index-Linked Instruments due 2022 |
| Transco Holdings plc | GBP 503.078 million 7.0%
Fixed Rate Instruments due 2024 |
| Transco plc (i) | JPY 55,000 million Floating
Rate Instruments due 2002 |
| Transco plc (i) | GBP 200 million 8.125% Fixed
Rate Instruments due 2003 |
| Transco plc | EUR 650 million 5.25% Fixed
Rate Instruments due 2006 |
| Transco plc | GBP 250 million 6.125% Fixed
Rate Instruments due 2006 |
| Transco plc | GBP 200 million 5.625% Fixed
Rate Instruments due 2007 |
| Transco plc | GBP 250 million 8.875% Fixed
Rate Instruments due 2008 |
| Transco plc | AUD 500 million 7.0% Fixed
Rate Instruments due 2008 |
| Transco plc | GBP 300 million 5.375% Fixed
Rate Instruments due 2009 |
| Transco plc | GBP 250 million 6.0% Fixed
Rate Instruments due 2017 |
| Transco plc | GBP 275 million 8.75% Fixed
Rate Instruments due 2025 |
| Transco plc | GBP 50 million 6.2% Fixed
Rate Instruments due 2028 |

| (i) | Matured during the year
ended 31 March 2003. |
| --- | --- |
| (ii) | Issued during the year ended
31 March 2003. |
| (iii) | Issue tapped during the
year ended 31 March 2003. |
| (iv) | Redeemed during the year
ended 31 March 2003. |

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| 21. |
| --- |
| The Group’s
treasury policy, described on pages 34 to 36, includes details of the nature,
terms and credit risk associated with financial instruments with off-balance
sheet risk. |
| The Group’s
counterparty exposure under foreign currency swaps and foreign exchange
contracts was £443m (2002: £235m) and under interest rate swaps
was £170m (2002: £40m). |
| The Group
had no significant exposure to either individual counterparties or geographical
groups of counterparties at 31 March 2003. |
| Where permitted
by FRS 13 ‘Derivatives and other Financial Instruments: Disclosures’,
short-term debtors and creditors, have been excluded from the following
disclosures. It is assumed that because of short maturities, the fair value
of short-term debtors and creditors approximates to their book value. |
| Currency
and interest rate composition of financial liabilities |
| The
currency and interest rate composition of the Group’s financial liabilities
are shown in the table below after taking into account currency and interest
rate swaps: |

| At
31 March 2003 | Total £m | Variable
rate £m | Fixed rate
liabilities — Fixed rate £m | Weighted average interest
rate % | Weighted average period for which rate is fixed years | |
| --- | --- | --- | --- | --- | --- | --- |
| Sterling | 9,655 | 4,157 | 5,498 | 6.29 | 8.3 | |
| US dollars | 4,824 | 965 | 3,859 | 7.09 | 5.9 | |
| Borrowings | 14,479 | 5,122 | 9,357 | 6.62 | 7.3 | |
| Other financial liabilities (sterling) | 76 | 60 | 16 | 5.34 | 2.7 | |
| Other financial liabilities (US dollars) | 824 | 755 | 69 | 5.77 | – | (i) |
| | 15,379 | 5,937 | 9,442 | 6.61 | 7.2 | |
| At 31
March 2002 | | | | | | |
| Sterling | 8,840 | 4,065 | 4,775 | 6.30 | 9.6 | |
| US dollars | 5,923 | 1,081 | 4,842 | 7.33 | 6.1 | |
| Borrowings | 14,763 | 5,146 | 9,617 | 6.71 | 7.5 | |
| Other financial liabilities (sterling) | 28 | 5 | 23 | 5.34 | 3.6 | |
| Other financial liabilities (US dollars) | 947 | 868 | 79 | 5.80 | – | (i) |
| | 15,738 | 6,019 | 9,719 | 6.70 | 7.4 | |

(i) Excludes non-equity minority interests of £69m (2002: £79m) with no final repayment date.

At 31 March 2003, the weighted average interest rate on short-term borrowings of £2,246m (2002: £2,050m) was 5.8% (2002: 4.5%).

Foreign exchange forward deals held to manage the currency mix of the Group’s borrowings portfolios comprising £165m (2002: £190m) forward sale of US dollars, have not been adjusted in the table above.

Other US dollar financial liabilities predominantly relate to indexed-linked energy swap contracts of £502m (2002: £461m), purchased power obligations due after more than one year of £253m (2002: £362m), exchange translation of cross-currency swaps of £nil (2002: £45m) and non-equity minority interests of £69m (2002: £79m).

Substantially all of the variable rate borrowings are subject to interest rates which fluctuate with LIBOR for the appropriate currency at differing premiums or, in the case of certain US companies, are based on the market rate for tax exempt commercial paper.

In calculating the weighted average number of years for which interest rates are fixed, swaps which are cancellable at the option of the swap provider are assumed to have a life based on the earliest date at which they can be cancelled.

Back to Contents

| Notes to the
accounts continued | |
| --- | --- |
| 21. | Financial instruments (continued) |
| | Currency
and interest rate composition of financial assets The currency and interest
rate composition of the Group’s financial assets are shown in the
table below after taking into account currency and interest rate swaps: |

| | | | | Fixed rate
assets | | |
| --- | --- | --- | --- | --- | --- | --- |
| | | | | | | Weighted |
| | | | | | | average |
| | | | | | Weighted | period |
| | | Non-interest | | | average | for which |
| At
31 March 2003 | Total | bearing | Variable rate | Fixed rate | interest rate | rate is fixed |
| | £m | £m | £m | £m | % | years |
| Sterling | 423 | – | 423 | – | – | – |
| US dollars | 147 | – | 147 | – | – | – |
| Other currencies | 31 | – | 31 | – | – | – |
| Cash and investments | 601 | – | 601 | – | – | – |
| Other financial assets (sterling) | 67 | 17 | – | 50 | 11.5 | 4.5 |
| Other financial assets (US dollars) | 34 | – | 1 | 33 | 4.77 | 10.8 |
| | 702 | 17 | 602 | 83 | 8.85 | 7.0 |
| At 31 March 2002 | | | | | | |
| Sterling | 340 | – | 198 | 142 | – | – |
| US dollars | 122 | – | 120 | 2 | – | – |
| Other currencies | 2 | – | 2 | – | – | – |
| Cash and investments | 464 | – | 320 | 144 | – | – |
| Other financial assets (sterling) | 62 | 17 | – | 45 | 11.5 | 4.1 |
| Other financial assets (US dollars) | 59 | 17 | 14 | 28 | 4.72 | 9.2 |
| | 585 | 34 | 334 | 217 | 8.87 | 6.1 |

Other financial assets at 31 March 2003 predominantly relate to assets held for exchange of £17m (2002: £17m), a net investment in a finance lease of £50m (2002: £45m), fixed asset investments of £33m (2002: £40m) and investment held for resale of £nil (2002: £15m). Cash and investments earn interest at local prevailing rates for maturity periods generally not exceeding 12 months, and include listed investments with a cost and market value of £226m (2002: £228m). The non-interest bearing assets held for exchange were realised in May 2003, on redemption of the 6% Mandatorily Exchangeable Bonds 2003, as described in note 20.

The maturity profile of the Group’s financial liabilities and assets are shown in the tables below after taking into account currency and interest rate swaps:

| Maturity
of financial liabilities at 31 March | 2003 | 2002 |
| --- | --- | --- |
| | £m | £m |
| In one year or less | 2,380 | 2,153 |
| In more than one year, but not more than
two years | 1,192 | 1,379 |
| In more than two years, but not more
than three years | 1,005 | 1,115 |
| In more than three years, but not more
than four years | 2,090 | 901 |
| In more than four years, but not more
than five years | 1,040 | 2,151 |
| In more than five years | 7,672 | 8,039 |
| | 15,379 | 15,738 |
| Maturity
of financial assets at 31 March | 2003 | 2002 |
| | £m | £m |
| In one year or less | 611 | 511 |
| In more than one year, but not more than
two years | 8 | 6 |
| In more than two years, but not more
than three years | 25 | 22 |
| In more than three years, but not more
than four years | 10 | 7 |
| In more than four years, but not more
than five years | 11 | 7 |
| In more than five years | 37 | 32 |
| | 702 | 585 |

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21.
Fair values of
financial instruments at 31 March

| | 2003 — Book
value | | Fair
value | | 2002 — Book value | | Fair value | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | £m | | £m | | £m | | £m | |
| 6% Mandatorily Exchangeable Bonds 2003 | (243 | ) | (17 | ) | (243 | ) | (18 | ) |
| Other short-term debt | (1,965 | ) | (1,973 | ) | (1,807 | ) | (1,830 | ) |
| 4.25% Exchangeable Bonds 2008 | (502 | ) | (510 | ) | (491 | ) | (543 | ) |
| Other long-term debt | (12,081 | ) | (13,042 | ) | (12,347 | ) | (12,987 | ) |
| Cash and investments | 601 | | 601 | | 464 | | 464 | |
| Other financial liabilities | (900 | ) | (871 | ) | (975 | ) | (971 | ) |
| Net investment in finance lease | 50 | | 50 | | 45 | | 46 | |
| Assets held for exchange | 17 | | 17 | | 17 | | 17 | |
| Other financial assets | 34 | | 50 | | 59 | | 57 | |
| Financial instruments held to manage
interest rate and currency profiles: | | | | | | | | |
| Interest rate swaps | – | | 8 | | – | | (38 | ) |
| Forward foreign currency contracts and
cross-currency swaps | 312 | | 533 | | 125 | | 189 | |
| Market values, where available,
have been used to determine fair values. Where market values are not available,
fair values have been calculated by discounting cash flows at prevailing
interest rates. | | | | | | | | |
| The notional principal amounts
relating to financial instruments held to manage interest rate and currency
profiles for interest rate swaps and forward rate agreements, foreign
currency contracts and cross-currency swaps, amounted to £6,363m
(2002: £10,042m) and £5,017m (2002: £5,958m) respectively. | | | | | | | | |

Gains and losses on hedges	Unrecognised		Unrecognised		Unrecognised		Deferred		Deferred		Deferred
	gains		losses		net gain		gains		losses		net loss
	£m		£m		£m		£m		£m		£m
Gains/(losses) on hedges at 1 April 2002	180		(154	)	26		29		(89	)	(60	)
(Gains)/losses arising in previous years
recognised in the year	(27	)	7		(20	)	(7	)	14		7
Gains/(losses) arising in previous years
not recognised in the year	153		(147	)	6		22		(75	)	(53	)
Gains/(losses) arising in the year	305		(82	)	223		17		(13	)	4
Gains/(losses)
on hedges at 31 March 2003	458		(229	)	229		39		(88	)	(49	)
Of which:
Gains/(losses) expected to be recognised
within one year	2		(12	)	(10	)	11		(12	)	(1	)
Gains/(losses) expected to be recognised
after one year	456		(217	)	239		28		(76	)	(48	)

| Borrowing facilities At 31 March 2003, the Group
had bilateral committed credit facilities of £1,221m (2002: £1,641m)
all of which were undrawn. The Group also had committed credit facilities
from syndicates of banks of £1,880m at 31 March 2003 (2002: £2,688m)
all of which were undrawn, and an analysis of the maturity of these undrawn
committed facilities is shown below: | | |
| --- | --- | --- |
| Undrawn committed borrowing
facilities | | |
| | 2003 | 2002 |
| | £m | £m |
| Expiring: | | |
| In one year or less | 1,155 | 1,562 |
| In more than one year, but not more than
two years | 966 | 323 |
| In more than two years | 980 | 2,444 |
| | 3,101 | 4,329 |
| Of the unused facilities
£2,135m (2002: £2,321m) were being held as backup to commercial
paper and similar borrowings. The remainder was available as additional
backup to commercial paper and for other general corporate purposes. | | |

Back to Contents

Notes to the accounts continued

1. Provisions for liabilities and charges

	Group — Decommissioning £m		Post-retirement benefits £m		Environmental £m		Deferred taxation £m		Restructuring £m		Other £m		Total provisions £m		Company — Other £m
At 1 April 2002	121		681		470		2,996		107		288		4,663		77
Exchange adjustments	(12	)	(67	)	(19	)	(102	)	–		(12	)	(212	)	–
Adjustment to provisional fair values
at acquisition (note 28)	–		2		–		(54	)	–		–		(52	)	–
Additions	68		108		–		201		186		17		580		–
Unwinding of discount	9		–		24		–		–		–		33		–
Unused amounts reversed	(30	)	(2	)	(4	)	–		–		(97	)	(133	)	(77	)
Utilised	(13	)	(171	)	(29	)	–		(137	)	(86	)	(436	)	–
Disposal of Group undertaking	–		–		–		(14	)	–		–		(14	)	–
Transfer to fixed asset investments	–		–		–		–		–		(27	)	(27	)	–
Other	–		–		–		4		–		–		4		–
At
31 March 2003	143		551		442		3,031		156		83		4,406		–

The decommissioning provision of £143m at 31 March 2003 represented the net present value of the estimated expenditure (discounted at rates between 4.25% and 5.00%) expected to be incurred in respect of the decommissioning of certain nuclear generating units and other related provisions. Related regulatory assets were also recognised (note 16). Expenditure is expected to be incurred between 2003 and 2010. Additions in the year included £9m in respect of the change in the discount rate.

The post-retirement benefits provision was in respect of pensions £253m (2002: £285m) and other post-retirement benefits (health care and life insurance) £298m (2002: £396m).

The environmental provision represented the estimated environmental restoration and remediation costs relating to a number of sites. At 31 March 2003, £244m (2002: £266m) of this provision represented the net present value of statutory decontamination costs of old gas manufacturing sites (discounted at 4.00%). The anticipated timing of the cashflows for statutory decontamination cannot be predicted with certainty. The provision at 31 March 2003 also included £186m (2002: £189m) which represented the net present value of estimated expenditure in the United States which had been discounted at a rate of 6.25%. This expenditure is expected to be incurred between 2003 and 2042. Substantially all of the remainder of the environmental provision is expected to be utilised within the next five years. The undiscounted amount of the provision was £561m.

At 31 March 2003, £50m of the total restructuring provision (2002: £40m) consisted primarily of provisions for the disposal of surplus leasehold interests and rates payable on surplus properties. The expected payment dates for property restructuring costs remain uncertain.

Other provisions included £12m (2002: £223m) in respect of obligations associated with the impairment of investments in joint ventures and associate and, in respect of the position at 31 March 2002, included the recognition of the net liabilities of a joint venture amounting to £37m. Other provisions also included £49m (2002: £58m) of estimated liabilities in respect of past events incurred by the Group’s insurance undertakings, including employer liability claims. In accordance with insurance industry practice, these estimates were based on experience from previous years and there was, therefore, no identifiable payment date.

Deferred taxation comprised:
	Provided
	2003 £m	2002 £m
Accelerated capital allowances	2,997	2,915
Other timing differences	34	81
	3,031	2,996

A deferred tax asset in respect of substantial capital losses had not been recognised because their future recovery was uncertain. The exact amount of these losses not recognised at 31 March 2003 was not yet quantified pending agreement of the amount with relevant tax authorities.

1. Share capital

| Group | Allotted,
called up and fully paid — millions | | £m | |
| --- | --- | --- | --- | --- |
| At 31
March 2000 (i) | 2,808 | | 281 | |
| At 31 March 2001 | 2,808 | | 281 | |
| Issued during the year | 292 | | 29 | |
| At 31 March 2002 | 3,100 | | 310 | |
| Issued during the year | 1 | | – | |
| Redeemed during the year | (24 | ) | (2 | ) |
| At
31 March 2003 | 3,077 | | 308 | |
| One
£1 special rights non-voting redeemable preference share (2002
and 2001: one). | | | | |

(i) In accordance with merger accounting principles, the shares issued in connection with the Merger have been treated as if those shares were in issue throughout the year and comparative periods.

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| 23. |
| --- |
| The total
consideration received by the Group in respect of shares issued during
the year ended 31 March 2003 was £4m, all of which was received
from employee share trusts, which represented contributions from Group
undertakings. |
| During the course
of the year, the Group purchased for cancellation 24,225,000 of its ordinary
shares at an average price per ordinary share of 401.59p. |

| Company | Allotted
and issued — number | | £ | | Called up
and partly paid — number | | £ | | Called up
and fully paid — millions | | £m | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| On incorporation at 11 July 2000 –
ordinary shares of £1 | 1 | | 1 | | 1 | | – | | – | | – | |
| 10:1 share split | 9 | | – | | 9 | | – | | – | | – | |
| At 28 November 2000 – ordinary shares
of 10 pence | 10 | | 1 | | 10 | | – | | – | | – | |
| Issued during the year | 499,990 | | 49,999 | | 499,990 | | 12,500 | | – | | – | |
| At 31 March 2001 | 500,000 | | 50,000 | | 500,000 | | 12,500 | | – | | – | |
| Cancelled during the year | (500,000 | ) | (50,000 | ) | (500,000 | ) | (12,500 | ) | – | | – | |
| Issued during the year | 1,776,932,870 | | 177,693,287 | | 23,450 | (i) | 2,345 | | 1,777 | | 178 | |
| At 31 March 2002 | 1,776,932,870 | | 177,693,287 | | 23,450 | | 2,345 | | 1,777 | | 178 | |
| Issued during the year | 1,324,195,509 | | 132,419,551 | | – | | – | | 1,324 | | 132 | |
| Fully paid up during the year | – | | – | | (23,450 | ) | (2,345 | ) | – | | – | |
| Repurchased and cancelled during the
year | (24,225,000 | ) | (2,422,500 | ) | – | | – | | (24 | ) | (2 | ) |
| At
31 March 2003 | 3,076,903,379 | | 307,690,338 | | – | | – | | 3,077 | | 308 | |
| One
£1 special rights non-voting redeemable preference share (2002:
one; 2001: nil). | | | | | | | | | | | | |

(i) These shares were nil paid at 31 March 2002. They represented shares issued to financial institutions in order to purchase Niagara Mohawk which were not required to form part of the final consideration and were sold on the open market during the year ended 31 March 2003.

The Company was incorporated on 11 July 2000 with authorised share capital of 100 ordinary shares of £1 each. On 28 November 2000, the ordinary shares of £1 each were subdivided into ordinary shares of 10 pence each in a 10:1 share split and the authorised share capital was increased to 2,500m ordinary shares of 10 pence each. At 31 March 2001, the authorised share capital of the Company was £250m and the allotted and issued share capital of the Company was £50,000 (500,000 ordinary shares of 10 pence each), of which £12,500 had been called up and paid.

At 31 March 2002, the authorised share capital of the Company was £250m (2,500m ordinary shares of 10 pence each and one £1 special rights non-voting redeemable preference share).

On 21 October 2002, the authorised share capital of the Company was increased to £500m (5,000m ordinary shares of 10 pence each and one £1 special rights non-voting redeemable preference share). This remained unchanged at 31 March 2003.

The total consideration received by the Company in respect of ordinary shares issued during the year ended 31 March 2003 was £136m, of which £4m was received from employee share trusts, which represented contributions from Group undertakings. The remaining ordinary shares were issued on the merger with Lattice as explained in notes 1 and 29.

The special rights non-voting redeemable preference share of £1 in National Grid Transco plc (‘the Special Share’), held on behalf of the Crown, was issued by National Grid to the Secretary of State for Trade and Industry on 31 January 2002 as part of a scheme of arrangement. It is redeemable at any time at par at the option of the holder, after consulting the Company. The Special Share does not carry any rights to vote at general meetings but entitles the holder to receive notice of and to attend and speak at such meetings. Certain matters, in particular the alteration of certain Articles of Association of the Company, require the prior written consent of the holder of the Special Share. The Special Share confers no right to participate in the capital or profits of the Company, except that on a winding-up the holder of the Special Share is entitled to repayment of £1 in priority to other shareholders. Prior to 31 January 2002, the Secretary of State for Trade and Industry held a Special Share with equivalent rights in National Grid Holdings One plc.

A similar special share in Lattice was held at 31 March 2002 by the Crown. This share was redeemed on 21 October 2002 as part of the Merger arrangements.

Share option schemes The Group operates two principal forms of share option schemes. They are an employee sharesave scheme and an Executive Share Option Scheme (‘the Executive Scheme’). The details given below relate to the schemes operated by National Grid and Lattice, which became schemes of National Grid Transco plc as of the date of the Merger. Each Lattice scheme option was converted into 0.375 National Grid Transco plc options.

In any ten year period, the maximum number of shares that may be issued or issuable pursuant to the exercise of options under all of the Group’s share option schemes may not exceed the number of shares representing 10% of the issued ordinary share capital from time to time.

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| Notes to the
accounts continued | |
| --- | --- |
| 23. | Share capital (continued) |
| | National Grid share
option schemes The sharesave scheme is savings related where, under normal circumstances,
share options are exercisable on completion of a three or a five-year
save-as-you-earn contract. The exercise price of options granted represents
80% of the market price at the date the option was granted. |
| | The Executive Scheme applies
to senior executives, including Executive Directors. Options granted for
the 1999/2000 financial year are subject to the achievement of performance
targets related to earnings per share growth over a three-year period.
Options granted for 2000/01 financial year and thereafter are subject
to the achievement of performance targets related to total shareholder
returns over a three-year period. The share options are generally exercisable
between the third and tenth anniversaries of the date of grant if the
relevant performance target is achieved. |
| | Movement in options to subscribe
for ordinary shares under the Group’s various options schemes for
the three years ended 31 March 2003 are shown below and include those
options related to shares issued to employee benefit trusts: |

	Weighted — average price	Sharesave — scheme		Weighted — average price	Executive — share scheme		Total
	£	millions		£	millions		millions
At 31 March 2000	2.16	16.2		3.75	6.0		22.2
Granted	4.16	1.4		5.31	1.6		3.0
Lapsed – forfeited	2.89	(0.4	)	–	–		(0.4	)
Exercised	1.68	(4.1	)	2.15	(0.7	)	(4.8	)
At 31 March 2001	2.54	13.1		4.31	6.9		20.0
Granted	4.57	2.4		5.50	2.6		5.0
Lapsed – forfeited	3.74	(0.7	)	–	–		(0.7	)
Lapsed – expired	–	–		4.17	(0.1	)	(0.1	)
Exercised	1.76	(5.0	)	3.05	(0.9	)	(5.9	)
At 31 March 2002	3.33	9.8		4.81	8.5		18.3
Converted from Lattice sharesave scheme	3.18	26.7		–	–		26.7
Granted	3.62	9.9		4.78	5.1		15.0
Lapsed – forfeited	4.14	(3.7	)	5.10	–		(3.7	)
Lapsed – expired	3.68	(1.0	)	2.85	(0.1	)	(1.1	)
Exercised	2.39	(3.7	)	2.84	(0.4	)	(4.1	)
At 31 March 2003	3.31	38.0		4.86	13.1		51.1
Included within options outstanding
at 31 March 2003 were the following options which were exercisable:
At 31 March 2003	3.34	1.7		3.72	2.4		4.1

Lattice sharesave scheme	Weighted	Sharesave
	average price	scheme
	£	millions
At 31 March 2000	–	–
Granted	1.18	71.0
At 31 March 2001	1.18	71.0
Granted	1.29	11.0
Lapsed – forfeited	1.18	(2.8	)
At 31 March 2002	1.19	79.2
Lapsed – forfeited	1.21	(1.4	)
Lapsed – expired	1.20	(3.4	)
Exercised	1.19	(1.9	)
Converted to National Grid Transco options	1.19	(71.2	)
At 31 March 2003	1.20	1.3
Included within options outstanding at
31 March 2003 were the following options which were exercisable:
At 31 March 2003	1.19	0.7

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| 23. |
| --- |
| Options outstanding at 31
March 2003 and 31 March 2002, together with their exercise prices and
dates were as follows: |

| | 2003 | | 2002 | Exercise
price — per share | Normal dates — of exercise |
| --- | --- | --- | --- | --- | --- |
| | millions | | millions | pence | Years |
| Employee sharesave schemes | – | | 2.2 | 171.0 | 2002 |
| | – | | 0.9 | 337.0 | 2002 |
| | 1.1 | | 1.3 | 312.0 | 2003 |
| | 0.4 | | 0.5 | 416.0 | 2003 |
| | 1.6 | | 1.9 | 337.0 | 2004 |
| | 0.2 | | 0.7 | 457.0 | 2004 |
| | 22.7 | (i) | – | 314.7 | 2004 – 2005 |
| | 0.4 | | 0.7 | 416.0 | 2005 |
| | 0.4 | | – | 397.0 | 2005 |
| | 3.3 | (i) | – | 344.0 | 2005 – 2007 |
| | 7.2 | | – | 350.0 | 2005 – 2007 |
| | 0.3 | | 1.6 | 457.0 | 2006 |
| | 0.4 | | – | 397.0 | 2007 |
| | 38.0 | | 9.8 | | |

(i) These amounts represent former Lattice sharesave options converted to National Grid options.

| Following the merger of Lattice
and National Grid a number of employees did not convert their Lattice
options into National Grid Transco options. These options remain options
over shares in Lattice but are converted to shares in National Grid Transco
upon exercise, details are disclosed below. | | | | | |
| --- | --- | --- | --- | --- | --- |
| | | | | Exercise
price | Normal dates |
| | 2003 | | 2002 | per share | of exercise |
| | millions | | millions | pence | Years |
| Lattice sharesave options | 1.1 | | 69.1 | 118.0 | 2004 –
2006 |
| | 0.2 | | 10.1 | 129.0 | 2005 – 2007 |
| | 1.3 | (ii) | 79.2 | | |

| (ii) |
| --- |
| The National
Grid Transco employee sharesave scheme and the Lattice sharesave scheme
are Inland Revenue approved and hence, as permitted by Urgent Issues Task
Force (UITF) abstract 17 (revised 2000), no charge has been made to the
profit and loss account. |

| | 2003 | 2002 | Exercise
price — per share | Normal dates — of exercise |
| --- | --- | --- | --- | --- |
| | millions | millions | pence | Years |
| Executive scheme | 0.9 | 1.1 | 205.5 –
280.0 | 2001 –
2007 |
| | 0.8 | 1.0 | 375.8 | 2001 – 2008 |
| | 0.6 | 0.7 | 424.0 – 455.3 | 2002 – 2009 |
| | 1.5 | 2.9 | 526.5 – 566.5 | 2003 – 2010 |
| | 4.2 | 2.8 | 479.5 – 623.0 | 2004 – 2011 |
| | 5.1 | – | 460.3 – 481.5 | 2005 – 2012 |
| | 13.1 | 8.5 | | |

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Notes to the accounts continued

1. Reserves

									Company
	Share						Profit		Share		Profit
	premium		Revaluation		Other		and loss		premium	Other	and loss
	account		reserve		reserves		account		account	reserve	account
	£m		£m		£m		£m		£m	£m	£m
At 31 March 2000	–		50		(5,243	)	5,509		–	–	–
Exchange adjustments	–		–		–		(15	)	–	–	–
Tax on exchange adjustments	–		–		–		32		–	–	–
Ordinary shares issued during the year	1		–		–		–		–	–	–
Transfer on issue of certain shares under
share option schemes	1		–		–		(1	)	–	–	–
Contribution to sharesave trust	–		–		–		45		–	–	–
Unrealised gain on transfer of assets
to a joint venture (net of tax)	–		–		19		–		–	–	–
Funding movements with BG Group	–		–		20		–		–	–	–
Retained profit for the year	–		–		–		655		–	–	–
Transfer	(2	)	–		2		–		–	–	–
At 31 March 2001	–		50		(5,202	)	6,225		–	–	–
Exchange adjustments	–		–		–		(58	)	–	–	–
Tax on exchange adjustments	–		–		–		21		–	–	–
Ordinary shares issued during the year
– Share option scheme	46		–		–		–		1	–	–
– Acquisition	1,242		–		–		–		1,242	–	–
Transfer on issue of certain shares under
share option schemes	11		–		–		(11	)	–	–	–
Unrealised gain on transfer of assets
to a joint venture (net of tax)	–		–		7		–		–	–	–
Reduction in revaluation reserve	–		(50	)	–		–		–	–	–
Retained (loss)/profit for the year	–		–		–		(901	)	–	–	498
Transfer	(56	)	–		56		–		–	–	–
At 31 March 2002	1,243		–		(5,139	)	5,276		1,243	–	498
Exchange adjustments	–		–		–		(322	)	–	–	–
Tax on exchange adjustments	–		–		–		12		–	–	–
Ordinary shares issued during the year	2		–		–		–		4	–	–
Repurchase and cancellation of ordinary
shares	–		–		2		(97	)	–	2	(97	)
Transfer on issue of certain shares under
share option schemes	2		–		–		(2	)	–	–	–
Unrealised gain on transfer of assets
to a joint venture (net of tax)	–		–		6		–		–	–	–
Retained (loss)/profit for the year	–		–		–		(139	)	–	–	734
At 31 March 2003	1,247		–		(5,131	)	4,728		1,247	2	1,135

| | The Company has not presented its own
profit and loss account as permitted by section 230 of the Companies Act
1985. The Company’s profit after taxation was £1,264m (2002:
£667m; 2001: £nil). |
| --- | --- |
| | Other reserves are non-distributable
reserves. They included merger accounting differences but, primarily represented
the difference between the carrying value of Group undertakings, investments
and their respective capital structures following the Lattice Demerger
from BG Group plc and the 1999 Lattice Refinancing of £(5,745)m.
Also included in the reserve were the merger differences described below
of £221m and £359m together with unrealised gains of £32m
on transfer of fixed assets to a former joint venture which subsequently
became a Group undertaking. |
| | The revaluation reserve brought forward
as at 1 April 2000 related to investment properties. These properties
were reclassified as other land and buildings in 2001 and are now reported
at historical cost. |
| | During the year ended 31 March 2003,
the application of merger accounting principles to the Merger gave rise
to a difference of £221m. It was accounted for as a merger difference
and included within other reserves. The difference represented the excess
of nominal share capital in issue by Lattice at the date of the Merger
over the National Grid Transco plc share capital issued to Lattice shareholders.
In accordance with merger accounting principles, the shares issued in
connection with the Merger were treated as if issued throughout the year
ended 31 March 2003 and comparative periods. |
| | During the year ended 31 March 2002,
the application of merger accounting principles to a group reconstruction
which involved the creation of a new holding company gave rise to a difference
of £359m. It was accounted for as a merger difference and included
within other reserves. In accordance with merger accounting principles,
the shares issued in connection with the scheme of arrangement to acquire
the former holding company of the Group (National Grid Holdings One plc),
as adjusted to reflect the issue of options were treated as if issued
throughout the year ended 31 March 2002 and comparative period. |
| 25. | Non-equity minority interests |
| | The non-equity minority interests of
£69m (2002: £79m) comprised cumulative preference stock issued
by Group undertakings. |

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1. Reconciliation of movement in equity shareholders’ funds

Profit/(loss) for the year	2003 £m — 391		2002 £m — (321	)	2001 £m — 1,124
Dividends	(530	)	(580	)	(469	)
	(139	)	(901	)	655
Issue of ordinary shares	2		1,317		1
Repurchase and cancellation of ordinary
shares	(97	)	–		–
Exchange adjustments	(322	)	(58	)	(15	)
Tax on exchange adjustments	12		21		32
Unrealised gain on transfer of assets
to a joint venture (net of tax)	6		7		19
Reduction in revaluation reserve on reclassification
of investment properties	–		(50	)	–
Contribution to sharesave trust	–		–		45
Funding movement with BG Group	–		–		20
Net (decrease)/increase in equity shareholders’
funds	(538	)	336		757
Equity shareholders’ funds at start
of year	1,690		1,354		597
Equity shareholders’
funds at end of year	1,152		1,690		1,354

27.
a) Reconciliation of operating profit
to net cash inflow from operating activities before exceptional items
	2003 £m		2002 £m		2001 £m
Operating profit of Group undertakings	1,612		1,060		1,712
Group exceptional operating items	476		673		88
Depreciation and amortisation	1,088		876		769
(Increase)/decrease in stocks	(16	)	3		(19	)
(Increase)/decrease in debtors	(149	)	222		(168	)
Increase/(decrease) in creditors	159		(180	)	147
Decrease in provisions	(16	)	(260	)	(37	)
Other	–		–		(10	)
Net
cash inflow from operating activities before exceptional items	3,154		2,394		2,482

b) Disposal of investments	2003 £m	2002 £m	2001 £m
Cash consideration received	328	37	205
Cash balances of businesses disposed	–	–	(9	)
	328	37	196
Comprises:
Disposal of Group undertakings	92	37	54
Disposal of other investments	236	–	142
	328	37	196

c) Acquisition of Group undertakings	2003 £m	2002 £m		2001 £m
Payments to acquire Group undertakings	–	(943	)	(443	)
(Overdraft)/cash balances of Group undertakings
acquired	–	(7	)	2
	–	(950	)	(441	)

Back to Contents

| Notes to the
accounts continued | |
| --- | --- |
| 27. | Group cash flow
statement (continued) |
| | d) Reconciliation
of net cash flow to movement in net debt |

	2003 — £m		2002 — £m		2001 — £m
Movement in cash and overdrafts	34		22		(15	)
Net cash outflow/(inflow) from the management
of liquid resources	138		(347	)	(696	)
(Increase)/decrease in borrowings	(267	)	(1,206	)	208
Change in net debt resulting from cash
flows	(95	)	(1,531	)	(503	)
Acquisition of Group undertakings	–		(3,678	)	(162	)
Disposal of Group undertaking	(62	)	–		–
Certificates of tax deposit surrendered	–		–		(4	)
Exchange adjustments	593		20		(218	)
Other non-cash movements	(15	)	(5	)	(51	)
Movement in net debt in the year	421		(5,194	)	(938	)
Net debt at start of year	(14,299	)	(9,105	)	(8,167	)
Net debt at end of
year	(13,878	)	(14,299	)	(9,105	)

| e) Analysis of changes in net debt | At
1 April 2000 £m | | Cash flow £m | | Acquisition of
Group undertakings £m | | Exchange adjustments £m | | Other non-cash movements £m | | At
31 March 2001 £m | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Cash at bank and in hand | 23 | | 5 | | – | | – | | – | | 28 | |
| Bank overdrafts | (4 | ) | (20 | ) | – | | – | | – | | (24 | ) |
| | | | (15 | ) | | | | | | | | |
| Current asset investments | 1,170 | | (696 | ) | – | | 21 | | (4 | ) | 491 | |
| Borrowings due after one year | (8,214 | ) | (310 | ) | (50 | ) | (205 | ) | 525 | | (8,254 | ) |
| Borrowings due within one year | (1,142 | ) | 518 | | (112 | ) | (34 | ) | (576 | ) | (1,346 | ) |
| | | | 208 | | | | | | | | | |
| | (8,167 | ) | (503 | ) | (162 | ) | (218 | ) | (55 | ) | (9,105 | ) |

| Cash at bank and in hand | At 1 April 2001 £m — 28 | | Cash flow £m — 82 | | Acquisition of
Group undertakings £m — – | | Exchange adjustments £m — – | | Other non-cash movements £m — – | | At
31 March 2002 £m — 110 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Bank overdrafts | (24 | ) | (60 | ) | – | | – | | – | | (84 | ) |
| | | | 22 | | | | | | | | | |
| Current asset investments | 491 | | (347 | ) | 215 | | (5 | ) | – | | 354 | |
| Borrowings due after one year | (8,254 | ) | (1,830 | ) | (3,189 | ) | 11 | | 549 | | (12,713 | ) |
| Borrowings due within one year | (1,346 | ) | 624 | | (704 | ) | 14 | | (554 | ) | (1,966 | ) |
| | | | (1,206 | ) | | | | | | | | |
| | (9,105 | ) | (1,531 | ) | (3,678 | ) | 20 | | (5 | ) | (14,299 | ) |

| Cash at bank and in hand | At 1 April 2002 £m — 110 | | Cash flow £m — 12 | | Disposal of
Group undertaking £m — – | | Exchange adjustments £m — (3 | ) | Other non-cash movements £m — – | | At 31 March 2003 £m — 119 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Bank overdrafts | (84 | ) | 22 | | – | | – | | – | | (62 | ) |
| | | | 34 | | | | | | | | | |
| Current asset investments | 354 | | 138 | | – | | (10 | ) | – | | 482 | |
| Borrowings due after one year | (12,713 | ) | (1,226 | ) | (55 | ) | 497 | | 1,264 | | (12,233 | ) |
| Borrowings due within one year | (1,966 | ) | 959 | | (7 | ) | 109 | | (1,279 | ) | (2,184 | ) |
| | | | (267 | ) | | | | | | | | |
| | (14,299 | ) | (95 | ) | (62 | ) | 593 | | (15 | ) | (13,878 | ) |

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| 28. |
| --- |
| The acquisition of Niagara
Mohawk was completed on 31 January 2002 at a total cost of £2,186m.
The net assets acquired were ascribed a provisional fair value of £1,376m
resulting in goodwill of £810m. During the year ended 31 March 2003,
the provisional fair values applied were reviewed and a number of adjustments
were made to those provisional values as a result of better information
being available, as shown below: |

| | Provisional — fair
value | | Fair
value | | Final | |
| --- | --- | --- | --- | --- | --- | --- |
| | at
acquisition | | adjustments | | fair
value | |
| | £m | | £m | | £m | |
| Tangible fixed assets | 3,265 | | (14 | )(i) | 3,251 | |
| Fixed asset investments | 64 | | – | | 64 | |
| Stocks | 36 | | – | | 36 | |
| Debtors | 3,955 | | (115 | )(ii)(iii) | 3,840 | |
| Investment held for resale | 15 | | 1 | | 16 | |
| Cash and deposits | 215 | | – | | 215 | |
| Creditors excluding borrowings | (939 | ) | (6 | )(iv) | (945 | ) |
| Borrowings | (3,852 | ) | – | | (3,852 | ) |
| Provisions for liabilities and charges | (1,317 | ) | 52 | (v) | (1,265 | ) |
| Minority interests | (66 | ) | – | | (66 | ) |
| Net
assets acquired | 1,376 | | (82 | ) | 1,294 | |

| Fair value adjustments
primarily comprise revaluation adjustments relating to: | |
| --- | --- |
| (i) | Write-off of construction
work in progress (£13m); |
| (ii) | Increase in bad debt provision
(£42m); |
| (iii) | Reduction in regulatory
assets (£64m); |
| (iv) | Adjustment to accruals (£6m);
and |
| (v) | Deferred tax on certain
fair value adjustments (£54m). |

| The following unaudited pro forma summary
gives effect to the acquisition of Niagara Mohawk, as if the acquisition
had taken place on 1 April 2000 and on 1 April 2001. The pro forma summary
combines the actual consolidated results of the Group (excluding the effect
of the acquisition in the actual period that it took place) and the results
of Niagara Mohawk after giving effect to certain adjustments. These adjustments
include estimates of the effect of adopting the final fair value adjustments
and the increased net interest expense, together with the associated tax
effects, as a result of financing the acquisition. In addition, the earnings
per share calculation has been adjusted as if the shares issued to acquire
Niagara Mohawk were issued on the assumed date of acquisition for the
purposes of preparing the pro forma summary. The pro forma summary does
not necessarily reflect the results of operations as they would have been
if the Group (excluding the acquisition) and the acquisition had constituted
a single entity during the periods presented. |
| --- |
| The unaudited pro forma summary is prepared
on the basis of UK GAAP and includes the business combination of Lattice
and National Grid on a merger accounting basis. As stated in note 33,
under US GAAP, this business combination is accounted for as an acquisition
of Lattice by National Grid. Therefore in note 34, additional disclosure
is provided that presents pro forma financial information to reflect the
business combination of National Grid and Lattice on the basis of acquisition
accounting under US GAAP. |

	2002 — £m		2001 — £m
Turnover	10,126		10,209
(Loss)/profit for the year – including
exceptional items and goodwill amortisation	(352	)	1,045
Profit for the year – excluding
exceptional items and goodwill amortisation	846		626
Earnings per ordinary share
Basic, including exceptional items and
goodwill amortisation	(12.4	)p	37.6	p
Adjusted basic, excluding exceptional
items and goodwill amortisation	33.6	p	22.8	p

Back to Contents

Notes to the accounts continued
29.	Merger accounting

| a) Alignment
of accounting policies and fair value of shares issued on Merger Lattice made changes to its accounting
policies with effect from 1 April 2002. These changes were reported in
its interim results for the six months ended 30 September 2002 and therefore
have not been included as alignments of accounting policies at the time
of the Merger. The changes made were as follows: |
| --- |
| i) Lattice changed its accounting
policy in respect of deferred tax, with the effect that Lattice no longer
discounted deferred tax balances, resulting in an increase in the 2002
tax charge of £4m (£26m on pre-exceptional profits) and an
increase in the deferred tax liability of £605m; ii) A pension interest credit of £22m that was included within the
net pension charge in operating profit is now reported within net interest;
and iii) Own shares of £7m in 2002 were recorded in other debtors but
are now included within fixed asset investments. |
| In addition to the above
changes, National Grid changed its policy in respect of the capitalisation
of capital contributions. An adjustment has been made to the 31 March
2002 balances to reclassify £90m of capital contributions from tangible
fixed assets to creditors (amounts due within one year) of £3m and
to creditors (amounts due after more than one year) of £87m. |
| The fair value of the shares
issued to effect the Merger was £6.6 billion. In addition, costs
directly related to the Merger transaction itself of £79m were incurred. |
| b) Analysis of Group
profit and loss account for the years ended 31 March 2002 and 2003 |

| Turnover, including share of joint ventures | National
Grid 1 April to 20 October 2002 £m — 3,475 | | Lattice 1 April to 20October 2002 £m — 1,470 | | National
Grid Transco 21 Oct 2002 to 31 March 2003 £m — 4,621 | | Total year ended 31 March 2003 £m — 9,566 | | National
Grid year ended 31 March 2002 £m — 4,660 | | Lattice year ended 31 March 2002 £m — 3,161 | | National
Grid Transco year ended 31 March 2002 £m — 7,821 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Less: share of joint ventures’ | | | | | | | | | | | | | | |
| turnover – continuing
operations | (72 | ) | – | | (27 | ) | (99 | ) | (133 | ) | (8 | ) | (141 | ) |
| Less: share of joint ventures’ | | | | | | | | | | | | | | |
| turnover – discontinued
operations | (65 | ) | – | | (2 | ) | (67 | ) | (126 | ) | – | | (126 | ) |
| Group turnover | | | | | | | | | | | | | | |
| – continuing operations | 3,338 | | 1,434 | | 4,591 | | 9,363 | | 4,401 | | 3,070 | | 7,471 | |
| – discontinued operations | – | | 36 | | 1 | | 37 | | – | | 83 | | 83 | |
| | 3,338 | | 1,470 | | 4,592 | | 9,400 | | 4,401 | | 3,153 | | 7,554 | |
| Operating profit/(loss) | | | | | | | | | | | | | | |
| Adjusted operating profit(i) of | | | | | | | | | | | | | | |
| Group undertakings
– continuing operations | 708 | | 243 | | 1,265 | | 2,216 | | 893 | | 985 | | 1,878 | |
| Adjusted operating loss(i) of | | | | | | | | | | | | | | |
| Group undertakings
– discontinued operations | – | | (18 | ) | (8 | ) | (26 | ) | – | | (60 | ) | (60 | ) |
| | 708 | | 225 | | 1,257 | | 2,190 | | 893 | | 925 | | 1,818 | |
| Share of joint ventures’ and associate’s
adjusted | | | | | | | | | | | | | | |
| operating profit/(loss)(i)
– continuing operations | 8 | | (1 | ) | 8 | | 15 | | 36 | | (17 | ) | 19 | |
| Share of joint ventures’ and associate’s
adjusted | | | | | | | | | | | | | | |
| operating loss/(profit)(i)
– discontinued operations | (22 | ) | – | | 2 | | (20 | ) | (54 | ) | – | | (54 | ) |
| | (14 | ) | (1 | ) | 10 | | (5 | ) | (18 | ) | (17 | ) | (35 | ) |
| Exceptional items – continuing operations | (22 | ) | (104 | ) | (182 | ) | (308 | ) | (122 | ) | (163 | ) | (285 | ) |
| Exceptional items – discontinued
operations | 127 | | (172 | ) | 6 | | (39 | ) | (792 | ) | (250 | ) | (1,042 | ) |
| Goodwill amortisation – continuing
operations | (60 | ) | (1 | ) | (41 | ) | (102 | ) | (78 | ) | (7 | ) | (85 | ) |
| Goodwill amortisation – discontinued
operations | – | | – | | – | | – | | (12 | ) | – | | (12 | ) |
| Total operating profit/(loss) | 739 | | (53 | ) | 1,050 | | 1,736 | | (129 | ) | 488 | | 359 | |
| Non-operating exceptional items –
continuing operations | (32 | ) | (35 | ) | 36 | | (31 | ) | 22 | | 103 | | 125 | |
| Non-operating exceptional items –
discontinued operations | – | | (32 | ) | (36 | ) | (68 | ) | 30 | | 1 | | 31 | |
| Profit/(loss) on ordinary activities | | | | | | | | | | | | | | |
| before interest
and taxation | 707 | | (120 | ) | 1,050 | | 1,637 | | (77 | ) | 592 | | 515 | |
| Net interest – excluding exceptional
items | (306 | ) | (203 | ) | (430 | ) | (939 | ) | (293 | ) | (364 | ) | (657 | ) |
| Net interest – exceptional items | (55 | ) | – | | 24 | | (31 | ) | (142 | ) | – | | (142 | ) |
| Net interest | (361 | ) | (203 | ) | (406 | ) | (970 | ) | (435 | ) | (364 | ) | (799 | ) |
| Profit/(loss)
on ordinary activities before taxation | 346 | | (323 | ) | 644 | | 667 | | (512 | ) | 228 | | (284 | ) |
| Taxation – excluding exceptional
items | (107 | ) | (5 | ) | (261 | ) | (373 | ) | (85 | ) | (166 | ) | (251 | ) |
| Taxation – exceptional items | 25 | | 34 | | 69 | | 128 | | 60 | | 106 | | 166 | |
| | (82 | ) | 29 | | (192 | ) | (245 | ) | (25 | ) | (60 | ) | (85 | ) |
| Profit/(loss)
on ordinary activities after taxation | 264 | | (294 | ) | 452 | | 422 | | (537 | ) | 168 | | (369 | ) |
| Minority interests – excluding exceptional
items | (4 | ) | 1 | | – | | (3 | ) | (6 | ) | 4 | | (2 | ) |
| Minority interests – exceptional
items | (12 | ) | – | | (16 | ) | (28 | ) | 50 | | – | | 50 | |
| | (16 | ) | 1 | | (16 | ) | (31 | ) | 44 | | 4 | | 48 | |
| Profit/(loss)
for the period | 248 | | (293 | ) | 436 | | 391 | | (493 | ) | 172 | | (321 | ) |

(i) Adjusted operating profit/(loss) is presented before exceptional items and goodwill amortisation.

There was no intercompany trading between National Grid and Lattice.

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29.
c) Analysis
of statement of total recognised gains and losses

					21 Oct 2002
	1 April
2002				to 31 March
	to 20 Oct
2002				2003		2003		2002
	National
Grid		Lattice		NGT		Total		National
Grid		Lattice		Total
	£m		£m		£m		£m		£m		£m		£m
Profit/(loss) for the period	248		(293	)	436		391		(493	)	172		(321	)
Exchange adjustments	(281	)	–		(41	)	(322	)	(58	)	–		(58	)
Tax on adjustments	–		–		12		12		21		–		21
Other recognised gains and losses	–		(2	)	8		6		–		(43	)	(43	)
Total recognised gains and
losses	(33	)	(295	)	415		87		(530	)	129		(401	)

d) Book value of net assets at date of Merger

| Book value of National Grid net assets
at date of Merger | £m — 3,039 | |
| --- | --- | --- |
| Book value of Lattice net liabilities
at date of Merger | (1,806 | ) |
| Total net assets at date
of Merger | 1,233 | |

| 30. |
| --- |
| Transactions
with related parties were in the normal course of business and are summarised
below. The Leasing Group plc, a former Group undertaking, was sold on 12
October 2002. As a result, its transactions with the Group from the date
of disposal were deemed to be related party transactions and are included
below: |

	2003	2002	2001
	£m	£m	£m
Sales:
Services supplied	10	33	47
Finance lease rentals	11	9	11
Tangible fixed assets	–	28	47
Purchases:
Services received	59	55	26
Finance lease rentals	1	–	–
Tangible fixed assets	12	3	–

Amounts owed from and to a former associate are given in note 16 and note 18 respectively.

Amounts owed to and from The Leasing Group plc amounted to £73m and £79m respectively at 31 March 2003. In respect of prior years, The Leasing Group plc was included within the Group accounts as a Group undertaking.

During the year, amounts were paid to or in respect of joint ventures, arising from the Group’s obligations from its decision to exit from these investments. The payments made during the year amounted to £153m, all of which had been provided for at 31 March 2002.

31.
a) Future
capital expenditure

	Group — 2003	2002	Joint ventures — 2003	2002
	£m	£m	£m	£m
Contracted for but not provided	664	550	1	26

b) Lease commitments At 31 March 2003, the Group’s operating lease commitments for the financial year ending 31 March 2004 amounted to £74m (2002: £39m) and are analysed by lease expiry date as follows:

| | Land and
buildings — 2003 | 2002 | Other — 2003 | 2002 | Total — 2003 | 2002 |
| --- | --- | --- | --- | --- | --- | --- |
| | £m | £m | £m | £m | £m | £m |
| Within one year | 1 | 1 | 7 | 2 | 8 | 3 |
| Between two and five years | 4 | 3 | 20 | 12 | 24 | 15 |
| After five years | 26 | 12 | 16 | 9 | 42 | 21 |
| | 31 | 16 | 43 | 23 | 74 | 39 |

Back to Contents

| Notes to the
accounts continued | |
| --- | --- |
| 31. | Commitments and contingencies (continued) |

| Total commitments under non-cancellable
operating leases were as follows: | 2003 | 2002 |
| --- | --- | --- |
| | £m | £m |
| In one year or less | 74 | 39 |
| In more than one year, but not more than
two years | 52 | 35 |
| In more than two years, but not more
than three years | 41 | 32 |
| In more than three years, but not more
than four years | 32 | 30 |
| In more than four years, but not more
than five years | 30 | 24 |
| In more than five years | 247 | 227 |
| | 476 | 387 |

c) Power commitments
At 31 March 2003, the Group
had obligations to purchase energy under long-term contracts. The following
table analyses these commitments, excluding those purchased power obligations,
the net present value of which is already reflected in creditors (notes
18 and 19):
	2003 £m	2002 £m
In one year or less	1,252	1,340
In more than one year, but not more than
two years	948	1,189
In more than two years, but not more
than three years	610	1,057
In more than three years, but not more
than four years	592	684
In more than four years, but not more
than five years	565	692
In more than five years	2,362	2,350
	6,329	7,312

| d) Third party contingencies The Group has outstanding
BG Group related commitments and contingencies amounting to £13m
(2002: £441m), arising from the restructuring of BG Group in 1999.
BG Group has been working with the Group since early 1999 to remove all
the relevant guarantees or to find an alternative guarantor which is not
part of the Group. For any guarantees that have not been replaced, the
Group will continue to provide such guarantees on an arm’s length
basis until they are removed or replaced. The Group has issued guarantees
in respect of a former associate amounting to £14m (2002: £14m
(associate)). During the year ended 31 March 2003, Transco, a Group undertaking,
was released from financial guarantees given as part of the Centrica demerger
in 1997 as to the performance by Centrica of certain long-term interruptible
gas supply contracts. |
| --- |
| e) Other commitments and contingencies The value of other Group commitments and contingencies at 31 March 2003
amounted to £194m (2002: £202m), including guarantees of £120m
(2002: £133m), of which £nil (2002: £11m) was in respect
of a joint venture. |

| Details of the guarantees
entered into by the Group at 31 March 2003 are shown below: | |
| --- | --- |
| i) | Performance guarantees of
£24m relating to certain property obligations of a Group undertaking; |
| ii) | £50m guarantee of the obligations
of a Group undertaking to pay liabilities under a meter operating contract
for a duration expected to be 20-30 years; |
| iii) | A four-year guarantee relating to an
interconnector construction project amounting to £18m provided by
the Company; and |
| iv) | Other guarantees amounting to £28m
arising in the normal course of business and entered into on normal commercial
terms. |

| The Company has guaranteed the lease
obligations of a former associate to a Group undertaking, amounting to
£50m (2002: £45m). |
| --- |
| f) Parent Company loan guarantees
on behalf of Group undertakings The Company has guaranteed the repayment of principal sums, any associated
premium and interest on specific loans due from certain Group undertakings
to third parties. At 31 March 2003, the sterling equivalent amounted to
£1,845m (2002: £1,426m). The guarantees are for varying terms
between four and ten years. |
| g) Larkhall prosecution As a result of a fatal accident in Larkhall, Lanarkshire in December
1999 in which four people died, the Crown Office in Scotland served an
indictment on Transco on 5 February 2003. This charged the company with
culpable homicide, with an alternative charge of a contravention of Sections
3 and 33 of the Health and Safety at Work Act 1974. Charging the company
with culpable homicide is unprecedented under Scots law and therefore
before a full trial can proceed, a number of fundamental legal issues
associated with the indictment are required to be resolved. At a preliminary
hearing in March 2003 to determine issues as to the competency and relevancy
and other associated matters in relation to the charges, judgement was
issued in favour of the Crown. Transco has appealed against this decision
and the appeal hearing commenced on 20 May 2003. On indictment, the maximum
penalties for both culpable homicide and contravention of Sections 3 and
33 are unlimited fines. |
| h) Sale of Millstone 3 In November 1999, New England Power (NEP), a subsidiary of National
Grid USA, entered into an agreement with Northeast Utilities (NU) to settle
claims made by NEP in relation to the operation of the Millstone 3 nuclear
unit. As part of this agreement, NU agreed to include NEP’s 16.2%
share in an auction of NU’s share in that unit, at a guaranteed price,
irrespective of the price actually received at auction. On 31 March 2001,
the Millstone 3 sale was completed and proceeds of US$28m (£20m)
were received by NEP. Millstone 3 was subsequently sold to Dominion Resources
Inc. for a total of approximately US$855m (£602m). |
| Regulatory authorities from Rhode Island,
New Hampshire and Massachusetts have expressed an intent to challenge
the reasonableness of the settlement agreement as NEP would have received
approximately US$140m of sale proceeds without the agreement. Any dispute
will be resolved by the Federal Energy Regulatory Commission (FERC). The
Group believes it has a strong argument that it acted prudently since
the amount received under the settlement agreement was the highest sale
price for a nuclear unit at the time the agreement was reached. |

Back to Contents

| 31. | Commitments and
contingencies (continued) |
| --- | --- |
| | i) Environmental related
litigation On 10 January 2002, New York State filed a civil action against Niagara
Mohawk in federal district court in Buffalo, New York, for alleged violations
of the federal Clean Air Act and related state environmental laws, at
the Huntley and Dunkirk power plants, which Niagara Mohawk sold in 1999
to NRG Energy Inc. and its affiliates (collectively, NRG). The State alleged,
among other things, that between 1982 and 1999 Niagara Mohawk modified
the two plants 55 times without obtaining proper preconstruction permits
and implementing proper pollution equipment controls. |
| | Niagara Mohawk
and NRG moved to dismiss the complaint on statute of limitations and other
grounds in 2002, and on 27 March 2003, the court granted the motions in
part, holding that the violations of the Clean Air Act prior to November
1996 were barred by the federal five-year statute of limitations, and
that related state statutory violations prior to November 1999 were barred
by the state three-year statute of limitations. At the same time, the
court preserved the State’s non-regulatory claims against Niagara
Mohawk and dismissed NRG from the suit. On 25 April, the State filed a
motion for leave to amend the complaint to assert new claims against both
Niagara Mohawk and NRG. |
| | Prior to the
commencement of the enforcement action, on 13 July 2001, Niagara Mohawk
filed a declaratory judgement action in New York State court in Syracuse
against NRG seeking a ruling that NRG is responsible for the costs of
pollution controls and mitigation that might result from the State’s
enforcement action. As a result of NRG’s voluntary bankruptcy petition,
filed in New York federal court for bankruptcy on 14 May 2003, Niagara
Mohawk’s declaratory judgement action is stayed. |
| 32. | Group undertakings
and joint ventures |
| | Principal Group
undertakings The principal Group undertakings included in the Group accounts at 31
March 2003 are listed below. These undertakings are wholly-owned and,
unless otherwise indicated, are incorporated in Great Britain. |

| | Principal
activity |
| --- | --- |
| Transco plc (i) | Gas transportation |
| National Grid Company plc (i) | Transmission of electricity in England
and Wales |
| New England Power Company (Incorporated
in the US) (i) | Transmission and generation of electricity |
| Massachusetts Electric Company (Incorporated
in the US) (i) | Distribution of electricity |
| The Narragansett Electric Company (Incorporated
in the US) (i) | Distribution of electricity |
| Niagara Mohawk Power Corporation (Incorporated
in the US) (i) | Distribution and transmission of electricity
and gas |
| NGG Finance plc (ii) | Financing |
| British Transco International Finance
B.V. (Incorporated in The Netherlands) (i) | Financing |
| SecondSite Property Portfolio Limited
(i) | Property |
| National Grid Holdings One plc (ii) | Holding company |
| Lattice Group plc (ii) | Holding company |
| National Grid USA (Incorporated in the
US) (i) | Holding company |
| Niagara Mohawk Holdings Inc. (Incorporated
in the US) (i) | Holding company |
| Lattice Group Holdings Limited (i) | Holding company |
| Transco Holdings plc (i) | Holding company |
| National Grid (US) Holdings Limited (ii) | Holding company |
| National Grid Holdings Limited (i) | Holding company |

| (i) | Issued ordinary share capital
held by Group undertakings. |
| --- | --- |
| (ii) | Issued ordinary share capital
held by National Grid Transco plc. |

Principal joint ventures
(at 31 March 2003)
	Group
holding	Country
of incorporation and
operation	Principal
activity
Compañia Inversora En Transmicion
Electrica CITELEC S.A.(i)	42.5% ordinary shares	Argentina	Transmission of electricity
Copperbelt Energy Corporation Plc.(i)	38.5% ordinary shares	Zambia	Transmission, distribution
			and supply of electricity

	(i)
	The investments
in joint ventures are held by Group undertakings.
	A full list
of all Group and associated undertakings is available from the Group Company
Secretary.
33.	Summary
US GAAP income statement, balance sheet, notes and associated reconciliations
	The Group
prepares its consolidated accounts in accordance with United Kingdom Generally
Accepted Accounting Principles (UK GAAP), which differ in certain respects
from United States Generally Accepted Accounting Principles (US GAAP).
	The most significant
difference between UK and US GAAP is that, under UK GAAP, the combination
of National Grid and Lattice has been accounted for as a merger (pooling
of interests), while under US GAAP this transaction is accounted for as
an acquisition (purchase accounting) of Lattice by National Grid. Consequently,
under UK GAAP, the accounts represent the combined accounts of National
Grid and Lattice on an historical cost basis for all periods presented.
Under US GAAP, the accounts presented prior to the Merger are those of National
Grid only.
	The income statements
and balance sheets shown on the following pages are presented in a US GAAP
format. The balance sheet at 31 March 2003 includes the impact of the fair
value of the acquired assets and liabilities of Lattice prepared under US
GAAP at the date of acquisition. A summary of the principal differences
between UK and US GAAP is shown in note 34.

Back to Contents

Notes to the accounts continued
33.	Summary US GAAP
income statement, balance sheet, notes and associated reconciliations (continued)
	Summary US
GAAP income statement

| | 2003 — National | | US
GAAP adjustments — 2003 | | 2003 | | 2003 — National | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | Grid | | Lattice
pre- | | Other | | Grid | |
| | Transco | | acquisition | | US
GAAP | | Transco | |
| | (UK
GAAP) | | (UK
GAAP) | | adjustments | | (US
GAAP) | |
| | £m | | £m | | £m | | £m | |
| Turnover | 9,400 | | (1,470 | ) | 1 | | 7,931 | |
| Operating costs | | | | | | | | |
| Depreciation | (851 | ) | 249 | | (129 | ) | (731 | ) |
| Payroll costs | (1,107 | ) | 308 | | (305 | ) | (1,104 | ) |
| Purchases of electricity | (1,901 | ) | – | | – | | (1,901 | ) |
| Purchases of gas | (357 | ) | 53 | | – | | (304 | ) |
| Rates and property taxes | (537 | ) | 130 | | – | | (407 | ) |
| Electricity transmission services scheme
direct costs | (252 | ) | – | | – | | (252 | ) |
| EnMo direct costs | (530 | ) | – | | – | | (530 | ) |
| Replacement expenditure | (405 | ) | 239 | | 166 | | – | |
| Other operating charges | (1,848 | ) | 543 | | 320 | | (985 | ) |
| | (7,788 | ) | 1,522 | | 52 | | (6,214 | ) |
| Operating profit | 1,612 | | 52 | | 53 | | 1,717 | |
| Share of operating profits/(losses) of
joint ventures and associate | 124 | | 1 | | (125 | ) | – | |
| Non-operating expenses | (99 | ) | 67 | | 27 | | (5 | ) |
| Profit before interest and taxation | 1,637 | | 120 | | (45 | ) | 1,712 | |
| Net interest expense | (970 | ) | 203 | | 103 | | (664 | ) |
| Profit on ordinary activities before
taxation | 667 | | 323 | | 58 | | 1,048 | |
| Taxation | (245 | ) | (29 | ) | 16 | | (258 | ) |
| Profit on ordinary activities after taxation | 422 | | 294 | | 74 | | 790 | |
| Minority interests | (31 | ) | (1 | ) | 29 | | (3 | ) |
| Interest in equity accounted affiliates | | | | | 3 | | 3 | |
| Net income from continuing operations | 391 | | 293 | | 106 | | 790 | |
| Net loss from discontinued operations | | | | | (39 | ) | (39 | ) |
| Net
income for the year | 391 | | 293 | | 67 | | 751 | |
| Basic earnings per share under US GAAP
(pence) – continuing operations | | | | | | | 33.6 | |
| Diluted earnings per share under US GAAP
(pence) – continuing operations | | | | | | | 32.9 | |
| Basic earnings per ADS under US GAAP
(pence) – continuing operations | | | | | | | 168.0 | |
| Diluted earnings per ADS under US GAAP
(pence) – continuing operations | | | | | | | 164.5 | |
| Basic earnings per share under US GAAP
(pence) – discontinued operations | | | | | | | (1.7 | ) |
| Diluted earnings per share under US GAAP
(pence) – discontinued operations | | | | | | | (1.6 | ) |
| Basic earnings per ADS under US GAAP
(pence) – discontinued operations | | | | | | | (8.5 | ) |
| Diluted earnings per ADS under US GAAP
(pence) – discontinued operations | | | | | | | (8.0 | ) |
| Net
income under US GAAP after £22m dilutive impact of 4.25% Exchangeable
Bonds 2008 | | | | | | | 773 | |
| Weighted
average number of shares in issue (million) – for basic EPS | | | | | | | 2,348 | |
| Weighted
average number of shares in issue (million) – for diluted EPS | | | | | | | 2,468 | |

Consolidated statement of comprehensive income and changes in shareholders’ equity under US GAAP

Net income	2003 £m — 751
Additional minimum pension liability
(net of tax credit of £417m)	(886	)
Exchange adjustments (net of tax credit
of £12m)	(322	)
Share of joint ventures’ other comprehensive
income	(10	)
Other	9
Comprehensive loss	(458	)
Dividends	(382	)
Shares issued to purchase Lattice	6,566
Other shares issued	2
Share options granted	29
Repurchase of shares	(97	)
Movement in treasury stock	7
Shareholders’ equity at 1 April
2002	3,759
Shareholders’
equity at 31 March 2003	9,426

Cumulative foreign exchange losses recognised in other comprehensive income at 31 March 2003 under US GAAP were £365m (2002: £31m; 2001: £22m).

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33.
Summary US GAAP income statement (continued)

	2002 — National		US GAAP adjustments — 2002		2002		2002 — National
	Grid		Lattice pre-		Other		Grid
	Transco		acquisition		US GAAP		Transco
	(UK GAAP)		(UK GAAP)		adjustments		(US GAAP)
	£m		£m		£m		£m
Turnover	7,554		(3,153	)	(4	)	4,397
Operating costs
Depreciation	(750	)	431		3		(316	)
Payroll costs	(946	)	581		(52	)	(417	)
Purchases of electricity	(1,410	)	–		–		(1,410	)
Purchases of gas	(171	)	113		–		(58	)
Rates and property taxes	(424	)	227		–		(197	)
Electricity transmission
services scheme direct costs	(204	)	–		–		(204	)
EnMo direct costs	(395	)	–		–		(395	)
Replacement expenditure	(368	)	368		–		–
Other operating charges	(1,826	)	880		411		(535	)
	(6,494	)	2,600		362		(3,532	)
Operating profit	1,060		(553	)	358		865
Share of operating profits/(losses)
of joint ventures and associate	(701	)	65		636		–
Non-operating income	156		(104	)	(30	)	22
Profit before interest and
taxation	515		(592	)	964		887
Net interest expense	(799	)	364		295		(140	)
Profit on ordinary activities
before taxation	(284	)	(228	)	1,259		747
Taxation	(85	)	60		13		(12	)
Profit on ordinary activities
after taxation	(369	)	(168	)	1,272		735
Minority interests	48		(4	)	(46	)	(2	)
Interest in equity accounted
affiliates					(43	)	(43	)
Net income from continuing
operations	(321	)	(172	)	1,183		690
Net loss from discontinued
operations					(857	)	(857	)
Net loss for the year	(321	)	(172	)	326		(167	)
Basic earnings per share
under US GAAP (pence) – continuing operations							45.2
Diluted earnings per share
under US GAAP (pence) – continuing operations							43.3
Basic earnings per ADS under
US GAAP (pence) – continuing operations							226.0
Diluted earnings per ADS
under US GAAP (pence) – continuing operations							216.5
Basic earnings per share
under US GAAP (pence) – discontinued operations							(56.1	)
Diluted earnings per share
under US GAAP (pence) – discontinued operations							(52.1	)
Basic earnings per ADS under
US GAAP (pence) – discontinued operations							(280.5	)
Diluted earnings per ADS
under US GAAP (pence) – discontinued operations							(260.5	)
							£m
Net loss under US GAAP							(167	)
Dilutive impact of 4.25%
Exchangeable Bonds 2008							22
Net loss after dilution							(145	)
Weighted average number
of shares in issue (million) – for basic EPS							1,527
Weighted average number
of shares in issue (million) – for diluted EPS							1,644

Consolidated statement of comprehensive income and changes in shareholders’ equity under US GAAP (continued)

	2002
	£m
Net loss	(167	)
Exchange adjustments (net of tax credit
of £7m)	(2	)
Share of associate’s other comprehensive
loss	(5	)
Other	(4	)
Comprehensive loss	(178	)
Dividends	(229	)
Other shares issued	1,305
Share options granted	5
Movement in treasury stock	(36	)
Share of associate’s capital transactions	(33	)
Other	5
Shareholders’ equity at 1 April
2001	2,920
Shareholders’ equity
at 31 March 2002	3,759

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Notes to the accounts continued
33.	Summary US GAAP income statements, balance
sheets, notes and associated reconciliations (continued) Summary US GAAP income statements (continued)

| | 2001 — National Grid Transco (UK GAAP) £m | | US
GAAP adjustments — 2001 Lattice pre- acquisition (UK GAAP) £m | | 2001 Other US GAAP adjustments £m | | 2001 — National Grid Transco (US GAAP) £m | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Turnover | 6,891 | | (3,091 | ) | (17 | ) | 3,783 | |
| Operating costs | | | | | | | | |
| Depreciation | (665 | ) | 388 | | 3 | | (274 | ) |
| Payroll costs | (736 | ) | 433 | | (8 | ) | (311 | ) |
| Purchases of electricity | (1,248 | ) | – | | – | | (1,248 | ) |
| Purchases of gas | (98 | ) | 98 | | – | | – | |
| Rates and property taxes | (390 | ) | 214 | | – | | (176 | ) |
| Electricity transmission services scheme
direct costs | (220 | ) | – | | – | | (220 | ) |
| EnMo direct costs | (201 | ) | – | | – | | (201 | ) |
| Replacement expenditure | (276 | ) | 276 | | – | | – | |
| Other operating charges | (1,345 | ) | 676 | | 60 | | (609 | ) |
| | (5,179 | ) | 2,085 | | 55 | | (3,039 | ) |
| Operating profit | 1,712 | | (1,006 | ) | 38 | | 744 | |
| Share of operating profits/(losses) of
joint ventures and associate | (105 | ) | 9 | | 96 | | – | |
| Non-operating income | 306 | | (43 | ) | (263 | ) | – | |
| Profit before interest and taxation | 1,913 | | (1,040 | ) | (129 | ) | 744 | |
| Net interest expense | (635 | ) | 380 | | 118 | | (137 | ) |
| Profit on ordinary activities before
taxation | 1,278 | | (660 | ) | (11 | ) | 607 | |
| Taxation | (147 | ) | 200 | | (245 | ) | (192 | ) |
| Profit on ordinary activities after taxation | 1,131 | | (460 | ) | (256 | ) | 415 | |
| Minority interests | (7 | ) | – | | 2 | | (5 | ) |
| Interest in equity accounted affiliates | | | | | 13 | | 13 | |
| Net income from continuing operations | 1,124 | | (460 | ) | (241 | ) | 423 | |
| Net income from discontinued operations | | | | | 387 | | 387 | |
| Net
income for the year | 1,124 | | (460 | ) | 146 | | 810 | |
| Basic earnings per share under US GAAP
(pence) – continuing operations | | | | | | | 28.7 | |
| Diluted earnings per share under US GAAP
(pence) – continuing operations | | | | | | | 27.8 | |
| Basic earnings per ADS under US GAAP
(pence) – continuing operations | | | | | | | 143.5 | |
| Diluted earnings per ADS under US GAAP
(pence) – continuing operations | | | | | | | 139.0 | |
| Basic earnings per share under US GAAP
(pence) – discontinued operations | | | | | | | 26.2 | |
| Diluted earnings per share under US GAAP
(pence) – discontinued operations | | | | | | | 24.2 | |
| Basic earnings per ADS under US GAAP
(pence) – discontinued operations | | | | | | | 131.0 | |
| Diluted earnings per ADS under US GAAP
(pence) – discontinued operations | | | | | | | 121.0 | |
| | | | | | | | £m | |
| Net income under US GAAP | | | | | | | 810 | |
| Dilutive impact of 4.25% Exchangeable
Bonds 2008 | | | | | | | 21 | |
| Net
income after dilution | | | | | | | 831 | |
| Weighted
average number of shares in issue (million) – for basic EPS | | | | | | | 1,476 | |
| Weighted
average number of shares in issue (million) – for diluted EPS | | | | | | | 1,596 | |
| Consolidated
statement of comprehensive income and changes in shareholders’ equity
under US GAAP (continued) | | | | | | | | |
| | | | | | | | 2001 £m | |
| Net income | | | | | | | 810 | |
| Exchange adjustments (net of tax credit
of £32m) | | | | | | | 29 | |
| Share of associate’s other comprehensive
income | | | | | | | (47 | ) |
| Other | | | | | | | 3 | |
| Comprehensive income | | | | | | | 795 | |
| Dividends | | | | | | | (213 | ) |
| Other shares issued | | | | | | | 1 | |
| Share options granted | | | | | | | 5 | |
| Movement in treasury stock | | | | | | | 6 | |
| Share of associate’s capital transactions | | | | | | | (15 | ) |
| Other | | | | | | | (5 | ) |
| Shareholders’ equity at 1 April
2000 | | | | | | | 2,346 | |
| Shareholders’
equity at 31 March 2001 | | | | | | | 2,920 | |

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1. Summary US GAAP income statements, balance sheets, notes and associated reconciliations (continued) Summary US GAAP balance sheet

	2003 £m		2002 £m
Assets
Current assets
Cash and cash equivalents	570		178
Marketable securities	48		65
Accounts and notes receivable	628		725
Inventories	126		56
Regulatory assets	407		424
Prepaid expenses and other current assets	705		373
Total current assets	2,484		1,821
Property, plant and equipment	23,087		9,089
Goodwill	5,900		2,223
Intangible assets	74		–
Investments	210		252
Regulatory assets	3,491		3,848
Other debtors	843		494
Total
assets	36,089		17,727
Liabilities and shareholders’ equity
Current liabilities
Bank overdrafts	62		37
Accounts payable	1,266		770
Short-term borrowings	1,973		1,136
Accrued income taxes	–		30
Purchased power obligations	68		102
Liability for index-linked swap contracts	121		53
Other accrued liabilities	1,067		421
Total current liabilities	4,557		2,549
Long-term borrowings	13,058		6,954
Purchased power obligations	253		362
Liability for index-linked swap contracts	381		408
Other liabilities	3,638		1,663
Deferred income taxes	4,687		1,929
Total
liabilities	26,574		13,865
Minority interest – equity	15		19
Cumulative preference stock issued by
Group undertakings	74		84
Shareholders’ equity
Common stock	308		178
Additional paid in capital	7,710		1,253
Other reserves	359		359
Retained earnings	2,263		1,982
Other comprehensive (loss)/income	(1,175	)	33
Treasury stock	(39	)	(46	)
Equity
shareholders’ funds	9,426		3,759
Total
liabilities and shareholders’ equity	36,089		17,727

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Notes to the accounts continued

1. Summary US GAAP income statements, balance sheets, notes and associated reconciliations (continued) Segmental information under US GAAP

	2003 £m		2002 £m		2001 £m
Turnover by business segment
Continuing operations
UK gas distribution	1,239		–		–
UK electricity and gas transmission	1,662		1,322		1,430
US electricity transmission	400		278		243
US electricity distribution	3,446		2,278		1,854
US gas	446		104		–
Other	915		443		281
Sales between businesses	(177	)	(28	)	(25	)
Group
turnover – continuing operations	7,931		4,397		3,783
Operating profit by business
segment
Continuing operations
UK gas distribution	567		–		–
UK electricity and gas transmission	596		540		521
US electricity transmission	116		95		62
US electricity distribution	446		240		162
US gas	52		17		–
Other	(60	)	(27	)	(1	)
Group
undertakings – continuing operations	1,717		865		744

| Turnover and operating profit in the
other segment relates primarily to Europe. | Tangible fixed
assets | | Goodwill | |
| --- | --- | --- | --- | --- |
| | 2003 £m | 2002 £m | 2003 £m | 2002 £m |
| Analysis by business segment | | | | |
| Continuing operations | | | | |
| UK gas distribution | 10,153 | – | 3,040 | – |
| UK electricity and gas transmission | 6,338 | 3,570 | 753 | – |
| US electricity transmission | 1,286 | 1,431 | 403 | 438 |
| US electricity distribution | 2,971 | 3,253 | 1,433 | 1,558 |
| US gas | 641 | 694 | 135 | 141 |
| Other | 1,698 | 141 | 136 | 86 |
| | 23,087 | 9,089 | 5,900 | 2,223 |
| Analysis by location of customer and
group undertaking | | | | |
| Europe | 18,131 | 3,624 | 3,848 | – |
| North America | 4,897 | 5,456 | 2,052 | 2,223 |
| Rest of the World | 59 | 9 | – | – |
| | 23,087 | 9,089 | 5,900 | 2,223 |

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1. Summary US GAAP income statements, balance sheets, notes and associated reconciliations (continued) Reconciliation of net income from UK to US GAAP The following is a summary of the material adjustments to net income which would have been required if US GAAP had been applied instead of UK GAAP:

| Net income/(loss) under UK
GAAP | 2003 £m — 391 | | 2002 £m — (321 | ) | 2001 £m — 1,124 | |
| --- | --- | --- | --- | --- | --- | --- |
| Adjustments to conform with
US GAAP | | | | | | |
| Elimination of Lattice pre-acquisition
results, measured under UK GAAP | 293 | | (172 | ) | (460 | ) |
| Merger costs | 32 | | – | | – | |
| Deferred taxation | 7 | | 7 | | (27 | ) |
| Pensions | 35 | | 29 | | 19 | |
| Share option schemes | (29 | ) | (5 | ) | (5 | ) |
| Fixed assets – purchase of Lattice | (169 | ) | – | | – | |
| Replacement expenditure | 166 | | – | | – | |
| Financial instruments | 40 | | (83 | ) | (55 | ) |
| Carrying value of EPICs liability | 2 | | 203 | | 153 | |
| Severance and integration costs | (110 | ) | 67 | | 23 | |
| Recognition of income | 2 | | (4 | ) | (17 | ) |
| Goodwill | 70 | | 78 | | (2 | ) |
| Restructuring – purchase of Lattice | 46 | | – | | – | |
| Share of joint ventures’ and associate’s
adjustments | (27 | ) | 37 | | 56 | |
| Other | 2 | | (3 | ) | 1 | |
| | 360 | | 154 | | (314 | ) |
| Net
income/(loss) under US GAAP | 751 | | (167 | ) | 810 | |

| Reconciliation
of equity shareholders’ funds from UK to US GAAP The following is a summary
of the material adjustments to equity shareholders’ funds which would
have been required if US GAAP had been applied instead of UK GAAP: | 2003 £m | | 2002 £m | |
| --- | --- | --- | --- | --- |
| Equity shareholders’
funds under UK GAAP | 1,152 | | 1,690 | |
| Adjustments to conform with
US GAAP | | | | |
| Elimination of Lattice shareholders’
funds | – | | 1,506 | |
| Deferred taxation | (1,593 | ) | (52 | ) |
| Pensions | (1,800 | ) | 217 | |
| Shares held by employee share trusts | (39 | ) | (46 | ) |
| Ordinary dividends | 317 | | 169 | |
| Tangible fixed assets – reversal
of partial release of impairment provision | (35 | ) | (38 | ) |
| Fixed assets – impact of Lattice
purchase accounting and replacement expenditure | 7,243 | | – | |
| Financial instruments | (253 | ) | (81 | ) |
| Issue costs associated with EPICs | – | | 2 | |
| Carrying value of EPICs liability | 243 | | 241 | |
| Severance liabilities | 3 | | 15 | |
| Recognition of income | (27 | ) | (22 | ) |
| Regulatory assets | 241 | | 34 | |
| Goodwill – purchase of Lattice | 3,829 | | – | |
| Goodwill – other acquisitions | 179 | | 105 | |
| Restructuring – purchase of Lattice | (6 | ) | – | |
| Share of joint ventures’ and associate’s
adjustments | (17 | ) | 21 | |
| Other | (11 | ) | (2 | ) |
| | 8,274 | | 2,069 | |
| Equity
shareholders’ funds under US GAAP | 9,426 | | 3,759 | |

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| Notes to the
accounts continued | |
| --- | --- |
| 33. | Summary US GAAP
income statements, balance sheets, notes and associated reconciliations (continued) |
| | Group cash flow statement The Group accounts include a cash flow statement prepared in accordance
with UK Financial Reporting Standard 1 (Revised 1996) ‘Cash Flow
Statements’ (‘FRS 1 (revised)’), the objectives and principles
of which are substantially the same as US Statement of Financial Accounting
Standard 95 ‘Statement of Cash Flows’ (‘SFAS 95’)
under US GAAP. The principal differences between FRS 1 (revised) and SFAS
95 relate to the classification of items within the cash flow statement
and the definition of cash and cash equivalents. Under UK GAAP, cash flows
are classified under nine standard headings whereas US GAAP only requires
presentation of cash flows from three activities, being operating activities,
investing activities and financing activities. |
| | Under US GAAP, in contrast
to UK GAAP, cash and cash equivalents do not include bank overdrafts but
do include investments with original maturities of three months or less. |
| | Set out below is a summary
of the Group cash flow statement under US GAAP: |

	2003 — £m		2002 — £m		2001 — £m
Net cash provided by operating activities
(i)	1,834		902		425
Investing activities
Payments to acquire tangible fixed assets	(1,004	)	(500	)	(472	)
Acquisition of Group undertakings (net
of cash acquired)	338		(934	)	(441	)
Payments to acquire investments	(163	)	(50	)	(337	)
Receipts from disposal of investments	328		37		196
Net movement in investments with an original
maturity date of more than three months	–		193		19
Other	31		54		(25	)
Net cash used in investing activities
(ii)	(470	)	(1,200	)	(1,060	)
Net cash (used in)/provided by financing
activities (iii)	(962	)	222		(104	)
Net increase/(decrease) in cash and cash
equivalents	402		(76	)	(739	)
Cash and cash equivalents at beginning
of year	178		259		977
Exchange adjustments	(10	)	(5	)	21
Cash and cash equivalents
at end of year	570		178		259

| Set out below
is an explanation of the reconciliation from US GAAP to UK GAAP cash flow
headings: | |
| --- | --- |
| (i) | Net cash provided by operating
activities comprises net cash inflow from operating activities, dividends
from joint ventures, returns on investments and servicing of finance,
excluding costs relating to the issue of debt, and taxation. |
| (ii) | Net cash used in investing
activities comprises capital expenditure, acquisitions and disposals and
the component of the management of liquid resources which comprises deposits
with an original maturity of more than three months. |
| (iii) | Net cash (used in)/provided
by financing activities comprises equity dividends paid, financing, including
costs relating to the issue of debt and movements in bank overdrafts. |

| 34. |
| --- |
| The principal differences
between UK and US GAAP, as applied in preparing the Group accounts under
US GAAP, are set out below: |
| Acquisition (purchase)
accounting adjustments (including elimination of merger costs) In order to determine the allocation
of purchase price relating to the acquired assets and liabilities of Lattice
under US GAAP purchase accounting, the cost of acquisition has been calculated
using the market value of the shares issued, the fair value of vested
options exchanged and direct external acquisition costs and then allocated
to the fair value of net assets acquired. As a result of the fair value
exercise, increases in the value of Lattice’s tangible fixed assets,
financial instruments, pension obligations and restructuring provisions
were recognised and market values attributed to its intangible fixed assets,
mainly product licences, patents and trademarks, together with the recognition
of appropriate deferred taxation effects. The difference between the cost
of acquisition and the fair value of the separable assets and liabilities
of Lattice has been recorded as goodwill. Additional depreciation in respect
of the fair value of tangible fixed assets will be recorded over their
respective economic useful lives. |
| The adjustments to the assets
and liabilities of Lattice to reflect the fair values and allocation of
the excess purchase consideration over the fair values of net assets acquired,
based on management’s best estimates of fair value, are discussed
below. The fair value adjustments to UK gas transmission and distribution
fixed assets, pensions, restructuring provision and the related deferred
tax thereon are provisional and may be subject to revision during the
year ending 31 March 2004. |
| a) The total purchase consideration
was calculated by multiplying the number of National Grid shares issued
to Lattice shareholders for all outstanding Lattice shares by the average
fair value of National Grid shares. The average fair value of National
Grid shares was calculated over a period of five business days, including
two days prior to and two days subsequent to the announcement of the Merger
on 22 April 2002. |
| The total purchase consideration,
which included merger costs of £32m that were expensed under UK
GAAP, also included the fair value of Lattice vested options exchanged
for vested options in National Grid Transco. |
| The total number of Lattice
vested options was multiplied by the respective fair value of each of
the ordinary shares and ADR plans determined at 22 April 2002. |
| b) The increase in the fair
value of tangible fixed assets primarily relates to UK gas transmission
and distribution. It was determined by calculating the value in use of
these businesses. Value in use represents the present value of expected
future cash flows discounted on a pre-tax basis, using the estimated cost
of capital. Future cash flows are based on a five-year plan, projected
out to perpetuity. The fair value of other fixed assets, largely gas metering
assets, was determined using their depreciated replacement costs, based
on current costs of replacing meters and expected remaining useful economic
lives. |
| c) The fair value attributed
to pension obligations reflects the recognition of previously unrecognised
actuarial gains and losses, prior service costs and transition amounts.
The amounts recognised are based on actuarial assessments at the acquisition
date. |

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34.
Acquisition
(purchase) accounting adjustments (including elimination of merger costs) (continued)
d)	The fair value attributed
to intangible fixed assets relates to licences, patents and trade marks
and has been determined based on discounted future cash flows.
e)	Restructuring costs (£60m)
represent the costs being incurred in respect of the integration of activities
within the newly merged Group and relate primarily to redundancy and property
relocation costs.
f)	Deferred taxes have been
computed on the excess of the fair value over book value, other than for
goodwill, using the applicable statutory UK tax rate.
g)	Goodwill represents the
remainder of unallocated purchase consideration.
The fair value
of consideration, assets and liabilities and the resulting goodwill is
set out in the table below:

Assets	£m
Total current assets	1,336
Property, plant and equipment	14,148
Intangible assets	20
Other assets	6
Total assets	15,510
Liabilities
Total current liabilities	2,656
Long-term borrowings	5,935
Pensions	535
Other liabilities	470
Deferred income taxes	3,129
Total liabilities	12,725
Net assets	2,785
Consideration	6,598
Goodwill	3,813

| Acquisitions – pro forma results |
| --- |
| The following unaudited pro forma summary
gives effect to the acquisitions of Lattice and Niagara Mohawk, as if
the acquisitions had taken place on 1 April 2001. The pro forma summary
combines the actual consolidated results of the Group (excluding the effect
of the acquisitions in the actual period that they took place) and the
results of Lattice and Niagara Mohawk after giving effect to certain adjustments.
These adjustments include estimates of the effect of adopting the final
fair value adjustments, and the increased net interest expense, together
with the associated tax effects, as a result of financing the acquisition
of Niagara Mohawk. In addition, the earnings per share calculation has
been adjusted as if the shares issued to acquire Lattice and Niagara Mohawk
were issued on the assumed date of acquisition for the purposes of preparing
the pro forma summary. The pro forma summary does not necessarily reflect
the results of operations as they would have been if the Group (excluding
the acquisitions) and the acquisitions had constituted a single entity
during the periods presented. |

| Continuing
operations | 2003 | 2002 |
| --- | --- | --- |
| | £m | £m |
| Turnover | 9,332 | 7,879 |
| Net income | 580 | 957 |
| | pence | pence |
| Earnings per share | 18.9 | 31.2 |
| Diluted earnings per share | 18.8 | 30.1 |
| | pence | pence |
| Earnings per ADS | 94.5 | 156.0 |
| Diluted earnings per ADS | 94.0 | 150.5 |

Deferred taxation Under UK GAAP, deferred taxation is provided in full on all material timing differences with certain exceptions, as outlined in Accounting Policies – Deferred taxation and investment tax credits. Under US GAAP, deferred tax is provided in full, using the liability method, and requires the recognition of deferred taxation on all timing differences except for non tax deductible goodwill.

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| Notes to the
accounts continued | |
| --- | --- |
| 34. | Principal differences
between UK and US accounting principles (continued) Deferred taxation (continued) |
| | The deferred tax
liability under US GAAP is analysed as follows: |

	2003 — £m		2002 — £m
Deferred taxation liabilities:
Excess of book value over taxation value
of fixed assets	4,955		1,714
Other temporary differences	1,229		1,376
	6,184		3,090
Deferred taxation assets:
Other temporary differences	(1,497	)	(1,161	)
	4,687		1,929
Analysed as follows:
Current	31		12
Non-current	4,656		1,917
	4,687		1,929

Pensions Under UK GAAP, pension costs have been accounted for in accordance with UK Statement of Standard Accounting Practice (SSAP) 24 and disclosures have been provided in accordance with SSAP 24 and FRS 17.

Under US GAAP, pension costs are determined in accordance with the requirements of US Statements of Financial Accounting Standards (SFAS) 87 and 88 and pension disclosures are presented in accordance with SFAS 132. Differences between UK GAAP and US GAAP figures arise from the requirement to use different actuarial methods and assumptions and a different method of amortising certain surpluses and deficits. Under US GAAP, the Company has estimated the effect on net income and shareholders’ equity assuming the adoption and application of SFAS 87 ‘Employers’ Accounting for Pensions’ as of 1 April 1996, as the adoption of SFAS 87 on the actual effective date of 1 April 1989 was not feasible. The unrecognised transition asset at 1 April 1989, using the financial assumptions at 1 April 1996, amounted to £172m and is being amortised over 15 years commencing 1 April 1989.

Under UK GAAP, as explained in note 7, net interest includes a credit of £3m (2002: £30m; 2001: £63m) in respect of the notional interest element of the variation from the regular pension cost. Under US GAAP, this credit is not recognised.

The net periodic charge/(credit) for pensions and other post-retirement benefits is as follows:

| | Pensions — 2003 | | 2002 | | 2001 | | Other post-retirement
benefits — 2003 | | 2002 | | 2001 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | £m | | £m | | £m | | £m | | £m | | £m | |
| Service cost | 78 | | 30 | | 25 | | 8 | | 5 | | 3 | |
| Interest cost | 456 | | 125 | | 111 | | 59 | | 29 | | 21 | |
| Settlements | 19 | | (12 | ) | – | | – | | – | | – | |
| Expected return on assets | (490 | ) | (160 | ) | (142 | ) | (32 | ) | (21 | ) | (17 | ) |
| Amortisation of prior service cost | 5 | | 4 | | 3 | | – | | – | | – | |
| Amortisation of previously unrecognised
losses | 4 | | – | | – | | 2 | | – | | – | |
| Amortisation of transitional asset | (11 | ) | (11 | ) | (11 | ) | – | | – | | – | |
| | 61 | | (24 | ) | (14 | ) | 37 | | 13 | | 7 | |
| Release of pension provision | (2 | ) | (2 | ) | (2 | ) | – | | – | | – | |
| | 59 | | (26 | ) | (16 | ) | 37 | | 13 | | 7 | |

The additional cost incurred in respect of severance cases computed in accordance with SFAS 88 ‘Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits’ is as follows:

				2003 — £m	2002 — £m	2001 — £m
Cost of termination benefits
and curtailments				119	46	4
The principal
financial assumptions used for the SFAS 87 calculations in respect of
the US and UK defined benefit schemes are shown below:
	US			UK
	2003	2002	2001	2003	2002	2001
	%	%	%	%	%	%
Discount rate	6.3	7.5	7.3	5.4	6.0	5.5
Return on assets	8.5	7.5 – 9.0	8.8	6.3 – 7.1	7.0	5.8
General salary increases	3.25 – 5.25	3.25 – 4.5	4.0	3.5	3.8	3.3
Pension increases	nil	nil	nil	2.6	2.9	2.5

The assumptions used for other post-retirement costs relate solely to US schemes. These assumptions were that the discount rate used would be 6.25% and that medical costs would increase by 10%, decreasing to 5% by 2008 and remain at 5% thereafter.

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| 34. |
| --- |
| Pensions (continued) |
| A
reconciliation of the funded status of the Group pension and other post-retirement
schemes to the (accrued benefit liability)/prepaid cost that would appear
in the Group’s balance sheet if prepared under US GAAP is as follows: |

	Pensions — 2003 £m		2002 £m		Other post-retirement benefits — 2003 £m		2002 £m
Projected benefit obligation	(15,030	)	(2,953	)	(1,004	)	(884	)
Fair value of plan assets	12,115		2,698		373		397
Excess of projected benefit obligation
over plan assets	(2,915	)	(255	)	(631	)	(487	)
Unrecognised transition asset	(11	)	(23	)	–		–
Unrecognised net loss	2,508		417		336		83
Unrecognised prior service cost/(credit)	57		65		(1	)	(2	)
(Accrued benefit liability)/prepaid cost
– before minimum liability adjustment	(361	)	204		(296	)	(406	)
Additional minimum liability adjustment	(1,583	)	–		–		–
(Accrued
benefit liability)/prepaid cost	(1,944	)	204		(296	)	(406	)

In 2003, as required under SFAS 87, an intangible asset of £57m has been recognised in relation to the additional minimum liability, being equal to the unrecognised prior service cost. A regulatory asset of £221m has also been created. The remaining additional minimum liability of £1,303m (before exchange adjustment of £2m) has been charged to other comprehensive income. All pension schemes have an additional minimum liability adjustment. The accumulated benefit obligation for pensions is £14,059m. The Group has followed approach two of Emerging Issues Task Force (EITF) Abstract 88-1 in calculating the accumulated benefit obligation. Changes in the projected benefit obligation and changes in the fair value of plan assets are shown below:

| | Pensions — 2003 £m | | 2002 £m | | Other
post-retirement benefits — 2003 £m | | 2002 | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | | | | | | £m | |
| Projected benefit obligation at start
of year | 2,953 | | 1,906 | | 884 | | 316 | |
| Service cost | 78 | | 30 | | 8 | | 5 | |
| Interest cost | 456 | | 125 | | 59 | | 29 | |
| Plan participants’ contributions | 10 | | 5 | | – | | – | |
| Plan amendment – prior service cost | 8 | | 23 | | – | | (2 | ) |
| Terminations and curtailments | 100 | | 40 | | – | | 7 | |
| Settlements | (109 | ) | – | | – | | – | |
| Actuarial loss | 1,212 | | 118 | | 195 | | 25 | |
| Benefits paid | (423 | ) | (140 | ) | (54 | ) | (26 | ) |
| Acquisition of Group undertakings | 10,908 | | 901 | | – | | 532 | |
| Transfers | (1 | ) | (50 | ) | – | | – | |
| Exchange adjustments | (162 | ) | (5 | ) | (88 | ) | (2 | ) |
| Projected
benefit obligation at end of year | 15,030 | | 2,953 | | 1,004 | | 884 | |
| Fair value of plan assets at start of
year | 2,698 | | 2,096 | | 397 | | 203 | |
| Actual return on assets | (437 | ) | 19 | | (35 | ) | 10 | |
| Employer contributions | 150 | | 23 | | 68 | | 16 | |
| Plan participants’ contributions | 10 | | 5 | | – | | – | |
| Benefits paid | (423 | ) | (140 | ) | (18 | ) | (20 | ) |
| Acquisition of Group undertakings | 10,373 | | 739 | | – | | 189 | |
| Transfers | – | | (40 | ) | – | | – | |
| Settlements | (109 | ) | – | | – | | – | |
| Exchange adjustments | (147 | ) | (4 | ) | (39 | ) | (1 | ) |
| Fair
value of plan assets at end of year | 12,115 | | 2,698 | | 373 | | 397 | |

It is estimated that a 1% change in the assumed healthcare cost trends would increase or decrease the accumulated post-retirement benefit obligation at 31 March 2003 by £106m (2002: £91m) and £96m (2002: £82m) respectively. The net periodic cost for the year ended 31 March 2003 would increase or decrease by £8m and £7m respectively (2002: immaterial).

Share compensation plans

Under UK GAAP, shares in the Company held by employee share trusts are recorded as fixed asset investments at cost less amounts written off. Under US GAAP, those shares not fully vested are regarded as treasury stock and recorded as a deduction from shareholders’ equity.

Share option schemes

As permitted under UK GAAP, no cost is accrued for share options awarded under the sharesave scheme where the exercise price of the options is below the market value at the date of grant. In respect of the grant of options under the Executive scheme, no cost is accrued under UK GAAP as the exercise price is equivalent to the market value at the date of grant.

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Notes to the accounts continued
34.	Principal differences
between UK and US accounting principles (continued)
	Share
option schemes (continued)
	Under
US GAAP, a charge is made against net income based on the fair value of
grants in accordance with SFAS 123 ‘Accounting for Stock Based Compensation’.
Disclosures are provided in accordance with SFAS 123 and SFAS 148 ‘Accounting
for Stock Based Compensation – Transition and Disclosure – an
amendment of FAS No. 123’.
	The average fair
value of the options granted during each of the three financial years ended
31 March 2003 are estimated as follows:

| Where the exercise price is less than
the market price at the date of grant | 2003 — 123.0 | p | 2002 — 158.0 | p | 2001 — 155.0 | p |
| --- | --- | --- | --- | --- | --- | --- |
| Where the exercise price is equal to
the market price at the date of grant | 50.0 | p | 62.0 | p | 68.0 | p |
| Where the exercise price is greater than
the market price at the date of grant | – | | – | | 65.0 | p |
| The fair value of the options
granted are estimated using the Black-Scholes European option pricing
model using the following principal assumptions: | | | | | | |
| | 2003 | | 2002 | | 2001 | |
| Dividend yield (%) | 3.5 | | 3.5 | | 2.7 | |
| Volatility (%) | 35.0 | | 30.0 | | 30.0 | |
| Risk-free investment rate (%) | 4.4 | | 5.4 | | 5.9 | |
| Average life (years) | 4.0 | | 4.2 | | 4.0 | |

The compensation cost charged is £29m for the year ended 31 March 2003 (2002: £5m; 2001: £5m).

Further details of the Group’s share based plans are given in note 23, pages 82 to 85.

Ordinary dividends

Under UK GAAP, final ordinary dividends are provided for in the year in respect of which they are proposed by the Board of Directors for approval by the shareholders. Under US GAAP, dividends are not provided until declared.

Tangible fixed assets – reversal of partial release of impairment provision During the financial year ended 31 March 1990, an impairment provision was recorded in respect of certain tangible fixed assets. Part of this impairment provision was subsequently released and shareholders’ equity credited. Under US GAAP this partial release would not be permitted.

Fixed assets – impact of Lattice purchase accounting and replacement expenditure Under UK GAAP, the combination of National Grid and Lattice has been accounted for as a merger (pooling of interests) while under US GAAP this transaction is accounted for as an acquisition (purchase accounting) of Lattice by National Grid. Consequently, under US GAAP the tangible fixed assets of Lattice have been recorded at their fair value at the date of purchase and depreciation subsequent to acquisition is calculated on that fair value.

In addition, under UK GAAP the Group charges to the profit and loss account replacement expenditure on certain components of plant and equipment, which is principally undertaken to repair and to maintain the safety of the pipeline system. Under US GAAP such expenditure is capitalised and depreciated over the assets’ useful lives.

Financial instruments Under UK GAAP, derivative financial instruments that qualify for hedge accounting are recorded at their historical cost, if any, and are not remeasured. Any related monetary assets or liabilities, including foreign currency borrowings, are translated at the hedged rate. In addition, under UK GAAP, it is permissible to hedge account for the net assets of overseas operations with hedging instruments denominated in currencies other than the functional currencies of the overseas operations.

Under US GAAP, as required by SFAS 133 ‘Accounting for Derivative Instruments and Hedging Activities’, all derivative financial instruments, including derivatives embedded within other contracts, are required to be recognised in the balance sheet as either assets or liabilities and measured at fair value. SFAS 133 only permits hedge accounting in specific circumstances, where the hedge is identified as one of three types: fair value; cash flow; or foreign currency exposures of net investments in foreign operations. Provided that it can be demonstrated that the hedge is highly effective and the relevant hedging criteria have been met, then in respect of fair value hedges, both the change in fair value of the derivative and hedged item are reflected in net income in the period of the change. For cash flow hedges and hedges of foreign currency exposures of net investments in foreign operations, changes in fair value are reflected through other comprehensive income. In the event that the conditions for hedge accounting are not met, changes in the fair value of derivatives are reflected in net income.

The primary differences that arise between UK GAAP and US GAAP result from the different criteria that are applied under UK GAAP and US GAAP to permit the use of hedge accounting, and the application of different measurement criteria.

Equity Plus Income Convertible Securities (EPICs) Under UK GAAP, EPICs are carried in the balance sheet at the gross proceeds of the issue. The related issue costs were written off in the year of issue. Under US GAAP, the issue costs were deferred and written off over the period to the date of redemption of the EPICs on 6 May 2003.

US GAAP requires the carrying value of the EPICs to be adjusted to the settlement amount of the debt, which is linked to the Energis plc share price as described in note 20.

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| 34. |
| --- |
| Regulatory
assets SFAS 71 ‘Accounting for Certain Types of Regulation’ establishes
US GAAP for utilities whose regulators have the power to approve and/or
regulate rates that may be charged to customers. Provided that through the
regulatory process the utility is substantially assured of recovering its
allowable costs by the collection of revenue from its customers, such costs
not yet recovered are deferred as regulatory assets. Due to the different
regulatory environment, no equivalent accounting standard applies in the
United Kingdom. |
| Under UK GAAP,
regulatory assets established in accordance with the principles of SFAS
71 are recognised where they comprise rights or other access to future economic
benefits which arise as a result of past transactions or events which have
created an obligation to transfer economic benefit to a third party. Measurement
of the past transaction or event and hence of the regulatory asset is determined
in accordance with UK GAAP. Where the application of UK GAAP results in
the non or partial recognition of an obligation compared with US GAAP, any
related regulatory asset is either not or partially recognised. In certain
circumstances, regulatory assets may be reported net of related regulatory
liabilities. |
| Recognition
of income Under US GAAP, income is recognised in the period that the service is provided
up to the maximum revenue allowed under the terms of the relevant regulatory
regime. Under UK GAAP, any income received or receivable in excess of the
maximum revenue allowed for the period, under the terms of the relevant
regulatory regime, is recognised as income, where prices would be reduced
in a future period. |
| Severance
and integration costs Under UK GAAP, severance costs are provided
for in the accounts if it is determined that a constructive or legal obligation
has arisen from a restructuring programme where it is probable that it will
result in the outflow of economic benefits and the costs involved can be
estimated with reasonable accuracy. Under US GAAP, severance costs are recognised
when the employees accept the severance offer. In addition, where the number
of employees leaving results in a significant reduction in the accrual of
pension benefits for employees’ future service (a curtailment under
US GAAP), the effects are reflected as part of the cost of such termination
benefits. Accordingly, timing differences between UK and US GAAP arise on
the recognition of such costs. |
| Goodwill
– purchase of Lattice Under UK GAAP the combination of National
Grid and Lattice has been accounted for as a merger (pooling of interests)
while under US GAAP this transaction is accounted for as an acquisition
(purchase accounting) of Lattice by National Grid. In accordance with US
GAAP, goodwill arising on the purchase has been capitalised, but is not
amortised. |
| Goodwill
– other acquisitions Under US GAAP, the fair value of net assets acquired is calculated in accordance
with US GAAP principles which differ in certain respects from UK GAAP principles.
As a result, the US GAAP fair value of net assets of Group undertakings
acquired differs from the fair value of net assets as determined under UK
GAAP principles. |
| Under UK GAAP,
goodwill is amortised over its expected useful economic life, principally
20 years. Under US GAAP, goodwill is not amortised, but is reviewed periodically
for impairment. |
| Restructuring
– purchase of Lattice Under US GAAP certain reorganisation costs relating to an acquired entity
are included in liabilities in determining the fair value of net assets
acquired. Under UK GAAP such costs are not recognised as liabilities of
the acquired entity at the date of acquisition and are treated as post-acquisition
costs. |
| Share
of joint ventures’ and associate’s adjustments The Group’s share of the associated
undertaking’s results and net assets, which also impact on the exceptional
profit on disposal of investments and assets held for exchange, have been
adjusted to conform with US GAAP. |
| Other
differences between UK and US GAAP UK GAAP requires the investors’ share of operating profit or loss,
interest and taxation relating to associates and joint ventures to be accounted
for and disclosed separately from those of Group undertakings. Under US
GAAP, the investors’ share of the after tax profits and losses of joint
ventures and associate is included within the income statement as a single
line item. UK GAAP requires the investors’ share of gross assets and
gross liabilities of joint ventures to be shown on the face of the balance
sheet. Under US GAAP, the net investment in joint ventures is shown as a
single line item. |
| Under UK GAAP,
the impact of discontinued operations on turnover, operating costs and operating
profit is required to be accounted for and disclosed separately from continuing
operations. Under US GAAP, the net income/(loss) from discontinued operations
is required to be separately accounted for and disclosed as a single line
item. |
| The Group reviews
all long-lived assets for potential impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Under UK GAAP, recognition and measurement of impairment is
determined on the basis of discounted cash flows attributable to income
generating units. Under US GAAP, impairments on long-lived assets are determined
in accordance with SFAS 144 ‘Accounting for the Impairment or Disposal
of Long-Lived Assets’ and are recognised on the basis of undiscounted
future cash flows and measured on the basis of discounted future cash flows.
This difference has no effect on the Group accounts for the three years
ended 31 March 2003. |
| Under UK GAAP,
assets in the balance sheet are presented in ascending order of liquidity
and the balance sheet is analysed between net assets and shareholders’
funds. Under US GAAP, assets are presented in descending order of liquidity
and the balance sheet is analysed between total assets and liabilities and
shareholders’ funds – see note 33. |

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| | Notes
to the accounts continued |
| --- | --- |
| 34. | Principal differences
between UK and US accounting principles (continued) |
| | New
US Accounting Standards adopted during 2002/03 National Grid Transco has adopted either in whole or in part the following
US GAAP Statements of Financial Accounting Standards (SFAS) which were issued
by the Financial Accounting Standards Board (FASB) during the year: |
| | SFAS 144 ‘Accounting
for the Impairment or Disposal of Long-Lived Assets’;SFAS 145 ‘Rescission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13
and Technical Corrections’; SFAS 146 ‘Accounting for Costs Associated
with Exit or Disposal Activities’; SFAS 148 ‘Accounting for Stock-Based
Compensation – Transition and Disclosure – An amendment of FASB
Statement No. 123’; and FASB Interpretation No. 45 (FIN 45) ‘Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others’. |
| | SFAS 144 replaces
SFAS 121, but does not fundamentally alter the required accounting for either
the recognition and measurement of the impairment of long-lived assets to
be held and used or for the measurement of long-lived assets to be disposed
of by sale. As a consequence, in this regard the application of this accounting
standard has had no impact on the Group. SFAS 144 also supersedes the accounting
and reporting provisions of Accounting Principles Board No. 30 (APB 30),
principally with regard to the reporting of discontinued operations. The
Group accounts have been prepared in accordance with SFAS 144, and the associated
accounting and disclosures obligations complied with accordingly. |
| | SFAS 145 amends
a number of accounting standards. The principal impact of compliance with
this standard on the Group has been the recording of £12m of pre-tax
losses relating to the extinguishment of debt as part of ordinary activities.
Prior to the implementation of SFAS 145, such losses would have been reported
as extraordinary items net of the related tax effect. |
| | SFAS 146 has addressed
significant issues relating to the recognition, measurement and reporting
of costs associated with exit and disposal activities, including restructuring
activities. These provisions have been complied with in the preparation
of the Group accounts and have not had any material impact on the results
or financial condition of the Group. |
| | SFAS 148 provides
additional transition guidance for those entities that elect to voluntarily
adopt the accounting provisions of SFAS 123 ‘Accounting for Stock-Based
Compensation’. Prior to the adoption by the Group of SFAS 148, the
Group had continued to account for stock compensation costs in accordance
with APB 25. The Group adopted the retroactive restatement method of accounting,
resulting in the restatement of the income statement and balance sheet under
US GAAP for each period presented. |
| | FIN 45 elaborates
on the disclosures to be made by a guarantor about its obligations under
certain guarantees that it has issued, and also requires the recording of
liabilities at fair value associated with the issuance of any guarantees
since 31 December 2002. The disclosure provisions of FIN 45 have been considered
in the identification and reporting of obligations in the Group accounts
and the measurement provisions have similarly been considered in respect
of any guarantees issued since 31 December 2002. |
| | New
US Accounting Standards and pronouncements not yet effective SFAS 143 ‘Accounting for Asset Retirement
Obligations’ requires entities to record the fair value of an ‘asset
retirement obligation’ arising in the period from legal obligations
associated with the disposal of tangible fixed assets. This standard is
applicable to the Group with effect from 1 April 2003. The application of
this standard is not expected to have any material impact on the results
or financial condition of the Group. |
| | On 17 January
2003, the FASB issued Interpretation No. 46, (FIN 46) ‘Consolidation
of Variable Interest Entities’ (VIE). Under FIN 46, certain entities
labelled ‘Variable Interest Entities’, must be consolidated by
the ‘primary beneficiary’ of the entity. The primary beneficiary
is generally defined as the party exposed to the majority of the risks and
rewards arising from the VIE. For VIEs in which a significant variable interest
is held that is not a majority interest, certain disclosures are required.
Full implementation of this interpretation to pre-existing entities is required
from 1 July 2003; FIN 46 is applicable to any new VIEs with effect from
1 February 2003, but the Company has not entered into any arrangements that
meet the definition of a VIE since this date. |
| | SFAS 149 ‘Amendment
of Statement 133 on Derivative Instruments and Hedging Activities’
clarifies the circumstances in which a contract with an initial net investment
meets the characteristic of a derivative and when a derivative contains
a financing component. In addition, the statement amends the definition
of an underlying to conform to language used in FIN 45 ‘Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others’, and certain other existing pronouncements.
The statement is effective prospectively for contracts entered into or modified,
and for hedging relationships designated, after 30 June 2003. The application
of this standard is not expected to have a material impact on the results
or the financial condition of the Group. |

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Summary Group Financial Information

Financial summary (unaudited) The financial summary set out below has been derived from the audited consolidated accounts of National Grid Transco for the three financial years ended 31 March 2003. It should be read in conjunction with the Group accounts and related notes, together with the Operating and Financial Review. It is not practicable to derive the information for years prior to 2001 due to the different year end of Lattice and the fact that Lattice had not been demerged from BG Group for the years ended 31 March 1999 and 2000.

| | 31
March — 2003 | | 31
March — 2002 | | 31
March — 2001 | |
| --- | --- | --- | --- | --- | --- | --- |
| | £m | | £m | | £m | |
| Summary profit and loss account | | | | | | |
| Group turnover | 9,400 | | 7,554 | | 6,891 | |
| Operating costs | (7,788 | ) | (6,494 | ) | (5,179 | ) |
| Operating profit of Group undertakings | 1,612 | | 1,060 | | 1,712 | |
| Share of joint ventures’ and associate’s
operating profit/(loss) | 124 | | (701 | ) | (105 | ) |
| Operating profit | | | | | | |
| – Before exceptional items and goodwill
amortisation | 2,185 | | 1,783 | | 1,780 | |
| – Exceptional items | (347 | ) | (1,327 | ) | (88 | ) |
| – Goodwill amortisation | (102 | ) | (97 | ) | (85 | ) |
| | 1,736 | | 359 | | 1,607 | |
| Non-operating exceptional items | (99 | ) | 156 | | 306 | |
| Net interest | | | | | | |
| – Excluding exceptional items | (939 | ) | (657 | ) | (635 | ) |
| – Exceptional items | (31 | ) | (142 | ) | – | |
| Profit/(loss) on ordinary activities
before taxation | 667 | | (284 | ) | 1,278 | |
| Tax on profit on ordinary activities
– excluding exceptional items | (373 | ) | (251 | ) | (390 | ) |
| Tax on profit on ordinary activities
– exceptional items | 128 | | 166 | | 243 | |
| Profit/(loss) on ordinary activities
after taxation | 422 | | (369 | ) | 1,131 | |
| Minority interests including exceptional
items | (31 | ) | 48 | | (7 | ) |
| Profit/(loss)
for the year | 391 | | (321 | ) | 1,124 | |
| Summary statement of net assets | | | | | | |
| Fixed assets | 18,993 | | 19,635 | | 15,696 | |
| Current assets | 5,950 | | 6,568 | | 2,960 | |
| Creditors: amounts falling due within
one year | (5,046 | ) | (4,888 | ) | (4,034 | ) |
| Net
current assets/(liabilities) | 904 | | 1,680 | | (1,074 | ) |
| Total assets less current liabilities | 19,897 | | 21,315 | | 14,622 | |
| Creditors: amounts falling due after
more than one year | (14,255 | ) | (14,868 | ) | (9,793 | ) |
| Provisions for liabilities and charges | (4,406 | ) | (4,663 | ) | (3,434 | ) |
| Net
assets | 1,236 | | 1,784 | | 1,395 | |
| Summary cash flow statement | | | | | | |
| Net cash inflow from operating activities
before exceptional items | 3,154 | | 2,394 | | 2,482 | |
| Expenditure relating to exceptional items | (328 | ) | (103 | ) | (129 | ) |
| Net cash inflow from operating activities | 2,826 | | 2,291 | | 2,353 | |
| Dividends from joint ventures | 11 | | 13 | | 20 | |
| Net cash outflow for returns on investments
and servicing of finance | (912 | ) | (705 | ) | (691 | ) |
| Net cash outflow for taxation | (112 | ) | (212 | ) | (350 | ) |
| Net cash outflow for capital expenditure
and financial investment | (1,407 | ) | (1,483 | ) | (1,179 | ) |
| Net cash inflow/(outflow) for acquisitions
and disposals | 163 | | (969 | ) | (587 | ) |
| Equity dividends paid | (571 | ) | (478 | ) | (336 | ) |
| Net cash outflow before the management
of liquid resources and financing activities | (2 | ) | (1,543 | ) | (770 | ) |
| Net cash (outflow)/inflow for the management
of liquid resources | (138 | ) | 347 | | 696 | |
| Net cash outflow b efore financing activities | (140 | ) | (1,196 | ) | (74 | ) |
| Net cash inflow from financing activities | 174 | | 1,218 | | 59 | |
| Net
increase/(decrease) in cash in the year | 34 | | 22 | | (15 | ) |

| Amounts in accordance with US GAAP | 31
March | | 31
March | | 31
March | | 31
March | | 31
March | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | 2003 | | 2002 | | 2001 | | 2000 | | 1999 | |
| | £m | | £m | | £m | | £m | | £m | |
| Group turnover | 7,931 | | 4,397 | | 3,783 | | 1,615 | | 1,514 | |
| Net income/(loss) | 751 | | (167 | ) | 810 | | 1,010 | | 1,003 | |
| Earnings/(loss) per ADS | | | | | | | | | | |
| Basic | 159.5 | p | (54.5 | )p | 274.5 | p | 342.8 | p | 341.9 | p |
| Diluted | 156.5 | p | (44.0 | )p | 260.0 | p | 323.4 | p | 322.1 | p |
| Total assets | 36,089 | | 17,727 | | 10,392 | | 9,106 | | 5,190 | |
| Net assets employed/total shareholders’
funds | 9,515 | | 3,862 | | 2,962 | | 2,381 | | 1,464 | |
| Equity shareholders’ funds | 9,426 | | 3,759 | | 2,920 | | 2,346 | | 1,464 | |

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Glossary of Terms

Term used in annual report Accounts Acquisition accounting Allotted Associate Called up share capital Capital allowances Creditors Debtors Equity shareholders’ funds Finance lease Financial year Fixed asset investments Freehold Freehold land Group accounts Interest payable Interest receivable Joint venture Net asset value Operating profit Pension scheme Profit Profit and loss account Profit and loss account (reserve) Profit for the year Provision for doubtful debts Provisions Reconciliation of movements in equity shareholders’ funds Reserves Share capital Share premium account

Stocks Tangible fixed assets Turnover

US equivalent or brief description Financial statements Purchase accounting Issued Equity investment Common stock issued and fully paid Tax term equivalent to US tax depreciation allowances Accounts payable (or payables) Accounts receivable (or receivables) Shareholders’ equity Capital lease Fiscal year Non-current investments Ownership with absolute rights in perpetuity Land owned Consolidated financial statements Interest expense Interest income Equity investment Book value Net operating income Pension plan Income (or earnings) Income statement Retained earnings Net income Allowance for bad and doubtful accounts receivable Long-term liabilities other than debt and specific accounts payable Statement of changes in stockholders’ equity Stockholders’ equity other than common stock Ordinary shares, capital stock or common stock issued and fully paid Additional paid-in capital relating to proceeds of sale of stock in excess of par value or paid-in surplus (not distributable) Inventories Property, plant and equipment Revenues (or sales)

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Definitions

ADRs American Depositary Receipts, negotiable certificates representing holdings in ADSs.

ADSs American Depositary Shares, each of which represents the right to receive five ordinary shares.

bcf Billion cubic feet.

Company or National Grid Transco National Grid Transco plc.

DC Direct current.

Demerger The demerger of Lattice from BG Group plc which became effective on 23 October 2000.

EMFs The electric and magnetic fields produced by all electrical equipment and appliances.

FERC Federal Energy Regulatory Commission.

Gridcom The Group’s communications infrastructure business.

Group National Grid Transco and/or its subsidiary undertakings or any of them as the context requires.

GW Gigawatt, 10 9 watts.

GWh Gigawatt hours.

HSE Health and Safety Executive.

kV Kilovolt, 10 3 volts.

kW Kilowatt, 10 3 watts.

kWh Kilowatt hours.

Lattice or Lattice Group Lattice Group plc and/or its subsidiary undertakings or any of them as the context requires immediately prior to the completion of the Merger.

LNG Liquefied natural gas.

LTI Lost Time Injury. A work-related injury that caused the person to be away from work for at least one normal shift after the shift on which the injury occurred, because he/she is unfit to perform his/her duties.

mcm Million cubic metres.

Merger The merger of Lattice and National Grid which became effective on 21 October 2002.

MJ/cuM Megajoules per cubic metre.

MW Megawatt, 10 6 watts.

MWh Megawatt hours.

National Grid or National Grid Group National Grid Group plc and/or its subsidiary undertakings or any of them as the context requires immediately prior to the completion of the Merger.

National Grid Company or NGC National Grid Company plc.

National Grid Transco or the Company National Grid Transco plc.

National Grid USA The US holding company which owns the Group’s US electricity, gas and telecommunications interests.

Niagara Mohawk Niagara Mohawk Holdings Inc., the US utility acquired by National Grid on 31 January 2002.

NTS or National Transmission System The UK national gas transmission system owned and operated by Transco.

Ofgem The Office of Gas and Electricity Markets which on 16 June 1999 became the new name for the combined Office of Electricity Regulation and Office of Gas Supply.

pence or p United Kingdom (UK) currency.

pound(s) sterling or £ United Kingdom (UK) currency.

PUHCA Public Utility Holding Company Act of 1935.

SEC United States Securities and Exchange Commission.

ordinary shares Ordinary shares of 10 pence each in the capital of National Grid Transco.

tonnes CO 2 equivalent Measure of greenhouse gas emissions in relation to the impact of carbon dioxide.

TW Terawatt, 10 12 watts.

TWh Terawatt hours.

Transco Transco plc.

US dollars, US$ or $ United States (US) currency.

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Independent Verifier’s Report on Operating Responsibly

| Verification objectives and scope URS Verification Ltd (URSVL)
has been commissioned by National Grid Transco to provide independent
assurance of the Operating Responsibly section (pages 21 to 25), herein
referred to as ‘the report’, of National Grid Transco’s
Annual Report and Accounts 2002/03. | |
| --- | --- |
| This assurance
process focused on assessing governance arrangements and reviewing information
presented in the report. This did not include a review of data presented
in the report. These priorities were agreed between URSVL and National
Grid Transco to be appropriate following the merger of National Grid and
Lattice in October 2002. | |
| Objectives included
assessment of the: | |
| • | robustness of corporate
responsibility systems to enable delivery of Group performance; |
| • | appropriateness of corporate
metrics to demonstrate and communicate National Grid Transco’s management
of impacts and risks; and |
| • | content and coverage of
the report including the balance of issues. |
| Based on the
above objectives, URSVL focused the interview process at a Group level
and conducted a selection of interviews with senior managers in the three
most significant business units in the UK and USA-National Grid Company,
Transco and National Grid USA. | |
| Responsibilities
of Directors and Verifiers The information contained in the 2002/03 Annual Report and Accounts is
the sole responsibility of the Directors of National Grid Transco. This
verification statement represents the independent opinion of URSVL in
relation to the report. URSVL was not involved in the development of this
material or associated corporate systems. | |
| URSVL has carried
out its services by checking samples of information and documents which
have been made available to URSVL by National Grid Transco. Accordingly,
URSVL has not checked or reviewed all of National Grid Transco’s
information and documents. The verification statement provided herein
by URSVL is not intended to be used as advice or as the basis for any
decisions, including, without limitation, financial or investment decisions. | |

Verification method The approach followed by URSVL is aligned to International Accreditation Forum IAF Guide 66, Guidance to Guide 66-EA-7/02 and EN 45012, frameworks for bodies operating independent assessment and certification of management systems. URSVL auditors conducted the verification process following the general principles of auditing and audit procedures as contained within the international standard, ISO 19011 and with consideration of the new assurance standard, AA1000.

Corporate responsibility In URSVL’s opinion, National Grid Transco has established clear roles and responsibilities at Board, Group and business unit levels, since the Merger. Appropriate Group policies for a number of key issues have been developed based on National Grid Transco’s Framework for Responsible Business, with further policies under consideration. Whilst communication and implementation of the new policies has commenced, this should be seen as an ongoing process, building on the established safety and environment systems in place in the business units. National Grid Transco has also developed a systematic methodology for identifying and assessing Group-wide operational risks including corporate responsibility issues. There was a good awareness of the defined risks and the mechanisms for their management amongst the personnel interviewed. However, it was noted that the register defines the risks in general terms and greater clarity of the risks as presented in the register may assist in ongoing use and understanding of this document. Furthermore, internal reporting mechanisms on safety and environment performance are well established at Board, Group and business unit levels. However, the internal performance reporting to the Board does not cover all key defined corporate responsibility risks.

| Content and coverage of the report In URSVL’s opinion, the report text which focuses on key risks
defined by National Grid Transco covers the appropriate corporate responsibility
issues for the Group. The qualitative information provided is also considered
fair, balanced across the business, and includes reporting of sensitive
issues. The metrics in the report reflect where existing data was available,
however these are not completely aligned with the internal reporting
process. | |
| --- | --- |
| Areas for
development of corporate responsibility and reporting To build on this first corporate responsibility report by National Grid
Transco and its internal strategy and systems, the following represent
primary areas for consideration: | |
| • | further dissemination and
implementation of policies across the Group building on existing systems; |
| • | increased effectiveness
in communication from Group to business unit level to strengthen integration
of cultures and systems; |
| • | greater clarity in the descriptions
of risks covered in the risk register to ensure complete understanding
of the risks covered; |
| • | review and consider inclusion
of additional metrics in the internal and external reporting process to
reflect a broader range of corporate risks to increase robustness of the
corporate responsibility process; and |
| • | documenting and communicating
targets and trends to increase openness and transparency of National Grid
Transco’s performance. |

David Westwood Director For and on behalf of URS Verification Ltd London May 2003

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Investor Information Market prices The following table sets out the highest and lowest market prices for the periods indicated:

| | Ordinary
shares — High (p) | Low (p) | ADSs — High ($) | Low ($) |
| --- | --- | --- | --- | --- |
| 1998/99 | 552.75 | 359.00 | 45.625 | 29.750 |
| 1999/2000 | 597.00 | 388.50 | 48.125 | 31.875 |
| 2000/01 | 646.00 | 479.50 | 47.875 | 37.000 |
| 2001/02 | 581.00 | 417.25 | 41.750 | 30.400 |
| Quarter 1 | 581.00 | 518.00 | 41.750 | 36.900 |
| Quarter 2 | 536.00 | 424.50 | 37.500 | 31.640 |
| Quarter 3 | 502.00 | 417.25 | 36.040 | 30.400 |
| Quarter 4 | 471.50 | 434.50 | 33.610 | 31.110 |
| 2002/03 | 511.50 | 365.75 | 37.400 | 29.690 |
| Quarter 1 | 511.50 | 459.00 | 37.400 | 32.870 |
| Quarter 2 | 472.25 | 402.25 | 36.500 | 31.400 |
| Quarter 3 | 480.00 | 418.00 | 37.140 | 32.800 |
| October 2002 | 480.00 | 451.50 | 37.140 | 35.300 |
| November
2002 | 453.00 | 429.00 | 36.160 | 33.500 |
| December
2002 | 456.50 | 418.00 | 36.790 | 32.800 |
| Quarter 4 | 448.00 | 365.75 | 35.920 | 29.690 |
| January 2003 | 448.00 | 384.00 | 35.920 | 32.060 |
| February
2003 | 421.00 | 391.00 | 33.560 | 31.630 |
| March 2003 | 417.00 | 365.75 | 32.610 | 29.690 |
| April 2003 | 418.00 | 394.00 | 33.180 | 31.060 |
| May 2003 | 421.00 | 400.50 | 34.250 | 32.100 |
| For the period to 20 May 2003 | | | | |

Exchange rates The following table sets out the $ to £ exchange rates as indicated:

	Period end ($)	Average ($) **	High ($)	Low ($)
1998/99	1.61	1.65	1.72	1.60
1999/2000	1.59	1.61	1.68	1.55
2000/01	1.42	1.47	1.60	1.40
2001/02	1.42	1.44	1.48	1.37
2002/03	1.58	1.55	1.65	1.43
October 2002			1.57	1.54
November 2002			1.59	1.54
December 2002			1.61	1.56
January 2003			1.65	1.60
February 2003			1.65	1.57
March 2003			1.61	1.56
April 2003			1.60	1.55
May 2003*			1.64	1.59
** The average rate is calculated
using the exchange rates on the last day of each month during the period

Trading markets for ordinary shares National Grid Transco’s shares have been listed on the London Stock Exchange since 11 December 1995. National Grid Transco’s ADRs have had a full listing on the New York Stock Exchange since 7 October 1999. Exchange controls There are currently no UK laws, decrees or regulations that restrict the export or import of capital, including, but not limited to, foreign exchange control restrictions, or that affect the remittance of dividends, interest or other payments to non-UK resident holders of ordinary shares except as otherwise set out in ‘Taxation’ below and except in respect of the governments of and/or certain citizens, residents or bodies of Iraq, the Federal Republic of Yugoslavia, Serbia, Myanmar (formerly Burma) and Afghanistan (in each case as more particularly described in applicable Bank of England Notices or European Union Council Regulations in force as at the date of this document). Defaults, dividend arrearages and delinquencies There has been no material default in the payment of principal, interest, a sinking or purchase fund instalment or any other material default with respect to the indebtedness for or in respect of monies borrowed or raised by whatever means of

the Company or any of its significant subsidiaries. There have been no arrears in the payment of dividends on, and no material delinquency with respect to, any class of preferred stock of any significant subsidiary of the Company.

Taxation The following summary describes the principal US Federal income and UK tax consequences to beneficial owners of ADSs or ordinary shares who are residents of the United States. The summary is not a complete analysis or listing of all the possible tax consequences of ownership and does not discuss special tax rules that may be applicable to certain classes of investors, including banks, insurance companies, securities dealers, investors with a ‘functional currency’ other than the US dollar and any corporation which alone, or together with one or more corporations which are treated as associated for the purposes of the US/UK taxation convention relating to income and capital gains (the ‘Income Tax Convention’), directly or indirectly controls 10% or more of the voting share capital of National Grid Transco. The statements regarding US Federal tax laws set out below are based (i) on the US Internal Revenue Code of 1986, as amended (the ‘Code’) and regulations issued thereunder, all of which are subject to change, possibly with retroactive effect and (ii) in part on representation of The Bank of New York as depositary (the ‘Depositary’) and assume that each obligation provided for in or otherwise contemplated by the deposit agreement entered into by and among National Grid Transco, the Depositary and the registered holders of ADRs pursuant to which ADRs have been issued dated as of 21 November 1995 and amended and restated as of 31 January 2002 (the ‘Deposit Agreement’) and any related agreement will be performed in accordance with its terms. The statements regarding UK tax set out below are based on what is understood to be the practice of the UK Inland Revenue as at such date and are subject to any change therein (including any change having retroactive effect). Beneficial owners of ADSs who are residents or citizens of the United States will be treated as the owners of the underlying ordinary shares for the purposes of the Code.

The US and UK signed a new convention for the avoidance of double taxation with respect to income and capital gains on 24 July 2001 (the ‘New Treaty’). The New Treaty entered into force following the exchange of instruments of ratification on 31 March 2003 and is effective for withholding taxes beginning 1 May 2003. This summary is based on the income tax treaty in effect at the end of National Grid Transco’s taxable year 31 March 2003 (the

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Investor Information continued

‘Old Treaty’), with a brief summary of the impact of the New Treaty on future distributions and disposals.

For the purposes of this discussion, the term ‘US Holder’ refers to a beneficial owner of ADSs or ordinary shares who is a resident of the United States for US Federal income tax purposes and, as to the description under ‘Taxation of dividends’ and ‘Taxation of capital gains’ below, is also a resident of the United States for the purposes of the Old Treaty.

Taxation of dividends The tax credit to which UK resident individual shareholders are generally entitled in respect of any dividend on their ordinary shares and which they can set against their total income tax liability is equal to one-ninth of the cash dividend (10% of the aggregate of the tax credit and the cash dividend).

Under the terms of the 1975 Income Tax Convention, effective for withholding tax purposes through to 30 April 2003, dividends paid to US shareholders controlling less than 10% of the voting capital of National Grid Transco are not subject to withholding taxes in the United Kingdom. The 1975 Income Tax Convention technically allows such US shareholders to claim the refundable tax credit for dividends which is available to UK shareholders. The amount of such credit is one-ninth of the cash distribution (10% of the aggregate of the credit and the cash dividend). If claimed by a US shareholder, however, the 1975 Income Tax Convention requires the credit to be reduced by 15% of the sum of the dividend and the credit, resulting in no net refundable credit.

Under the terms of the 2003 Income Tax Convention, effective for withholding tax purposes beginning on 1 May 2003, the United Kingdom is allowed to impose a 15% withholding tax on dividends paid to US shareholders controlling less than 10% of the voting capital of National Grid Transco. The United Kingdom does not, however, currently impose a withholding tax on such dividends. If it were to impose such a tax, the treaty provides for an exemption from withholding taxes for dividends paid on shares held through a tax exempt pension fund, 401(k) plan, or similar ‘pension scheme’. The 2003 Income Tax Convention eliminates the refundable tax credit provision found in the prior treaty. To obtain benefits under the New Treaty, a US holder must comply with the limitations on benefits article.

Taxation of capital gains A US Holder who is not resident or ordinarily resident for UK tax purposes in the UK will not be liable for UK taxation on

capital gains realised or accrued on the sale or other disposal of ADSs or ordinary shares unless the US Holder carries on a trade, profession or vocation in the UK through a branch or agency and such ADSs or ordinary shares are or have been used, held or acquired for the purposes of such trade, profession or vocation or such branch or agency. A US Holder will be liable for US Federal income tax on gains on the sale of ADSs or ordinary shares to the same extent as on any other gains from sales of stock. Gain, if any, will generally be US source.

A US citizen who is resident or ordinarily resident in the UK, a US corporation which is resident in the UK by reason of its business being managed and controlled in the UK or a US citizen who, or a US corporation which, is trading or carrying on a profession or vocation in the UK through a branch or agency and has used, held or acquired ADSs or ordinary shares for the purpose of such trade, profession or vocation or such branch or agency, may be liable for both UK and US tax on a capital gain recognised on the disposal of ADSs or ordinary shares. Such holder, however, will generally be entitled to foreign tax credit, subject to certain limitations, against any US Federal tax liability for the amount of any UK tax (namely capital gains tax in the case of an individual and corporation tax on chargeable gains in the case of a corporation) which is paid in respect of such gain.

A US Holder who becomes resident in the UK after a period of ‘temporary’ nonresidence (of up to five years) following an earlier period of residence in the UK may also be liable to UK capital gains tax.

The taxation of capital gains remains broadly unchanged under the New Treaty. However, a US Holder must comply with the limitation on benefits article in the New Treaty in order to obtain treaty benefits.

UK stamp duty and stamp duty reserve tax (‘SDRT’) Transfers of ordinary shares: Generally speaking SDRT at the rate of 0.5% of the amount or value of the consideration paid is payable where an agreement to transfer ordinary shares is not completed by a duly stamped transfer to the transferee. Where an instrument of transfer is executed and duly stamped before the expiry of the period of six years beginning with such date, the SDRT liability will be cancelled, and any SDRT which has been paid will be refunded. SDRT is due whether or not the agreement or transfer of such chargeable securities is made or carried out in the UK and whether or not any party to that agreement or transfer is a UK resident.

Purchases of ordinary shares completed by

execution of a stock transfer form will generally give rise to a liability to UK stamp duty at the rate of 0.5% (rounded up to the nearest £5) of the actual consideration paid.

Paperless transfers under the CREST paperless settlement system will generally be liable to SDRT at the rate of 0.5%, and not stamp duty.

The transfer of ordinary shares where there is no change of beneficial ownership will generally attract fixed rate stamp duty of £5 per transfer.

SDRT is generally the liability of the purchaser and UK stamp duty is usually paid by the purchaser or transferee.

Transfer of ADSs: No UK stamp duty will be payable on the acquisition or transfer of existing ADSs or beneficial ownership of ADSs, provided that any instrument of transfer or written agreement to transfer is executed outside the UK and remains at all times outside the UK. An agreement for the transfer of ADSs in the form of ADRs will not give rise to a liability for SDRT. On a transfer of ordinary shares from the London, England office of The Bank of New York as agent of the Depositary (the ‘Custodian’) to a holder of ADSs upon cancellation of the ADSs, only a fixed stamp duty fee of £5 per instrument of transfer will be payable. Any transfer for value of the underlying ordinary shares represented by ADSs may give rise to a liability on the transferee to UK stamp duty or SDRT.

A charge to stamp duty or SDRT may arise on the issue or transfer of ordinary shares to the Depositary or the Custodian. The rate of stamp duty or SDRT will generally be 1.5% of either (i) in the case of an issue of ordinary shares, the issue price of the ordinary shares concerned, or (ii) in the case of a transfer of ordinary shares, the value of the consideration or, in some circumstances, the value of the ordinary shares concerned. The Depositary will generally be liable for the stamp duty or SDRT. In accordance with the terms of the Depositary Agreement, the Depositary will charge any tax payable by the Depositary or the Custodian (or their nominees) on the deposit of ordinary shares to the party to whom the ADSs are delivered against such deposits. If the stamp duty is not already a multiple of £5, the duty will be rounded up to the nearest multiple of £5.

US information reporting and backup withholding A US resident Holder who holds ADSs may in certain circumstances be subject to information reporting to the IRS and possible US backup withholding at a rate of 30% with respect to dividends on ADSs and proceeds from the sale or other

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disposition of ADSs unless such holder furnishes a correct taxpayer identification number or is otherwise exempt.

UK inheritance tax An individual who is domiciled in the US for the purposes of the convention between the US and the UK for the avoidance of double taxation with respect to estate and gift taxes (the ‘Estate Tax Convention’) and who is not a national of the UK for the purposes of the Estate Tax Convention will generally not be subject to UK inheritance tax in respect of the ADSs on the individual’s death or on a gift of the ADSs during the individual’s lifetime, unless the ADSs are part of the business property of a permanent establishment of the individual in the UK or pertain to a fixed base in the UK of an individual who performs independent personal services. Special rules apply to ADSs held in trust. In the exceptional case where the shares are subject both to UK inheritance tax and to US Federal gift or estate tax, the Estate Tax Convention generally provides for the tax paid in the UK to be credited against tax paid in the US.

Memorandum and Articles of Association The following description is a summary of the material terms of National Grid Transco’s share capital and material provisions of the Memorandum and Articles of Association of National Grid Transco (the ‘Articles’) and English law. The following description is a summary only and is qualified in its entirety by reference to the Articles, which have been filed with the US Securities and Exchange Commission, and the Companies Act 1985, as amended (the ‘Companies Act’). National Grid Transco’s authorised share capital is 5,000,000,000 ordinary shares of 10 pence each and one special rights non-voting redeemable preference share of £1. All of the outstanding shares are fully paid. Accordingly, no further contribution of capital may be required by National Grid Transco from the holders of such shares.

General: National Grid Transco is incorporated under the name National Grid Transco plc and is registered in England and Wales with registered number 4031152. The Company’s objects are set forth in the fourth clause of its Memorandum of Association and cover a wide range of activities, including the following:

| • | carrying on the business of a holding
company; |
| --- | --- |
| • | employing the funds of the Company to
develop and expand its business; and |

• carrying on any other activity supplemental to the foregoing or capable of enhancing the Company’s profitability.

The Memorandum of Association grants National Grid Transco a broad range of corporate powers to effect these objectives.

Directors: The Articles provide that unless otherwise determined by an ordinary resolution of the Company’s shareholders, the number of Directors shall not be fewer than two but shall not be subject to any maximum number. Under the Articles, a Director may not vote in respect of any contract in which the Director, directly or indirectly, has an interest. This is subject to certain exemptions relating to (a) giving the Director any guarantee, security or indemnity in respect of obligations incurred at the request of or for the benefit of National Grid Transco, (b) giving any guarantee, security or indemnity to a third party in respect of obligations of National Grid Transco for which the Director has assumed responsibility under an indemnity or guarantee, (c) an offer of securities of National Grid Transco in which the Director may be entitled to participate or will be interested as an underwriter, (d) any contract concerning any other company in which the Director is beneficially interested in less than 1% of that other company, (e) any arrangement for the benefit of employees of National Grid Transco under which he benefits in a similar manner as the employees and (f) any contract concerning any insurance that National Grid Transco is empowered to purchase or maintain for its Directors.

The compensation awarded to Executive Directors is decided by a remuneration committee, which consists exclusively of Non-executive Directors.

The Directors are empowered to exercise all the powers of National Grid Transco to borrow money, subject to the limitation that the aggregate principal amount outstanding of all borrowings shall not exceed an amount equal to four times National Grid Transco’s share capital and aggregate reserves, calculated in the manner described in the Articles, unless sanctioned by an ordinary resolution of the Company’s shareholders.

Any Director not otherwise required to retire at an annual general meeting of shareholders shall do so unless he was appointed or reappointed as a Director at either of the last two annual general meetings before that meeting. At each annual general meeting one-third of the Directors (or, if their number is not a multiple of three, the number nearest to but not greater than one-third) shall retire from office by rotation. A retiring Director shall be eligible for re-election. No Director shall be

required to retire by reason only of the fact that he has attained the age of 70 or any other age.

A Director is not required to hold shares of National Grid Transco in order to qualify as a Director.

The Special Share: Any one of Her Majesty’s Secretaries of State, another Minister of the Crown, the Solicitor for the affairs of HM Treasury or any other person acting on behalf of the Crown may hold the Special Share. The registered holder of the Special Share may, after consulting National Grid Transco and subject to the provisions of the Companies Act, require National Grid Transco to redeem the Special Share at par at any time. The holder of the Special Share has the right to receive notice of, and to attend and speak at, any general meeting or any separate meeting of the holders of any class of shares, but the special share confers no right to vote nor any other rights at any shareholders’ meeting. The Special Share confers no right to participate in National Grid Transco’s capital or profits except that, on a distribution of capital in a winding-up, the holder of the Special Share is entitled to repayment of £1 in priority to other shareholders.

Each of the following actions is effective only with the written consent of the holder of the Special Share:

(a) the amendment, removal or alteration of the effect of (including the ratification of any breach of) specified provisions of the Articles, including the Article relating to the Special Share, the Article on general limitations on shareholdings, the Article on shareholding restrictions on persons who are bound by the Balancing and Settlement Code or who are licence holders and the Article relating to the disclosure of interests in shares under section 212 of the Companies Act (each as described under ‘General Limitations on Shareholdings’ and ‘Shareholding Restrictions on Persons who are bound by the Balancing and Settlement Code or who are Licence Holders’ below) except to the extent that any amendment, removal or alteration of the Article relating to the disclosure of interests in shares is required to comply with the Listing Rules of the UK Listing Authority;

(b) the creation or issue of any shares in the Company with voting rights attached, not being: (i) shares comprised or shares which would, following issue, be comprised in the relevant share capital (as defined in section 198(2) of the Companies Act) of the Company; or (ii) shares which do not or shares which, following issue, would not constitute equity share capital (as defined in section 744 of the Companies Act) and which, when aggregated with all other

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Investor Information continued

such shares, carry (or would, if in issue carry) the right to cast less than 15% of the maximum number of votes capable of being cast on a poll on any resolution at any general meeting of the Company (whether or not the votes could be cast on a poll in relation to all resolutions at all general meetings);

(c) the variation of any rights (save for dividend rights and rights to repayment of capital) attached to any shares in National Grid Transco;

(d) the disposal by the Company or the disposal by any other member of the Group, to any person who is not a member of the Group, of all or any of the shares or of any rights or interests therein held by such company in the Transmission Licence Holder or in any company which directly or indirectly holds shares therein, or the entering into by the Company or any other member of the Group of any agreement or arrangement with any person who is not a member of the Group with respect to, or to the exercise of any rights attaching to, such shares;

(e) the giving by the Company of any consent or agreement to (including, without limitation, the casting of any vote in favour of) any amendment, removal or alteration of the effect of Article 10 of the Articles of Association of Transco plc (company number 2006000) or of the equivalent article in the Articles of Association of each Relevant Subsidiary (as defined in the Articles);

(f) the giving by the Company (or any Relevant Subsidiary) of any consent or agreement to (including, without limitation, the casting of any vote in favour of) the creation or issue of any shares in the capital of Transco plc (or any Relevant Subsidiary) other than an issue of such shares following which the Company will own (directly or through any Relevant Subsidiary) the full legal and beneficial interest in, and control, shares in the capital of Transco plc carrying at least 85% of the voting rights exercisable at general meetings of Transco plc (as defined in the Articles);

(g) the disposal by the Company (or any Relevant Subsidiary) of any of the shares in Transco plc held by it (or any Relevant Subsidiary) or of any rights or interests therein or the entering into by the Company (or any Relevant Subsidiary) of any agreement or arrangement with respect to, or to the exercise of any voting or other rights attaching to, such shares such that the Company would cease (directly or through any Relevant Subsidiary) to own the full legal and beneficial interest in, and control, shares in the capital of Transco plc carrying at least 85% of the voting rights exercisable

at general meetings of Transco plc. For these purposes, ‘disposal’ shall include any sale, gift, lease, licence, loan, mortgage, charge or the grant of any other encumbrance or the permitting of any encumbrance to subsist (other than a floating charge over the whole of the Company’s or Relevant Subsidiary’s assets), or any other disposition to a third party;

(h) the giving by the Company (or any Relevant Subsidiary) of any consent or agreement to (including, without limitation, the casting of any vote in favour of) any abrogation, variation, waiver or modification of any of the rights or privileges attaching to any shares of any class in Transco plc (or any Relevant Subsidiary) such that the Company would cease (directly or through any Relevant Subsidiary) to own the full legal and beneficial interest in, and control, shares in the capital of Transco plc carrying at least 85% of the voting rights exercisable at any general meeting of Transco plc;

(i) without limitation to any of the foregoing, any act or omission to act by the Company or the Board (or any Relevant Subsidiary or its board of directors) which results in the Company ceasing (directly or through any Relevant Subsidiary) to own the full legal and beneficial interest in, and control, shares in the capital of Transco plc carrying at least 85% of the voting rights exercisable at general meetings of Transco plc;

(j) any scheme of arrangement which if put into effect would relieve the Transmission Licence Holder or any other Affiliate of the Company of, or otherwise modify, the obligation required to be imposed on such person by the Company;

(k) the voluntary winding-up of the Company, a special resolution to the effect that the Company should be wound up by the court, the presentation by the Company or by the Directors (whether solely or jointly with each other or with any other person) of a petition for the winding-up of the Company by the court or any proposal for any of the foregoing;

(l) the presentation by the Company (whether solely or jointly with any other person) of a petition to the court for, or the exercise by the Company of any rights in support of, the winding-up of the Transmission Licence Holder or any proposal for either of the foregoing;

(m) the presentation by the Company or by the Directors (whether solely or jointly with each other or with any other person) of a petition applying for an administration order pursuant to section 9 of the Insolvency Act 1986 or any proposal thereof;

(n) the proposal by the Board of a voluntary arrangement pursuant to section 1 of the Insolvency Act 1986; and

(o) save with respect to a Qualifying Reorganisation (as defined in the Articles), the establishment of a holding company for the Company.

Ordinary Shares Dividends and Other Distributions: National Grid Transco may not pay any dividend otherwise than out of profits available for distribution under the Companies Act and the other applicable provisions of English law. In addition, as a public company, National Grid Transco may make a distribution only if and to the extent that, at the time of the distribution, the amount of its net assets is not less than the aggregate of its called-up share capital and undistributable reserves (as defined in the Companies Act). Subject to the foregoing, National Grid Transco may, by ordinary resolution, declare dividends in accordance with the respective rights of the shareholders but not exceeding the amount recommended by the Board of Directors. The Board of Directors may pay interim dividends if the Board of Directors considers that National Grid Transco’s financial position justifies the payment.

Except insofar as the rights attaching to any share otherwise provide, all dividends will be apportioned and paid proportionately to the amounts paid up (otherwise than in advance of calls) on the shares.

A general meeting declaring a dividend may, upon the recommendation of the Board of Directors, direct that the dividend be satisfied wholly or partly by the distribution of assets. Dividends may be declared or paid in any currency. The Board of Directors may, if authorised by a shareholders’ ordinary resolution, offer the holders of ordinary shares the right to elect to receive new ordinary shares credited as fully paid, instead of cash for all or part of the dividend specified by that ordinary resolution.

National Grid Transco may stop paying dividends or other monies payable in respect of a share to a shareholder if in respect of at least two consecutive dividend payments, through no fault of National Grid Transco, payment has not been effected (or, following one such occasion, reasonable enquiries have failed to establish any new address of the holder or appropriate details for effecting payment by other means). National Grid Transco must resume payment of dividends or other monies payable in respect of a share if the shareholder or person entitled by transmission claims the arrears of dividend.

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All dividends or other sums payable unclaimed for one year after having been declared may be invested or otherwise made use of by the Board of Directors for the benefit of National Grid Transco until claimed. Any dividend or interest unclaimed for 12 years from the date when it was declared or became due for payment will be forfeited and revert to National Grid Transco.

In a winding-up, a liquidator may, with the sanction of a special resolution of National Grid Transco and any other sanction required by applicable provisions of English law, (a) divide among the shareholders the whole or any part of National Grid Transco’s assets (whether the assets are of the same kind or not) and may for this purpose value any assets and determine how the division should be carried out as between different shareholders or different classes of shareholders or otherwise as the resolution may provide, or (b) vest the whole or any part of the assets in trustees upon such trusts for the benefit of the contributories as the liquidator, with the sanction of a special resolution, determines, but in neither case will a shareholder be compelled to accept assets upon which there is a liability.

Unless the Board of Directors determines otherwise, no shareholder holding shares representing 0.25% or more of any class of National Grid Transco’s shares will be entitled to receive payment of any dividend or other distribution if he or any person appearing to be interested in those shares has been given a notice under section 212 of the Companies Act and has failed to give National Grid Transco the information required by the notice within 14 days from the date of service of the notice.

Voting Rights: Subject to any rights or restrictions attached to any shares and to any other provisions of the Articles, at any general meeting on a show of hands every shareholder who is present in person will have one vote and on a poll every shareholder will have one vote for every share which he holds. On a poll, shareholders may cast votes either personally or by proxy and a proxy need not be a shareholder. Under the Articles all special and extraordinary resolutions must be decided on a poll.

In the case of joint holders of a share, the vote of the senior who tenders a vote, whether in person or by proxy, will be accepted to the exclusion of the votes of the other joint holders. Seniority will be determined by the order in which the names of the holders appear in the register of shareholders.

Unless the Board of Directors otherwise determines, no shareholder, or person to

whom any of that shareholder’s holding is transferred other than by a transfer approved under the Articles, can vote at any general meeting either in person or by proxy in respect of any share in National Grid Transco held by him:

(a) if all monies presently payable by him in respect of that share have not been paid;

(b) if he or any other person appearing to be interested in the share has been given a notice under section 212 of the Companies Act and has failed to provide the information required by the notice within 14 days from the date of service of the notice (or in the case of shares representing less than 0.25% of their class, within 28 days of service of the notice); or

(c) in the circumstances referred to under ‘General Limitations on Shareholdings’ and ‘Shareholding Restrictions on Persons who are bound by the Balancing and Settlement Code or Licence Holders’ below.

Variation of Rights: Subject to applicable provisions of English law and the rights attached to any specific class of shares, the rights attached to any class of shares of National Grid Transco may be varied with the written consent of the holders of three-fourths in nominal value of the issued shares of that class, or with the sanction of an extraordinary resolution passed at a separate meeting of the holders of the shares of that class. The applicable provisions of English law and the Articles relating to general meetings will generally apply to any such separate meeting except that:

(a) the necessary quorum will be two persons between them holding or representing by proxy not less than one-third in nominal amount of the issued shares of that class or, at any adjourned meeting of holders of shares of that class at which that quorum is not present, will be any holder of shares of that class who is present in person or by proxy whatever the number of shares held by him;

(b) any holder of shares of that class present in person or by proxy may demand a poll; and

(c) every holder of shares of that class will, on a poll, have one vote in respect of every share of that class held by him.

Alteration of Capital: National Grid Transco may by ordinary resolution increase, consolidate and divide and subdivide its share capital. Subject to applicable provisions of English law, National Grid Transco may by special resolution reduce its share capital, any capital redemption reserve and any share

premium account or other undistributable reserve in any manner. Subject to applicable provisions of English law and to any rights conferred on the holders of any class of shares, National Grid Transco may purchase all or any of its shares of any class (including any redeemable shares).

General Limitations on Shareholdings: The Articles contain provisions which limit interests in voting shares. These provisions are described briefly below:

(a) If any person has, or appears to the Board of Directors to have, an interest in shares which carry 15% or more of the total votes attaching to the relevant share capital (as defined in the Companies Act) of National Grid Transco and capable of being cast on a poll or is deemed so to have such an interest, the Board of Directors must take the following actions. The Board must give notice to all persons who appear to the Board of Directors to have interests in the shares concerned and, if different, to the registered holders of those shares. The notice will require that the interest concerned be reduced to less than 15% by selling shares within 21 days of the notice (or such longer period that the Board of Directors considers reasonable). No transfer of the shares to which the interest relates may then be registered except for the purpose of reducing the interest to less than 15% or until the notice has been withdrawn.

(b) If a person receiving a notice described in paragraph (a) does not comply with it, the Board of Directors will, so far as it is able, sell the shares on appropriate terms, as it determines. The proceeds of that sale will be received by National Grid Transco and paid (without interest and after deduction of any expenses of sale) to the former registered holder.

(c) A registered holder receiving a notice described in paragraph (a) is not entitled, until he has complied with the notice, to attend or vote at any general meeting of National Grid Transco or of any class of shares. Likewise, the holder will not be able to exercise any other of the rights of a shareholder in relation to that meeting, and those rights will vest in the chairman of that meeting who will have discretion to exercise them or not.

(d) Any resolution or determination of, or decision or exercise of any discretion or power by, the Board of Directors or any Director or the chairman of any meeting under the relevant Article will be final and conclusive. Any disposal or transfer made by or on behalf of or on the authority of the Board of Directors or any Director pursuant to the relevant Article will be conclusive and binding on all persons concerned and

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Investor Information continued

will not be open to challenge. The Board of Directors is not required to give any reasons for any decision, determination or declaration taken or made in accordance with the relevant Article. There are limited exceptions to these restrictions relating principally to holdings of a trustee or fiduciary nature and market clearing arrangements. These restrictions do not apply to the Depositary acting in its capacity as such.

Shareholding Restrictions on Persons who are bound by the Balancing and Settlement Code or Licence Holders: The Articles contain additional restrictions which are intended to prevent any person who is bound by the Balancing and Settlement Code by virtue of being a party to the BSC Framework Agreement dated 14 August 2000, a holder of a licence under the Electricity Act 1989, or in either case, any affiliate thereof, from having an interest in shares which carry 1% or more of the total votes attaching to the relevant share capital of National Grid Transco and capable of being cast on a poll.

The Board of Directors has the same rights as those set out under ‘General Limitations on Shareholdings’ above to require the sale or to sell sufficient numbers of shares to bring the relevant interest within the permitted limit where these provisions are breached.

Obligations Relating to the Transmission Licence Holder: The Articles provide that National Grid Transco must procure that, without the consent in writing of the holder of the special share:

(a) the transmission licence (as subsequently amended) which was granted by the then Secretary of State for Energy shall not be held by any person which is not National Grid Transco or a wholly-owned subsidiary of National Grid Transco;

(b) National Grid Transco and its wholly-owned subsidiaries shall not cease to carry on, or dispose of or relinquish operational control over any asset required to carry on, the transmission business or the interconnectors business (as defined in the transmission licence in place at 11 December 1995) except if that cessation, disposal or relinquishment is required by law or is permitted pursuant to or by virtue of the terms of the transmission licence;

(c) neither National Grid Transco nor any affiliate of National Grid Transco is permitted to carry on in the United Kingdom any activity which requires a generation or supply licence or which is exempted from such requirement, save where that activity is expressly permitted

under the terms of the transmission licence in place at 11 December 1995 and neither National Grid Transco nor any affiliate of National Grid Transco is permitted to engage outside the United Kingdom in the generation of electricity to be imported into the United Kingdom;

(d) no employee or director of any person who is bound by the Balancing and Settlement Code by virtue of being a party to the BSC Framework Agreement dated 14 August 2000 or the holder of a licence under the Electricity Act 1989 or, in either case, any affiliate thereof (other than National Grid Transco or any wholly-owned subsidiary of National Grid Transco) is permitted to be a director of National Grid Transco or the transmission licence holder; and

(e) the transmission licence holder is not permitted to carry on activities other than:

(i) those required or contemplated on the part of the transmission licence holder (in its capacity as the holder of the transmission licence) by the transmission licence or the Electricity Act 1989 or related to those requirements; or

(ii) those carried on by The National Grid Company plc at or prior to 11 December 1995.

The restrictions set out in this sub-paragraph (e) would not prevent the acquisition of any share capital by the transmission licence holder in any company (subject to sub-paragraph (c)).

Annual General Meetings and Extraordinary General Meetings: Annual General Meetings must be convened upon advance written notice of 21 clear days. An Extraordinary General Meeting must be convened upon advance written notice of 21 clear days for the passing of a special resolution and 14 days for any other resolution. The notice must specify the nature of the business to be transacted. The notice must also specify the place, the day and the time of the meeting.

Rights of Non-Residents: There are no restrictions under National Grid Transco’s Memorandum and Articles of Association that would limit the rights of persons not resident in the UK, as such, to vote ordinary shares.

Disclosure of Interests: (a) A shareholder may lose the right to vote his shares if he or any other person appearing to be interested in those shares fails to comply within a prescribed period of time with a request by National Grid Transco under the Companies Act to give the required information with respect to

past or present ownership or interests in those shares. In the case of holders of more than 0.25% in nominal amount of any class of the share capital of National Grid Transco, in addition to disenfranchisement, the sanctions that may be applied by National Grid Transco include withholding of the right to receive payment of dividends and other monies payable on shares, and restrictions on transfers of the shares.

(b) The Companies Act provides that a person (including a company and other legal entities) that acquires an interest of 3% or more in any class of shares constituting an English public company’s ‘relevant share capital’ (ie National Grid Transco’s issued share capital carrying the right to vote in all circumstances at a general meeting of National Grid Transco) is required to notify the company of its interest within two business days following the day on which the obligation arises. After the 3% level is exceeded, similar notifications must be made in respect of increases or decreases of 1% or more.

For purposes of the notification obligation, the interest of a person in shares means any kind of interest in shares including interests in any shares (a) in which a spouse, or child or stepchild under the age of 18 is interested, (b) in which a corporate body is interested and either (i) that corporate body or its directors generally act in accordance with that person’s directions or instructions or (ii) that person controls one-third or more of the voting power of that corporate body or (c) in which another party is interested and the person and that other party are parties to a ‘concert party’ agreement. A concert party agreement is one which provides for one or more parties to acquire interests in shares of a particular company and imposes obligations or restrictions on any one of the parties as to the use, retention or disposal of such interests acquired under the agreement, and any interest in the company’s shares is in fact acquired by any of the parties under the agreement. Some of the interests (eg those held by certain investment fund managers) may be disregarded for the purposes of calculating the 3% threshold, but the obligations of disclosure will still apply where those interests exceed 10% or more of any class of the company’s relevant share capital and to increases or decreases of 1% or more thereafter.

In addition, section 212 of the Companies Act provides that a public company may send a written notice to a person whom the company knows or has reasonable cause to believe to be, or to have been at any time during the three years immediately

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preceding the date on which the notice is issued, interested in shares constituting the company’s ‘relevant share capital’. The notice will require that person to state whether he has an interest in the shares, and in case that person holds or had held an interest in those shares, to give additional information relating to that interest and any other interest in the shares of which that person is aware.

Where a company serves notice under the provisions described above on a person who is or was interested in shares of the company and that person fails to give the company any information required by the notice within the time specified in the notice, the company may apply to an English court for an order directing that the shares in question be subject to restrictions prohibiting, among other things, any transfer of those shares, the taking up of rights in respect of those shares and, other than in a liquidation, payments in respect of those shares.

A person who fails to fulfil the obligations imposed by those provisions of the Companies Act described above is subject to criminal penalties.

Material contracts Save for the contracts described below, no contracts (other than contracts entered into in the ordinary course of business) have been entered into by the Group: within the two years immediately preceding the date of this document which are, or may be material; or which contain any provision under which any member of the Group has any obligation or entitlement which is material to the Group at the date of this document.

(a) Credit agreement dated 22 November 2001 between National Grid Transco plc (as guarantor and borrower); NGG Finance plc (as borrower); HSBC Investment Bank plc (the facility agent); HSBC (USA) Inc. (the swingline agent); and certain banks and financial institutions (the banks) which provides a $1.7 billion 364 day multicurrency revolving credit facility and $600 million five year multicurrency revolving facility with a $300 million swingline facility. An agreement to extend $1.5 billion of the 364 day multicurrency revolving credit facility for a further 364 days to 20 November 2003 was signed on 20 November 2002.

| (b) Offering
circular issued by NGG Finance plc on 20 August 2001 summarising the trust
deeds, subscription agreements and paying agency agreements relating to
the € 1,250,000,000 5.25%
guaranteed bonds due 2006 and the € 750,000,000
6.125% guaranteed bonds due 2011 issued by NGG Finance plc and guaranteed
by National Grid Transco. | | |
| --- | --- | --- |
| Documents on display National Grid Transco is subject
to the filing requirements of the US Securities Exchange Act of 1934.
In accordance with these requirements, National Grid Transco files reports
and other information with the US Securities and Exchange Commission (SEC).
These materials, including this document, may be inspected during normal
business hours at National Grid Transco’s registered office at 1-3
Strand, London WC2N 5EH or at the SEC’s Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549. For further information about
the Public Reference Room, please call the SEC on 1-800-SEC-0330. Some
of National Grid Transco’s filings are also available on the SEC’s
website at www.sec.gov. | | |
| Exhibits The following have been filed
with the Securities and Exchange Commission or will so be filed with the
2002/03 Form 20-F: | | |
| 1 | | Memorandum and Articles
of Association of National Grid Transco plc |
| 2(a) | | Amended and restated Deposit
Agreement dated as of 31 January 2002 |
| 4(a) | (i) | Credit agreement dated 22 November 2001 between National
Grid Transco plc (as guarantor and borrower); NGG Finance plc (as borrower);
HSBC Investment Bank plc (the facility agent); HSBC (USA) Inc. (the swingline
agent); and certain banks and financial institutions (the banks) which
provides a $1.7 billion 364 day multicurrency revolving credit facility
and $600 million five year multicurrency revolving facility with a $300
million swingline facility. An agreement to extend $1.5 billion of the
364 day multicurrency revolving credit facility for a further 364 days
to 20 November 2003 was signed on 20 November 2002. |

| | (ii) | Offering circular issued
by NGG Finance plc on 20 August 2001 summarising the trust deeds, subscription
agreements and paying agency agreements relating to the € 1,250,000,000 5.25%
guaranteed bonds due 2006 and the € 750,000,000
6.125% guaranteed bonds due 2011 issued by NGG Finance plc and guaranteed
by National Grid Transco. |
| --- | --- | --- |
| 4(b) | (i) | Service Agreement –
Edward Astle |
| | (ii) | Service Agreement –
Steve Holliday |
| | (iii) | Service Agreement –
Steve Lucas |
| | (iv) | Service Agreement –
Sir John Parker |
| | (v) | Employment Agreement –
Rick Sergel |
| | (vi) | Service Agreement –
Nick Winser |
| | (vii) | Service Agreement –
John Wybrew |
| 4(c) | (i) | National Grid Executive
Share Option Plan 2002 |
| | (ii) | National Grid Group Share
Matching Plan 2002 |
| | (iii) | National Grid Transco Performance
Share Plan 2002 |
| | (iv) | National Grid Executive
Share Option Plan 2000 |
| | (v) | National Grid Executive
Share Option Scheme |
| | (vi) | Lattice Long Term Incentive
Scheme |
| 6 | Earnings per
share – see note 11 to the accounts | |
| 8 | List of subsidiaries | |
| 12(a) | Certifications
pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |

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| Cross
Reference to Form 20-F — Item | | Page |
| --- | --- | --- |
| PART I | | |
| 1 | Identity of Directors, Senior
Management and Advisers. | n/a |
| 2 | Offer Statistics and Expected Timetable. | n/a |
| 3 | Key Information. | |
| A | Selected Financial Data | |
| | Financial summary | 107 |
| | Dividends | 31 |
| | Exchange rates | 111 |
| B | Capitalisation and Indebtedness | n/a |
| C | Reasons for the Offer and Use of Proceeds | n/a |
| D | Risk Factors | 53 |
| 4 | Information on the Company. | |
| A | History and Development of the Company
Overview of National Grid Transco | 10 |
| | History and development of the business | 10 |
| | Incorporation | 55 |
| | Operating and Financial Review | 29 |
| B | Business Overview | |
| | Chief Executive’s Review | 4 |
| | Business Review | 10 |
| | Operating and Financial Review | 29 |
| C | Organisational Structure | |
| | Note 32 Group undertakings and joint
ventures | 93 |
| D | Property, Plant and Equipment | |
| | UK gas distribution | |
| | Background information | |
| | Fixed assets | 11 |
| | UK electricity and gas transmission | 13 |
| | Background information | 13 |
| | Fixed assets | |
| | US electricity and gas networks | 15 |
| | Background information | 16 |
| | Fixed assets | 19 |
| 5 | Operating and Financial Review and
Prospects. | |
| A | Operating Results Operating and Financial Review | 29 |
| B | Liquidity and Capital Resources Liquidity,
resources and capital expenditure | 33 |
| C | Research and Development, Patents and
Licences etc Research and development | 55 |
| D | Trend Information | |
| | Business Review | 10 |
| | Operating and Financial Review | 29 |
| | Changes and developments | 38 |
| E | Reserved | |
| F | Reserved | |
| G | Reserved | |

Item		Page
6	Directors, Senior Management and Employees.
A	Directors and Senior Management Board
of Directors	26
B	Compensation
	Directors’ Remuneration Report	44
	Note 7 Pension and post-retirement benefits	68
C	Board Practices
	Directors’ service contracts	47
	Corporate Governance and Internal Control	41
D	Employees
	Note 5 Payroll costs and employees	67
E	Share Ownership
	Directors’ Remuneration Report	44
	Employee share ownership	24
	Note 23 Share capital	82
7	Major Shareholders and Related Party
Transactions.
A	Major Shareholders
	Substantial shareholdings	119
	Voting rights of substantial shareholders	119
	Distribution of shares by type of shareholder and size of shareholding	119
B	Related Party Transactions
	Related party transactions	38
	Note 16 Debtors	76
	Note 18 Creditors	76
	Note 30 Related party transactions	91
C	Interests of Experts and Counsel	n/a
8	Financial Information.
A	Consolidated Statements and Other Financial
Information Statement of Directors’ responsibilities for preparing
the accounts	55
	Independent Auditors’ Report	56
	Accounting Policies	57
	Group Profit and Loss Account	60
	Balance Sheets	61
	Group Cash Flow Statement	62
	Notes to the Accounts	63
	Dividend policy	32
B	Significant Changes Changes
and developments	38
9	The Offer and Listing.
A	Offer and Listing Details Market prices	111
B	Plan of Distribution	n/a
C	Markets
	Trading markets for ordinary shares	111
D	Selling Shareholders	n/a
E	Dilution	n/a
F	Expenses of the Issue	n/a

Item		Page
10	Additional Information.
A	Share Capital
	Note 23 Share capital	82
B	Memorandum and Articles
of Association	113
C	Material Contracts	117
D	Exchange Controls	111
E	Taxation	111
F	Dividends and Paying Agents	n/a
G	Statement by Experts	n/a
H	Documents on Display	117
I	Subsidiary Information	n/a
11	Quantitative and Qualitative
Disclosures About Market Risk.
	Refinancing risk management	35
	Interest rate risk management	35
	Foreign exchange risk management	35
	Counterparty risk management	35
12	Description of Securities
Other than Equity Securities.
A	Debt Securities	n/a
B	Warrants and Rights	n/a
C	Other Securities	n/a
D	American Depositary Shares	n/a
PART II
13	Defaults, Dividend Arrearages
and Delinquencies.	111
14	Material Modifications
to the Rights of Security Holders and Use of Proceeds.	n/a
15	Controls and Procedures.
	Evaluation of disclosure
controls and procedures	43
16	Reserved.
PART III
17	Financial Statements.
	See Item 18
18	Financial Statements.
	Statement of Directors’
responsibilities for preparing the accounts	55
	Independent Auditors’
Report	56
	Accounting Policies	57
	Group Profit and Loss Account	60
	Balance Sheets	61
	Group Cash Flow Statement	62
	Notes to the Accounts	63
19	Exhibits.	117

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Shareholder Statistics

Distributions of shares by type of shareholder and size of shareholding

The following analyses of shareholdings are as at 20 May 2003:

| Shareholders | Number
of Holders | Number of shares | %
of issued share capital | Shareholdings | Number
of Holders | Number of shares | %
of issued share capital |
| --- | --- | --- | --- | --- | --- | --- | --- |
| ADSs (a) | 1 | 80,667,316 | 2.62 | 1-100 | 684,779 | 40,534,719 | 1.32 |
| Banks | 30 | 103,317,054 | 3.36 | 101-500 | 674,757 | 140,413,620 | 4.56 |
| Electricity companies (b) | 7 | 277,658 | 0.01 | 501-1,000 | 67,772 | 46,570,888 | 1.51 |
| Individuals | 1,462,213 | 329,915,052 | 10.72 | 1,001-5,000 | 44,348 | 86,107,088 | 2.80 |
| Insurance companies | 14 | 20,962,387 | 0.68 | 5,001-10,000 | 2,881 | 19,524,988 | 0.64 |
| Nominee companies (c) | 13,313 | 2,414,140,796 | 78.45 | 10,001-50,000 | 1,608 | 33,478,609 | 1.09 |
| Other corporate bodies | 710 | 26,663,976 | 0.87 | 50,001-100,000 | 325 | 23,498,327 | 0.76 |
| Pension funds | 51 | 167,315 | 0.01 | 100,001-500,000 | 628 | 147,472,659 | 4.79 |
| Other limited | | | | 500,001-1,000,000 | 155 | 107,080,422 | 3.48 |
| and public companies | 1,260 | 101,109,470 | 3.28 | 1,000,001 and above | 346 | 2,432,539,704 | 79.05 |
| Total | 1,477,599 | 3,077,221,024 | 100.00 | Total | 1,477,599 | 3,077,221,024 | 100.00 |

(a) ADSs are listed on the New York Stock Exchange. Each ADS represents five National Grid Transco ordinary shares. Holdings in ADSs are registered with The Bank of New York, the US depositary, that holds the ordinary shares represented by all ADSs. In addition to the number of ordinary shareholders shown there are approximately 18,200 beneficial and 23,110 registered holders of ADSs. Substantial shareholdings As at 20 May 2003, National Grid Transco had been notified of the following beneficial interests in 3% or more of its issued share capital: (b) In accordance with National Grid Transco’s Articles of Association, no holder of a licence under the Electricity Act 1989 and no affiliate of such licence holder has an interest of 1% or more in the voting share capital of National Grid Transco. (c) Nominee companies typically hold shares on behalf of banks, insurance companies, investment trusts, pension funds and ISA investors.

| | Shares | %
of issued — share
capital |
| --- | --- | --- |
| The Capital Group Companies, Inc. | 215,635,632 | 7.00 |
| Legal and General Investment Management
Ltd | 104,964,080 | 3.41 |
| No further notifications have
been received. All ordinary shares have the same voting rights. The only
other issued share in the capital of the Company is the Special Share. Details
of the Special Share are set out on page 113. | | |
| Financial
Calendar | | |
| The following dates have been announced
or are indicative of future dates: | | |

| 28 May 2003 | Ordinary
shares go ex-dividend |
| --- | --- |
| 30 May
2003 | Record
date for 2002/03 final dividend |
| 21 July 2003 | Annual
General Meeting |
| 20 August 2003 | 2002/03 final dividend
paid to qualifying shareholders |
| 20 November 2003 | 2003/04 interim results |
| 26 November 2003 | Ordinary shares go ex-dividend |
| 28 November 2003 | Record date for 2003/04
interim dividend |
| 21 January 2004 | 2003/04 interim dividend
paid to qualifying shareholders |

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Shareholder Information

Queries Queries from shareholders should be addressed to the Registrar: Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DA (telephone 0870 600 3969, fax 0870 600 3980, e-mail ngtshareenq@lloydstsb-registrars.co.uk, www.shareview.co.uk, textphone for the hard of hearing 0870 600 3950).

Queries from holders of American Depositary Shares (ADSs) should be addressed to the Depositary: The Bank of New York, Shareholders Correspondence, PO Box 11258, New York, NY 10286-1258 (for calls inside the US telephone 1-800-466-7215, for international calls telephone +1-610-312-5315, e-mail shareowners@bankofny.com, www.adrbny.com).

Additional information Additional information about National Grid Transco is available on our website at www.ngtgroup.com. Share price information, previous Annual Reports and Reviews and shareholder information can be found in the Investors section of that site.

Documentation A copy of National Grid Transco’s Annual Review is sent to all shareholders each year.

For the assistance of visually impaired shareholders, an audio tape version of the Annual Review is produced and may be obtained free of charge by contacting the Registrar, Lloyds TSB Registrars. A large type version of the Annual Review is also available on request.

Shareholders may opt to receive copies of National Grid Transco’s Annual Report and Accounts that contain the full accounts and additional information required by the US Securities and Exchange Commission. To request this document please contact either the Registrar, Lloyds TSB Registrars or the Depositary, The Bank of New York.

If you currently receive the Annual Report and would like in future years to receive only the Annual Review, please contact either the Registrar, Lloyds TSB Registrars or the Depositary, The Bank of New York.

Shareholders may elect to receive all shareholder communications, such as the Annual Review and Notice of AGM, by electronic means. To take advantage of this opportunity shareholders need to register on the Registrar’s website www.shareview.co.uk. Registration is free. Once registered, shareholders will receive notification by e-mail when documentation is available, together with instructions on how to view it. There are no particular software requirements to view the documents, other

than those described and available on the National Grid Transco website www.ngtgroup.com.

Shareholders who register to receive electronic notification of documents, but decide at any time in the future that they would prefer to receive paper copies may register this preference on the website, www.shareview.co.uk or by contacting the Registrar, Lloyds TSB Registrars.

Holders of ADSs may elect to receive some documents electronically by checking the appropriate box on the reverse side of their voting instruction card. Alternatively, they should call The Bank of New York at 1-800-466-7215. Prior to general meetings of National Grid Transco, ADS holders will be mailed a notice of meeting with instructions on how to access the Annual Review and/or other documents electronically.

Shareholders or ADS holders who wish to continue to receive all communications in paper form need take no action.

Consolidated tax voucher Shareholders who receive their dividends directly into their bank or building society accounts will receive a consolidated tax voucher once each year, rather than a tax voucher with each payment.

This consolidated tax voucher will be sent out in January/February each year.

Should shareholders wish to receive a separate voucher with each dividend they should contact the Registrars, Lloyds TSB Registrars.

Share dealing Information on a range of low cost share dealing services is available from the Registrars, Lloyds TSB Registrars, or from the National Grid Transco website.

Should you not wish to use this service, you may find details of a broker in your local telephone directory, on the internet or enquire about share dealing at any high street bank or building society.

The Directors of National Grid Transco are not in any way seeking to encourage shareholders either to buy or sell shares. If you are in any doubt as to the action you should take, you are recommended to seek your own financial advice from an independent financial adviser authorised pursuant to the Financial Services and Markets Act 2000 or other appropriately authorised independent financial adviser.

ISA investors Individual Savings Accounts for National Grid Transco shares are available. Further

information may be obtained from the Account Manager: Stocktrade, PO Box 1076, 10 George Street, Edinburgh EH2 2PZ (telephone 0131 240 0443, www.stocktrade.co.uk/NGT_Sharedealing/ sharedealing_main.htm).

CGT information The following is for information purposes only. It does not constitute financial, investment or tax advice. If in doubt, shareholders should obtain independent financial advice.

The base cost for National Grid shareholders would depend on either the purchase price or the date their shares were distributed by the Regional Electricity Companies. For shares distributed on 8 December 1995 (by East Midlands, Midlands Electricity, SEEBOARD, London Electricity, Northern Electric, South Wales and Yorkshire Electricity), the acquisition base cost is 207 pence per share. For shares distributed on 23 January 1996 by Southern Electric, the acquisition base cost is 192.5 pence per share.

The split of the capital gains tax base cost of shares held in BG Group immediately prior to the Demerger has been calculated as:

BG Group plc shares	65.6212%
Lattice Group plc shares	34.3788%

Under the terms of the Merger, Lattice Group shareholders received 37.5 National Grid Transco shares for every 100 Lattice Group shares.

The first market value of National Grid Transco ordinary 10 pence shares following the merger of National Grid and Lattice, as calculated in accordance with Section 272(3) of the Taxation of Chargeable Gains Act 1992, and as derived from the London Stock Exchange Daily Official List on 21 October 2002, was 459.625 pence.

All calculations are in accordance with the methodology set out in the Inland Revenue guidelines.

Shareholder networking National Grid Transco will continue its innovative programme allowing shareholders to meet staff and visit operational sites. These visits allow us to explain National Grid Transco’s business to you in person. If you would like to take part in a visit please write to: Shareholder networking organiser, NGT House, Warwick Technology Park, Gallows Hill, Warwick CV34 6DA.

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1-3 Strand London WC2N 5EH England Telephone: +44 (0)20 7004 3000 Facsimile: +44 (0)20 7004 3004 www.ngtgroup.com UK Shareholder enquiries: 0870 600 3969 US Shareholder enquiries: 1 800 466 7215 Registered in England and Wales No. 4031152

SIGNATURE

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

By:	/s/ Stephen Lucas
	Stephen Lucas
Date: June 11, 2003	Group Finance Director

CERTIFICATIONS

I, Roger Urwin, certify that:

1. I have reviewed this annual report on Form 20-F of National Grid Transco plc;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

1. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

1. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: June 11, 2003
Roger Urwin
Group Chief Executive

I, Stephen Lucas, certify that:

1. I have reviewed this annual report on Form 20-F of National Grid Transco plc;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

1. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

1. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: June 11, 2003
Stephen Lucas
Group Finance Director

Exhibit List

Exhibit	Description
1	Memorandum
and Articles of Association of National Grid Transco plc (Exhibit 1 to National
Grid Group Form 20-F dated 21 June 2002 File No. 1-14958)	Incorporated
by reference (amendment filed herewith)
2(a)	Amended and restated Deposit
Agreement dated as of 31 January 2002 (Exhibit 2(a) to National Grid Group
Form 20-F dated 21 June 2002 File No. 1-14958)	Incorporated by reference
4(a)(i)	Credit
agreement dated 22 November 2001 between National Grid Transco plc (as guarantor
and borrower); NGG Finance plc (as borrower); HSBC Investment Bank plc (the
facility agent); HSBC (USA) Inc. (the swingline agent); and certain banks
and financial institutions (the banks) and extension agreement dated 20
November 2002. (Exhibit 2(b)(iii) to National Grid Group Form 20-F dated
21 June 2002 File No. 1-14958)	Incorporated
by reference (extension agreement filed herewith)
4(a)(ii)	Offering circular issued by NGG
Finance plc on 20 August 2001 summarising the trust deeds, subscription
agreements and paying agency agreements relating to the €1,250,000,000
5.25% guaranteed bonds due 2006 and the €750,000,000 6.125% guaranteed
bonds due 2011 issued by NGG Finance plc and guaranteed by National Grid
Transco plc. (Exhibit 2(b)(ii) to National Grid Group Form 20-F dated 21
June 2002 File No. 1-14958)	Incorporated by reference
4(b)(i)	Service Agreement – Edward
Astle (Exhibit 4(b)(i) to National Grid Group Form 20-F dated 21 June 2002
File No. 1-14958)	Incorporated by reference
4(b)(ii)	Service Agreement – Steve
Holliday (Exhibit 3(b)(iv) to National Grid Group Form 20-F dated 18 June
2001 File No. 1-14958)	Incorporated by reference
4(b)(iii)	Service
Agreement – Steve Lucas	Filed
herewith
4(b)(iv)	Service
Agreement – Sir John Parker	Filed
herewith
4(b)(v)	Employment Agreement – Rick
Sergel (Exhibit 2 to National Grid Group Form 20-F dated 28 June 2000 File
No. 1-14958)	Incorporated by reference
4(b)(vi)	Service
Agreement – Nick Winser	Filed
herewith
4(b)(vii)	Service
Agreement – John Wybrew	Filed
herewith
4(c)(i)	National Grid Executive Share
Option Plan 2002 (Exhibit 4(c) to National Grid Group Form 20-F dated 21
June 2002 File No. 1-14958)	Incorporated by reference
4(c)(ii)	National Grid Group Share Matching
Plan 2002 (Exhibit 4(c) to National Grid Group Form 20-F dated 21 June 2002
File No. 1-14958)	Incorporated by reference
4(c)(iii)	National
Grid Transco Performance Share Plan 2002	Filed
herewith
4(c)(iv)	National Grid Executive Share
Option Plan 2000 (Exhibit 4C to National Grid Group S-8 dated 26 July 2001
File No. 333-65968)	Incorporated by reference
4(c)(v)	National Grid Executive Share
Option Scheme (Exhibit 4D to National Grid Group S-8 dated 26 July 2001
File No. 333-65968)	Incorporated by reference
4(c)(vi)	Lattice
Long Term Incentive Scheme	Filed
herewith
6	Earnings per share – see
note 11 to the accounts	N/A
8	List
of subsidiaries	Filed
herewith
12(a)	Certifications
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002	Filed
herewith