Use these links to rapidly review the documentTABLE OF CONTENTS 3

Exhibit 15.1

Contents

This document is an extracted form of the Annual Report and Accounts 2004/05. Certain pages, images and text have been deleted from it.
The Annual Report and Accounts is available in full on our website, at www.ngtgroup.com.



|19  |  | Board of Directors                                     
|--- |  | -------------------------------------------------------
|21  |  | Operating and Financial Review                         
|21  |  | Introduction                                           
|25  |  | Operating Review                                       
|45  |  | Financial Review                                       
|48  |  | Dividends                                              
|49  |  | Dividend policy                                        
|50  |  | Treasury policy                                        
|52  |  | Commodity price hedging                                
|57  |  | Related party transactions                             
|60  |  | Directors' Report                                      
|60  |  | Incorporation                                          
|60  |  | Research and development                               
|62  |  | Corporate Governance and Risk and Compliance Management
|62  |  | Corporate Governance                                   
|67  |  | Risk and Compliance Management                         
|67  |  | Risk factors                                           
|69  |  | Directors' Remuneration Report                         
|80  |  | International Financial Reporting Standards            
|84  |  | Statement of Directors' Responsibilities               
|85  |  | Accounting Policies                                    
|88  |  | Group Profit and Loss Account                          
|89  |  | Balance Sheets                                         
|90  |  | Group Cash Flow Statement                              
|90  |  | Group Statement of Total Recognised Gains and Losses   
|91  |  | Notes to the Accounts                                  
|91  |  | Note 2 Segmental analysis                              
|97  |  | Note 5 Payroll costs and employees                     
|97  |  | Note 7 Pensions and other post-retirement benefits     
|112 |  | Note 23 Share capital                                  
|119 |  | Note 28 Related party transactions                     
|121 |  | Note 30 Group undertakings and joint ventures          
|144 |  | Glossary of Terms                                      
|145 |  | Definitions                                            
|146 |  | Summary Group Financial Information                    
|147 |  | Shareholder Information                                
|147 |  | Analysis of Shareholdings                              

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Board of Directors

Sir John ParkerChairman  (appointed October 2002) (Age 63) N (ch)

Sir
John Parker became Chairman of the Group following the merger of National Grid Group plc and Lattice Group plc. He had been Chairman of Lattice Group plc since its demerger from BG
Group plc in 2000. He had previously been a Non-executive Director of BG plc from 1997. Sir John's career has encompassed the engineering, shipbuilding and defence industries. He is
Chairman of the Peninsular & Oriental Steam Navigation Company, a Non-executive Director of Carnival plc and Carnival Corporation, Inc. and Senior Non-executive
Director of the Court of the Bank of England. Sir John is a former Chairman of RMC Group plc, a former Chairman and Chief Executive of Harland & Wolff plc and Babcock International Group PLC
and a former Non-executive Director of Brambles Industries plc, GKN plc and British Coal Corporation. He is a Fellow of the Royal Academy of Engineering.

Roger UrwinGroup Chief Executive  (appointed November 1995) (Age 59) E (ch), F

Roger
Urwin was appointed as a Director of the Group 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 Utilico Investment Trust plc and is a Fellow of the Royal Academy of Engineering.

Steve LucasGroup Finance Director  (appointed October 2002) (Age 51) E, F

Steve
Lucas joined the Board following the merger of National Grid Group plc and Lattice Group plc in October 2002. He had been Executive Director, Finance of Lattice Group plc
since its demerger from BG Group plc in 2000. Previously, he was Treasurer of BG Group plc 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. Steve
is also a Non-executive Director of Compass Group PLC.

Nick WinserGroup Director  (appointed April 2003) (Age 44) 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 joined National Grid Company plc 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.

Steve HollidayGroup Director  (appointed March 2001) (Age 48) E

Steve
Holliday joined the Group as Group Director, UK and Europe in March 2001. Immediately following the merger of National Grid Group plc and Lattice Group plc, he was
responsible for the Group's electricity and gas 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 refining and
shipping. His international experience includes a four-year spell in the US. He also developed business opportunities in countries as diverse as China, Australia, Japan, Brazil and the
former Soviet Union. Steve is also a Non-executive Director of Marks and Spencer Group plc.

Mike JesanisGroup Director  (appointed July 2004) (Age 48) E

Mike
Jesanis joined the Board in July 2004, becoming Group Director responsible for US Distribution. He became President of National Grid USA in November 2003, having been
its Chief Operating Officer and responsible for the day-to-day operations since January 2001. He was Chief Financial Officer of National Grid USA and New England
Electric System (NEES) between March 1998 and January 2001, having joined NEES in July 1983. Mike is also Chairman of the Board of Trustees of Becker College in Worcester,
Massachusetts.

Edward AstleGroup Director  (appointed September 2001) (Age 51) E

Edward
Astle joined the Board 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 & Wireless. He was Regional
Director Europe, CEO of its global networks and marine divisions, and in 1995 joined the Cable & Wireless board as Executive Director Global Businesses.

Ken HarveyNon-executive Director and Senior Independent Director  (appointed October 2002) (Age 64) N, R, R&R

Ken
Harvey joined the Board following the merger of National Grid Group plc and Lattice Group plc in October 2002, having been appointed to the Lattice Group plc board in
September 2000. He is Chairman of Pennon Group plc. A Chartered Engineer, he is a former Chairman and Chief Executive of Norweb plc, Comax Holdings Ltd, The Intercare Group plc and
Beaufort International Group plc.

John AllanNon-executive Director  (appointed 1 May 2005) (Age 56) A, R

John
Allan was appointed to the Board in May 2005. He is Chief Executive of Exel plc (previously Ocean Group plc), having been appointed in September 1994. He is a
Non-executive Director of PHS Group plc. John started his career in marketing with Lever Brothers, moving to Bristol-Myers Company Limited and Fine Fare Limited. He joined BET plc in 1985
and was appointed to the board in 1987. He is a member of the CBI's Presidents' Committee, the International Advisory Council of the Singapore Economic Development Board and the University of
Edinburgh Campaign Board. John was previously a Non-executive Director of Wolseley plc, Hamleys plc and Connell plc.

John GrantNon-executive Director  (appointed November 1995) (Age 59) A, N, R (ch)

John
Grant was appointed a Director of the Group in November 1995. He is Chairman of Hasgo Group Limited and The Royal Automobile Club Motor Sports Association Limited and a
Non-executive Director of Torotrak plc, Corac Group Plc, Cordex Plc and The Royal Automobile Club Limited. He was Chief Executive of Ascot Plc from 1997 to 2000 and Finance Director of
Lucas Industries plc from 1992 to 1996. He previously held a number of senior executive positions during 25 years with Ford Motor Company.

Paul JoskowNon-executive Director  (appointed March 2000) (Age 57) F (ch), N

Paul
Joskow was appointed a Director of the Group in March 2000 following the acquisition of New England Electric System (NEES). He is a Professor of Economics and Management at
the Massachusetts Institute of Technology (MIT), Director of MIT Center for Energy and Environmental Policy Research, Research Associate of the US National Bureau of Economic Research and a Fellow of
the Econometric Society and of the American Academy of Arts and Sciences. Paul is also an independent Trustee of the Putnam Mutual Funds and an independent Non-executive Director of
TransCanada. He had served as a Director of NEES between 1987 and its acquisition.

Stephen PettitNon-executive Director  (appointed October 2002) (Age 54) F, R, R&R (ch)

Stephen
Pettit was appointed to the Board following the merger of National Grid Group plc and Lattice Group plc, having been appointed to the Lattice Group plc board in 2001. He is a
Non-executive Director of National Air Traffic Services, Halma plc and is Chairman of ROK Property Solutions plc. He is a former Executive Director of Cable & Wireless plc. Before
joining Cable & Wireless, he was Chief Executive, Petrochemicals at British Petroleum. Stephen was previously a Non-executive Director of KBC Advanced Technologies plc and Norwood
Systems Limited.

Maria RichterNon-executive Director  (appointed October 2003) (Age 50) A, F, R&R

Maria
Richter was appointed to the Board in October 2003. Maria worked for Morgan Stanley between 1993 and 2002, most recently as Managing Director of its Corporate Finance Retail
Group. Prior to this, she was Managing Director of Investment Banking in the Southern Cone of Latin America, and Executive Director and Head of Independent Power and Structured Finance Business.
Previous appointments include Vice President of Independent Power Group for Salomon Brothers, and Vice President of Prudential Capital Corporation and Power Funding Associates. Maria is also a
Director of the Western Electricity Co-ordinating Council, one of 10 Councils in North America responsible for promoting electricity system reliability.

George RoseNon-executive Director  (appointed October 2002) (Age 53) A (ch), N, R

George
Rose was appointed to the Board following the merger of National Grid Group plc and Lattice Group plc, having been appointed to the Lattice Group plc board in
September 2000. He has been Finance Director of BAE Systems plc (formerly British Aerospace plc) since 1998, having joined the company in 1992. He is a member of the shareholder committee of
Airbus SAS and is also a Non-executive Director of SAAB AB and a member of the Financial Reporting Review Panel. George is also a former Non-executive Director of Orange plc.

Helen MahyGroup Company Secretary and General Counsel  (appointed October 2002) (Age 44) E

Helen
Mahy was appointed as Group Company Secretary following the merger of National Grid Group plc and Lattice Group plc, having been Company Secretary at Lattice Group plc since
March 2002. She was additionally appointed as General Counsel from October 2003. Previously, she was Group General Counsel and Company Secretary at Babcock International Group PLC. Helen
was appointed a Non-executive Director of Aga Foodservice Group plc in March 2003. She is a barrister, member of the Bar Council and an Associate of the Chartered Insurance
Institute.

Committee membership

|A  |  | Audit                      |  | E   |  | Executive            
|-- |  | -------------------------- |  | --- |  | ---------------------
|F  |  | Finance                    |  | N   |  | Nominations          
|R  |  | Remuneration               |  | R&R |  | Risk & Responsibility
|ch |  | denotes Committee chairman |  |     |  |                      

19

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Operating and Financial Review

Introduction

National Grid Transco is a network utility, based mainly in the UK and the US. Our principal interests are in the transmission and distribution of electricity and
gas and in the provision of network infrastructure to the broadcast and telecommunications industries. We also have interests in related markets, including metering services, liquefied natural gas
facilities and property in the UK, as well as electricity interconnectors in the UK, US and Australia.

History and development of the business

National Grid Transco originated from the restructurings of the UK gas industry in 1986 and the UK electricity industry in 1990. We entered the US energy delivery
market in 2000 and substantially expanded our UK wireless infrastructure activities in 2004.

The
UK gas industry was first restructured in 1986 when British Gas was incorporated as a public limited company, British Gas plc. In 1997, Centrica was demerged from British Gas plc
which was re-named BG plc. In December 1999, BG plc completed a restructuring programme which resulted in the creation of a new parent company, BG Group plc, and involved separating
the UK regulated business, BG plc (re-named Transco plc), from its other businesses. Lattice Group plc was created as the holding company for Transco plc and certain other
non-regulated infrastructure service businesses and, in October 2000, it was demerged from BG Group plc and separately listed on the London Stock Exchange.

In
1990 National Grid Company plc took on the ownership and control of the electricity transmission network in England and Wales and certain interests in the interconnectors with
Scotland and France from the Central Electricity Generating Board. Originally the predominant shareholders in National Grid Company plc, via a holding company, were the twelve
Regional Electricity Companies which owned and operated the local distribution systems, but in 1995, shares in the holding company were listed on the London Stock Exchange and by early 1996 the
Regional Electricity Companies had disposed of most of their respective shareholdings.

We
entered the US electricity market in 2000 when we acquired New England Electric System and Eastern Utilities Associates. We expanded further into the northeastern US with our
acquisition of Niagara Mohawk Power Corporation in January 2002. National Grid USA is the holding company for our US operations.

In
October 2002 National Grid Group plc, the holding company for National Grid Company plc and National Grid USA, merged with Lattice Group plc, changing its name to National Grid
Transco plc.

In
August 2004, we completed the purchase of the UK operations of Crown Castle International Corp. and integrated it with the Group's existing communications business, Gridcom UK,
to form a single business, known as Crown Castle UK.

Also
in August 2004, we agreed the sales of four of our UK gas distribution networks. These sales are expected to complete on 1 June 2005, after which we will still own the
largest gas distribution network in the UK. Further details of these planned sales are included in the Operating Review on page 33.

Regulatory environment

National Grid Transco is listed on the London Stock Exchange and on the New York Stock Exchange and, as a consequence, is subject to regulation by the Financial
Services Authority in the UK, and by the Securities and Exchange Commission (SEC) in the US.

As
a result of our position in and importance to the economies we serve, our electricity and gas transmission and distribution businesses in the UK and US are subject to UK, European
Union and US industry regulation.

In
the UK these businesses are regulated by the Office of Gas and Electricity Markets (Ofgem). Ofgem operates under the direction and governance of the Gas and Electricity Markets
Authority, which makes all major decisions and sets policy priorities for Ofgem.

In
the US our public utilities are regulated by the commissions in the states in which we operate and by the Federal Energy Regulatory Commission. These US regulators set service
standards and determine our potential levels of return.

As
a result of our ownership of several US public utility companies, National Grid Transco is a registered holding company under the US Public Utility Holding Company Act 1935, for which
the regulator is the SEC. This law imposes various conditions and limitations relating to financing, subsidiary company transactions and ownership of non-utility businesses, and the
requirement for SEC consent for further US utility acquisitions.

In
addition, certain of the UK activities of our Wireless infrastructure business are subject to regulation by the Office of Communications (Ofcom), in particular our UK analogue
television and radio transmission networks. We operate two digital multiplexes under the terms of a licence granted by Ofcom. Ofcom is also responsible for regulating the broadcast and
telecommunication industries to which Crown Castle UK provides wireless infrastructure.

Regulatory developments

On 1 April 2005, the British Electricity Transmission and Trading Arrangements (BETTA) came into operation and, as the Great Britain System Operator, we
became responsible for operating the Scottish electricity transmission network in addition to that of England and Wales. This change is discussed in more detail in the Operating Review on page 26.

The
European Union Electricity Regulation requires a mandatory inter-operator compensation scheme to be established in respect of electricity transfers between member states. The scheme
may be introduced in the course of 2006, although this is by no means certain. Any receipts from, or payments to, the scheme will have to be set against transmission charges and so the overall impact
is expected to be neutral. The scheme could also impact on charging arrangements for the interconnector with France. The Regulation also allows for other changes to be made to transmission tariffs and
congestion management across member state borders, although details of these areas will only be developed over the coming year.

A
European Union Directive concerning measures to safeguard security of natural gas supply is due for implementation in May 2006. This will ensure that member states have in
place, and publish, policies and standards on gas security of supply. In addition, the Gas Regulation on conditions for access to gas networks is expected to be adopted by the European Union in the
summer of 2005. We expect the impact of these regulations on our businesses to be minimal.

21

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There
are also a number of European Directives and Regulations in development covering many issues including electricity security of supply, harmonisation of access to gas systems and
infrastructure development, where the precise impact on our businesses in the future is currently uncertain.

Business segments

We report our operating results by segment, reflecting the management responsibilities and economic characteristics of the Group's business activities. Our
business operations are divided into the following segments: UK electricity and gas transmission; US electricity transmission; UK gas distribution; US electricity and gas distribution; US stranded
cost recoveries; and Wireless infrastructure; with all other activities of the Group being reported as part of Other activities.

Our
UK electricity and gas transmission segment comprises the high-voltage electricity transmission networks and the gas National Transmission System in the UK. Our US
electricity transmission segment comprises high-voltage electricity transmission networks in the northeastern US and transmission management operations for other utilities in the
midwestern US.

Our
UK gas distribution segment comprises the majority of Great Britain's gas distribution system. Information on the planned sales of four regional gas distribution networks, comprising
approximately half of this segment, is given on page 33.

Our
US electricity and gas distribution segment delivers electricity and gas in New York State and electricity in New England.

Our
US stranded cost recoveries segment represents the recovery of generation-related costs through a special rate charged to electricity customers. We incurred these costs prior to
industry-wide restructuring that deregulated the generation business.

Our
Wireless infrastructure segment includes our activities in providing network infrastructure to the broadcast and telecommunications industries. It was established as a separate
segment in 2004/05, when we acquired the UK operations of Crown Castle International Corp. and integrated it with our existing Gridcom business in the UK. We also operate in the US through Gridcom US.

Other
activities not included in the above segments include metering services, property and liquefied natural gas operations in the UK and our electricity interconnector businesses in
the UK and Australia.

As
described in the Financial Review on page 48, these business segments are different from those presented in last year's Annual Report and Accounts, and comparative results for the
years ended 31 March 2004 and 2003 have been restated accordingly.

Financial performance

The summary consolidated results of the Group for the years ended 31 March 2005, 2004 and 2003 are discussed on page 23.

The
Operating Review beginning on page 25 focuses on the performance of individual business segments, including a consideration of the business environment within which each of our
business segments operates and the operational and financial performance of each business segment. The Operating Review contains a discussion of changes in segmental financial results during the years
under review.

The
Financial Review beginning on page 45 primarily focuses on the financial impact of matters that do not arise from operating performance or are better discussed in the wider Group
context rather than on a segment by segment basis. Consequently, it comments on consolidated turnover, adjusted operating profit and operating profit, interest, taxation, exceptional items and cash
flows.

The
Operating Review and the Financial Review should be read together to obtain a complete understanding of our results of operations and financial condition during the years presented
in the financial statements.

Adjusted profit measures

We use 'adjusted' profit measures in considering the performance of the Group's operating segments and businesses. References to 'adjusted operating profit',
'adjusted profit before taxation', 'adjusted earnings' and 'adjusted earnings per share' are stated before exceptional items and goodwill amortisation.

The
Directors believe that the use of these adjusted measures better indicates the underlying business performance of the Group than the unadjusted measures. Excluding exceptional items
removes their distorting impact in order to provide a clearer comparison from year to year, and excluding goodwill amortisation enhances comparability with other UK companies as this is a standard
reporting practice in the UK. These measures are the primary financial performance measures used by the Directors to evaluate our operations.

Other performance measures

The Group uses a number of measures of operational and financial performance relating to its various businesses. The Group's core businesses are regulated
utilities and therefore many of our targets are determined by the relevant regulators. Much of the Group's performance depends on meeting and exceeding those regulatory targets. Measures of
operational performance include: Lost Time Injuries (LTIs); the management of controllable costs in relation to our UK and US regulated businesses; reliability of our energy delivery networks; and
other service quality measures.

The
Directors believe that safety is paramount and, as a fundamental part of this, that all work-related injuries and illnesses are preventable. Consequently, we measure the
level of LTIs as a key operational performance indicator for the Group. LTIs are injuries that arise from a person's employment and cause that person to be unable to attend the workplace and perform
his or her duties for one or more shifts or working days. All our businesses are required to report on LTIs suffered by their respective employees and any contractors.

The
level of controllable costs is another critical performance measure in our core utility businesses. Our ability to make a profit depends largely on our ability to manage those of our
costs that we can control. Controllable costs include employment costs (excluding pension fund deficits in the UK) and other costs incurred in operating and maintaining transmission and distribution
systems. The manner in which we calculate controllable costs varies within the Group as a result of, among other things, different regulatory regimes and the historical treatment of costs by our
regulators. However, the underlying principle is the same, and in the event that the definition of controllable costs is changed for any reason, comparatives are amended so that year on year changes
are not distorted. Ofgem monitors our performance in a number of areas and our ability to reduce controllable costs is important to this process. We also use controllable costs in our US regulated
operations as an additional performance measure.

22

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Certain
costs, of course, cannot be controlled and hence are not included within the definition of controllable costs. Some are fixed or semi-fixed and generally cannot be
altered by management. These costs include depreciation charges, replacement expenditure, goodwill amortisation and certain pension and pension deficit related costs. Those commodity and other costs
incurred by Group businesses that are passed through to our customers in turnover or commodity costs that change as a result of movements in market prices over which we have no control are therefore
also excluded from the definition of controllable costs.

Operational
reliability is a core measure of our success, and it is fundamental to our relationships with our regulators and the public. We monitor reliability using various methods,
relevant to each particular energy delivery network. We also measure service quality in each of those businesses, with various methods relevant to each particular network, to assess the performance of
our management and staff in serving our customers.

Summary results

PIE CHARTS

The
following tables summarise the turnover, adjusted operating profit and operating profit of the Group by business segment. Comparative figures for the years ended 31 March 2004
and 2003 have been restated to reflect changes in accounting policies and changes in the presentation of segmental information as described in notes 1 and 2 to the accounts on page 91.

|                                    |  | Years ended 31 March |  
|----------------------------------- |  | -------------------- | -
|
|
|UK electricity and gas transmission |  | 1,930                |  
|US electricity transmission         |  | 283                  |  
|UK gas distribution                 |  | 2,215                |  
|US electricity and gas distribution |  | 3,114                |  
|US stranded cost recoveries         |  | 420                  |  
|Wireless infrastructure             |  | 208                  |  
|Other activities                    |  | 844                  |  
|Sales between businesses            |  | (493                 | )
|                                    |  |                      |  
|Continuing operations               |  | 8,521                |  
|Discontinued operations             |  |                     |  
|Sales between businesses            |  |                     |  
|                                    |  |                      |  
|Group turnover                      |  | 8,521                |  
|                                    |  |                      |  

|                                    |  | Years ended 31 March | 
|----------------------------------- |  | -------------------- | 
|
|
|UK electricity and gas transmission |  | 809                  | 
|US electricity transmission         |  | 123                  | 
|UK gas distribution                 |  | 570                  | 
|US electricity and gas distribution |  | 374                  | 
|US stranded cost recoveries         |  | 121                  | 
|Wireless infrastructure             |  | 46                   | 
|Other activities                    |  | 162                  | 
|                                    |  |                      | 
|Continuing operations               |  | 2,205                | 
|Discontinued operations             |  |                     | 
|Joint ventures                      |  | 7                    | 
|                                    |  |                      | 
|Total adjusted operating profit     |  | 2,212                | 
|                                    |  |                      | 

Exceptional
items, which are not included in the adjusted operating profit and other adjusted measures, are defined as material items arising from the ordinary activities of the Group,
requiring separate disclosure on the grounds of size or incidence for the accounts to give a true and fair view. Such exceptional items include, for example, material restructuring costs and
impairments. Page 46 contains a discussion of the nature of these exceptional items for each year.

|                                    |  | Years ended 31 March | 
|----------------------------------- |  | -------------------- | 
|
|
|UK electricity and gas transmission |  | 807                  | 
|US electricity transmission         |  | 102                  | 
|UK gas distribution                 |  | 390                  | 
|US electricity and gas distribution |  | 286                  | 
|US stranded cost recoveries         |  | 121                  | 
|Wireless infrastructure             |  | 10                   | 
|Other activities                    |  | 129                  | 
|                                    |  |                      | 
|Continuing operations               |  | 1,845                | 
|Discontinued operations             |  |                     | 
|Joint ventures                      |  | 7                    | 
|                                    |  |                      | 
|Total operating profit              |  | 1,852                | 
|                                    |  |                      | 

23

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Turnover and operating profit

Movements from year to year in turnover do not necessarily have an impact on the financial condition of the Group as the amounts we charge to customers can vary
depending on our costs. In particular, we can pass through certain elements of our costs to customers, and these therefore do not have a significant impact on adjusted operating profit and operating
profit.

In
addition, there can be timing differences in our UK regulated businesses between when costs are incurred and when these can be recovered from customers. In these cases, turnover,
operating costs, adjusted operating profit and operating profit will vary from year to year.

Cash flows from operating activities

The Group generated positive operating cash flows before exceptional items of £3,103 million in 2004/05, compared with
£3,058 million and £3,154 million in 2003/04 and 2002/03 respectively. After exceptional items, operating cash inflows were £2,909 million,
£2,810 million and £2,826 million in 2004/05, 2003/04 and 2002/03 respectively.

Cash
flows from our operations are largely stable over a period of years, but they do depend on the timing of customer payments and exchange rate movements. The Group's electricity and
gas transmission and distribution operations in the UK and US are subject to multi-year rate agreements with regulators. In the UK, this results in essentially stable cash flows in local
currency terms. However, weather conditions can affect cash flows in those businesses, with abnormally mild or extreme weather driving volumes down or up respectively. In the US, the regulatory
mechanisms for recovering costs from customers can result in very significant cash flow swings from year to year.

Exchange rates

As shown in the summary results tables on page 23, adjusted operating profit and operating profit from our US businesses each accounted for some 28% of the totals
for Group undertakings for 2004/05. The functional currency for our US operations is US dollars. As a consequence, their results are translated into sterling for Group reporting purposes at the
average rate of exchange for the year. Consequently, to the extent that the US dollar to sterling exchange rate moves from year to year, the sterling value of US dollar denominated results will also
vary even if the underlying US dollar values remain the same.

The
financial impact of the movement in average US dollar to sterling exchange rates between years is discussed on page 47 in the Financial Review. Although during the periods under
review there was a significant impact on operating profit and adjusted operating profit as a result of the movement in this exchange rate, this was substantially offset by the impact of the
translation of US dollar denominated interest and taxation. As a consequence, in comparing the adjusted earnings and earnings of 2004/05 with 2003/04 and of 2003/04 with 2002/03, the impact of
currency translation was less significant as a result of these offsetting movements not included in adjusted operating profit or operating profit.

Acquisitions, disposals and mergers

As described above under 'History and development of the business', we have agreed the sales of four of our regional gas distribution networks, comprising
approximately half of the UK gas distribution segment. Cash proceeds from these planned sales are expected to be £5.8 billion. Further details on the planned sales are included in
the Operating Review on page 33.

In
2004/05, we acquired the UK operations of Crown Castle International Corp. This acquisition has been accounted for in accordance with acquisition accounting principles (purchase
accounting) under UK GAAP. The business was acquired for cash consideration of £1,138 million and gave rise to goodwill amounting to £622 million under UK GAAP.
Under US GAAP, goodwill was £510 million, with £220 million ascribed to the value of other intangible fixed assets that are not recognised under UK GAAP.

There
were no significant acquisitions, disposals or mergers during 2003/04.

During
2002/03, National Grid Group plc merged with Lattice Group plc and the resulting entity was renamed National Grid Transco plc. In accordance with UK GAAP, this was accounted for
using merger accounting principles such that the results of the Group under UK GAAP have been presented as if the combined 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 Group plc with Lattice Group plc was accounted for as an acquisition. Under US GAAP, the purchase consideration for Lattice Group
plc was £6,598 million, primarily satisfied by the issuance of shares, which gave rise to goodwill amounting to £3,824 million. The US GAAP accounting of this
business combination is described in more detail in the Financial Review on pages 57 and 58.

24

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Operating and Financial Review

Operating Review

Transmission

Our Transmission business comprises two segments: 'UK electricity and gas transmission' for our UK assets and 'US electricity transmission' for our US assets.
Details of each of these segments, including background information on their assets and operations, the regulatory environments in which they operate, their operating and financial performance, and
investment in the networks, are set out on this page to page 31.

The
results for the Transmission business for the years ended 31 March 2005, 2004 and 2003 were as follows.

|                                                                      |  | Years ended 31 March |  
|--------------------------------------------------------------------- |  | -------------------- | -
|
|
|Turnover                                                              |  | 1,930                |  
|Operating costs excluding exceptional items and goodwill amortisation |  | (1,121               | )
|                                                                      |  |                      |  
|Adjusted operating profit                                             |  | 809                  |  
|Exceptional items                                                     |  | (2                   | )
|Goodwill amortisation                                                 |  |                     |  
|                                                                      |  |                      |  
|Operating profit                                                      |  | 807                  |  
|                                                                      |  |                      |  

UK electricity and gas transmission



Our UK electricity and gas transmission business comprises the ownership and operation of the high-voltage electricity transmission system in England
and Wales and of the gas National Transmission System (NTS) in Great Britain. Since 1 April 2005 we have also been responsible for operating the high-voltage electricity
transmission system in Scotland.

We
own electricity assets which comprise approximately 4,500 miles of overhead line, about 410 miles of underground cable and 341 substations at 243 sites.
Day-to-day operation of the electricity transmission system involves the continuous real-time matching of generation output with demand, ensuring the stability and
security of the power system and the maintenance of satisfactory voltage and frequency.

The
NTS comprises approximately 4,300 miles of high pressure pipe and 25 compressor stations, connecting to eight distribution networks and to third party independent systems for onward
transportation of gas to end consumers. Day-to-day operation of the NTS includes balancing supply with demand, maintaining satisfactory system pressures and ensuring gas
quality standards are met.

Our
UK electricity and gas transmission business has four separately regulated activities:



As
electricity transmission owner and gas transmission owner, we own and maintain the physical assets, develop the networks to accommodate new connections and disconnections, and manage
a programme of asset replacement and investment to ensure the long-term reliability of the systems.

As
electricity system operator and gas system operator, we undertake a range of activities necessary for the successful delivery in real time of secure, reliable and efficient energy
and, in the case of electricity, the continuous real-time balancing of supply and demand. The electricity and gas system operator parts of the business are subject to regulatory incentive
schemes.



Through our subsidiary, National Grid Company plc, we own and operate the electricity transmission assets and are the sole holder of an electricity transmission
licence for England and Wales. We have a duty under the Electricity Act 1989 to develop and maintain an efficient, 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, we are responsible for setting charges and maintaining the charging statements, which describe the charges and methodologies used to
calculate them. We receive income through charges to generators, distributors, suppliers and directly-connected customers for use of and connection to the transmission system. Transmission Network Use
of System charges are levied in respect of the provision of transmission assets and infrastructure (the electricity transmission owner activity) and Balancing Services Use of System charges are levied
for operating the system (the electricity system operator activity).

Revenue
from charges for using the transmission network and charges for connections made before March 1990 is controlled by a revenue restriction condition set out in the
transmission licence. This revenue restriction is known as a price control. The current price control period commenced on 1 April 2001 and was intended to continue until 31
March 2006. However, in order to align electricity and gas transmission price controls, we are currently undergoing a mini review, which will effectively extend the period to 31
March 2007. It is anticipated that this review will address the issue of the increased levels of capital investment that have already been committed in the current price control. We expect
these negotiations to conclude by the end of calendar year 2005. We are also preparing for discussions with Ofgem regarding the next five-year price control commencing on 1
April 2007.

Through
our subsidiary Transco plc, we own the gas transmission assets, and our operations are undertaken under the terms of the NTS gas transporter licence. We are subject to separate
revenue restrictions, known as price controls, in respect of gas transmission owner and gas system operator activities which will both last until 31 March 2007.

With
effect from 1 May 2005, our UK gas transmission business and UK Gas Distribution business (and each of the networks which we plan to sell) each hold a gas transporter
licence. These licences are derived from the original integrated transmission and distribution licence but have been substantially amended in order to distinguish between the separate activities of
transmission and distribution gas transportation, and to facilitate the post sales environment with multiple gas distribution transporters.

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Under
the terms of the NTS gas transporter licence, we receive income through charges to shippers for entry and exit capacity (gas transmission owner activity) and commodity charges (gas
system operator activity). The system entry capacity charges are set via auctions. The exit capacity charges and the entry capacity auction proceeds together recover the allowed revenue under the
transmission owner price control in respect of the provision of the transmission assets.

Electricity transmission owner

The electricity transmission owner price control takes into account Ofgem's estimates of operating expenditure, capital expenditure, replacement expenditure and
allowed rate of return (which is currently set at a real pre-tax rate of 6.25%) on our regulatory asset value. Our regulatory asset value is currently estimated at around
£5.2 billion at 31 March 2005.

The
electricity transmission owner 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.

An
amended connection charging methodology for our electricity transmission owner activity, known as 'Plugs', was introduced from 1 April 2004. The changes for Plugs modified the
charging boundary between connection assets that were attributable to specific users and the main interconnected transmission network shared by all users. This required us to make repayments to
connected parties associated with relevant assets that had been subject to capital contributions or other accelerated payment terms. In total, these repayments were approximately
£71 million, of which £61 million has been refunded in 2004/05. The majority of these repayments have been treated as capital expenditure for regulatory purposes.

Gas transmission owner

The gas transmission owner price control takes into account Ofgem's estimates of operating expenditure, capital expenditure, replacement expenditure and allowed
rate of return (which is currently set at a real pre-tax rate of 6.25%) on our regulatory asset value. Our regulatory asset value is currently estimated at around
£2.5 billion at 31 March 2005.

Electricity system operator

As electricity system operator, we are responsible for the operation of the high-voltage electricity transmission system across England and Wales.
With the implementation of the British Electricity Trading and Transmission Arrangements (BETTA), we also took over responsibility for the operation of the transmission system in Scotland on 1
April 2005. Our activities as electricity system operator include the procurement and use of balancing services to match supply and demand continuously. Balancing services include commercial
agreements with market participants. These enable the electricity system operator to vary their electricity demand or generation output. Revenue from charges for the provision of balancing services is
regulated under an incentive scheme, where benefits of cost savings in system operation compared to a target are shared with customers.

The
UK Government's Energy Bill was granted Royal Assent on 22 July 2004. The Act includes the legislative framework for BETTA. The framework provides the transitional and
enduring licence obligations required in order to implement BETTA. National Grid Company was formally announced as the Great Britain (GB) System Operator under BETTA on 1 September 2004.

As
a result of licence modifications associated with BETTA, we are responsible for operating the GB transmission system, setting charges and maintaining the charging statements for all
transmission users in Great Britain. In this role, we recover payments from all GB transmission users and make payments to the Scottish transmission operators in accordance with arrangements set out
in the System Operator Transmission Operator Code. Scottish Power is currently seeking judicial review of the Gas and Electricity Markets Authority's decision to approve the GB electricity
Transmission Network Use of System charging methodology developed and proposed by National Grid Transco. In addition, under the regulatory arrangements for BETTA the Scottish interconnector
(previously outside of the regulated business) now forms part of the regulated businesses of Scottish Power and ourselves.

As
GB System Operator, we are also responsible for managing the operations of both the Scottish and the England and Wales networks, and also operating the GB energy balancing mechanism.
For 2005/06, the electricity System Operator incentive scheme has been set a target of £377.5 million, with sharing factors for the System Operator external costs of 40% upside and
20% downside, in relation to the operation of the GB transmission system. This compares to a target of £415 million with sharing factors of 40% for upside and downside for 2004/05,
which was only in relation to the operation of the England and Wales transmission system. The reduction in target of £37.5 million comparing 2004/05 with 2005/06 is due to the
change in treatment of transmission losses, such that the gross value of losses is removed from the target. This is partly offset by the increase in scope of the incentive scheme, from operation of
the England and Wales transmission system to the GB transmission system, following BETTA implementation. For comparison with the 2004/05 target, an equivalent target for 2005/06, including the gross
value of losses, would be around £500 million.

BETTA
has required significant information systems expenditure development during the past year. In particular, this has included a substantial increase in database capacity and the
number of displays on our integrated energy management system.

We
have recruited approximately 60 staff to support the BETTA activities, in both the commercial area and the control room environment, plus the functions that support it.

In
2004, the energy management system used for electricity system operations was replaced with a new integrated energy management system. The new system not only has the capability to
handle the increasing complexity of the England and Wales systems, but also the 30% increase in network size, which was needed to incorporate the Scottish networks, which we now operate. Furthermore,
this system is designed to be upgraded on an ongoing basis and we believe it will be adequate for future growth of the electricity network.

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Gas system operator

The gas system operator price control includes incentive arrangements such that if performance exceeds the targets set in the price control, we retain a share of
the benefits, and vice versa. The incentives cover the costs of investment for additional capacity, managing capacity constraints, the costs of purchasing shrinkage gas (gas that is either used in
operating the system or lost from the system during transportation) and other gas system operator costs.

Our
gas transporter licence also may, in certain circumstances, allow the recovery of significant and unforeseen increases in efficiently incurred costs.

Further
detailed arrangements for the industry are provided through the Network Code, which defines the obligations, responsibilities and roles of the industry participants.

During
2004, the Health and Safety Executive (HSE) and Ofgem accepted our proposal to remove the 'Top-up' arrangements from the Transco Safety Case (a document setting out
our arrangements for the safe flow of gas, investigations of gas escapes, fires and explosions, and gas quality, which must be accepted by the HSE in order to transport gas) and the Network Code.
Previously under the Network Code, our UK gas transmission business undertook the role of managing Top-up. This required the setting, monitoring and preservation of storage levels to
protect gas stocks under prolonged and severe winter conditions. This could entail the purchase of gas from the open market to maintain the prescribed levels of gas storage stocks. In turn, this could
have led to the business and the wider industry incurring significant costs if there was a shortage of gas available to the market.

Under
the revised arrangements, Top-up storage monitors have been replaced by a set of 'safety monitors'. These ensure that sufficient gas is kept in the various storage
facilities throughout the winter to underpin the safe operation of the network. A potential breach of a safety monitor could lead to Transco declaring a network gas supply emergency and using the
established emergency procedures to avoid the breach occurring. The new framework more clearly distinguishes between our role in ensuring safety, and the market's role in delivering a secure supply.

On
20 January 2005, the Gas and Electricity Markets Authority granted its conditional consent to our application to dispose of four of our eight distribution networks. In
conjunction with this, we have undertaken to use our best endeavours to implement enduring exit arrangements for the NTS by 1 September 2005, including the design of incentive schemes to
support the exit arrangements.

The
incentive schemes are being designed to ensure, among other things, that the NTS is incentivised, through an efficient balance of risk and reward, to release for sale the maximum
capability of the network in response to demand.

Final
proposals on the incentive schemes are anticipated to be published by Ofgem in summer 2005.

In
November 2004, we also opened the new Gas National Control Centre. The centre represents an investment of £3.3 million and is equipped with the latest
technology to cope with the increasing network and commercial complexity.



Safety performance in UK electricity and gas transmission has been encouraging. During 2004/05, there was a 20% reduction in LTIs from 10 in 2003/04 to eight in
2004/05, and we went 142 consecutive days without an LTI.



The winter of 2004/05 saw demand from the electricity transmission network in England and Wales hit a peak of 53.29 GW. This slightly exceeded the previous year's
peak of 52.97 GW.

During
2004/05, excluding anomalous losses (defined as three or fewer customers), loss of supply totalled 55.3 MWh in 2004/05 spread across six incidents. This has only been bettered
once in the last decade and represents successful delivery of 99.99998% of energy demanded during the year.

Since
1 January 2005, National Grid Company has operated under a new Transmission Network Reliability Incentive scheme. Scheme parameters have been set until 31 March 2007
and the incentive takes the form of a sliding scale. This scheme allows us to receive payments if we maintain or improve reliability of the England and Wales transmission system by delivering above
average reliability of the network. The incentive target set is equivalent to a level of reliability of better than 99.9999%.

For
the initial period from 1 January 2005 to 31 March 2006, there is the potential to earn additional revenue for performance better than the lower target level of loss of
supply of 310 MWh, up to a maximum of 1.25% of revenue. For loss of supply in excess of 342 MWh, we can potentially lose revenue, up to a maximum of 1.875% of revenue, capped at a level of loss of 816
MWh. For each incentive year, the revenue impact takes place in the following year, so that any change in revenue due to incentive performance for the initial 15 month period will be accounted
for in our allowed revenue in 2006/07.

System
performance is partly monitored through system availability, including winter peak and average annual availability. Availability is reduced whenever a circuit is taken out of
operation, either for planned purposes eg construction work, or as a result of a fault. Planned work is required to provide new user connections as well as the maintenance necessary to retain a high
level of system reliability to ensure that licence standards are met. Over the course of 2004/05, we have maintained our average annual availability of the electricity network at 95.2% compared with
95.2% in 2003/04 and 95.8% in 2002/03, and our five-year average was 95.5% in 2004/05. System availability at winter peak demand was 97.6% in 2004/05 compared with 98.0% in 2003/04 and
98.8% in 2002/03, and our five-year average was 98.3% in 2004/05. The 0.4% reduction in system availability at winter peak comparing 2004/05 with 2003/04 reflected the increased system
outage commitment due to construction, connection and maintenance work.

2004/05
saw a maximum demand for gas of 418 mcm on 28 February 2005. This was a decrease from the previous year's peak of 444 mcm and was partly due to a mild winter with a cold
spell at the end of February and in early March.

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The
ability of the gas transmission system to transport the available gas is dependent on the performance of our compressor fleet. The compressors are used to maintain the pressure at
key points on the gas transmission system. The performance of the compressor fleet is measured by the average time elapsed between breakdowns for the fleet; a longer time indicates better performance.
Over 2004/05, the performance improved with the average time between compressor failures at 24% above our five-year average, compared with 11% above the five-year average in
the mean time between failures in 2003/04.



The
results of the UK electricity and gas transmission segment for the years ended 31 March 2005, 2004 and 2003 were as follows.

|                                            |  | Years ended 31 March |  
|------------------------------------------- |  | -------------------- | -
|
|
|Turnover                                    |  | 1,930                |  
|Operating costs excluding exceptional items |  | (1,121               | )
|                                            |  |                      |  
|Adjusted operating profit                   |  | 809                  |  
|Exceptional items                           |  | (2                   | )
|                                            |  |                      |  
|Operating profit                            |  | 807                  |  
|                                            |  |                      |  

The
£63 million increase in UK electricity and gas transmission turnover comparing 2004/05 with 2003/04 was due to higher Transmission Network Use of System charges
arising from the introduction of the revised connection charging methodology under Plugs from 1 April 2004 of £32 million. The increase was also due to timing and
inflationary impacts on electricity transmission revenue collection of £29 million.

The
£26 million reduction in turnover comparing 2003/04 with 2002/03 was mainly due to the receipt of a £20 million one-off
connection-related fee in 2002/03.

The
£13 million increase in UK electricity and gas transmission operating costs, excluding exceptional items, comparing 2004/05 with 2003/04 reflected higher
incentivised costs associated with the Balancing Services Incentive Scheme of £24 million and an £11 million pension deficit charge associated with the recent
actuarial valuation of the electricity and gas pension schemes. This was partly offset by a £22 million charge incurred in 2003/04 as a result of the introduction of Plugs.

The
£24 million increase in operating costs, excluding exceptional items, comparing 2003/04 with 2002/03 reflected the Plugs related charge of
£22 million as referred to above.

Under
Plugs, we have made refunds to connected parties associated with assets that were subject to capital contributions or other accelerated payment terms. The electricity transmission
owner business recovers these refunds from customers under the transmission licence through Transmission Network Use of System income. The majority of the refunds have been made in 2004/05, but the
recovery of the income associated with these refunds is over a more extended time period.

The
UK electricity and gas transmission owner activity controllable costs shared a 1% reduction in real terms in 2004/05 from 2003/04 with a cumulative 5% reduction since 2002/03.

The
£50 million increase in UK electricity and gas transmission adjusted operating profit comparing 2004/05 with 2003/04 reflected the movements in turnover and
operating costs as described above.

The
£50 million decrease in adjusted operating profit comparing 2003/04 with 2002/03 was mainly as a result of the Plugs one-off charge and lower
connection-related fee income (see earlier discussions under operating costs) and higher depreciation reflecting extensive investment in the UK gas and electricity transmission systems. This decrease
was partly offset by lower shrinkage costs, a reduction in controllable costs and other movements mainly due to timing.

Exceptional
items, which explain the difference between adjusted operating profit and operating profit, relate to merger related restructuring costs.



Capital investment in the replacement, reinforcement and extension of the UK electricity and gas transmission systems in 2004/05 was
£522 million, compared with £584 million in 2003/04 and £567 million in 2002/03.

In
2004/05, 41% of electricity transmission capital expenditure was related to asset replacement, reflecting the increasing need to replace transmission network assets, many of which
were commissioned in the 1960s.

The
decrease in overall capital investment comparing 2004/05 with 2003/04 was largely due to completion of major projects on the gas and electricity networks, despite an underlying
increase in electricity asset replacement investment in 2004/05.

BAR CHART

Investment
in electricity and gas transmission systems is, by its nature, variable and is largely driven by changing sources of supply and asset replacement requirements. The gas
transporter and electricity transmission licences oblige us to provide connections and capacity upon request for users wishing to use the networks.

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The
UK is entering a period of changing supply patterns for both gas and electricity. The sources of gas and electricity are shifting, with the decline in UK continental shelf gas
reserves and the Government's emphasis on combating climate change and encouragement of renewable generation. We also continue to see a trend toward greater use of gas in power generation with the UK
moving toward a low carbon economy.

We
continue to work with the UK Government and Ofgem to make possible the necessary investments in the electricity transmission network to support the development of renewable energy
projects. The final Transmission Investment for Renewable Generation proposals from Ofgem recognised the need to invest in networks to accommodate renewables. Funding costs for
£108 million of investment will be allocated to our electricity transmission owner activity allowable revenue for the upgrade of the Anglo-Scottish interconnector (conditional on
the satisfactory outcome of key planning consent issues in Scotland). The proposals also include increased rates of return of 8.8% real pre-tax for the approved baseline projects, the
funding to be recovered through our Transmission Network Use of System charges. At this time, access has been sought by 10.5 GW of wind generation (3.3 GW in England and Wales and 7.2 GW in Scotland),
and as the GB System Operator we have processed 65 applications. In addition to these, there is interest from another 3.4 GW (72 sites).

MOUNTAIN CHART

Due
to the decline in gas production from the UK continental shelf (UKCS), our latest forecast is that the UK will import in the region of 50% of its gas requirements by the end of the
decade. We have therefore seen increasing activity in providing the necessary import capability. This involves gas interconnectors and liquefied natural gas (LNG) importation facilities, such as the
Norwegian interconnector, the LNG facility at Milford Haven and the LNG facility we are developing on the Isle of Grain, which will come on stream this year. It is anticipated that additional
Norwegian gas supplies will be delivered at Easington terminal, and so will require further gas transportation construction from Pannal to Nether Kellett for 2007/08. The Milford Haven importation
facility is also due to be connected for the 2007/08 gas supply year and will require the reinforcement of the existing gas transportation network with approximately 168 miles of new pipeline in South
Wales and Gloucestershire to cater for the increase in flow. The projects to meet the changing supply sources will result in a total of over £750 million in capital expenditure on
the gas transmission system over the next five years.

The
bulk of the current electricity transmission network was installed during the 1960s and 1970s, with main plant asset lives typically of between 40 to 50 years. Over the next
few years, we anticipate substantially increasing investment on replacing parts of our UK electricity network as these assets will be due for renewal. In addition, parts of the gas transmission
network are reaching the end of their lives. These are mainly compressor stations, control systems and valves (ie above ground assets and not the high pressure pipes). This, together with work
required to meet changing supply sources, means that the UK electricity and gas transmission business will be embarking on a significant increase in investment and network renewal.

In
order to meet the increasing programme of work, we will be recruiting approximately 100 staff, project and site engineers over the next two to three years to ensure we can deliver the
increased work programme. We will also be exploring ways to work more efficiently and collaboratively with major suppliers and contractors to manage the increase in workload effectively.

US electricity transmission



In the US, we own and operate an electricity transmission network of approximately 14,000 miles. Our US electricity transmission business operates facilities at
voltages ranging from 69 kV to 345 kV, utilising nearly 9,000 miles of overhead lines and 541 substations. We are the largest electricity transmission service provider in the northeastern US by
reference to the length of these high-voltage transmission lines. In addition, we own and operate a 139 mile direct current transmission line rated at 450 kV that is a key section of an
interconnector between New England and Canada.

We
provide electricity transmission in New York state through Niagara Mohawk Power Corporation and in New England principally through New England Power Company.

In
addition, in the midwestern US, our GridAmerica business manages a range of electricity transmission operations on behalf of its participant utilities. These include operational
planning, outage management and scheduling of transmission service. It was the first multi-system independent transmission company and was formed under agreements with Ameren, FirstEnergy, Northern
Indiana Public Service Company (NIPSCO) and the Midwest Independent System Operator (MISO).

During
April 2005, Ameren notified our US electricity transmission business and its fellow GridAmerica participants that it will withdraw from GridAmerica, effective 1
November 2005. Together with FirstEnergy and NIPSCO, we evaluated GridAmerica's viability given the current industry environment, their respective long-term corporate strategies and
Ameren's departure, and ultimately agreed to cease operations also effective 1 November 2005. The Group will be looking to reapply the skills and knowledge brought to its participation in
GridAmerica as it seeks to develop interests in North America.

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New England Power Company collects electricity transmission revenues from its distribution company affiliates under regional and local tariffs approved by the
Federal Energy Regulatory Commission (FERC) which allow it to recover the costs of providing transmission services, with a return on capital. Niagara Mohawk Power Corporation collects the transmission
business revenues under FERC and state tariffs, with state provisions similar to the distribution regulation discussed on pages 34 and 35.

GridAmerica
receives revenues from the MISO under a rate schedule approved by the FERC, along with management fees paid by the three participant utilities. This will continue until
November 2005, when GridAmerica operations will cease.

The
US electricity transmission business in the Northeast currently operates within two independent system operators (ISOs), ISO New England and New York ISO, which administer the
markets and provide oversight of transmission in their respective regions.

New
England Power Company operates co-operatively with other New England transmission owners within ISO New England. The transmission owners are responsible for certain
aspects of operation, such as field operations and switching operations, and the ISO has responsibility for overall system operation and coordinating the regional transmission for the whole of New
England. It is also responsible for operating reliable and efficient wholesale electricity markets. On 1 February 2005, ISO New England became the regional transmission organisation (RTO) for
New England. Becoming an RTO gives ISO New England more independence from market participants and a stronger right to require transmission investments by the transmission owners under a regional
system expansion planning process.

By
becoming a member of the New England RTO, New England Power Company can seek a higher allowed return for our New England assets, in accordance with the FERC's proposed transmission
pricing policy. This application for an increased return is under review by the FERC.



US electricity transmission recorded no employee LTIs during 2004/05, extending the time since the last LTI to 23 months.



Over the course of 2004/05, our estimated average annual network availability was 98.55%. Overall average network availability was similar in New England and New
York, for both summer and winter.

Last
year saw an increase in the number of disturbances experienced on our US electricity transmission networks, much of which we attribute to lightning activity which was 85% above the
10-year average and almost five times the prior year's level. We are actively analysing the impact from lightning and have undertaken a project to consider a range of lightning mitigation
measures.



The
results of the US electricity transmission segment for the years ended 31 March 2005, 2004 and 2003 were as follows.

|                                                                      |  | Years ended 31 March |  
|--------------------------------------------------------------------- |  | -------------------- | -
|
|
|Turnover                                                              |  | 283                  |  
|Operating costs excluding exceptional items and goodwill amortisation |  | (160                 | )
|                                                                      |  |                      |  
|Adjusted operating profit                                             |  | 123                  |  
|Exceptional items                                                     |  | (3                   | )
|Goodwill amortisation                                                 |  | (18                  | )
|                                                                      |  |                      |  
|Operating profit                                                      |  | 102                  |  
|                                                                      |  |                      |  

The
average exchange rates used to translate the results of US operations during 2004/05, 2003/04 and 2002/03 were $1.87:£1, $1.68:£1 and $1.59:£1
respectively. In order to illustrate underlying performance, the impact of exchange rate movements has been separated from other changes by also presenting the operating results for 2003/04 and
2002/03 on a constant currency basis, using the average exchange rate for 2004/05 of $1.87:£1. The 2003/04 and 2002/03 results are discussed below as if the 2004/05 exchange rate had
applied.

The
£2 million reduction in US electricity transmission turnover comparing 2004/05 with 2003/04 was mainly the result of a decrease in New England Power Company's
operating costs which flow through to revenue.

The
£61 million reduction in turnover comparing 2003/04 with 2002/03 was primarily related to the transfer of £76 million of New England Power Pool
billings and costs from transmission to distribution segments. This decrease in turnover was partially offset by increased revenues from higher operating costs in New England Power Company which
flowed through to revenue.

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The
£6 million reduction in US electricity transmission operating costs, excluding exceptional items and goodwill amortisation, comparing 2004/05 with 2003/04 was
primarily related to reduced payroll and lower pension and other post-retirement benefit costs.

The
£71 million reduction in operating costs, excluding exceptional items and goodwill amortisation, comparing 2003/04 with 2002/03 was primarily related to a transfer
of costs associated with New England Power Pool billings as discussed above. This was partially offset by the increase in New England Power Company operating costs which flow through to revenue.

The
£4 million increase in US electricity transmission adjusted operating profit comparing 2004/05 with 2003/04 was mainly due to lower operating costs in New York as
a result of lower payroll and pension costs and increased returns for New England Power Company.

The
£10 million increase in adjusted operating profit comparing 2003/04 with 2002/03 was primarily due to the pass-through allowance for certain
exceptional reorganisation costs and the first six months profits from GridAmerica of £2 million.

Exceptional
items and goodwill amortisation explain the difference between adjusted operating profit and operating profit. For 2004/05, exceptional items were principally attributable to
restructuring costs. In 2003/04, exceptional items included £5 million in connection with voluntary early retirement offers.



Capital investment in the replacement, reinforcement and extension of the US electricity transmission networks in 2004/05 was £74 million,
compared with £53 million in 2003/04 and £49 million in 2002/03. These amounts are given using the respective average exchange rates for 2004/05, 2003/04 and
2002/03.

LOGO

The
increase in capital expenditure comparing 2004/05 with 2003/04 reflected additional planned asset replacement investments in both New England and New York to ensure the ongoing
safety, environmental and reliability performance of the system.

We
expect a significant increase in investment in New England to deliver our regional system expansion planning process projects. There will also be an increase in investment in New York
in order to address asset replacement requirements and increase safety and reliability of the system.

UK Gas Distribution



Our UK Gas Distribution business currently comprises almost all of Great Britain's gas distribution system. The gas distribution system consists of approximately
170,000 miles of distribution pipelines. Gas is transported on behalf of approximately 70 active gas shippers from the NTS through the eight regional distribution networks to around 21 million
consumers.

Following
the planned sales of four of our regional gas distribution networks (Scotland, Wales and West, North of England and South of England), which are expected to be completed on 1
June 2005, our retained gas distribution system will consist of approximately 82,000 miles of distribution pipeline.

We
are and will continue to be responsible for the safety, development, maintenance and daily operation of our UK Gas Distribution system.

Following
completion of the network sales the national emergency number (0800 111 999) will remain the same, which we will continue to manage on behalf of all gas transporters.



We are regulated through our subsidiary Transco plc, which owns and operates our UK Gas Distribution business under the terms of our gas transporter licence.

The
price control that applies to the UK Gas Distribution business takes into account Ofgem's estimates of operating expenditure, capital expenditure, replacement expenditure and allowed
rate of return (which is currently set at a real pre-tax rate of 6.25% on our regulatory asset value). As at 31 March 2005, our regulatory asset value is estimated as
approximately £11 billion.

On
1 April 2002, the activities of the UK Gas Distribution business became subject to a separate five-year price control formula ('distribution price control
formula'), as distinct from the gas transmission price control. With effect from 1 April 2004, this single price control formula was disaggregated into eight separate price control formulae
('networks price control formulae') to cover the activities of the eight regional gas distribution networks.

The
networks price control formulae take the same form as the distribution price control formula, with a maximum allowed revenue assigned to each network. Each formula retains a 65%
fixed, 35% variable revenue associated with transportation volume changes, a mains replacement incentive mechanism and the pass-through of prescribed rates and gas transporter licence
fees.

Each
network was allocated a regulatory asset value associated with its distribution assets using an estimate of the UK Gas Distribution business's regulatory asset value as at 1
April 2002. The allocation was aimed to minimise unnecessary regional differentials in transportation charges. The networks price control formulae also incorporates the same allowed return
assumptions at a real pre-tax rate of 6.25%.

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Each
network is subject to its own mains replacement incentive mechanism and retains 33% of any outperformance against Ofgem's annual cost targets as additional return or, alternatively,
bears 50% of any overspend if it underperforms. In 2004/05, it is estimated that we earned a small additional return from the operation of the incentive mechanism for mains replacement, which is lower
than the previous year. The lower return is primarily due to a reduction in Ofgem allowances compared with the previous year, together with inflationary pressures acting in our labour and contract
costs.

Ofgem
has indicated that it will extend the existing five-year gas distribution price control for a further year, with a mini price control review taking place to set revenue
for 2007/08, followed by a full price control review for the next five-year price control period starting 1 April 2008.

New
incentive schemes are being designed which will apply to both the sold networks and our retained networks following completion of the network sales.

With
effect from 1 May 2005, our UK Gas Distribution business (and each of the networks which we plan to sell) and UK gas transmission business each hold a gas transporter
licence. These licences are derived from the original integrated transmission and distribution licence, but have been substantially amended in order to distinguish between the separate activities of
transmission and distribution gas transportation, and to facilitate the post sales environment with multiple gas distribution transporters.



UK Gas Distribution has continued to make progress towards our Group goal of zero injuries and work-related ill-health. Over the last
year, we have achieved an 18% reduction in LTIs to our employees, from 119 in 2003/04 to 97 in 2004/05.

We
continue to make progress in our management of occupational illness with a comprehensive health surveillance programme for our industrial employees monitoring issues such as Hand Arm
Vibration Syndrome.



Gas demand was 697 TWh in 2004/05, compared with 706 TWh in 2003/04 and 708 TWh in 2002/03. The decrease was due to the very mild weather experienced. If the
weather had corresponded to seasonal normal temperatures, it is estimated that gas demand would have been 729 TWh in 2004/05, compared with 732 TWh in 2003/04 and 730 TWh in 2002/03.

While
there has been underlying growth of 0.4% in demand from small users (2003/04: 1.9% demand growth), 2004/05 saw a 2.6% reduction in underlying demand from business and other large
users (2003/04: 3.5% reduction), which can be attributed to higher gas prices.

We
again exceeded our safety-related standards of service targets with more than 98% of 'uncontrolled' gas escapes (where the gas leak cannot be controlled by turning the gas supply off
at the meter) attended within one hour, and more than 99% of 'controlled' gas escapes (where the gas leak can be controlled at the meter) attended within two hours.

Over
the year, we have seen a significant improvement in performance against all of our connections-related standards of service, meeting all but two of our performance targets. Low
levels of performance in the early part of the year against these two standards adversely affected our overall performance for the year. Ofgem is currently investigating our performance in relation to
standards of service associated with connections activities for 2003/04.

We
have been working with Ofgem and the wider industry to develop new connections-related standards of service which came into effect on 1 May 2005. These standards better reflect
the current connections market and provide more comprehensive protection to consumers requiring a gas connection service.

Furthermore,
it has become increasingly apparent that the prospects for competition in the domestic connections market are limited. Therefore, we have decided to deliver this element of
the service from within our UK Gas Distribution business to improve service to domestic customers further.



The
results of the UK Gas Distribution segment for the years ended 31 March 2005, 2004 and 2003 were as follows.

|                                            |  | Years ended 31 March |  
|------------------------------------------- |  | -------------------- | -
|
|
|Turnover                                    |  | 2,215                |  
|Operating costs excluding exceptional items |  | (1,645               | )
|                                            |  |                      |  
|Adjusted operating profit                   |  | 570                  |  
|Exceptional items                           |  | (180                 | )
|                                            |  |                      |  
|Operating profit                            |  | 390                  |  
|                                            |  |                      |  

The
£30 million reduction in UK Gas Distribution turnover comparing 2004/05 with 2003/04 was primarily due to a £53 million reduction in revenue
recovered under the distribution price control formula. This arose from a 3.5% price cut implemented in April 2004, which reduced income by £43 million, and a
£14 million reduction because of the relatively mild weather, partially offset by a £4 million increase from growth in underlying volumes. This net reduction in
income was partially offset by a £17 million increase in work undertaken by Transco plc's workforce on behalf of the Group's regulated and non-regulated Metering
businesses.

32

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The
£156 million increase in turnover comparing 2003/04 with 2002/03 was primarily due to an increase in revenue recovered under the distribution price control formula
of £84 million, mainly because of a 5% price increase implemented in October 2003 which added £79 million, combined with an increase in underlying volumes
which added £21 million, but offset by an £11 million reduction because of relatively mild weather. In addition, there was an increase of
£72 million in other income primarily because of increased work for the Group's other businesses.

The
£116 million increase in UK Gas Distribution operating costs, excluding exceptional items, comparing 2004/05 with 2003/04 was principally because of a planned
£86 million increase in expenditure associated with the iron mains replacement programme. The other main factors behind the increase were higher controllable costs
(£18 million, discussed below) and increased work for the Group's other businesses (£29 million), partly offset by a lower charge for UK Gas Distribution's share
of the Lattice pension deficit (£17 million).

The
£13 million reduction in operating costs, excluding exceptional items, comparing 2003/04 with 2002/03 was as a result of a £97 million reduction
in controllable costs (discussed below) offset inter alia by higher costs associated with the increased work for the Group's other businesses (£65 million) and a
first-time charge in respect of the Lattice pension deficit (£23 million).

Further
cost efficiencies have been achieved against the backdrop of substantial organisational change and the significant volume of work required to design and implement a new industry
structure as a result of the planned network sales. Controllable costs, which exclude increases in ongoing pension costs and gas commodity prices, decreased by 3% in real terms during the year and
have now decreased by 23% in real terms since March 2002.

The
£97 million reduction in controllable operating costs comparing 2003/04 with 2002/03 was the result of restructuring plans announced in September 2002,
together with the effects of investment in technology and the centralisation of activities, and aided by synergies achieved since the merger of National Grid Group plc and Lattice Group plc.

The
£86 million increase in replacement expenditure comparing 2004/05 with 2003/04 was in line with the planned increase in the iron mains replacement programme agreed
with the Health and Safety Executive (HSE).

The
£17 million reduction in replacement expenditure comparing 2003/04 with 2002/03 was associated with the completion of the medium pressure ductile iron replacement
programme in 2002/03 and the commencement of the iron mains replacement programme, with 2003/04 representing the lowest year of expenditure planned until 2007.

The
£146 million reduction in UK Gas Distribution adjusted operating profit comparing 2004/05 with 2003/04 was the result of the factors referred to above, with the
increased replacement expenditure and lower price controlled income being the two main factors.

The
£169 million increase in adjusted operating profit comparing 2003/04 with 2002/03 was the result of higher price controlled income and lower controllable costs, as
described above.

Exceptional
items explain the difference between adjusted operating profit and operating profit. UK Gas Distribution exceptional items in 2004/05 comprised £62 million
in connection with the network sales process, £109 million in respect of internal restructuring initiatives and a £9 million charge reflecting a revised estimate
of environmental liabilities.



Growth capital expenditure in the reinforcement and extension of the UK Gas Distribution network was £272 million in 2004/05, compared with
£293 million in 2003/04 and £380 million in 2002/03.

During
the year ended 31 March 2005, we made around 120,000 new connections to our network.

LOGO

Capital
expenditure reduced from £293 million in 2003/04 to £272 million in 2004/05 because of a lower level of investment in high pressure pipeline
projects, such projects being dependent on forecasts of future demand.

During
2004/05 we spent £474 million on replacement expenditure. Ofgem treats 50% of projected replacement expenditure as recoverable during the price control period
and 50% as recoverable over future years, as another form of capital investment in the network.



The process to implement the planned sales of four of our eight gas distribution networks (Scotland, Wales and West, North of England and South of England),
announced in August 2004, has progressed steadily over the past year. In January of this year, Ofgem gave its conditional approval to the sale of the four gas distribution networks. This was
followed by Department of Trade and Industry consent later that month.

Since
then, we have developed a network code with the industry that will be suitable for us and independent distribution gas transporters. This revised code has become the Uniform
Network Code.

A
Joint Office of Gas Transporters (an unincorporated association) has been established in order to administer and coordinate certain functions that result from common licence
obligations imposed on both transmission and distribution gas transporters. The role of the Joint Office will include, for example, the coordination of transportation charge changes and the
administration of the Uniform Network Code modification procedures.

33

---



We
have established xoserve ltd, which will act as the common service provider ('agency') envisaged by the licences of transmission and distribution gas transporters. The company
was formed from the internal departments previously known as shipper services. The initial role of xoserve ltd is to continue to provide essential services and systems on a common basis to
network gas transporters. These services include the key roles of transportation invoice production, supply point administration services, data processing and, in relation to the NTS, managing the
financial consequences of energy imbalances. The key objective in creating xoserve ltd was to minimise the changes shippers would need to make as a result of network sales and to improve
industry efficiency by providing common commercial interfaces between shippers and multiple distribution gas transporters.

Ofgem
has also completed a number of public consultations concerning the establishment of the appropriate industry frameworks. Ofgem's impact assessments and detailed cost benefit
analysis concluded that the sales will potentially generate approximately £225 million net benefit to customers.

On
1 May, having received Ofgem approval, we transferred the four sold networks into four new wholly-owned subsidiaries of National Grid Transco. On the same date, the Uniform Network
Code became effective and the Joint Office and xoserve commenced operations.

Submissions
have been made to the HSE to seek their acceptance of the safety cases for the new independent gas networks, which we expect to receive before 31 May 2005. Ofgem's
final consent to allow the sales to complete on 1 June is also expected by the end of May.

With
anticipated cash proceeds of £5.8 billion, the planned sales represent a major step in value creation. Completion will enable both a £2 billion
return of value to our shareholders and repayment of around £2.3 billion of debt.

We
remain committed to operating a substantial gas distribution business in Great Britain and we will continue to be the largest operator of gas distribution assets in the country. The
retained system will consist of approximately 82,000 miles of distribution pipelines, distributing gas to around 11 million consumers.



The 'Way Ahead' restructuring programme in the West Midlands, London, North West and East of England networks (the networks that we will retain) is advanced. A
number of offices have closed and more are set to close over the coming months as we move to a new unified structure which is supported by two key centres, one in Hinckley and the other at our new
office in Northampton. This will enable us to place increased emphasis on safety and efficiency, and share best practice across the organisation. It should also enable the delivery of further
reductions in controllable costs. This is particularly focused on bringing overheads into line with the smaller size of the retained business. In addition, we have entered into eight year alliances
with key contractors to ensure the safe, efficient and sustainable delivery of the iron mains replacement programme.

US Distribution

Our US Distribution business comprises two segments: 'US electricity and gas distribution' for our energy delivery businesses operating in the northeastern US and
'US stranded cost recoveries' for the recovery of generation-related costs incurred prior to divestiture. Details of each of these segments are set out below.

US electricity and gas distribution



We are one of the leading electricity distribution service providers in the northeastern US, as measured by energy delivered, and one of the largest utilities in
the US, as measured by the number of electricity distribution customers. US electricity and gas distribution serves approximately 3.3 million electricity customers over a network of 72,000
circuit miles and around 565,000 gas customers over a network of 8,500 miles.

We
provide electricity and gas distribution in New York state through our subsidiary Niagara Mohawk Power Corporation. We provide electricity distribution in New England through our
subsidiaries Massachusetts Electric Company (operating in Massachusetts), Nantucket Electric Company (operating on Nantucket Island off Massachusetts), The Narragansett Electric Company (operating in
Rhode Island) and Granite State Electric Company (operating in New Hampshire).



Niagara Mohawk, Massachusetts Electric Company and Narragansett Electric Company together constitute over 98% of our US electricity distribution business, and
Niagara Mohawk operates our US gas distribution business. Under their long-term rate plans with state regulators, these subsidiaries can earn and retain certain amounts in excess of
traditional regulatory allowed returns. Their incentive returns and shared savings allowances are designed to provide them with an opportunity to use efficiency gains following their respective
mergers to more than offset the costs of completing those mergers.

Niagara Mohawk distribution rates

Niagara
Mohawk's electricity delivery rates are governed by a 10-year rate plan that began when we acquired it on 31 January 2002. Under the plan, after reflecting its
share of savings related to the acquisition, Niagara Mohawk may earn a threshold return on equity for its electricity distribution business of 10.6%, or 12.0% if certain customer education targets are
met, and half of any earnings in excess of that amount. The return on equity is measured on a US GAAP basis and calculated cumulatively from inception to 31 December 2005 and on a
two-year rolling basis thereafter. The earnings calculation used to determine the regulated returns excludes half of the synergy savings, net of the cost to achieve them, that were assumed
in the rate plan. This exclusion effectively offers Niagara Mohawk the potential to achieve a return in excess of the regulatory allowed return of 10.6%.

Under
the plan, gas delivery rates were frozen until the end of the 2004 calendar year, and Niagara Mohawk now has the right to request an increase at any time, if needed. 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 earnings above this threshold with customers.

34

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Massachusetts Electric distribution rates

Under Massachusetts Electric's 20-year rate plan, there is no cap on earnings and no earnings sharing mechanism until 2010. From May 2000 until
February 2005, rates were frozen. In March 2005, a settlement credit in the company's rates expired, which represents an increase of $10 million in pre-tax income
through to February 2006. From March 2006, rates will be adjusted each March until 2009 by the annual percentage change in average electricity distribution rates in the northeastern US.
In 2010, actual earned savings will be determined and the company will be allowed to retain 100% of annual earned savings up to $70 million and 50% of annual earned savings between
$70 million and $145 million (all figures pre-tax). Earned savings represents the difference between calendar year 2008 distribution turnover and the company's cost of
providing service, including a regional average authorised return. These efficiency incentive mechanisms provide an opportunity to achieve returns in excess of traditional regulatory allowed returns.
Massachusetts Electric will be allowed to include its share of earned savings in demonstrating its costs of providing service to customers from January 2010 until May 2020.

Narragansett Electric distribution rates

Narragansett Electric's distribution rates are governed by a 20-year rate plan. Between May 2000 and the end of October 2004, rates were
frozen and it was permitted to retain 100% of its earnings up to an allowed return on equity of 12%. The company kept 50% of earnings between 12% and 13%, and 25% of earnings in excess of 13%. With
effect from November 2004 until December 2009, Narragansett Electric has agreed to lower its rates by $10.2 million per year. Beginning in January 2005, it will be able to
keep an amount equal to 100% of its earnings up to an allowed return on equity of 10.5%, plus $4.65 million (pre-tax), which represents its share of demonstrated savings subsequent
to the acquisition of Eastern Utilities Associates in 2000. Earnings above that amount up to an additional 1% return on equity are to be shared equally between the company and its customers, while
additional earnings will be allocated 75% to customers and 25% to the company. The company determines earned return on equity based on a hypothetical capital structure of 50% common equity, 5%
preferred equity and 45% debt. This regulatory mechanism offers the potential to achieve returns in excess of traditional regulatory allowed returns.



The number of employee LTIs in the US electricity and gas distribution business fell from 143 in 2003/04 to 81 in 2004/05, a decrease of 43%. This is a marked
improvement in our safety record, after a 14% increase in 2003/04.



We work towards service quality standards that our 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 some cases achieve an incentive. Although we met or bettered our standards on customer service, we missed targets for reliability in the 2004 calendar year,
incurring an aggregate net penalty of £2.2 million. Although the shortfalls were small, we are committed to reducing the frequency and duration of service interruptions. We are
therefore increasing our investments in the coming financial year for asset enhancement, replacement and maintenance. Continuation of this programme into future years should improve reliability,
reduce inefficient use of resources in responding to outages and create a safer work environment.



The
results of the US electricity and gas distribution segment for the years ended 31 March 2005, 2004 and 2003 were as follows.

|                                                                      |  | Years ended 31 March |  
|--------------------------------------------------------------------- |  | -------------------- | -
|
|
|Turnover                                                              |  | 3,114                |  
|Operating costs excluding exceptional items and goodwill amortisation |  | (2,740               | )
|                                                                      |  |                      |  
|Adjusted operating profit                                             |  | 374                  |  
|Exceptional items                                                     |  | (20                  | )
|Goodwill amortisation                                                 |  | (68                  | )
|                                                                      |  |                      |  
|Operating profit                                                      |  | 286                  |  
|                                                                      |  |                      |  

The
average exchange rates used to translate the results of US operations during 2004/05, 2003/04 and 2002/03 were $1.87:£1, $1.68:£1 and $1.59:£1
respectively. In order to illustrate underlying performance, the impact of exchange rate movements has been separated from other changes by also presenting the operating results for 2003/04 and
2002/03 on a constant currency basis, using the average exchange rate for 2004/05 of $1.87:£1. The 2003/04 and 2002/03 results are discussed below as if the 2004/05 exchange rate had
applied.

There
was a £25 million decrease in US electricity and gas distribution turnover in 2004/05 compared with 2003/04. Turnover decreased by £33 million
as a consequence of the recovery of lower purchased electricity costs, partially offset by the recovery of higher purchased gas costs. The costs of purchased electricity and gas are reflected in
turnover because they are collected from customers under our rate plans. This overall decrease in turnover occurred despite a 0.5% increase in deliveries of electricity, or 1.4% weather-normalised.
Deliveries to the residential customer class increased by 1.7%, weather-normalised.

35

---



The
£328 million increase in turnover comparing 2003/04 with 2002/03 resulted from the recovery of increased purchased electricity and gas costs and the transfer of
certain FERC-regulated tariff charges previously reported under US electricity transmission. Partially offsetting the increase were a 0.8% decline in electricity deliveries and an 18.9%
decline in gas deliveries. After normalising for weather, electricity deliveries increased by 0.8% but gas deliveries fell by 18.5%. Strong residential deliveries contributed to the increase in
electricity deliveries. The decline in gas deliveries mainly reflected certain larger customers purchasing gas directly from suppliers.

US
electricity and gas distribution operating costs, excluding exceptional items and goodwill amortisation, decreased by £74 million comparing 2004/05 with 2003/04.
Purchased electricity and gas costs represent more than one-half of US electricity and gas distribution operating costs. These costs decreased £33 million as compared to
the prior year because of lower prices and despite increased deliveries. Most of the remainder of the decrease of £41 million in operating costs can be attributed to a
£35 million decrease in controllable costs due primarily to the effects of staffing reductions and lowered bad debt expenses. National Grid USA, the holding company for the Group's
US operations, has reduced controllable costs by 20% in real terms since 2001/02.

Operating
costs, excluding exceptional items and goodwill amortisation, increased by £344 million comparing 2003/04 with 2002/03. Purchased electricity and gas
increased by £248 million for 2003/04 as compared to 2002/03. This was mainly driven by higher prices for electricity and gas, partially offset by a decrease in volumes purchased.
Also contributing to the increase was the transfer of £76 million of certain tariff charges as discussed above.

The
£49 million increase in US electricity and gas distribution adjusted operating profit comparing 2004/05 with 2003/04 was a consequence of the growth in turnover of
£8 million and the £41 million reduction in operating costs discussed above, both after excluding the movement in commodity costs recovered from customers.

The
£16 million decrease in adjusted operating profit comparing 2003/04 with 2002/03 was primarily because of the increase in other operating costs discussed above,
again after excluding the movement in commodity costs.

Exceptional
items and goodwill amortisation explain the difference between adjusted operating profit and operating profit. For 2004/05, all the exceptional items were incurred in
connection with restructuring costs. In 2003/04, exceptional items included £57 million in connection with voluntary early retirement offers, restructuring costs of
£15 million and £12 million for the non-capitalised costs of a new enterprise resource planning system.



Capital investment in the replacement, reinforcement and extension of the US electricity and gas distribution networks in 2004/05 was
£234 million, compared with £277 million in 2003/04 and £249 million in 2002/03. These amounts reflect the actual respective average exchange
rates for 2004/05, 2003/04 and 2002/03.

US
electricity and gas distribution capital investment expenditure decreased by £43 million in 2004/05, of which £28 million is attributable to the
impact of exchange rate movements. There was a £45 million decline in spending on automated meter reading and on a large gas pipeline project, both of
which were largely completed in 2003/04. This decrease was partially offset by increased other spending of £30 million.

US
electricity and gas distribution capital investment expenditure increased by £28 million in 2003/04. This reflected increased spending of
£13 million to establish automated meter reading and £28 million for load relief and reliability projects, including £9 million for a large gas
pipeline, partially offset by the £13 million impact of exchange rate movements.

LOGO

US stranded cost recoveries



The US stranded cost recoveries segment captures the recovery of various generation-related costs that were incurred prior to industry-wide
restructuring that deregulated the generation business. These costs consist primarily of the above-market costs associated with the generation assets and with amending or ending purchased power
contracts. We recover a large portion of these stranded costs, along with a return, through a special rate charged to customers.



36

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The results of the US stranded cost recoveries segment for the years ended 31 March 2005, 2004 and 2003 were as follows.

|                           |  | Years ended 31 March |  
|-------------------------- |  | -------------------- | -
|
|
|Turnover                   |  | 420                  |  
|Operating costs            |  | (299                 | )
|                           |  |                      |  
|Adjusted operating profit* |  | 121                  |  
|                           |  |                      |  

---

The
average exchange rates used to translate the results of US operations during 2004/05, 2003/04 and 2002/03 were $1.87:£1, $1.68:£1 and $1.59:£1
respectively. In order to illustrate underlying performance, the impact of exchange rate movements has been separated from other changes by also presenting the operating results for 2003/04 and
2002/03 on a constant currency basis, using the average exchange rate for 2004/05 of $1.87:£1. The 2003/04 and 2002/03 results are discussed below as if the 2004/05 exchange rate had
applied.

There
was a £35 million decrease in US stranded cost recoveries turnover comparing 2004/05 with 2003/04. Turnover decreased by £74 million as a
consequence of the recovery of lower purchased power contract costs, partially offset by an increase in recoveries of stranded costs in accordance with Niagara Mohawk's rate plan. Most of the prior
year's decrease of £43 million was attributable to lower gross returns on the stranded cost asset, which is diminishing as stranded costs are recovered from customers, as well as
the impacts of weaker sales and reduced purchased power contract costs.

Operating
costs for US stranded cost recoveries decreased by £35 million and £20 million in 2004/05 and 2003/04 respectively, in each case mainly
because of lower purchased power contract costs.

Adjusted
operating profit stayed constant at £121 million in 2004/05 and decreased by £23 million comparing 2003/04 with 2002/03. This segment had
no goodwill amortisation during the periods presented, and so the differences between adjusted operating profit and operating profit in 2003/04 and 2002/03 related to exceptional items.

Wireless infrastructure



In August 2004, we completed the purchase of the UK operations of Crown Castle International Corp. for £1.1 billion. The process of
integrating this business with Gridcom UK to establish a single business, known as Crown Castle UK, is on track. This will allow us to realise £18 million of cash savings per annum
through the rationalisation of staffing, office buildings and systems.

Crown
Castle UK is the leading independent provider of network infrastructure to mobile telephone operators and one of two providers of transmission networks for analogue and digital
television and radio broadcasters in the UK.

Following
the integration, the business has around 5,000 active sites used for mobile communications and provides services to over 14,500 tenants. Crown Castle UK also owns some 750
purpose-built broadcast towers and associated transmission equipment used for radio and television broadcasting.

As
the leading independent provider of network infrastructure to mobile operators, with an expanded portfolio of undeveloped sites, the business is well positioned to benefit from
continued strong demand for mobile infrastructure, not least the roll-out of 3G networks. Crown Castle UK is similarly well placed to provide the additional network infrastructure that
will be required for the planned switchover from analogue to digital television.

Recognising
our significant investment in this business, we have created a new reporting segment, Wireless infrastructure, which also includes our Gridcom US business.



Our mobile infrastructure business provides sites on long-term contracts to blue chip companies. In addition, sites are also used by other customers
such as the emergency services and taxi companies. We also offer other services such as site design, antenna installation and project management.

The
current roll-out of 3G networks continues to provide demand for additional infrastructure to ensure coverage of the new services across the UK. Crown Castle UK is well
placed to benefit from this demand having around 13,000 marketable sites, which includes the right to lease space on up to 4,000 BT exchange sites that are close to densely populated areas and have
direct access to the BT network, making them highly attractive sites.



Our broadcast transmission business is a network of transmission towers and broadcast equipment with long-term contracts to transmit analogue and
digital radio and television signals for reception by the public from content providers, such as the BBC, BSkyB, MTV, Virgin Radio and talkSPORT.

37

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Crown
Castle UK also owns the licences for two of six digital multiplexes. Each multiplex has the capacity to transmit at least four digital television channels. Due to improvements in
multiplexing technology, further channel capacity is expected to be available in 2005/06.

We
are currently working closely with the broadcast industry on the planning of the analogue to digital switchover. The digital terrestrial television switchover programme for the UK is
expected to take place on a region by region basis between 2008 and 2012. We will be bidding for new contracts for the roll-out of infrastructure required for the switchover from analogue
to digital television, as well as the continuation of services such as analogue and digital radio, not least of these being the contract with the BBC which is due to expire in 2007.

Ofcom
has published its determination on the regulation that will apply at the site access level, which is similar to that prevailing since the BBC Home Transmission Service was
privatised in 1997. The regulation of the managed transmission services layer is still the subject of consultation by Ofcom.



Gridcom US provides communications infrastructure and related network services to wireless and fixed network operators in the northeastern US. Lines of business
include communication towers, wireless pylon attachments, distributed antenna system networks and related network services and a dark fibre network.



The major operational risks in our business arise from working at height and driving. During 2004/05, Wireless infrastructure had five employee LTIs compared with
five in 2003/04.



The
results of the Wireless infrastructure segment for the years ended 31 March 2005, 2004 and 2003 were as follows.

|                                                                      |  | Years ended 31 March |  
|--------------------------------------------------------------------- |  | -------------------- | -
|
|
|Turnover                                                              |  | 208                  |  
|Operating costs excluding exceptional items and goodwill amortisation |  | (162                 | )
|                                                                      |  |                      |  
|Adjusted operating profit/(loss)                                      |  | 46                   |  
|Exceptional items                                                     |  | (13                  | )
|Goodwill amortisation                                                 |  | (23                  | )
|                                                                      |  |                      |  
|Operating profit/(loss)                                               |  | 10                   |  
|                                                                      |  |                      |  

The
£136 million increase in Wireless infrastructure turnover, £96 million increase in operating costs and £40 million increase
in adjusted operating profit comparing 2004/05 with 2003/04 primarily reflect the seven months reported results for the UK operations of Crown Castle International Corp. acquired in
August 2004.

As
at 31 March 2005, we had achieved over half our targeted cash savings of £18 million on an annualised basis, the majority being realised in headcount
savings.

In
2003/04, adjusted operating profit significantly improved from a loss of £23 million reported in 2002/03 to a profit of £6 million, due to
reducing the cost base of the UK business.

Exceptional
items and goodwill amortisation, which explain the difference between adjusted operating profit and operating profit, primarily related to the acquisition and integration of
the UK operations of Crown Castle International Corp. in 2004/05.

Exceptional
items of £8 million and £27 million in 2003/04 and 2002/03 respectively were due to restructuring costs.



Capital investment in Wireless infrastructure was £19 million in 2004/05, compared with £2 million in 2003/04 and
£7 million in 2002/03. The increase in capital expenditure primarily reflects the acquisition of the UK operations of Crown Castle International Corp.

LOGO

38

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Other businesses



Progress continues to re-focus the portfolio of other businesses to the provision of infrastructure and related services where we can exploit our core
skills and assets to create value.

Other
businesses are Metering, Interconnectors, Liquefied Natural Gas, Property Services Group, Fulcrum Connections, Advantica and other corporate activities. These businesses are
included in the financial statements under Other activities.



There was an increase in the total number of employee LTIs in the other businesses, rising from five in 2003/04 to nine in 2004/05.

During
the year, Fulcrum Connections received recognition for its safety performance, including a Gas Industry Award for Safety and a Gold RoSPA Award, and achieved world-class status in
the Confederation of British Industry's 'Contour' benchmark.



The
aggregated results of Other activities for the years ended 31 March 2005, 2004 and 2003 were as follows.

|                                                                      |  | Years ended 31 March |  
|--------------------------------------------------------------------- |  | -------------------- | -
|
|
|Turnover                                                              |  | 844                  |  
|Operating costs excluding exceptional items and goodwill amortisation |  | (682                 | )
|                                                                      |  |                      |  
|Adjusted operating profit                                             |  | 162                  |  
|Exceptional items                                                     |  | (33                  | )
|Goodwill amortisation                                                 |  |                     |  
|                                                                      |  |                      |  
|Operating profit                                                      |  | 129                  |  
|                                                                      |  |                      |  

Turnover
from Other activities in 2004/05 was in line with 2003/04, despite a £27 million reduction in Metering, primarily reflecting lower prices offered in
commercial contracts signed in March 2004. Offsetting this reduction was a £23 million improvement in Fulcrum Connections' revenues.

The
£27 million decrease in turnover comparing 2003/04 with 2002/03 was primarily due to a reduction in turnover from Advantica of £13 million, as a
result of reduced activity with Transco, and £17 million from Fulcrum Connections.

The
£56 million reduction in Other activities operating costs comparing 2004/05 with 2003/04 primarily reflected the lower carrying value of property stock sold during
the year by SecondSite Property.

The
£24 million increase in operating costs comparing 2003/04 with 2002/03 was mainly due to an increase in Metering costs of £26 million,
principally as a result of increased depreciation.

The
£66 million increase in Other activities adjusted operating profit comparing 2004/05 with 2003/04 and the £51 million reduction in adjusted
operating profit comparing 2003/04 with 2002/03 were due to the above factors.

Exceptional
items and goodwill amortisation explain the difference between adjusted operating profit and operating profit. The improvement in exceptional costs during the year was mainly
due to the £21 million impairment of assets and restructuring at Advantica in 2003/04.

The
£29 million decrease in exceptional costs comparing 2003/04 with 2002/03 was primarily due to merger costs incurred in 2002/03.



Capital expenditure in 2004/05 amounted to £310 million, an increase of £38 million compared with
£272 million in 2003/04. This reflected an increase of £58 million relating to the Basslink project, offset by a £7 million reduction in
capital expenditure on the Isle of Grain LNG importation terminal and a £13 million reduction in other capital expenditure.

Capital
expenditure in 2003/04 of £272 million was £99 million higher than in 2002/03, comprising a £58 million increase on the
Isle of Grain LNG project, a £28 million increase in Basslink and a £13 million increase in other capital spending.

LOGO



The UK Metering businesses, Transco Metering and OnStream, provide installation, maintenance and meter reading services to gas and electricity suppliers in the
regulated and unregulated markets. During 2005/06, it is our intention to bring together the two businesses under a single legal entity, reinforcing our position as the national leading provider of
utility metering services in Great Britain.

Transco Metering

Transco Metering has continued to provide services on behalf of Transco for an asset base of around 20 million domestic and industrial and commercial gas
meters. On 12 July 2004, the UK gas metering industry successfully implemented a suite of new contracts, information systems and business processes to deliver the recommendations of Ofgem's
Review of Gas Metering Arrangements. Transco Metering played a major role in the four-year industry-wide project.

39

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OnStream

OnStream's focus is the provision of metering services to the competitive market. During the year, it continued the installation of gas meters and began to
install electricity meters under a major contract signed with British Gas Trading.



In the UK, we own and operate electricity interconnectors between England and Scotland and England and France that provide access to alternative wholesale
electricity markets and additional sources of supply.

2004/05
is the last year in which the England/Scotland interconnector operated as a separate business activity. The introduction of BETTA means that it became part of the enlarged
transmission assets in the Great Britain electricity market from 1 April 2005.

The
Basslink project is a 600 MW interconnector linking the electricity network on the island state of Tasmania to mainland Australia. As a result of damage to six transformers incurred
during shipment from Germany, commissioning is expected to be delayed until Spring 2006.

Capital
expenditure on the Basslink project was £136 million in 2004/05, compared with £78 million in 2003/04 and £50 million in
2002/03. Total project costs remain broadly on budget and the total cost to completion, excluding capitalised financing costs, is still expected to be approximately £300 million.



The first phase of our development of the Isle of Grain LNG import terminal will be ready for commissioning in June 2005. It will be the first new LNG
import terminal constructed and operated in the UK for some 20 years. In 2004/05, capital expenditure on the project was £51 million, compared with
£58 million in 2003/04 and £2 million in 2002/03.

In
March 2005, we announced a new £355 million investment to triple the capacity of the Isle of Grain LNG import terminal. This second phase of development will
increase the facility's capacity to import and process LNG from 3.3 million tonnes per year to 9.8 million tonnes per year, representing around 12% of the current UK annual gas demand,
and is planned to commence operations in late 2008. These investments in the Isle of Grain LNG import terminal are underpinned by 20-year customer contracts.

Our
LNG storage business, which covers the four other UK sites (Glenmavis, Partington, Dynevor Arms and Avonmouth), continues to provide gas storage facilities. In 2005/06, this business
has been incorporated back into the UK electricity and gas transmission segment.



During the year, we consolidated all of our property holding and management activities into a single unit, Property Services Group.

Property
Services Group is responsible for the management of all occupied operational property. In addition, through its SecondSite Property arm, it is responsible for the management,
clean up and disposal of surplus non-operational properties largely comprising contaminated former gas works.

During
the year ended 31 March 2005, SecondSite Property disposed of 57 properties and generated £114 million in disposal proceeds, compared with 91 properties
and £154 million in 2003/04 and 74 properties and £89 million in 2002/03.

Property
disposals contributed £62 million to profit on the disposal of fixed assets in 2004/05 compared with £88 million in 2003/04 and
£54 million in 2002/03.



Fulcrum Connections is the largest provider of gas connections and associated design services with a national footprint in the UK. During 2004/05, Fulcrum
Connections provided, on behalf of our UK Gas Distribution business, some 130,000 new gas connections and gas meter alterations to domestic and industrial customers, a similar level to that in
2003/04.

Reflecting
the need to restructure our connection services as a result of the planned sales of four of our gas distribution networks, going forward the business will be incorporated into
our UK Gas Distribution business.



Advantica is an engineering and software consultancy providing services to the gas, oil, water and electricity sectors primarily in the UK and US.



During the year, we have continued our exit from our non-core businesses. We completed the sale of our interests in Citelec, viavera and Kielder.

40

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Operating and Financial Review

Financial Review

Basis of accounting

The accounts on pages 85 to 143 present our results for the years ended 31 March 2005, 2004 and 2003 and our financial position as at 31 March 2005
and 2004. They have been prepared using the accounting policies shown on pages 85 to 87, in accordance with generally accepted accounting principles in the United Kingdom (UK GAAP).

We
also provide a reconciliation from our results and financial position as prepared under UK GAAP to the results and financial position as if they had been prepared in accordance with
generally accepted accounting principles in the United States (US GAAP), together with condensed US GAAP financial information. A discussion of the principal differences between UK GAAP and US GAAP is
provided on pages 57 to 59.

This
is the last annual report in which we will be presenting consolidated accounts under UK GAAP, as we will apply International Financial Reporting Standards (IFRS) starting with our
annual report for the year ending 31 March 2006. A discussion of the principal changes that are expected to arise on the implementation of IFRS is included on pages 80 and 81.

Financial performance

|                                                                      |  | Years ended
31 March |  
|--------------------------------------------------------------------- |  | -------------------- | -
|
|
|Group turnover                                                        |  | 8,521                |  
|Operating costs excluding exceptional items and goodwill amortisation |  | (6,316               | )
|Joint ventures                                                        |  | 7                    |  
|                                                                      |  |                      |  
|Adjusted operating profit                                             |  | 2,212                |  
|Operating exceptional items                                           |  | (251                 | )
|Goodwill amortisation                                                 |  | (109                 | )
|                                                                      |  |                      |  
|Total operating profit                                                |  | 1,852                |  
|Disposals of tangible fixed assets                                    |  | 70                   |  
|Other non-operating exceptional items                                 |  | 13                   |  
|Net interest payable                                                  |  | (783                 | )
|                                                                      |  |                      |  
|Profit before taxation                                                |  | 1,152                |  
|Taxation                                                              |  | (245                 | )
|Minority interests                                                    |  | 1                    |  
|                                                                      |  |                      |  
|Profit for the year                                                   |  | 908                  |  
|                                                                      |  |                      |  

The
following discussion compares the results for the year ended 31 March 2005 (2004/05) with those of the year ended 31 March 2004 (2003/04) and of 2003/04 with those of
the year ended 31 March 2003 (2002/03).

Further
discussion of the financial performance on a segment by segment basis is included in the Operating Review on pages 25 to 44.



The Group adopted FRS 20 'Share-based Payment' on 1 April 2004. The standard requires the Group to record a charge in its profit and loss account
reflecting the value of grants of shares or rights to shares to third parties, including employees. A charge is recognised in the profit and loss account based on the fair value of the shares at the
date the grant of shares or right to shares is made. The charge incurred in 2004/05 was £16 million.

As
a consequence of this change in accounting policy, the financial statements for 2003/04 and 2002/03 have been restated, with adjusted operating profit reduced by
£25 million and £37 million respectively and adjusted basic earnings per share reduced by 0.8 pence and 1.2 pence. Operating profit for these years has been
reduced by £25 million and £40 million (of which £3 million was exceptional) and basic earnings per share has been reduced by 0.8 pence and 1.3
pence. Net assets at 31 March 2004 was restated from £1,263 million to £1,271 million.



The decrease in Group turnover from 2003/04 to 2004/05 of £512 million primarily related to a reduction of £435 million
arising from the movement in the average US dollar to sterling exchange rate from $1.68:£1 in 2003/04 to $1.87:£1 in 2004/05. Turnover from discontinued operations was
£158 million lower as a result of the disposal in 2003/04 of EnMO Limited, which provides the on-the-day commodity market for gas trading in Great Britain.
This was partially offset by an increase of £148 million from the acquisition of the UK operations of Crown Castle International Corp. during 2004/05.

The
fall in Group turnover from 2002/03 to 2003/04 of £367 million primarily reflected a reduction in turnover relating to discontinued operations which dropped from
£567 million in 2002/03 to £158 million in 2003/04, related mostly to EnMO Limited and a reduction in turnover of £231 million arising from the
movement in the average US dollar to sterling exchange rate from $1.59:£1 in 2002/03 to $1.68:£1 in 2003/04. After taking these factors into account turnover increased, arising
from sales volume growth in UK gas distribution and in US electricity and gas distribution.



Group operating costs, excluding exceptional items and goodwill amortisation, decreased from 2003/04 to 2004/05 by £511 million. The most
significant elements of this movement reflected a change in the US dollar to sterling exchange rate giving rise to a reduction of £370 million and a reduction of
£158 million from the discontinued business, EnMO Limited. These reductions were partially offset by the operating costs of acquired businesses during 2004/05 and
£86 million from higher replacement expenditure (repex), net of other changes in operating costs.

Group
operating costs, excluding exceptional items and goodwill amortisation, decreased from 2002/03 to 2003/04 by £420 million, primarily as a result of a reduction
of £454 million due to the impact of discontinued operations, mainly EnMO Limited and from a reduction of £193 million from the movement in the US dollar to
sterling average exchange rate.



Joint ventures contributed £7 million to operating profit in 2004/05, unchanged from 2003/04. Of this, £1 million in 2004/05
related to a discontinued joint venture, Citelec, in which we sold our 42.5% interest in August 2004.

Citelec
is the holding company of Transener, which owns and operates a transmission system in Argentina. We accounted for Citelec under hyperinflationary accounting principles up until
its disposal. The application of these principles had no material impact on the results for the year ended 31 March 2005 or 2004, but during the year ended 31 March 2003,
they resulted in the recognition of an exceptional interest credit of £67 million and related exceptional minority interest charge of £28 million.

There
was a £2 million reduction in the continuing operations operating profit generated by joint ventures in comparing 2003/04 with 2002/03, as our share of joint
ventures from continuing operations changed from £9 million in 2002/03 to £7 million in 2003/04. Discontinued joint ventures contributed negative
£14 million to adjusted operating profit and £115 million to operating profit in 2002/03.

45

---





Adjusted operating profit in 2004/05 was £1 million lower than 2003/04, reflecting a £65 million reduction as a consequence
of the movement in the US dollar to sterling exchange rate and a contribution of £39 million from the acquisition of the UK operations of Crown Castle International Corp.

Adjusted
operating profit in 2003/04 was £65 million higher than 2002/03. The main reason for the increase in adjusted operating profit was the strong performance of
UK gas distribution, together with a reduction in losses from discontinued operations of £26 million.



Net operating exceptional items included within operating profit that related to both continuing and discontinued operations moved from a net charge of
£350 million in 2002/03 to £277 million in 2003/04 and to £251 million in 2004/05.

The
operating exceptional items for 2004/05 related to:



Operating
exceptional items in 2003/04 comprised £24 million of restructuring costs associated with the planned sales of four regional gas distribution networks; other
restructuring costs of £100 million for US electricity and gas transmission and distribution, £77 million for UK gas distribution, £14 million
for UK transmission and £34 million for other businesses; and £28 million of environmental costs.

Operating
exceptional costs in 2002/03 for continuing operations of £311 million related primarily to merger related costs and restructuring costs arising from
efficiency programmes, which were mainly severance related.



The increase in goodwill amortisation from 2003/04 to 2004/05 of £10 million relates to additional goodwill amortisation of
£20 million for the seven months from 1 August 2004 to 31 March 2005 arising from the acquisition of the UK assets of Crown Castle International Corp., offset by a
reduction of £10 million (£6 million from 2002/03 to 2003/04) reflecting the reduced sterling cost of US dollar denominated goodwill amortisation as a result of
the weakening of the US dollar during 2004/05 and 2003/04.



Group operating profit rose by £15 million from 2003/04 to 2004/05, resulting from a reduction in adjusted operating profit of
£1 million, an increase in goodwill amortisation of £10 million and a reduction in net operating exceptional charges of £26 million as compared
with 2003/04.

Group
operating profit rose by £141 million from 2002/03 to 2003/04. This reflected an increase in adjusted operating profit of £65 million and a
reduction in net operating exceptional charges of £73 million as compared with 2002/03.



Non-operating exceptional items consisted of:





Net interest decreased by £39 million from 2003/04 to 2004/05. This was primarily explained by a weaker US dollar and a reduction in the
interest charge relating to pensions.

Net
interest fell from £970 million in 2002/03 to £822 million in 2003/04. Exceptional financing costs relating to a joint venture of
£31 million incurred in 2002/03 did not recur. Excluding exceptional items, the remaining reduction of £117 million from 2002/03 to 2003/04 was primarily
explained by the refinancing of debt in the UK and US, lower short-term interest rates, the weaker US dollar, a higher level of capitalised interest, a reduction in joint venture interest
costs and a lower level of Group net debt, partially offset by a net increase of £55 million in pension interest costs, most of which arose from the actuarial valuation of the
Lattice Group Pension Scheme undertaken as at 31 March 2003.



A net charge of £245 million arose in 2004/05, compared with £261 million in 2003/04 and £245 million in
2002/03. This reflects exceptional tax credits amounting to £79 million, £89 million and £128 million in respect of exceptional items in
2004/05, 2003/04 and 2002/03 respectively. The effective tax rate was 21.3%, 19.6% and 39.0% for 2004/05, 2003/04 and 2002/03 respectively.

Excluding
the effect of exceptional tax credits, goodwill amortisation and tax credits relating to prior years, the effective tax rate for 2004/05, 2003/04 and 2002/03 was 24.8%, 25.6%
and 30.9% respectively, compared with a standard UK corporation tax rate of 30% for all three years. The effective tax rate for 2004/05, 2003/04 and 2002/03, based on profit after goodwill
amortisation but before exceptional items and excluding tax credits relating to prior years, was 26.8%, 27.6% and 33.7% respectively.

A
reconciliation of the main components giving rise to the difference between the relevant effective tax rate and the UK standard corporation tax rate is shown in note 9 to the
accounts on page 102.



Excluding exceptional items, minority interests were a £1 million credit in 2004/05, a £2 million charge in 2003/04 and a
£3 million charge in 2002/03. In 2002/03, as discussed under 'Joint ventures' on page 45, there were exceptional minority interest charges of £28 million.

46

---





The Group has used the weighted average exchange rate to translate all US dollar results into sterling for 2004/05, 2003/04 and 2002/03, being
$1.87:£1, $1.68:£1 and $1.59:£1 for each year respectively. The balance sheets at 31 March 2005, 31 March 2004 and 31 March 2003 have been
translated at $1.89:£1, $1.83:£1 and $1.58:£1 respectively.

Exchange
rate movements had an adverse effect on the translation of US dollar denominated adjusted operating profit and operating profit for 2004/05 compared with 2003/04. If 2003/04 was
translated on a comparable basis, using the 2004/05 average exchange rate of $1.87:£1, adjusted operating profit and operating profit for 2003/04 would have been
£65 million and £45 million lower respectively. Similarly, adjusted operating profit and operating profit for 2002/03 would have been
£38 million and £29 million lower respectively if translated at the 2003/04 average exchange rate of $1.68:£1.

The
effect of movements in the US dollar exchange rate on adjusted operating profit and operating profit was 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, adjusted profit for the year and profit for the year for 2003/04 would have been
£21 million and £3 million lower respectively if translated at the 2004/05 average exchange rate of $1.87:£1. The adjusted profit for the year and
profit for the year for 2002/03, would have been £13 million and £5 million lower if translated at the 2003/04 average exchange rate of $1.68:£1.



Pension and other post-retirement benefit costs calculated in accordance with Statement of Standard Accounting Practice No. 24 (SSAP
24) were £231 million in 2004/05, with £194 million charged to operating costs and £37 million to interest expense. This was
£33 million lower than the charge in 2003/04 of £264 million. This primarily resulted from the spreading of a lower pension deficit in the Lattice Scheme offset
by the recognition of a higher pension deficit expense in respect of the National Grid Scheme.

The
Group provides additional disclosures on its pension obligations as required by Financial Reporting Standard No. 17 'Retirement benefits' (FRS 17). Substantially as a result
of the improvement in world stock markets, the Group's FRS 17 pension deficit, net of deferred tax, reduced from £2,262 million at 31 March 2003 to
£1,563 million at 31 March 2004 and to £1,363 million at 31 March 2005.



The following tables reconcile the statutory or unadjusted UK GAAP measure to the corresponding adjusted measure.

a)    Reconciliation of adjusted operating profit to total operating profit

|                            |                          | Years ended 31 March |     
|--------------------------- | ------------------------ | -------------------- | ----
|
|
|Adjusted operating profit   |                          | 2,212                |     
|Operating exceptional items |                          |                      |     
|                            | Continuing operations   |                      | (251
|                            | Discontinued operations |                      |    
|Goodwill amortisation       |                          | (109                 | )   
|                            |                          |                      |     
|Total operating profit      |                          | 1,852                |     
|                            |                          |                      |     

Adjusted
operating profit is presented on the face of the profit and loss account on page 88, under the heading 'Operating profitbefore exceptional items and goodwill
amortisation'.

b)    Reconciliation of adjusted profit before taxation to profit before taxation

|                                |                          | Years ended 31 March |     
|------------------------------- | ------------------------ | -------------------- | ----
|
|
|Adjusted profit before taxation |                          | 1,429                |     
|Operating exceptional items     |                          |                      |     
|                                | Continuing operations   |                      | (251
|                                | Discontinued operations |                      |    
|Non-operating exceptional items |                          |                      |     
|                                | Continuing operations   |                      | 70  
|                                | Discontinued operations |                      | 13  
|Exceptional finance charge      |                          |                     |     
|Goodwill amortisation           |                          | (109                 | )   
|                                |                          |                      |     
|Profit before taxation          |                          | 1,152                |     
|                                |                          |                      |     

Adjusted
profit before taxation is presented in note 11 to the accounts on page 103, under the heading 'Adjusted profit on ordinary activities before taxation'.

c)    Reconciliation of adjusted earnings to earnings (profit for the year)

|                                |                          | Years ended 31 March |     
|------------------------------- | ------------------------ | -------------------- | ----
|
|
|Adjusted earnings               |                          | 1,106                |     
|Operating exceptional items     |                          |                      |     
|                                | Continuing operations   |                      | (251
|                                | Discontinued operations |                      |    
|Non-operating exceptional items |                          |                      |     
|                                | Continuing operations   |                      | 70  
|                                | Discontinued operations |                      | 13  
|Exceptional finance charge      |                          |                     |     
|Exceptional taxation            |                          | 79                   |     
|Exceptional minority interest   |                          |                     |     
|Goodwill amortisation           |                          | (109                 | )   
|                                |                          |                      |     
|Earnings (profit for the year)  |                          | 908                  |     
|                                |                          |                      |     

Adjusted
earnings is presented on the face of the profit and loss account on page 88, under the heading 'Profit for the yearbefore exceptional items and goodwill
amortisation'.



The following table sets out the adjusted basic earnings per share and basic earnings per share for 2004/05, 2003/04 and 2002/03 and reconciles the differences
between them.

|                                  |  | Years ended 31 March |  
|--------------------------------- |  | -------------------- | -
|
|
|Adjusted basic earnings per share |  | 35.9                 |  
|Exceptional items                 |  | (2.9                 | )
|Goodwill amortisation             |  | (3.5                 | )
|                                  |  |                      |  
|Basic earnings per share          |  | 29.5                 |  
|                                  |  |                      |  

Adjusted
basic earnings per share for 2004/05 increased by 2.0 pence, primarily resulting from the reduction in interest and tax charges when compared with 2003/04.

47

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Basic
earnings per share decreased from 35.0 pence in 2003/04 to earnings of 29.5 pence per share in 2004/05, reflecting a movement from net exceptional credits in 2003/04 to net
exceptional charges in 2004/05.

LOGO

Diluted
earnings per share was 29.3 pence in 2004/05, 0.2 pence lower than basic earnings per share, compared with 34.9 pence per share in 2003/04 (0.1 pence lower) and 11.6 pence per
share in 2002/03 (0.2 pence higher). The principal reason for the dilution in 2004/05 relates to employee share option schemes.

Segmental reporting

In addition to presenting the overall results and financial position in the financial statements, we provide a breakdown of those results and balances into a
number of different business segments. The presentation of segment information is based on the management responsibilities that existed at 31 March 2005. Our principal business segments
consist of UK electricity
and gas transmission, US electricity transmission, UK gas distribution, US electricity and gas distribution, US stranded cost recoveries and Wireless infrastructure, with our other businesses being
aggregated within Other activities. Our geographical segments principally reflect the Group's activities in the UK and the US.

The
new Wireless infrastructure segment combines the acquired UK operations of Crown Castle International Corp. with our existing Gridcom businesses in the UK and the US. These had
previously been included within Other activities. We have also changed the segments in our US operations, consolidating our US gas distribution and US electricity distribution activities into a single
segment called US electricity and gas distribution, but separately identifying US stranded costs recoveries as a new segment. The Directors believe that the economic characteristics of gas
distribution and electricity distribution in the US are similar as they receive revenues under similar regulatory schemes. Moreover gas distribution is a minor activity within the context of the
combined US electricity and gas distribution activity, comprising only 14% of its turnover.

The
treatment of US stranded cost recoveries as a separate segment enhances their visibility. Stranded costs are various generation-related costs that we incurred prior to the
divestiture of generation assets beginning in the late 1990s, and we are recovering these costs unevenly over the period up to 2011.

Comparative
figures for 2003/04 and 2002/03 have been restated to reflect the changes in business segments.

A
review of the operational and financial performance of the reporting segments is contained in the Operating Review on pages 25 to 44 together with additional financial and performance
information relating to the segments, including a discussion of changes in turnover, operating costs, adjusted operating profit and operating profit.

Dividends

|                         |  | Years ended 31 March
|------------------------ |  | --------------------
|
|
|
|Interim                  |  | 8.5                 
|Final                    |  | 15.2                
|                         |  |                     
|Total ordinary dividends |  | 23.7                
|                         |  |                     
|
|Interim                  |  | 0.79                
|Final                    |  | 1.38                
|                         |  |                     
|Total ordinary dividends |  | 2.17                
|                         |  |                     

The
total ordinary dividend for 2004/05 amounted to £731 million or 23.7 pence per ordinary share. This represented an increase of 20% over the previous year's
ordinary dividend per share of 19.78 pence (£609 million), which in turn was an increase of 15% of the dividend for 2002/03 of 17.20 pence per ordinary share
(£530 million).

The
total ordinary dividend per share was covered 1.5 times by adjusted earnings per ordinary share (2003/04 covered 1.7 times; 2002/03 covered 1.6 times) and covered 1.2 times by basic
earnings per ordinary share (2003/04 covered 1.8 times; 2002/03 covered 0.7 times).

The
table above shows the ordinary dividends paid or payable by National Grid Transco for the last five financial years. These dividends do not include any associated UK tax credit in
respect of such dividends. The table excludes dividends paid or payable by Lattice Group plc prior to the Merger on 21 October 2002.

Dividends
expressed in US dollars per ADS in the table below 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 2004/05. The final ordinary dividend per ADS for 2004/05 reflects the declared US dollar amount expressed to two decimal places.

LOGO

48

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Dividend policy

As a result of the advanced process of obtaining regulatory approval relating to the sales of four of the Group's UK gas distribution networks, the Board has
recommended a 28% increase in the final dividend per share for the year ended 31 March 2005, giving rise to a 20% increase in the total dividend for the year. Going forward, the Board has
declared its dividend policy is to aim to increase dividends per ordinary share, expressed in sterling, by 7% nominal in each financial year to 31 March 2008.

Liquidity, resources and capital expenditure



Net cash inflow from operations before exceptional items was £3,103 million in 2004/05 compared with £3,058 million in
2003/04 and £3,154 million in 2002/03. The increase of £45 million from 2003/04 to 2004/05 primarily reflected reduced UK pension payments compared with 2003/04.
The reduction in 2003/04 compared with 2002/03 of £96 million reflected higher US related pension payments, adverse exchange rate variances and higher commodity costs, partially
offset by other favourable movements in working capital.

Exceptional
cash outflows, mainly relating to operating exceptional items, were £194 million, £248 million and £328 million in
2004/05, 2003/04 and 2002/03 respectively. Taking these into account, net cash inflow from operations in 2004/05 was £2,909 million compared with £2,810 million
in 2003/04 and £2,826 million in 2002/03.

Payments
to providers of finance, in the form of net interest and dividends, totalled £1,386 million in 2004/05 compared with £1,252 million in
2003/04 and £1,483 million in 2002/03. Net interest cash outflows fell from £901 million in 2002/03 to £686 million in 2003/04 and increased to
£755 million in 2004/05. The reduction in 2003/04 reflected the beneficial impact of refinancing debt, lower short-term interest rates and the weaker US dollar. The
increase in 2004/05 compared with 2003/04 related primarily to the refinancing of debt during the year.

Net
corporate tax payments amounted to £150 million in 2004/05 compared with £18 million in 2003/04 and £112 million in 2002/03.

Net
corporate tax payments in 2004/05 were higher than in 2003/04, primarily because tax payments in 2003/04 were reduced as a result of the cessation of trade of a subsidiary company,
186k Limited, which reduced corporation tax payments and a repayment of corporate tax arising from the settlement of tax liabilities of around £44 million. For these reasons
corporate tax payments in 2003/04 were lower than those in 2002/03.

Purchases
of tangible and intangible fixed assets net of disposal proceeds absorbed cash of £1,262 million compared with £1,254 million in 2003/04
and £1,407 million in 2002/03.

The
increase of £8 million in purchases of tangible and intangible fixed assets net of disposal proceeds from 2003/04 to 2004/05 reflected a reduction in cash outflows
on capital expenditure of £46 million, offset by a £54 million reduction in cash proceeds from the sale of fixed assets, primarily property disposals. The
reduction in capital expenditure related mainly to the UK electricity and gas transmission segment offset by an increase in capital expenditure on the Basslink interconnector.

The
reduction of £153 million in purchases of tangible and intangible fixed assets net of disposal proceeds from 2002/03 to 2003/04 reflected lower purchases of fixed
assets amounting to £118 million, primarily related to reduced capital expenditure by UK gas distribution and discontinued operations. This reduction was partially offset by
increased purchases in relation to the construction of the Basslink interconnector and Isle of Grain LNG projects. In addition, there was an increase in disposal proceeds of
£35 million, mainly linked to the sale of property. Discontinued operations capital expenditure for 2002/03 related primarily to 186k Limited and The Leasing Group plc, which were
disposed of during 2002/03.

Cash
outflows in 2004/05 relating to the acquisition of Group undertakings amounted to £1,151 million before taking account of cash acquired of
£29 million, mainly relating to the acquisition of the UK operations of Crown Castle International Corp. There were cash outflows of £16 million to acquire
investments compared with £26 million and £165 million in 2003/04 and 2002/03 respectively.

Cash
outflows in 2002/03 included £153 million related to expected contractual funding obligations in respect of joint ventures.

Cash
inflows from the disposal of investments in 2004/05 amounted to £8 million compared with £33 million in 2003/04 and
£328 million in 2002/03. The 2002/03 inflow related 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 plc.

During
2003/04, the Group terminated some cross currency swaps, resulting in a cash inflow of £148 million. As a result of this transaction, the underlying borrowing
which had been hedged by these swaps was translated to sterling, at the prevailing spot rate, resulting in an increase in net sterling borrowing of £140 million. Consequently, the
impact of the termination of cross currency swaps on net debt was insignificant.

During
2004/05 and 2003/04 we received cash of £13 million and £38 million respectively from the issue of ordinary share capital. During 2002/03,
the Group purchased for cancellation 24.2 million shares resulting in a cash outflow of £97 million.



Equity shareholders' funds at 31 March 2004 and 31 March 2003 have been restated from the amounts reported in last year's Group
accounts as a consequence of implementing FRS 20 'Share-based Payment'. Equity shareholders' funds at 31 March 2004 of £1,213 million were restated to
£1,221 million and at 31 March 2003 were restated from £1,113 million to £1,121 million.

Equity
shareholders' funds rose from £1,121 million at 31 March 2003 to £1,221 million at 31 March 2004 and to
£1,359 million at 31 March 2005. These increases were mainly explained by the retained profit for the years to 31 March 2005 and 31 March 2004 of
£177 million and £465 million respectively, partially offset by net foreign exchange adjustments amounting to £73 million and
£417 million respectively, primarily related to the retranslation of US dollar denominated net assets and associated hedges.

49

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Capital expenditure in 2004/05 was £1,431 million compared with £1,481 million in 2003/04 and
£1,520 million in 2002/03. The decrease in 2004/05 compared with 2003/04 of £50 million reflected a reduction in capital expenditure in the UK electricity and gas
transmission segment of £62 million and a reduction of £21 million within the UK gas distribution segment.

The
total level of capital expenditure for continuing operations of £1,481 million in 2003/04 was higher than capital expenditure within continuing operations for
2002/03 by £56 million. This reflected higher capital expenditure: in constructing the Basslink interconnector and the Isle of Grain LNG import terminal; within US electricity and
gas distribution; and within UK electricity and gas transmission. The higher capital expenditure was partially offset by a reduction in capital expenditure within UK gas distribution.

The
Operating Review on pages 25 to 44 contains a discussion of any significant variance between years relating to capital expenditure by reporting segment and provides details of any
material capital expenditure programmes.



Net debt increased by £917 million from £12,632 million at 31 March 2004 to £13,549 million
at 31 March 2005, primarily as a result of increased borrowings following the acquisition of the UK operations of Crown Castle International Corp. for a net cash outflow of
£1,109 million, partially offset by exchange movements of £112 million and operating cash flows after payments for interest, tax and capital expenditure.

LOGO

The
composition of net debt at 31 March 2005 is shown in note 27 to the accounts on page 118.

Gearing
at 31 March 2005 and 31 March 2004, calculated as net debt at that date expressed as a percentage of net debt plus net assets shown in the balance sheet, amounted
to 91%. By comparison, the gearing ratio, adjusted for the inclusion of UK regulated businesses at their estimated regulatory asset values (adjusted gearing ratio), amounted to 56% at 31
March 2005 compared with 55% at 31 March 2004.

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

|Adjustment to net assets                                 |  | 2005   |  | 2004
(restated)
|-------------------------------------------------------- |  | ------ |  | ---------------
|
|Net assets per balance sheet                             |  | 1,391  |  | 1,271          
|Adjustment for increase in UK business regulatory values |  | 9,252  |  | 8,900          
|                                                         |  |        |  |                
|Adjusted net assets                                      |  | 10,643 |  | 10,171         
|                                                         |  |        |  |                

As
a registered holding company, under the US Public Utility Holding Company Act 1935, we operate under certain regulatory restrictions applied by the SEC. As a result, the scope of our
financing activity is limited to specific areas that are authorised from time to time, such authorisation being currently set sufficient to cover all normal requirements. In addition, we are required
to maintain our consolidated common stock equity as a percentage of our total consolidated capitalisation (defined in general as common stock equity plus preferred stock plus gross debt) measured on a
US GAAP book value basis at 30% or above. At 31 March 2005, this ratio stood at 41.8% (31 March 2004: 41.3%).



Both short- and long-term cash flow forecasts are produced frequently to assist in identifying the liquidity requirements of the Group.

These
forecasts 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.



The Group has both committed and uncommitted facilities that are available for general corporate purposes.

At
31 March 2005, National Grid Transco had a US$3.0 billion US Commercial Paper Programme (US$2.7 billion of which was unutilised); National Grid Company plc had a
US$1.0 billion US Commercial Paper Programme (unutilised) and a US$1.0 billion Euro Commercial Paper Programme (US$0.6 billion unutilised); and National Grid Transco and National
Grid Company plc had a joint Euro Medium Term Note Programme of €6 billion (€2.5 billion unissued). Transco plc had a US$2.5 billion US Commercial
Paper Programme (US$1.5 billion unutilised) and a US$1.25 billion Euro Commercial Paper Programme (US$0.1 billion unutilised); and Transco plc and Transco Holdings plc had a joint
Euro Medium Term Note Programme of €7.0 billion (€3.3 billion unissued). At 31 March 2005, the Group in the UK had
£1.98 billion and $1.55 billion of short-term (364 day) committed facilities (undrawn) and £1.0 billion of uncommitted borrowing
facilities (undrawn). The short-term committed facilities include an option to extend these facilities.

National
Grid USA companies had committed facilities of $680 million, all of which were undrawn at 31 March 2005. These facilities provide liquidity support for New England
Power Company's tax-exempt debt programme.

In
addition to the above facilities, at 31 March 2005, Basslink had a A$630 million loan facility (A$140 million undrawn).

Note 21
to the accounts on page 111 shows the maturity profile of all undrawn committed borrowing facilities of the Group in sterling at 31 March 2005.

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 the funding for the Group and manages interest rate and foreign exchange rate risk.

50

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The
Group has separate financing programmes for each of the main Group companies. The Finance Committee of the Board and the finance committee or board of the appropriate Group
undertaking approve all funding programmes.

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 on page 52.

As
a result of the Public Utilities Holding Companies Act 1935 and other US regulatory limits applicable to certain US companies in the Group, the freedom of these companies to provide
financing among themselves is restricted. Nevertheless, for those Group companies external financings or other arrangements are in place to ensure that they have adequate access to
short-term liquidity.

The
Group had borrowings outstanding at 31 March 2005 amounting to £14,219 million (31 March 2004: £13,248 million). The table
in note 20 on page 108 shows the expected maturity of these borrowings.

The
Group has in place appropriate committed facilities, and believes that the maturing amounts in respect of its contractual obligations as shown on page 53 can be met from these
facilities, operating cash flows and other refinancings that it reasonably expects to be able to secure in the future. 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 that are invested with approved banks and counterparties. Details
relating to the Group's cash, short-term investments and other financial assets at 31 March 2005 are shown in note 21 to the accounts on page 110.

We
have a credit rating of Baa1/A-, provided by Moody's and S&P respectively. In addition, certain Group undertakings are also credit rated. National Grid Company plc has a
credit rating of A2/A provided by Moody's and S&P respectively, whereas Transco plc has a credit rating of A2/A/A and Transco Holdings plc has been separately rated A3/A-/A- by
Moody's, S&P and Fitch respectively.

It
is a condition of the regulatory ring-fences around National Grid Company plc, Transco plc and Transco Holdings plc that they use reasonable endeavours to maintain an
investment grade credit rating. It is also an SEC requirement that we maintain an investment grade credit rating. At these ratings, the principal borrowing entities of the Group should have good
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 review and agree policies for managing each risk and they are
summarised below.



The Board controls refinancing risk mainly 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.

Within
these limits we have increased the amount of short-term borrowings at 31 March 2005 in anticipation of repaying an expected £2.3 billion in
debt following completion of the planned sales of four regional gas distribution networks expected to occur on 1 June 2005.



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 (being 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 plc and Transco Holdings plc are index-linked, that is their cost is linked to changes in the UK Retail Price Index (RPI). The Group believes these bonds provide a good
hedge for revenues that are also RPI-linked under the price control formulae.

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.



The Group has a policy of hedging certain contractually committed foreign exchange transactions over a prescribed minimum size. It covers a minimum of 75% of such
transactions expected to occur up to six months in advance and of 50% of transactions six to twelve months 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 risks, 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 and cash flows. This translation has no impact on the currency cash flows 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. Cash flows may be hedged through
matching with interest flows or by forward foreign exchange deals and options.

The
currency and average interest rate compositions of the Group's financial liabilities and assets are shown in note 21 to the accounts on pages 109 and 110 respectively.

51

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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.



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
financial instruments (derivatives) to manage exposures of this type and 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. In addition, the
Group enters into bought and written option contracts on interest rate swaps. These contracts are known as swaptions. The Group also 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.

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.

More
details on derivative financial intruments are provided in note 21 to the accounts on page 110.



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.
The market yield curve for each currency is obtained from the Reuters or Bloomberg screen notes for interest and foreign exchange rates. In the case of instruments with optionality, the Black's
variation of the Black-Scholes model is used to calculate fair value.

The
valuation techniques described above for interest rate swaps and currency swaps are a standard market methodology. These techniques do not take account of the credit quality of
either party but this is not considered to be a significant factor unless there is a material deterioration in the credit quality of either party.

In
relation to swaptions, the Group only uses swaptions for hedging purposes with a European style exercise. As a consequence, the Black's variation of the Black-Scholes model is
considered to be sufficiently accurate for the purpose of providing fair value information in relation to these types of swaptions. More sophisticated valuation models exist but the Group does not
believe it is necessary to employ these models, given the extent of its activities in this area.

The
valuations obtained using the techniques described above are used for the purpose of disclosure of fair value information under UK GAAP as shown in note 21 to the accounts on
page 110 and for recognition, where appropriate, under US GAAP as shown in notes 32 and 33 to the accounts commencing on page 121.

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 2005, the potential change in the fair value of the aggregation of long-term debt and derivative instruments, assuming an increase or decrease of 10% in
the level of interest rates and exchange rates, was £151 million and £159 million for interest rates and £386 million and
£472 million for exchange rates respectively.

Commodity price hedging

In the normal course of business, the Group is party to commodity derivatives. These have included indexed swap contracts, gas futures, electricity swaps, gas
options, gas forwards and gas basis 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 transporter licences 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, Niagara Mohawk replaced existing power purchase agreements in 1998 with indexed swap contracts that expire
in June 2008. 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 2005, the Group had liabilities of £327 million (31 March 2004: £391 million) in respect of the above indexed swap
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 £27 million movement in the value of the
index-linked swap contracts assuming a US dollar to sterling exchange rate of $1.89: £1. There would be no impact on earnings, as there would be a corresponding movement in the book value
of the related regulatory asset.

The
fair value of the index-linked swap contracts is based on the difference between projected future market prices and projected contract prices as applied to the notional quantities
stated in the contracts and discounted using a US Treasury Bill rate curve to the current present value.

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. As at 31
March 2005, the last options to which Niagara Mohawk was counterparty had expired and there were no open option positions outstanding at this date. Niagara Mohawk is not currently using options
to hedge its gas commodity. Gains relating to gas futures as at 31 March 2005 were not material and, as a result of regulatory treatments, have no impact on earnings.

52

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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. 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 2005, deferred gains on these contracts were immaterial in the context of the Group as a whole.

In
our UK gas transmission operation we are obliged to offer for sale through a series of auctions (both short- and long-term) a predetermined quantity of entry capacity for
every day in the year at predefined 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 gas 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.

Our
UK electricity transmission operations have also entered into electricity options, pursuant to the requirement to stabilise the electricity market in Great Britain through the
operation of the British Electricity Trading and Transmission Arrangements (BETTA). 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 BETTA
role.

Commitments and contingencies

The Group's commitments and contingencies outstanding at 31 March are summarised in the table below:

|Commitments and contingencies                          |  | 2005  |  | 2004 
|------------------------------------------------------ |  | ----- |  | -----
|
|Future capital expenditure contracted but not provided |  | 927   |  | 448  
|Total operating lease commitments                      |  | 930   |  | 478  
|Power commitments                                      |  | 4,915 |  | 5,555
|Other commitments, contingencies and guarantees        |  | 349   |  | 263  

Information
regarding the Group's obligations under pension and other post-retirement benefits is given below under the heading 'Retirement arrangements'.

The
power commitments shown in the commitments and contingencies table above reflect the Group's obligation to purchase energy under longterm contracts. To the extent that power
commitment obligations exceed the above market values that are attributable to these contracts, the net present value of these amounts is reflected in creditors and is not shown in this table. At 31
March 2005, the component of power commitments representing the above market value amounts included, within creditors, amounts falling due within one year and amounts falling due after more
than one year of £54 million (2004: £57 million) and £90 million (2004: £149 million) respectively.

The
Group proposes to meet all of its commitments from operating cash flows, existing credit facilities, future facilities and other financing that it reasonably expects to be able to
secure in the future.



The table of contractual obligations shown opposite analyses the long-term contractual obligations of the Group according to its payment period.

Purchase
obligations reflect the Group's commitments under power commitments (excluding the above market amounts) and future capital expenditure contracted for but not provided. The
other long-term liabilities reflected in the balance sheet at 31 March 2005 comprise the net present value of purchase power obligations in respect of above market amounts;
liability for index-linked swap contracts; and other creditors that represent contractual obligations falling due after more than one year.

|Contractual obligations                                    |  | Total  |  | Less
than
1 year |  | 1-3
years |  | 3-5
years |  | More
than
5 years
|---------------------------------------------------------- |  | ------ |  | ---------------- |  | --------- |  | --------- |  | -----------------
|Total borrowings                                           |  | 14,219 |  | 3,256            |  | 2,471     |  | 2,506     |  | 5,986            
|Operating lease commitments                                |  | 930    |  | 99               |  | 174       |  | 156       |  | 501              
|Purchase obligations                                       |  | 5,842  |  | 1,656            |  | 1,534     |  | 1,030     |  | 1,622            
|Other long-term liabilities reflected in the balance sheet |  | 616    |  | 126              |  | 318       |  | 126       |  | 46               
|                                                           |  |        |  |                  |  |           |  |           |  |                  
|                                                           |  | 21,607 |  | 5,137            |  | 4,497     |  | 3,818     |  | 8,155            
|                                                           |  |        |  |                  |  |           |  |           |  |                  



With the exception of derivative financial instruments used for the purpose of managing risks associated with fluctuations in interest rates, exchange rates and
commodity prices, described on pages 51 to 53, the Group does not have any other off balance sheet arrangements that have or are likely to have any current or future effect on the financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material.

Note 21
to the accounts on page 110 provides fair value information in relation to all off balance sheet derivative financial instruments used by the Group.



The Group operates three major UK occupational pension schemes the National Grid Company Group of the Electricity Supply Pension Scheme (the National
Grid Scheme), the Lattice Group Pension Scheme (the Lattice Scheme) and the Crown Castle UK Pension Scheme (the Crown Castle Scheme). The National Grid Scheme is a defined benefit pension scheme. The
Lattice Scheme has a defined benefit section that is effectively closed to new entrants and a defined contribution section. The Crown Castle Scheme is a defined benefit pension scheme that is closed
to new entrants. There are no current plans to merge the schemes.

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

Actuarial
valuations of the Lattice Scheme and the National Grid Scheme were carried out as at 31 March 2003 and 31 March 2004 respectively. The last actuarial valuation of
the Crown Castle Scheme was as at 31 December 2002.

In
respect of US-based pension and other post-retirement schemes, the latest full actuarial valuations were carried out at 1 April 2004. These valuations
were updated using assumptions and market values at 31 March 2005.

The
actuarial valuation of the Lattice Scheme as at 31 March 2003 was completed during the year ended 31 March 2004. This revealed that the pre-tax deficit was
£879 million (£615 million net of tax) in the defined benefit section on the basis of the funding assumptions adopted by the actuary.

53

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An
assessment of the Lattice Scheme was conducted as at 31 March 2004. This assessment indicated that the deficit has decreased in the defined benefit section on the basis of the
funding assumptions adopted by the actuary. The next full valuation will be conducted at 31 March 2006.

It
has been agreed that no funding of the deficit identified in the 2003 actuarial valuation will need to be provided to the scheme until the outcome an interim actuarial assessment as
at 31 March 2007 is known. At this point, the Group will pay
the gross amount of any deficit up to a maximum amount of £520 million (£364 million net of tax) into the scheme. Until the 31 March 2007 actuarial
valuation has been completed, the Group has arranged for banks to provide the trustees of the Lattice Scheme with letters of credit. The main conditions under which these letters of credit could be
drawn relate to events which would imperil the interests of the scheme, such as Transco plc, a Group undertaking, becoming insolvent or the Group failing to make agreed payments into the fund.
Employer cash contributions for the ongoing cost of the Lattice Scheme are currently being made at a rate of 23.3% of pensionable payroll for the year to 31 March 2006.

The
actuarial valuation of the National Grid Scheme at 31 March 2004 was completed during the year ended 31 March 2005 and revealed a pre-tax deficit of
£272 million (£190 million net of tax) on the basis of the funding assumptions adopted by the actuary.

It
has been agreed that no funding of the deficit identified in the 2004 actuarial valuation will need to be provided to the scheme until the outcome of the actuarial valuation as at 31
March 2007 is known. At this point, the Group will pay the gross amount of any deficit up to a maximum amount of £68 million (£48 million net of tax) into
the scheme. Until the 31 March 2007 actuarial valuation has been completed, the Group has arranged for banks to provide the trustees of the National Grid Scheme with letters of credit. The main
conditions under which these letters of credit could be drawn relate to events which would imperil the interests of the scheme, such as National Grid Company plc becoming insolvent or the Group
failing to make agreed payments into the fund. Employer cash contributions for the ongoing cost of the National Grid Scheme are currently being made at a rate of 13.1% of pensionable payroll.

The
actuarial valuation of the Crown Castle Scheme as at 31 December 2002 was completed during the year ended 31 December 2003. This revealed that the pre-tax
deficit was £3 million (£2 million net of tax) on the basis of the funding assumptions adopted by the actuary. The next valuation will be conducted at 31
December 2005. Employer cash contributions for the ongoing cost of the Crown Castle Scheme are currently being made at a rate of 18.4% of pensionable payroll.

There
are no set employer contribution rates for the US schemes.



Our subsidiary Transco plc has been charged with breaches of the Health and Safety at Work Act 1974 following fatal accidents at Larkhall, Lanarkshire, in
December 1999 and at Cavendish Mill, Lancashire, in November 2001. In each case the maximum penalty for such breaches is an unlimited fine.

Further
details of litigation and other material disputes are contained within note 29 to the accounts on page 120.

Critical accounting policies

The accounts are prepared using the Group's accounting policies as described on pages 85 to 87, in accordance with UK GAAP.

UK
GAAP differs in certain significant respects from US GAAP. Information relating to the nature and effect of such differences is summarised in note 32 to the accounts
'Differences between UK and US accounting principles' on pages 121 to 129.

The
application of accounting principles, requires us to make estimates, judgements and assumptions that may affect the reported amounts of assets, liabilities, revenue and expenses and
the disclosure of contingent assets and liabilities in the accounts. On an ongoing basis, we evaluate our estimates using historical experience, consultation with experts and other methods that we
consider reasonable in the particular circumstances to ensure compliance with UK GAAP and with US GAAP. Actual results may differ significantly from our estimates, the effect of which is recognised in
the period in which the facts that give rise to the revision become known.

Certain
of the Group's UK GAAP accounting policies have been identified as critical accounting policies, as these policies involve particularly complex or subjective decisions or
assessments. The discussion of critical accounting policies below should be read in conjunction with the description of the Group's accounting policies set out on pages 85 to 87. Where critical
accounting policies adopted under US GAAP are significantly different from the ones adopted under UK GAAP, additional information is included in the US GAAP section on pages 57 to 59.



Determining the particular asset economic lives for goodwill and tangible fixed assets involves the exercise of judgement and can materially affect the reported
amounts for goodwill amortisation and depreciation of tangible fixed assets.

Under
UK GAAP, goodwill is principally being amortised over 20 year periods, while the economic lives of tangible fixed assets are disclosed in 'Accounting policiese)
Tangible fixed assets and depreciation' on page 85. For the year ended 31 March 2005, the Group profit and loss account reflected goodwill amortisation and depreciation of tangible fixed assets
amounting to £109 million and £860 million (2003/04: £99 million and £866 million) respectively.

In
businesses such as ours, which are capital intensive in nature and have long tangible fixed asset lives, goodwill is similarly expected to have a long asset life. Therefore, goodwill
is amortised over a long life, typically 20 years. If goodwill were amortised over 10 or 30 years, goodwill amortisation would increase or decrease by approximately
£110 million or £40 million per annum respectively. This sensitivity assumes the same average US dollar to sterling exchange rate as applied in 2004/05.



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.

54

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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. Such circumstances or
events could 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, is compared with 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 groups of 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 and the selection of appropriate discount rates relating to particular assets or groups of
assets involve the exercise of a significant amount of judgement.

At
31 March 2005, we carried out reviews for impairments in respect of goodwill in general, and other assets relating to interconnectors, LNG, and certain telecom activities. We
determined that an impairment of £2 million to goodwill and £2 million to tangible fixed assets relating to a telecoms activity was required but we did not
recognise any other impairments.

During
the year ended 31 March 2004, we carried out reviews for impairments in respect of goodwill in general, and other assets attributable to Advantica, telecoms, metering,
interconnectors and LNG. We determined that the carrying value of goodwill and tangible fixed assets related to Advantica and telecoms were impaired based on estimates of future operating results of
the respective asset groups. As a result, we recognised within restructuring costs an impairment charge of approximately £20 million.



This expenditure represents the cost of planned maintenance on gas mains and services assets, the vast majority of which relates 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, as such expenditure
does not enhance the economic 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 2005 was £474 million (2003/04:
£388 million). This accounting policy materially affects only the results of the UK gas distribution segment.



These 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. SFAS 71 provides that certain costs may be deferred on the balance sheet (referred to as 'regulatory assets') if it is probable that the costs will be recovered through
future increases in regulated revenue rates. An entity applying SFAS 71 does not need absolute assurance prior to capitalising a cost, only reasonable assurance. If the principles of SFAS 71 were not
applicable, it is likely that this would result in the full or partial non-recognition of these regulatory 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; furthermore only those regulatory assets arising as a result of a past transaction or event are recorded under UK GAAP. Regulatory assets are
only recognised in respect of US activities and primarily relate to the US electricity and gas distribution and US stranded cost segments.

The
total carrying value of regulatory assets, under UK GAAP, at 31 March 2005 amounted to £2,771 million (£3,111 million at 31
March 2004).



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.

In
our US electricity transmission and US electricity and gas distribution segments, estimates of energy supplied are based on a combination of known energy purchases and the historical
pattern of billings information. Our estimate of unbilled revenues for these segments amounted to £97 million, 3% of total annual segmental revenues, at 31 March 2005
(£85 million, 2%, at 31 March 2004).

In
our UK electricity and gas transmission and UK gas distribution segments, turnover in respect of transportation services supplied includes an estimate for transportation services
supplied but not yet invoiced, which substantially represents the transportation services supplied in respect of the last month of the year. The estimate of unbilled turnover is determined as the
total of commodity services supplied, less amounts already billed during the year. Total commodity services supplied is calculated from the actual volume of gas transported at estimated weighted
average prices, based on recent history and the value of contracted capacity services supplied. Our estimate of unbilled revenues at 31 March 2005 for these segments amounted to
£276 million, 7% of total annual segmental revenues (£287 million, 7%, at 31 March 2004).

Under
UK GAAP, the Group is not permitted to recognise 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.

55

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The Group operates a number of defined benefit schemes for its employees. In addition, other post-retirement benefits are provided to employees within
the Group's US businesses. 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 Statement of Standard Accounting Practice No. 24 (SSAP 24).

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'. Note 7 to the accounts on pages 97 to 99 describes the principal discount rate, earnings increase, and pension/healthcare payment
increase assumptions that have been used to determine the pension and postretirement 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. The assumptions adopted are based on prior experience, market conditions
and the advice of plan actuaries.

Each
year, we choose a discount rate for each scheme which reflects yields on high-quality fixed-income investments, which may be increased for SSAP 24 purposes to allow for
higher returns expected over the longer term from the schemes' equity holdings. The pension liability and future pension expense both increase as the discount rate is reduced.

At
31 March 2005, the Group's prepaid pension asset was £38 million, compared with £19 million at the end of 2003/04 and the Group's pension
and other post-retirement benefits provision was £512 million, compared with £464 million at the end of 2003/04.

For
the year ended 31 March 2005, the Group recognised a charge excluding exceptional items for pensions and other post-retirement benefits of
£231 million (before tax), lower than the £264 million net charge in 2003/04, both before amounts capitalised and amounts deferred as regulatory assets.

The
Group has also provided disclosures in accordance with FRS 17 indicating the significantly different results and balance sheet position that would have resulted had FRS 17 been
adopted instead of SSAP 24. These disclosures are in note 7 to the accounts on pages 99 to 101. Applying FRS 17 would have reduced the net charge, excluding exceptional items for 'pensions and
other post-retirement benefits' by £83 million before tax and reduced net assets by £1,107 million.



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 and are discussed earlier in this Financial Review.



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.

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. Index-linked swap contracts are carried in
the UK GAAP balance sheet within creditors, with a total liability amounting to £327 million at 31 March 2005 (£391 million at 31 March 2004). The
best estimate of this liability was the estimated market value of the swaps at the balance sheet date determined on the basis of the technique discussed on page 52.

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 109 to 111 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.



Provision is made for liabilities arising from environmental restoration, remediation and decommissioning costs relating to various sites owned by the Group, as
described in note 22 to the accounts on pages 111 and 112. The calculations of these provisions are 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 and decommissioning liabilities are based on management estimates supported by the use of
external consultants.

At
31 March 2005, we have recorded provisions for environmental liabilities and decommissioning costs totalling £596 million. A range of possible recorded
provision balances was possible if different assumptions had been used. For example, a 10% increase in the projected net cash outflows would increase the total environmental and decommissioning
provision balance by approximately £60 million. The provisions can also be affected by the timing of cash flows and from changes in the discount rates used. A 1% decrease in the
discount rates used to calculate the provisions would increase the total balance by approximately £36 million.



The Group's tax charge is based on the profit for the year and tax rates in effect. The determination of appropriate provisions for taxation requires us to take
into account anticipated decisions of tax authorities and estimate our ability to utilise tax benefits through future earnings and tax planning. Our estimates and assumptions may differ from future
events.

56

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Related party transactions

The Group provides services to and receives services from related parties. In the year ended 31 March 2005, the Group charged
£4 million and received charges of £24 million from its related parties, other than Directors. Further information relating to related party transactions is
contained within note 28 to the accounts on page 119.

Changes and developments

Significant changes and developments that have occurred since 31 March 2005 have been noted in this Annual Report and Accounts 2004/05.

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 reporting



The accounts have been prepared in accordance with UK GAAP, which differs in certain significant respects from US GAAP. A reconciliation of net income and equity
shareholders' funds from UK GAAP to US GAAP, together with a summary of adjustments, is provided in note 32 to the accounts on pages 121 to 129. In addition, condensed income statements,
balance sheets and segmental information prepared in accordance with US GAAP are provided in note 33 to the accounts on pages 130 to 135.



Net income from continuing operations for 2004/05 under US GAAP was £1,304 million (2003/04: £998 million; 2002/03:
£790 million). The US GAAP results for 2004/05, 2003/04 and 2002/03 included losses relating to discontinued operations amounting to £nil; £nil; and
£39 million respectively. Consequently, net income for 2004/05 under US GAAP was £1,304 million (2003/04: £998 million; 2002/03:
£751 million). This compared with the profit for the year under UK GAAP for 2004/05, 2003/04 and 2002/03 of £908 million; £1,074 million; and
£351 million respectively.

Equity
shareholders' funds under US GAAP at 31 March 2005 were £10,591 million (2004: £9,821 million) compared with
£1,359 million (2004: £1,221 million (restated)) 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
Operating Review on pages 25 to 44 and the rest of this Financial Review.

Note 33
to the accounts on pages 130 to 135 shows condensed financial statements for 2004/05, 2003/04 and 2002/03 under US GAAP.

The
principal adjustments from net income and equity shareholders' funds under UK GAAP to their equivalents under US GAAP relate to adjustments arising from differences in accounting for
the acquisition of the UK operations of Crown Castle International Corp. during 2004/05; the treatment of the business combination with Lattice Group plc as an acquisition instead of as a merger; the
capitalisation of replacement expenditure; the recording of derivative financial instruments at their fair value in the balance sheet; and the non-amortisation of goodwill. The other
adjustments between UK GAAP and US GAAP are explained in more detail in note 32 to the accounts on pages 121 to 129.

Some
of the adjustments included within the US GAAP summary income statements and balance sheet substantially reflect reclassifications of items that are presented 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 of Group undertakings 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 loss from discontinued operations'. In respect of the discontinued activities of joint ventures, under UK GAAP these
activities are also classified as part of total operating profit, whereas under US GAAP these amounts are accounted for within 'interest in equity accounted affiliates'. The share of equity
affiliates' operating profit/(loss), net interest, taxation, and minority interests are disclosed separately under UK GAAP, whereas, under US GAAP, all these amounts are accounted for within 'interest
in equity accounted affiliates'.

At
31 March 2005, the planned sales of four of our regional gas distribution networks did not meet the criteria to be classified as discontinued under UK GAAP, US GAAP or IFRS.
Since 31 March 2005, these criteria have been met for US GAAP and IFRS purposes, and so the Group will reclassify the assets, liabilities and results of these operations as discontinued
in preparing the interim results for the six months ending 30 September 2005 and the full year results for the year ending 31 March 2006.

Under
UK GAAP, the planned sales are not presented as discontinued as the sales had not completed at the date the financial statements were approved. However, additional UK GAAP
information has been included in note 2 to the accounts on pages 92 to 94 and additional US GAAP information has been included in note 32 on page 128.



Acquisition accounting

Under US GAAP, the Group applies purchase accounting to its business combinations, which is different from acquisition accounting under UK GAAP in certain
respects. The most significant areas of difference are in the recognition of separately identifiable intangible assets and in measuring the fair value of acquired assets and liabilities assumed. This
affects the amount of goodwill recognised under US GAAP as compared with UK GAAP. In the acquisition of the UK operations of Crown Castle International Corp. during 2004/05, the Group recognised
£509 million of goodwill under US GAAP, compared with £622 million recognised under UK GAAP. The difference arises primarily as a result of
£220 million of separately identifiable intangibles being recognised under US GAAP, partially offset by £96 million of deferred tax on that and other fair value
adjustments. Furthermore, goodwill is not amortised under US GAAP as it is under UK GAAP but is measured annually for impairment.

Merger with Lattice Group plc

The application of UK GAAP to the business combination of National Grid Group plc and Lattice Group plc in 2002/03 resulted in the transaction being treated as a
merger, and so the accounts present the results of the Group on a combined basis both before and after the merger, using common accounting policies.

Under
US GAAP, purchase accounting was applied to this business combination, which is a fundamentally different method of accounting from the merger accounting applied under UK GAAP.
Under US GAAP, National Grid Group plc (now National Grid Transco) is viewed as the acquirer of Lattice Group plc.

57

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The
results of the Group under US GAAP only include the results of Lattice Group plc from 21 October 2002, the date of the business combination, and not prior to this date.

In
an acquisition under US GAAP, the assets and liabilities of the acquired business are measured at fair value as at the date of the acquisition and goodwill is recognised for the
amount of the purchase price in excess of the fair value of the net assets acquired and liabilities assumed. The assets and liabilities of Lattice Group plc were measured and recorded at their fair
values in the consolidated accounts of National Grid Group plc at the time of the business combination. This resulted in £3,824 million of goodwill being recognised under US GAAP.

The
most significant adjustment in establishing the fair value of the net assets acquired was attributable to property, plant and equipment. The most significant element, accounting for
94% of the total adjustment to property, plant and equipment, was in relation to Transco plc. Management determined that its knowledge of the UK regulatory environment within which Transco plc
operates is superior to that of external specialists and therefore it was better qualified to estimate the relevant fair values. Thus, no external specialists were used and the adjustments were
determined by management.

The
treatment of this business combination as an acquisition under US GAAP has significantly affected the UK electricity and gas transmission segment, UK gas distribution segment, and
other activities, as compared with the treatment under UK GAAP. The remaining segments are unaffected by differences between merger and acquisition accounting principles. Consequently, this has
impacted on the results of the segments as follows:



Under UK GAAP, the results of Citelec, an equity accounted affiliate, were accounted for under hyper-inflationary accounting rules. Under US GAAP, the results of
Citelec are not accounted for under hyper-inflationary accounting rules, but this did not give rise to any significant accounting difference compared with UK GAAP, as Citelec had already been impaired
under US GAAP and was carried at £nil.



Under US GAAP, all derivatives are recorded at fair value except those that qualify for exemptions, such as normal purchase rules for commodity contracts. Changes
in fair values of derivatives not designated as a hedge under US GAAP are recorded through earnings. The Group applies a hedging strategy which meets UK GAAP requirements, but does not apply US GAAP
hedge accounting in most cases. This results in a much greater volatility in the US GAAP income statements.



The Group accounts for its pension schemes under US GAAP in accordance with FAS 87 'Employers' Accounting for Pensions'. Under FAS 87, when pension scheme assets
are less than the accumulated benefit obligation of that scheme, a minimum pension liability is recognised.



No additional impairments to goodwill or other long-lived assets were identified during 2004/05. Following a review of goodwill and other longlived
assets for impairment during 2003/04, evidence of impairment of goodwill and other intangible assets relating to Advantica was revealed. This resulted in an additional impairment charge relating to
these assets being incurred under US GAAP amounting to £31 million. These charges are recorded in respect of Other activities.



During 2004/05, the Group adopted the following US GAAP accounting standards.

FIN 46(R)

FIN 46(R) requires the primary beneficiary of a variable interest entity for which control is achieved through means other than through voting rights to
consolidate that variable interest entity. The Group adopted FIN 46(R) for the financial year beginning 1 April 2004. The Group has completed an assessment of this standard and determined that
it did not have a material impact on the Group's financial statements.

FSP 106-2

Financial Accounting Standards Board Staff Bulletin 106-2 'Accounting and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003' (FSP 106-2), was issued in May 2004, superseding FSP 106-1 of the same title issued in January 2004. This pronouncement
relates to legislation which introduced a US federal subsidy to sponsors of certain retiree health care benefit plans. The Group has concluded that, if the provisions are finalised in their current
form, the benefits provided under the Group's plan will be 'actuarially equivalent' to Medicare Part D as required by the legislation. The Group adopted FSP 106-2 prospectively in
the quarter ended 30 September 2004, thereby reducing its accumulated benefit obligation by £43 million and realising a related £4 million tax benefit. Any
decrease in the US GAAP future net periodic post-retirement benefit expense that results from this legislation will be deferred and credited to customers.

EITF 03-1

In March 2004, the US Emerging Issues Task Force reached a consensus on assessing impairment losses and issued EITF Issue 03-1 'The Meaning of
Other-Than-Temporary Impairment and Its Application for Certain Investments', which provides new guidance in this area and prescribes a three step impairment model. In
September 2004, FASB Staff Position EITF 03-1-1 delayed the effective dates of the measurement and recognition guidance in paragraphs 10-20 of EITF
03-1. The disclosure requirements of EITF 03-1, remain effective and have been adopted by the Group; however, they did not have a significant impact on the Group.

58

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SFAS 123(R)

Financial Accounting Standards Board Statement No. 123 (revised 2004) 'Share-Based Payment' (SFAS 123(R)) was issued in December 2004. This
is a revision of SFAS 123 'Accounting for Stock-Based Compensation'. SFAS 123(R) supersedes APB Opinion No. 25 'Accounting for Stock Issued to Employees', and amends FASB
Statement No. 95 'Statement of Cash Flows'. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all
share-based payments to employees, including grants of employee stock options, to be recognised in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
The Group expects to adopt SFAS 123(R) as of 1 April 2006.

SFAS 123(R)
permits adoption of the requirements using one of two methods: a 'modified prospective' method where the requirements are applied to all share-based payments granted
after the effective date of the pronouncement; or a 'modified retrospective' method which allows entities to restate prior periods based on the amounts previously recognised under SFAS 123 for
the purposes of pro forma disclosures. The Group plans to adopt SFAS 123(R) using the modified prospective method.

The
Group adopted the fair-value based method of accounting for sharebased payments using the 'retroactive restatement method' described in FASB Statement No. 148
'Accounting for Stock-Based CompensationTransition and Disclosure'. Currently, the Group uses a Monte Carlo simulation model for awards with market-based vesting conditions. For options
granted to employees under the Company's shareholder schemes, the Group used the Black-Scholes European option pricing model to estimate the value of stock options granted to employees and expects to
continue to use this acceptable option valuation model upon the required adoption of SFAS 123(R) on 1 April 2006. The Group does not anticipate that adoption of SFAS 123(R) will
have a material impact on its results of operations or its financial position. However, SFAS 123(R) also requires the benefits of tax deductions in excess of recognised compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as required under current accounting guidance. This requirement will reduce net operating cash flows and increase net financing
cash flows in periods after the effective date.

SFAS 153

In December 2004, as part of the FASB's short-term convergence project with the International Accounting Standards Board, the FASB issued FASB
Statement No. 153 'Exchanges of Non-Monetary Assets' (SFAS 153), which is an amendment to APB Opinion No. 29 'Accounting for Non-Monetary Transactions'
(APB 29). APB 29 provided an exemption to its general principle of measuring such transactions at fair value where the exchange related to similar productive assets. The exemption permitted the
exchange to be valued at the recorded amount of the assets relinquished. SFAS 153 removes this exemption so that all non-monetary transactions (apart from those without commercial
substance) are recorded at fair value. The Group expects to adopt SFAS 153 prospectively for all transactions taking place after 1 April 2006. The impact of the adoption of
SFAS 153 cannot be predicted at this time because it will depend on whether applicable nonmonetary transactions take place after the effective date.

FIN 47

FASB Interpretation No. 47 'Accounting for Conditional Asset Retirement Obligations' (FIN 47) was issued in March 2005. FIN 47 clarifies that
the term 'conditional asset retirement obligation', as used in SFAS No. 143 'Accounting for Asset Retirement Obligations' (SFAS 143), refers to a legal obligation to perform an asset
retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Group. FIN 47 is effective for financial years
ending after 15 December 2005. The Group does not believe the adoption of FIN 47 will have a material impact on its accounts.

Other matters



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, among 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.



Although demand for electricity and gas can vary on a seasonal basis, the Group's UK electricity and gas transmission turnover and adjusted earnings are not,
generally speaking, subject to substantial seasonal variations, because the largest elements of UK electricity and gas 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. 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 financial year.

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

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

59

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Directors' Report

Incorporation

National
Grid Transco plc was first incorporated on 11 July 2000. The Company is registered in England and Wales with its registered office at 1-3 Strand, London WC2N
5EH (telephone +44 (0)20 7004 3000) and company number 4031152.

Activities

The Company's principal activity is as the ultimate holding company of a group of companies involved in the transmission and distribution of energy, the provision
of wireless infrastructure and other businesses in related markets.

More
detailed information about the Group's businesses, activities and the financial performance of the Group can be found in the Operating and Financial Review on pages 21 to 59.

The
Responsibility section of our website provides more detailed information on the non-financial performance of the Group (www.ngtgroup.com/responsibility).

Directors

Biographical details of those Directors currently serving on the Board are on pages 18 and 19. Details of Directors who served during the year and of their
interests in shares and share options can be found in the Directors' Remuneration Report on pages 69 to 79.

The
Company arranges Directors' and Officers' liability insurance cover, which the Board regards as appropriate and adequate.

Material interests

At no time during the year did any Director have any material interest in a contract within the Group, being a contract of any significance in relation to the
Group's business.

Post balance sheet events

There have been no material events between 31 March 2005 and the date of this report which are required to be brought to the attention of shareholders.

Dividends

An interim dividend of 8.5 pence per share (US$0.7865 per ADS) was paid on 24 January 2005.

The
Directors are recommending that a final dividend of 15.2 pence per share (US$1.3869 per ADS) be paid on 24 August 2005. The payment of the final dividend is subject to
shareholder approval at the Annual General Meeting. This would bring the total dividend for 2004/05 to 23.7 pence per share (US$2.1734 per ADS).

Research and development

Expenditure on research and development in 2004/05 was £9 million, compared with £10 million in 2003/04 and
£18 million in 2002/03.

Share buy-back

National Grid Transco has authority from shareholders to repurchase up to 10% of its own ordinary shares. This authority was not used during 2004/05, nor in the
period to 18 May 2005.

The
Board intends to seek shareholder approval to renew this authority at the Extraordinary General Meeting which immediately follows the Annual General Meeting.

Companies
are now permitted to hold repurchased shares as treasury shares rather than cancelling them. The Board has no current intention to hold repurchased shares as treasury shares,
other than as required for share schemes.

Political donations

The Group made no political donations in the UK or European Union during the year (including donations as defined for the purposes of the Political Parties,
Elections and Referendums Act 2000).

Our
US businesses contributed a total of US$20,000 (£10,695) in connection with the Democratic and Republican national conventions held in the summer of 2004 in Massachusetts
and New York, in addition to the US$50,000 (£29,762) reported in last year's Directors' Report. No money was donated to either political party, and all of these contributions were
compliant with US state and federal law.

Charitable donations

During 2004/05 approximately £7,296,000 was spent in support of community initiatives and relationships across Group operations. Within this figure
direct donations to charitable organisations amounted to approximately £1,352,000 in the UK (2003/04 £1,228,000) and £1,847,000 ($3,454,000) in the US (2003/04
£1,868,000 ($3,139,000)).

We
used the London Benchmarking Group model to assess our total community contributions. Our application of the model has been independently assured by the Corporate Citizenship Company.
In addition to our charitable donations substantial financial support was provided for our Affordable Warmth Programme, Environmental Centres, Young Offender training programme and university
research.

To
support employees' fundraising activities the Group operates a matched giving scheme. In the UK this scheme matches every pound donated or raised for charities and local community
groups up to £400 per employee per year. In the US the programme assists voluntary support of eligible non-profit organisations by employees. Qualifying gifts of up to $3,500
per employee may be matched in any one year.

60

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Policy on payment of creditors

National Grid Transco is a signatory to the Better Payment Practice Code, details of which can be found at www.payontime.co.uk.

The
average creditor payment period at 31 March 2005 for the Group's principal operations in the UK was 28 days (26 days at 31 March 2004).

Substantial shareholders

As at 18 May 2005, the Group had been notified of the following beneficial interests in 3% or more of its issued share capital:

|                                          |  | % of issued share capital
|----------------------------------------- |  | -------------------------
|The Capital Group Companies, Inc.         |  | 7.98                     
|Legal & General Investment Management Ltd |  | 3.88                     
|Barclays plc                              |  | 3.47                     
|Credit Suisse First Boston group          |  | 3.24                     

No
further notifications have been received.

Employment policy

Information on the Group's employee policies is included on pages 13 and 14 under the heading 'Investing in our People' and on pages 41 and 42 under the headings
'Valuing people through inclusion', 'Business ethics', 'Leadership development' and 'Employee engagement'.

The
Group uses multiple channels to communicate with its staff. These include email, Group intranets, cascade briefings, employee telephone information lines and in-house
magazines. Additionally, regular consultation with employees and their trade unions takes place using both formal and informal mechanisms.

Employee share ownership

The Group facilitates share ownership amongst its employees by the operation of both sharesave and share incentive plans in the UK. In the US, employees are able
to invest in the Group through employee incentive thrift plans.

In
the UK, approximately 10,300 employees participate in sharesave schemes, representing about 64% of employees at the year-end. There are also 3,775 participants in the
current share incentive plan, holding shares purchased on a monthly basis. In the US, 6,773 employees held ADSs in the employee incentive thrift plans at 31 March 2005, representing
approximately 82% of employees.

Annual General Meeting

National Grid Transco's 2005 Annual General Meeting will be held on Monday 25 July 2005. Details are set out in a separate Notice of Annual General
Meeting.

Extraordinary General Meeting

National Grid Transco will be holding an Extraordinary General Meeting immediately after its 2005 Annual General Meeting. The Extraordinary General Meeting seeks
approvals principally in respect of the proposed return of cash to shareholders following the sales of four of our UK Gas Distribution networks.

On
behalf of the Board

Helen MahyGroup Company Secretary and General Counsel
18 May 2005

National
Grid Transco plc
Registered office:
1-3 Strand, London WC2N 5EH

Registered
in England and Wales: No. 4031152

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Corporate Governance and  Risk and Compliance Management

Corporate Governance

The Combined Code on Corporate Governance

National Grid Transco is subject to the Combined Code on Corporate Governance, updated in 2003. The Combined Code sets out principles and provisions relating to
the good governance of companies. The aim is to provide guidance on how companies should be directed and controlled.

The
Company fully complied with the provisions set out in Section 1 of the Combined Code throughout the year. The following statements explain how the Company has applied the
principles set out in Section 1 of the Combined Code.

The Board

The Board currently consists of 14 Directors comprising the Chairman, six Executive Directors (including the Group Chief Executive) and seven
Non-executive Directors, (including the Senior Independent Director). Short biographical details of each of the Directors are included on page 19.

Mike
Jesanis joined the Board as Group Director responsible for US Distribution in July 2004, following the retirement of Rick Sergel. John Allan was appointed as a
Non-executive Director by the Board on 1 May 2005, following his recommendation by the Nominations Committee.

All
Directors are required to be re-elected by shareholders at the Annual General Meeting following their appointment by the Board and then at least once every three years.
This ensures regular approval of Director appointments by shareholders.

The
Board, based on proposals from the Nominations Committee, assesses the independence of each of the Non-executive Directors using the guidelines set out in the Combined
Code and considering the main question of whether the Director is independent in character and judgement. This opinion is based on current participation and performance on both the Board and Board
Committees including consideration of the length of service at National Grid Transco together with that at either Lattice Group plc or National Grid Group plc prior to their merger. Based on this
assessment the Board has determined that each of the Non-executive Directors is independent.

Whilst
John Grant has now served on the Board since November 1995, exceeding the nominal nine year guideline, his continued participation is valued. His extensive business
experience allows useful input as an independently minded Non-executive Director. The Board has also agreed that he remain as chairman of the Remuneration Committee where continuity for at
least a further year post-merger is desirable. In line with guidelines he will seek annual reappointment by shareholders.

Professor
Paul Joskow has now served on the Board for five years under the criteria set out above. He is considered by the Board to be an independent Director as his period as a director
of New England Electric System is not considered to impact his independence given it now represents a minority part of the total operations of the Group. In addition, Professor Joskow is considered by
the Board to be a world authority on utility regulation and to have a broad knowledge of the US utility scene.

Role of Chairman and Chief Executive

The respective roles of the Chairman and Chief Executive are set out and approved by the Board. The Chairman's priority is the management of the Board and its
governance while the primary role of the Chief Executive is the management of the Company.

The
main duties outside the Group of the Chairman, Sir John Parker, are included in his biography on page 19. During the year, the Chairman stepped down as Non-executive
Chairman of RMC Group plc following its sale to Cemex of Mexico. In February 2005 he took up his post as Senior Non-executive Director of the Court of the Bank of England, and that
of Chairman of Peninsular & Oriental Steam Navigation Company in May 2005. The Chairman continues to comply with the Combined Code requirement that no individual act as chairman for more
than one FTSE 100 company. His contractual commitment to the Company is two days per week, but in practice this is often exceeded.

Role of Senior Independent Director

A key responsibility for the Senior Independent Director is to be available to shareholders in the event that they may feel it inappropriate to relay views
through the Chairman or Chief Executive. In addition the Senior Independent Director takes the lead when the Non-executive Directors assess the Chairman's performance and when the
appointment of a new chairman is considered.

Ken
Harvey assumed the role of Senior Independent Director following the retirement of James Ross in October 2004.

Management of the Board

In order to ensure effective control of the Group, the Board restricts a range of decisions to itself. The principal matters reserved to the Board include:



The
Board manages these matters at its regular meetings and strategy days. It receives reports and presentations from each of the Executive Directors responsible for the Group's
operating businesses and key central functions. It also receives minutes and/or oral reports of Board Committee meetings. This ensures that all Directors are aware of, and are in a position to monitor
effectively, the overall performance of the Group, its development and implementation of strategy and its management of risk.

To
enable Directors to carry out their duties, they are able, where necessary, to seek outside independent legal advice at the Company's cost.

The
Chairman met separately with the Non-executive Directors twice during the year in formal session (once with the Group Chief Executive present) and three meetings are
scheduled for 2005/06. These meetings and other regular informal discussions create the opportunity for valuable input from the Non-executive Directors.

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Internal control and risk management

The Board is ultimately responsible for the Group's system of internal control and for reviewing its effectiveness along with the review of risk management
processes. National Grid Transco's system of internal control and embedded risk management, which has been in place throughout 2004/05, helps to safeguard the Group's assets and is designed to manage,
rather than eliminate, material risks to the achievement of the Group's business objectives. These reviews recognise that any such system can provide only reasonable, and not absolute, assurance
against material misstatement or loss.

The
Board, together with the Executive, Audit and Risk & Responsibility Committees, is central to the internal control process. Throughout the year the Board receives reports from
each of these Committees and as part of the year-end process receives the Group Chief Executive's Letter of Assurance. This process seeks to confirm compliance with all major internal and
external requirements along with the existence of appropriate controls and processes to manage risks and to provide details of material risks and control weaknesses. The Board additionally conducts a
formal review of the effectiveness of internal controls based on the information and assurances provided to it directly and via the Committees mentioned.

The
Board has adopted a Code of Ethics for senior financial professionals. This code is available on the Group website at www.ngtgroup.com (where any amendments or waivers will also be
posted). There were no amendments to, or waivers of, our Code of Ethics in 2004/05.

Board member training and development

Upon appointment each Director receives material and presentations to provide an induction to the Company and its businesses and is provided with detailed
information relating to the operation and management of the Board. Site visits and meetings with senior and middle managers and the Company's advisors are also arranged. Major shareholders are also
invited to meet new Directors.

The
Group Company Secretary and General Counsel monitors Director attendance at meetings and the presentations that they receive to ensure that the Company is aware whether or not all
Directors are in receipt of up-to-date information about the Group. Directors are also encouraged to attend relevant external courses to ensure that they are fully equipped to
serve as effective Directors. For example, external courses attended during the year by Non-executive Directors included: 'Continuing Professional Development for Non-executive
Directors' (including attendance at a Remuneration Committee Workshop) and 'The Non-executive Directors Seminar'.

Significant
attention has also been given to the development programme for each of the Executive Directors, established following in-depth personal appraisals with the
assistance of external specialists. Development programmes include external and internal mentoring support, attendance at relevant business schools and experience of other boardrooms through serving
as Non-executive Directors.

Board effectiveness

The effectiveness of the Board, its Committees and individual Directors is vital to the overall success of the Group. A formal Board and Committee evaluation
process in the form of a confidential questionnaire to each Director from the Group Company Secretary and General Counsel is used as the basis to assess the effectiveness of the Board, the Chairman
and each of the Committees. The questionnaire is supplemented by one-to-one meetings between the Chairman and each of the Directors where individual performance is openly
discussed along with any particular knowledge gap or the need for external training. Based on an analysis of the output of the questionnaire and the one-to-one meetings, an
action plan is drawn up. This is discussed by the Nominations Committee before being recommended to the Board for action in the forthcoming year. During the last year actions included greater exposure
of the Board to the next layer of management, improving the balance of strategic versus operational debate and improving the linkages between Board Committees. The aim is to ensure continuous
improvement in Board processes and procedures. The Non-executive Directors also meet separately, under the chairmanship of the Senior Independent Director, to discuss the performance of
the Chairman and provide him with collective feedback.

Board Committees

The Board Committees comprise the Audit, Executive, Finance, Nominations, Remuneration and Risk & Responsibility Committees. The developing roles of Board
Committees have led to them carrying out increasingly important work. This ensures that issues of policy and oversight are given time for detailed debate outside the main Board, where the time
available is required to embrace a wide range of issues. To ensure the whole Board is updated, the Committee chairmen provide a summary of key issues debated and recommendations formulated at each
Board meeting.

Each
Committee has established terms of reference, agreed by both the Committee and the Board. The terms of reference for each of these Committees are published on the Group website at
www.ngtgroup.com.



The current members of the Audit Committee are John Allan, John Grant, Maria Richter and George Rose, who is the chairman of the Committee. John Allan and Maria
Richter were appointed to the Committee with effect from 1 May 2005, replacing Ken Harvey and Paul Joskow.

Each
of these Non-executive Directors is regarded by the Board as independent. The Board has determined that George Rose is an 'audit committee financial expert' as required
by the Audit Committee terms of reference (for his biographical details see page 19).

The
Chairman, Group Chief Executive, Group Finance Director, external auditors, Group Head of Audit, and Group Company Secretary and General Counsel are invited to attend most meetings.

The
Audit Committee's main responsibilities are:



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During
the year ended 31 March 2005 the Committee met on five occasions. At meetings during the year the Committee reviewed the Company's pre-close trading statements
and results before publication and received regular reports from the internal audit function and external auditors. The Committee also received reports on risk and compliance management within the
Company and, since the introduction to UK employees of the Code of Business Conduct in April 2004, regular updates on the implementation of the Code. It also considered the actions being taken
by the Company to address compliance with Section 404 of the Sarbanes-Oxley Act 2002 and the introduction of International Financial Reporting Standards.

With
effect from 1 May 2005, the Audit Committee has undertaken a new role in relation to securing adequate separation between Transco plc's transmission and distribution
businesses. The aims are to ensure that the governance arrangements required by the business separation licence conditions in Transco plc's licences are observed and to oversee the activities of
Transco plc's Business Separation Compliance Officer.

During
the year, the Audit Committee met separately with the external auditors, without management being present, on a number of occasions.

The
Committee is responsible for overseeing the relationship with the external auditors which includes (but is not limited to):



At
its meeting in May 2005, the Committee reviewed the independence and objectivity of the Company's external auditors, PricewaterhouseCoopers, including the policy on the
employment by the Company of PricewaterhouseCoopers staff for senior positions. At this meeting, the Committee also evaluated the external audit process and considered the re-appointment
of the external auditors.

All
non-audit work is subject to pre-approval and total non-audit fees are reviewed by the Committee on a quarterly basis. Details of both the audit
and non-audit fees paid to the auditors during the year are set out in note 3 to the accounts on page 95.



The Board has essentially delegated the day-to-day running of the Group to the Executive Committee which is made up of each of the
Executive Directors and the Group Company Secretary and General Counsel. The Executive Committee is chaired by the Group Chief Executive.

The
Executive Committee manages and safeguards the interests of the Group. Its responsibilities include Group strategy, the annual business plan, capital allocation programme, annual
operational budgets and other targets established by the Board.

The
Executive Committee's key tasks also include keeping under review the adequacy of reporting arrangements and the effectiveness of internal control and risk management. At its regular
meetings it considers safety and environmental performance reports and operational business performance reports.

On
behalf of the Board the Executive Committee receives and considers half yearly certifications and due diligence reports from the operating businesses and corporate centre functions in
connection with the completeness and accuracy of financial statements and associated disclosures. The Committee also receives regular reports on the results of internal audits (allowing appropriate
and timely management follow-up) and, on an exception basis, reviews safety and environmental audits and occupational health reviews.



The Finance Committee is chaired by Paul Joskow, the other members being Roger Urwin, Steve Lucas, Stephen Pettit and Maria Richter.

The
Finance Committee is responsible for:



The members of the Nominations Committee are John Grant, Ken Harvey, Paul Joskow and George Rose, each of whom is regarded by the Board as independent. Sir John
Parker chairs the Committee. Each of these Directors was a member of the Committee throughout the year, other than Paul Joskow who was appointed with effect from 1 May 2005.

The
main responsibility of the Nominations Committee is to keep under review the size, structure and composition of the Board. When necessary it is the responsibility of the Committee to
identify and nominate to the Board for appointment Board Directors and direct reports to the Group Chief Executive. The Nominations Committee must also consider the annual reappointment of Directors,
proposing Directors for reappointment by shareholders, having first considered the effectiveness and independence of any Non-executive Directors.

Clearly
defined processes for the appointment of a Chairman, Chief Executive, Executive Director, Non-executive Director and Company Secretary are detailed and reviewed
annually by the Committee. In addition the Committee has oversight of Boardroom succession planning and the development programme for each Executive Director.

As
an on-going process the Nominations Committee considers succession planning for the Board over both the short and long term. The Nominations Committee also receives
regular reports from the Group Chief Executive and Group Human Resources Director on succession planning for senior positions within the Group. The Nominations Committee has overall responsibility for
reviewing the leadership needs of the Group and co-ordinates the review of the Board and Board Committees' effectiveness. The Nominations Committee also assesses the independence of each
Non-executive Director annually prior to making recommendations to the Board.

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The Remuneration Committee members are John Allan, Ken Harvey, Stephen Pettit and George Rose. The Committee chairman is John Grant. Each of these
Non-executive Directors is regarded by the Board as independent and they all served throughout the year, other than John Allan who was appointed with effect from 1 May 2005.

The
Group Human Resources Director provides advice on remuneration policies and practices and is usually invited to attend meetings along with the Chairman and the Group Chief Executive.
No Director or other attendee participates in any discussion on his or her own remuneration.

The
Remuneration Committee is responsible for developing Group policy on executive remuneration, and for determining the remuneration of the Executive Directors and the executives below
Board level who report directly to the Group 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
Board has accepted all the recommendations made by the Committee during the year.

The
Remuneration Committee has authority to obtain the advice of outside independent remuneration consultants and is solely responsible for their appointment, retention and termination
and for approval of their fees and other terms. The Committee retained Ernst & Young LLP as independent remuneration advisors throughout the year. The Group, with the agreement of the
Committee, retained Linklaters to provide advice to the Committee on Directors' service contracts and Alithos Limited was retained to provide calculations relating to performance criteria of various
share schemes.

Further
details of the Group's remuneration policy and details of Director remuneration can be found in the Directors' Remuneration Report on pages 69 to 79, which the Committee compiles
and recommends to the Board for approval.



Stephen Pettit chairs the Risk & Responsibility Committee. Its other members are Ken Harvey and Maria Richter. Ken Harvey was appointed to the Committee
with effect from 1 May 2005.

The
Group Chief Executive, two external specialists (advisors on safety and environmental affairs), the Group Corporate Responsibility Director and the Group Company Secretary and
General Counsel are expected to attend meetings.



The following table indicates the number of meetings of the Board and each of its Committees held during 2004/05 and the number of those meetings that each of the
Directors attended as a member:

|                 |  | Board Committees
|---------------- |  | ----------------
|
|Total held       |  | 14              
|Sir John Parker  |  | 14              
|Roger Urwin      |  | 14              
|Edward Astle     |  | 14              
|Steve Holliday   |  | 13              
|Mike Jesanis(ii) |  | 9               
|Steve Lucas      |  | 14              
|Rick Sergel(iii) |  | 4               
|Nick Winser      |  | 13              
|James Ross(iv)   |  | 9               
|Kenneth Harvey   |  | 14              
|John Grant       |  | 14              
|Paul Joskow      |  | 13              
|Stephen Pettit   |  | 14              
|Maria Richter    |  | 14              
|George Rose      |  | 11              

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The
responsibility of the Committee is to review the strategies, policies, management, initiatives, targets and performance of the Group and, where appropriate, its suppliers and
contractors in the following areas:



The
Risk & Responsibility Committee is involved in the internal control process as it considers and provides reports to the Audit Committee on the non-financial risks
identified above and any reputational risks.

Communication with shareholders

During the year, the Group Chief Executive and Group Finance Director hold regular meetings with institutional investors, fund managers and analysts to discuss
information made public by the Group. In addition, the Chairman reminds major shareholders, in writing, of his availability (along with that of the Senior Independent Director or
Non-executive Directors where required) should there be issues which shareholders may wish to raise.

To
ensure that the Board is effectively informed of shareholder views, it receives feedback from the Company's brokers supplemented by the Group Head of Investor Relations. This ensures
that all Board members, including the
Non-executive Directors, are aware of the views of major shareholders and of any outstanding issues that they may have.

The
principal method of communicating with the majority of shareholders is through the Annual Review. All shareholders can attend the Company's Annual General Meeting where they have the
opportunity to question Directors on any issues relating to the management of the Company. The Group also has in place a Shareholder Networking Programme, which allows a small number of shareholders
to visit operational sites and meet senior managers and Directors. More details of the Shareholder Networking Programme are on page 147.

Corporate governance practices: differences from New York Stock Exchange (NYSE) listing standards

The corporate governance practices of the Group substantially conform to those required of US companies listed on the NYSE. The principal differences between the
Group's governance practices pursuant to the Combined Code/UK governance practices and the Section 303A Corporate Governance Rules of the New York Stock Exchange are:



Disclosure committees

National Grid Transco has constituted several disclosure committees across the Group that undertake various duties relating to the material disclosures made by
the Company and relevant subsidiaries within the Group.

The
Group Finance Director chairs the National Grid Transco Disclosure Committee. This Committee assists the Group Chief Executive and Group Finance Director in fulfilling their
responsibility under US securities laws to oversee the accuracy and timeliness of the disclosures made by the Company. This includes the design and implementation of controls and other procedures that
are intended to ensure that information required by the Company to be disclosed is recorded, processed, summarised and reported accurately and on a timely basis. The Committee also monitors the
effectiveness of the Company's disclosure controls and reviews and considers the preparation of material public disclosures. It undertakes an evaluation of the effectiveness of the Company's
disclosure controls at the end of the Company's financial year and considers other matters as necessary.

Information assurance

Information is an important asset to the business and, like any other asset, it must be fit for purpose.

Critical
to demonstrating information integrity is a process of assurance from the business that clearly demonstrates that information is being sourced and managed effectively. The Group
recognises that these behaviours are important to achieving necessary standards. The key objective of having accurate and reliable information is supported by a risk-based, holistic
approach that deals with information assurance as a business critical function. This approach ensures that accurate and reliable information is available to those who need it in a timely fashion, thus
enabling informed decisions that support and further our Group objectives.

We
manage a broad range of risks to our information. Key elements in managing these risks are education, training and awareness. These initiatives emphasise the importance of information
security, the quality of data collection, and the affirmation process that supports our business transactions, evidencing our decisions and actions.

The
Group continues to work collaboratively with a variety of organisations and professional bodies to develop and implement best practice.

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Risk and Compliance Management

Risk management

We believe that risk management is an essential discipline in our business operations. As an integral part of this, we have established a Group-wide
risk management process to ensure a consistent approach to the assessment, recording, consolidation and reporting of our key risks in a visible, structured and continuous manner. This process complies
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. In addition, the process supports the Group's compliance with our obligations under the Sarbanes-Oxley Act.

The
risk management process continues to be based on both bottom-up and top-down assessments of operational, financial and other business risks. From the bottom
up, business units and corporate centre functions must prepare and maintain risk registers that capture their key risks and the actions that are being taken to manage them. These risk registers are
primarily management tools for use at an operational level, but are also intended to ensure that risk data is reported on a consistent basis throughout the Group. The key element in the
top-down assessment of our risk profile is the involvement of the Executive Directors and other senior management across the Group at critical stages in the review process. Their review of
the bottom-up assessment produces an overall evaluation of the risks that are faced by the Group. Graphics that set out the Group's risk profile and the significant changes to this between
reporting periods are considered by the Executive Committee, the Risk & Responsibility Committee and the Audit Committee twice a year. The Audit Committee also reviews the risk management
process at least once during each year and reports on this to the Board.

In
May 2004, we were awarded 'best enterprise-wide risk management programme' by Strategic Risk Magazine. However, we recognise that risk management is a dynamic
process and, as a result, risk reporting at Board level was refined during the year to ensure greater visibility and understanding of business specific risks. Similarly, an internal assessment on the
extent to which risk management is embedded in the Group was carried out during the latter part of 2004 and further work will be undertaken to drive the embedding of risk management throughout
National Grid Transco. An external benchmarking exercise has also begun with other FTSE 100 companies and similar organisations to measure the effectiveness of our own approach and exchange best
practice.

The
Group's risk management process has identified the risk factors set out on pages 67 to 68.

Compliance management

Last year, we reported that we had begun to introduce a compliance management process that seeks to raise awareness of the increasing number of compliance
obligations to which the Group is subject. The compliance management procedure is consistent with, and complimentary to, the Group's risk management procedure and is intended to ensure that we take
all reasonable steps to comply with our principal legal and regulatory obligations. We are also using the process to ensure compliance with our Group policies and procedures.

Twice
during each year the Executive Committee, the Risk & Responsibility Committee and the Audit Committee receive a report setting out the significant obligations across the
Group, any material non-compliance with those, together with control opinions and action plans to improve controls where necessary.

Going
forward, we aim to implement a procedure to provide assurance that robust compliance programmes are in place or are being developed for all significant obligations.

Risk factors

Our risk management process has identified the following risk factors that could have a material adverse effect on our business, financial condition, results of
operations and reputation, as well as the value and liquidity of our securities. Not all of these factors are within our control. In addition, other factors besides those listed below may have an
adverse effect on the Group. Any investment decision regarding our securities and any forwardlooking statements made by us should be considered in the light of these risk factors and the cautionary
statement set out on the inside front cover.

Changes in law or regulation in the geographies in which we operate could have an adverse effect on our results of operations.

Many of our businesses are utilities or networks that are subject to regulation by governments and regulatory authorities. Consequently, changes in law or
regulation in the countries or states in which we operate could adversely affect the Group. Regulatory decisions concerning, for example, whether licences or approvals to operate are renewed, whether
market developments have been satisfactorily implemented, whether there has been any breach of the terms of a licence or approval, the level of permitted revenues for our businesses and proposed
business development activities, could have an adverse impact on our results of operations, cash flows, the financial condition of our businesses and the ability to develop those businesses in the
future. For further information about this, please see the relevant sections of the Operating Review and Financial Review and, in particular, the 'Regulatory environment' and 'Regulatory developments'
sections on pages 21 and 22.

Breaches of environmental or health and safety laws or regulations could expose us to claims for financial compensation and adverse regulatory consequences and could damage our  reputation.

Aspects of our activities are inherently dangerous, such as the operation and maintenance of electricity lines and the transmission and distribution of natural
gas. Electricity and gas utilities also typically use and generate in their operations hazardous and potentially hazardous products and by-products. In addition, there may be other aspects
of our operations that are not currently regarded or proved to have adverse effects but could become so, for example, the effects of electric and magnetic fields. We are subject to laws and
regulations relating to pollution, the protection of the environment, and how we use and dispose of hazardous substances and waste materials. We are also subject to laws and regulations governing
health and safety matters, protecting both the public and our employees. Any breach of these obligations, or even incidents relating to the environment or health and safety that do not amount to a
breach, could adversely affect the results of operations and our reputation. For further information about environmental and health and safety matters relating to our businesses, please see the
Responsibility section of our website at www.ngtgroup.com/responsibility.

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Network failure or the inability to carry out critical non-network operations may have significant adverse impacts on both our financial position and our  reputation.

We may suffer a major network failure or may not be able to carry out critical non-network operations. Risks to operational performance could arise
from a failure to maintain the health of the system or network, inadequate forecasting of demand or inadequate record keeping. Any failure could cause us to be in breach of a licence or approval, and
even incidents that do not amount to a breach could result in adverse regulatory action and financial consequences, as well as harming our reputation. In addition to these risks, we are subject to
other risks that are largely outside of our control such as the impact of weather or unlawful acts of third parties. Weather conditions can affect financial performance, particularly in the US, and
severe weather that causes outages or damages infrastructure will adversely affect operational and, potentially, business performance. Terrorist attack, sabotage or other intentional acts may also
physically damage our businesses or otherwise significantly affect corporate activities and as a consequence affect the results of operations.

Our results of operations depend on a number of factors relating to business performance including the ability to outperform regulatory targets and to deliver anticipated cost  and efficiency savings.

Earnings maintenance and growth from our regulated gas and electricity businesses will be affected by our ability to meet or better regulatory efficiency targets
set by Ofgem and other regulators. From time to time, we also publish cost and efficiency savings targets for our businesses in the UK and the US. To meet these targets, we must continue to improve
management and operational performance. In the US, under our state rate plans, earnings from our regulated businesses will be affected by our ability to deliver integration and efficiency savings.
Earnings from our regulated businesses in both the UK and the US also depend on meeting service quality standards set by regulators. To meet these standards, we must improve service reliability and
customer service. If we do not meet these targets and standards, both our results of operations and our reputation may be adversely affected.

Changes to the regulatory treatment of commodity costs may have an adverse effect on the results of operations.

Changes in commodity prices could potentially impact our energy delivery businesses. For example, the costs incurred by our electricity businesses in purchasing
electricity are subject to movements in the prices of oil and gas. Current regulatory arrangements in the UK and US provide the ability to pass through virtually all of the increased costs related to
commodity prices to consumers. If regulators in the UK or the US were to restrict this ability, it could have an adverse effect on our operating results.

Our reputation may be harmed if consumers of energy suffer a disruption to their supply even if this disruption is outside of our control.

Our energy delivery businesses are responsible for transporting available electricity and gas. We consult with and provide information to regulators, governments
and industry participants about future demand and the availability of supply. However, where there is insufficient supply, our role is to manage the relevant system safely, which in extreme
circumstances may require us to disconnect consumers.

We are subject to the risk that business development activity, such as significant acquisitions or disposals, will be based on incorrect assumptions or conclusions or that  significant liabilities will be overlooked or
there may be other unanticipated adverse impacts.

In any acquisition or disposal process we evaluate the projected financial impact of the transaction and conduct due diligence; however, unforeseen circumstances
or erroneous assumptions may adversely affect the anticipated financial consequences of that project.

Fluctuations in the value of the US dollar could have a significant impact on our results of operations because we have substantial business interests in the US and because of  the proportion of our total debt that is
denominated in US dollars.

We have significant operations in the US. These businesses are subject to the risks normally associated with foreign businesses, including the need to translate
US assets and liabilities, and income and expenses, into sterling, our primary reporting currency. Our results of operations may be similarly impacted because we hold a significant proportion of our
borrowings in US dollars. For further information about this see 'Foreign exchange risk management' on page 51.

The nature and extent of our borrowings means that an increase in interest rates could have an adverse impact on our financial position and business results.

A significant proportion of our borrowings are subject to variable interest rates that may fluctuate with changes to prevailing interest rates. Increases in these
interest rates could therefore increase our costs and diminish our profits. For further information about this see 'Interest rate risk management' on page 51.

Our overall financial position may be adversely affected by a number of factors including restrictions in borrowing and debt arrangements, changes to credit ratings and  effective tax rates.

We are subject to certain covenants and restrictions in relation to our listed debt securities and our bank lending facilities. We are also subject to
restrictions on financing that have been imposed by regulators. These restrictions may hinder us in servicing the financial requirements of our current businesses or the financing of newly acquired or
developing businesses. The debt issued by the Company and certain of its subsidiaries is rated by credit rating agencies and changes to 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 accounting standards and the
Group's overall approach to such matters, the results of which could increase or decrease that rate.

New or revised accounting standards, rules and interpretations by the UK, US or international accounting standard setting boards and other relevant bodies could have an adverse  effect on the Group's reported financial
results.

With the adoption of International Financial Reporting Standards (IFRS), changes in the accounting treatment of replacement expenditure, regulatory assets and
pension and post-retirement benefits will significantly affect the way we report our financial position and results of operations. New standards, rules or interpretations may be issued
that could also have significant effects. In addition, as a body of practice develops, the application of accounting principles to our particular circumstances may change.

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Directors' Remuneration Report

I am pleased to present the Directors' Remuneration Report for 2004/05. Our policy of relating pay to the performance of the Group continues to be a strong
principle underlying the Remuneration Committee's consideration of executive remuneration.

This
year we have thoroughly reviewed the remuneration policies established following the merger between National Grid Group plc and Lattice Group plc in 2002, to ensure they continue to
reflect best practice and align as closely as possible with the Group's strategic objectives and our shareholders' interests. We have concluded that salary levels and the mix between fixed and
variable compensation is appropriate but that a number of refinements should be made to both short term and long term incentives over the coming year.

The
maximum levels of annual bonus will remain unchanged but, instead of the share matching arrangement used previously, our Executive Directors, as well as their direct reports, will be
paid a proportion of that bonus in shares, which must be retained for three years. As a result, we will not be using the Share Matching Plan from 2005/06. This complements our shareholding policy for
Executive Directors, which requires them to hold shares worth at least one year's salary.

Long
term incentives are now delivered solely through the Performance Share Plan, with the maximum level of grant remaining unchanged from last year at 125% of salary. Over the coming
year, we expect to amend the performance measure under this plan to align it more closely with shareholders' interests and management's ability to influence performance. We are consulting with our
major shareholders on this. No further awards will be made under the Executive Share Option Plan.

Our
other main focus in 2005/06 will be to adjust (with the aim not to enhance) pension arrangements, to take account of changes in pension legislation, to be introduced from
April 2006.

I
am confident that our approach continues to align Executive Directors' remuneration with the interests of shareholders whilst maintaining the motivation and engagement of the strong
team leading the Group.

John GrantChairman, Remuneration Committee

Remuneration Committee

The Remuneration Committee members are Ken Harvey, Stephen Pettit, George Rose and John Allan. The Committee chairman is John Grant. Each of these
Non-executive Directors is regarded by the Board as independent and served throughout the year, except John Allan, who was appointed with effect from 1 May 2005.

The
Group Human Resources Director provides advice on remuneration policies and practices and is usually invited to attend meetings along with the Chairman and the Group Chief Executive.
No Director or other attendee participates in any discussion on his or her own remuneration.

The
Remuneration Committee is responsible for developing Group policy on executive remuneration, and for determining the remuneration of the Executive Directors and the executives below
Board level who report directly to the Group 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
Board has accepted all the recommendations made by the Committee during the year.

The
Remuneration Committee has authority to obtain the advice of outside independent remuneration consultants and is solely responsible for their appointment, retention and termination
and for approval of their fees and other terms.

In
the year to 31 March 2005, the following advisors provided services to the Committee:

Remuneration policy

The Remuneration Committee determines remuneration policies and practices with the aim of attracting, motivating and retaining high calibre Executive Directors
and other senior employees who will deliver value for shareholders and high levels of customer service, safety and environmental performance. The Committee sets remuneration policies and practices in
line with best practice in the markets in which the Group operates. Remuneration policies continue to be framed around the following key principles:

The
policies that will apply in 2005/06 are similar to last year, except that a number of refinements will be made to both short-term and longterm interests. It is currently
intended to continue these policies in subsequent years.



Remuneration packages for Executive Directors consist of the following elements:

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Salary

Salaries are reviewed annually and targeted at the median position in the relevant market. In determining the relevant market, the Remuneration Committee takes
account of the regulated nature of the majority of the Group's operating activities, along with the size, complexity and international scope of the business. For UK-based Executive
Directors a UK market is used, while for US-based Executive Directors a US market is used. In setting individual salary levels the Committee takes into account business performance, the
individual's experience in the role and the employment and salary practices prevailing for other employees in the Group.

Annual Bonus Plan

Annual bonuses are based on achievement of a combination of demanding Group, individual and, where applicable, divisional targets. The principal measures of Group
performance are earnings per share (EPS) and cash flow; the main divisional measures are divisional operating profit and divisional cash flow. Individual targets are set in relation to key operating
and strategic objectives and include overriding measures of safety and customer service performance. The Remuneration Committee sets targets at the start of the year and at the end of the year reviews
performance against those targets to determine bonus levels. The Committee may use its discretion to reduce payments to take account of significant safety or service standard incidents, or to increase
them in the event of exceptional value creation.

Performance
against Group and divisional financial targets for this year is shown in the table below:

|                 |  | Level of performance achieved in 2004/05
as determined by the Committee
|---------------- |  | -----------------------------------------------------------------------
|
|
|EPS              |  | between target and stretch                                             
|Cash flow        |  | between target and stretch                                             
|Operating profit |  |                                                                        
|Cash flow        |  |                                                                        

---

In
2004/05, UK-based Executive Directors participated in the annual bonus scheme with a maximum bonus opportunity of 75% of base salary. One third of any bonus earned was
automatically deferred into National Grid Transco shares. Through the Share Matching Plan, these shares are matched on a 1:1 gross basis after three years, providing the Director is still employed by
the Group, resulting in a maximum potential bonus of 100% of base salary. The Remuneration Committee can at the time of exercise use its discretion to pay a cash amount equivalent to the value of the
dividends that would have accumulated on the Matching Shares.

US-based
Executive Directors were provided in 2004/05 with a maximum bonus opportunity of 62.5%. Each year an additional award, calculated as a proportion (currently 60%) of
annual bonus, is paid in National Grid Transco shares or American Depositary Shares (ADSs); these are subject to a minimum three-year holding period. The total maximum value of the annual
bonus plan, including deferral, is therefore 100% of base salary. In line with US market practice, US-based Executive Directors' cash bonuses are pensionable.

For
2005/06 the maximum bonus levels for all Executive Directors will be retained at 100% of base salary, but UK and US policies will be brought into alignment. All Executive Directors
will be required to defer one half of any cash bonus into National Grid Transco shares (or ADSs for US-based Executive Directors) for a period of three years.

The
Remuneration Committee believes that requiring Directors to invest a substantial amount of their bonus in National Grid Transco shares increases the proportion of rewards linked to
both short-term performance and longer-term total shareholder returns. This practice also acts as a retention tool and ensures that Executive Directors share a significant
level of personal risk with the Group's shareholders.

US-based
Executive Directors also participate in the USA Goals Program, a bonus plan covering a large number of US-based employees that can pay up to 5.7% of
salary on the achievement of certain earnings and performance targets.

Long-term incentives

Performance Share Plan (PSP)

Executive Directors and approximately 350 other senior employees who have significant influence over the Group's ability to meet its strategic objectives, receive
notional allocations of shares. The value of shares constituting an award (as a percentage of salary) may vary by grade and seniority, subject to a maximum, for Executive Directors, of 125% of salary.
Shares vest after three years, subject to the satisfaction of the relevant performance criteria, which are set by the Remuneration Committee at the date of grant. Shares must then be held for a
further year, the retention period, after which they are released, subject to the Executive Director's continuing employment with the Group or at the Committee's discretion.

The
performance criteria for this Plan, for the year 2005/06 is currently under review. Grants in the year to 31 March 2005 were based on the Group's Total Shareholder Return
(TSR) performance over a three-year period, relative to the TSR performance of the following group of comparator companies:

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

This
comparator group, which is unchanged from the year to 31 March 2004, 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 Committee may amend the list of comparator companies if circumstances make this necessary. Under
the terms of the PSP, the Committee may allow shares to vest early to departing Executive Directors to the extent that the performance condition has been met, in which event the number of shares that
vest will be prorated to reflect the proportion of the performance period that has elapsed at the Executive's date of departure.

70

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In
calculating TSR, it is assumed that all dividends are reinvested. 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 retesting
of performance is permitted for any shares that do not vest after the three-year performance period and any such shares will lapse.

Executive Share Option Plan

The Remuneration Committee has decided that no further awards will be made under the Executive Share Option Plan (details about this Plan are contained on page
77).

Executive Directors' remuneration package

Illustrated below is the remuneration package of Executive Directors (excluding pensions, all-employee share plans and non-cash benefits)
for both the 'maximum stretch' performance and assuming 'on target' performance of 50% for the bonus plan and relative TSR performance such that 45% of PSP awards are released to participants at the
end of the performance period and subsequent retention period.

LOGO

All-employee share plans



Pensions

UK-based Executive Directors, with the exception of Steve Lucas, are members of the National Grid Company Group of the Electricity Supply Pension
Scheme. Steve Lucas is a member of the defined benefit section of the Lattice Group Pension Scheme. Both of the pension schemes are tax-approved.

Within
the National Grid Company Group of the Electricity Supply Pension Scheme (ESPS) only base salary is pensionable. The contractual retirement age for Executive Directors is 63,
however, the provisions for participating Executive Directors in the Scheme are designed to give a pension of two thirds of final salary at age 60, subject to completion of 20 years' service
and including any pension rights earned in previous employments. On the death in service of a participating Executive Director, a spouse's pension is payable equal to two thirds of the potential value
of the pension had service been continued to normal retirement age. On death in retirement, a spouse's pension is payable equal to two thirds of the participating Executive Director's pension prior to
any exchange for a cash lump sum at retirement. Once payments from the pension have begun, pensions are increased annually in line with price inflation up to a maximum of 5%. For participating
Executive Directors affected by the 'earnings cap' there is a restriction on the benefits that can be provided from the tax-approved pension scheme and the Company provides any excess of
benefits on salary above the earnings cap on an unfunded basis.

71

---



Within
the Lattice Group Pension Scheme only base salary is pensionable. It is designed to give two thirds of final salary (which may be restricted by remuneration averaged over three
years) at normal retirement age of 65, inclusive of any pension rights earned in previous employment. On early retirement after age 60, the accrued pension can be paid with no actuarial reduction in
benefit. A dependant's pension is payable on death in service of a participating Executive Director equal to two thirds of the potential value of the pension had service been continued 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 any exchange for a cash lump sum at retirement.
Once payments from the pension have begun, pensions are increased annually in line with price inflation. Steve Lucas is subject to the earnings cap and therefore also participates in the Lattice Group
Supplementary Benefits Scheme; an unfunded unapproved arrangement that increases retirement benefits to the level which would otherwise have been provided in the Lattice Group Pension Scheme, had they
not been subject to the earnings cap.

Provision
has been made in the accounts in respect of unfunded obligations for post-retirement benefits.

Mike
Jesanis participates in a qualified pension plan and an executive supplemental retirement plan provided through National Grid USA. These plans are non-contributory
defined benefit arrangements. The qualified plan is directly funded, while the supplemental plan is indirectly funded through a 'rabbi trust'. Benefits are calculated using a formula based on years of
service and highest average compensation over five consecutive years. In line with many US plans, the calculation of benefits under the arrangements takes into account salary, bonuses and incentive
share awards but not share options. The normal retirement age under the qualified pension plan is 65. The executive supplemental plan, however, provides unreduced pension benefits from age 55. On the
death of the participating Executive Director, the plans also provide for a spouse's pension of at least 50% of that accrued by the participating Executive Director. Benefits under these arrangements
do not increase once in payment.

Non-cash benefits

The Group provides competitive benefits to Executive Directors, such as a fully expensed car or cash alternative in lieu of car and fuel, use of a driver when
required, private medical insurance and life assurance. UK-based Executive Directors with less than five years continuous service, who were previously directors of National Grid Group plc,
are provided with long-term ill health insurance. Business expenses incurred are reimbursed in such a way as to give rise to no benefit to the Director.



Executive Directors are encouraged to build up and retain a shareholding of at least 100% of annual 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.



Where shares may be issued or treasury shares reissued to satisfy incentives, the aggregate dilution resulting from executive incentives will not exceed 5% in any
10-year period. Dilution resulting from all incentives, including all-employee incentives, will not exceed 10% in any 10-year period. The Remuneration Committee
reviews dilution against these limits regularly and under these limits, the Company has headroom of over 4% and 6% respectively.



Service contracts for all Executive Directors are set at one year's notice by either party. The Committee operates a policy on mitigation of losses in the event
of an Executive Director's employment being terminated by the Group. If this occurs, the departing Executive would be expected to mitigate any losses incurred as a result of the termination.
Therefore, entitlement to the payment of 12 months' remuneration on early termination will no longer be automatic, but will instead be based on the circumstances of the termination. Steve
Lucas' contract provides for a liquidated damages payment of one year's salary plus a credit of one year's pensionable service if the contract is terminated within one year of a change of control of
the Group.

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

|                    |  | Date of contract       |  | Notice period
|------------------- |  | ---------------------- |  | -------------
|Executive Directors |  |                        |  |              
|Roger Urwin         |  | 17 November 1995       |  | 12 months    
|Steve Lucas         |  | 13 June 2002           |  | 12 months    
|Edward Astle        |  | 27 July 2001           |  | 12 months    
|Steve Holliday      |  | 6 March 2001           |  | 12 months    
|Nick Winser         |  | 28 April 2003          |  | 12 months    
|Mike Jesanis(i)     |  | 8 July 2004            |  | 12 months    
|Rick Sergel         |  | (retired 26 July 2004) |  |              

---



With the approval of the Board in each case, Executive Directors may normally accept an external appointment as a Non-executive Director of another
company and retain any fees received. The table below details the Executive Directors who served as Non-executive Directors in other companies during the year ended 31 March 2005.

|                    |  | Company                      |  | Retained fees (£)
|------------------- |  | ---------------------------- |  | -----------------
|Executive Directors |  |                              |  |                  
|Roger Urwin         |  | Utilico Investment Trust plc |  | 15,000           
|Steve Lucas(i)      |  | Compass Group PLC            |  | 35,615           
|Steve Holliday(ii)  |  | Marks and Spencer Group plc  |  | 35,641           

---

72

---







Non-executive Directors' fees are determined by the Executive Directors subject to the limits applied by National Grid Transco's articles of
association. Non-executive Directors' remuneration comprises an annual fee and a fee for each Board meeting attended (with a higher fee for meetings held outside the Director's country of
residence), with an additional fee payable for chairmanship of a Board Committee. The Chairman participates in the Company's personal accident and private medical insurance schemes and the Company
provides him with life assurance cover, a car (with driver when appropriate) and fuel expenses. Non-executive Directors do not participate in the annual bonus plan or in any
long-term incentive scheme, nor do they receive any pension benefits from the Group.



The Chairman's letter of appointment provides for a period of six months' notice in order to give the Group reasonable security with regard to his service. The
terms of engagement of Non-executive Directors other than the Chairman are also set out in letters of appointment; their initial appointment and any subsequent re-appointment
is subject to election by shareholders. The letters of appointment do not contain provision for termination payments.

|                             |  | Date of letter
of appointment |  | End of period
of appointment
|---------------------------- |  | ----------------------------- |  | ----------------------------
|Non-executive Directors      |  |                               |  |                             
|Sir John Parker (Chairman)   |  | 12 January 2004               |  | 2006 AGM                    
|James Ross (Deputy Chairman) |  | (retired 21 October 2004)     |  |                             
|John Grant                   |  | 5 June 2003                   |  | 2005 AGM                    
|Ken Harvey(i)                |  | 5 June 2003                   |  | 2006 AGM                    
|Paul Joskow                  |  | 5 June 2003                   |  | 2005 AGM                    
|Stephen Pettit               |  | 5 June 2003                   |  | 2006 AGM                    
|Maria Richter                |  | 30 September 2003             |  | 2007 AGM                    
|George Rose                  |  | 5 June 2003                   |  | 2006 AGM                    
|John Allan(ii)               |  | 1 May 2005                    |  | 2005 AGM                    

---

Performance graph

The graph below represents the comparative TSR performance of the Group from 31 March 2000 to 31 March 2005. For the period before the merger of
National Grid Group plc and Lattice Group plc the TSR shown is that of National Grid Group plc.

This
graph represents the Group's performance against the performance of the FTSE 100 index, which is considered suitable for this purpose 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 Schedule 7A to the Companies Act 1985.

In
drawing this graph it has been assumed that all dividends 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.

LOGO

73

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Remuneration outcomes during the year ended 31 March 2005

Tables 1A, 1B, 2, 3, 4 and 5 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 emoluments during the years ended 31 March 2005 and 2004, including bonuses but
excluding pensions, for individual Directors who held office in National Grid Transco during the year ended 31 March 2005.

Table 1A

|                    |  | Year ended 31 March 2005 |  | Year ended 31 March 2004
|------------------- |  | ------------------------ |  | ------------------------
|
|Executive Directors |  |                          |  |                         
|Roger Urwin         |  | 701                      |  | 404                     
|Steve Lucas         |  | 395                      |  | 234                     
|Edward Astle        |  | 375                      |  | 231                     
|Steve Holliday(ii)  |  | 400                      |  | 158                     
|Nick Winser(iii)    |  | 335                      |  | 183                     
|Mike Jesanis(iv)    |  | 292                      |  | 145                     
|Rick Sergel(v)(vi)  |  | 153                      |  | 76                      
|                    |  |                          |  |                         
|Totals              |  | 2,651                    |  | 1,431                   
|                    |  |                          |  |                         

---

Table 1B

|                        |  | Year ended 31 March 2004 |  | Year ended 31 March 2005
|----------------------- |  | ------------------------ |  | ------------------------
|
|Non-executive Directors |  |                          |  |                         
|Sir John Parker(i)      |  | 375                      |  | 31                      
|James Ross              |  | 64                       |  |                        
|John Grant              |  | 65                       |  |                        
|Ken Harvey              |  | 58                       |  |                        
|Paul Joskow             |  | 73                       |  |                        
|Stephen Pettit          |  | 58                       |  |                        
|Maria Richter           |  | 66                       |  |                        
|George Rose             |  | 61                       |  |                        
|John Allan(ii)          |  |                         |  |                        
|                        |  |                          |  |                         
|Totals                  |  | 820                      |  | 31                      
|                        |  |                          |  |                         

---

74

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2.    Directors' pensions

The table below gives details of the Executive Directors' pension benefits in accordance with both Schedule 7A of the Companies Act 1985 and the UK Listing
Authority's Listing Rules.

Table 2

|                  |  |    |  |     |  |       |  |       |  |       |  |    |  | Transfer value of increase in accrued benefit in the year ended 31 March 2005 (excluding Director's contributions and inflation)
|----------------- |  | -- |  | --- |  | ----- |  | ----- |  | ----- |  | -- |  | --------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
|
|
|Roger Urwin       |  | 54 |  | 457 |  | 9,016 |  | 7,353 |  | 1,621 |  | 42 |  | 778                                                                                                                             
|Steve Lucas       |  | 15 |  | 141 |  | 2,261 |  | 1,566 |  | 683   |  | 12 |  | 179                                                                                                                             
|Edward Astle      |  | 15 |  | 45  |  | 639   |  | 366   |  | 250   |  | 14 |  | 173                                                                                                                             
|Steve Holliday    |  | 15 |  | 53  |  | 679   |  | 404   |  | 251   |  | 15 |  | 163                                                                                                                             
|Nick Winser(ii)   |  | 27 |  | 108 |  | 1,281 |  | 821   |  | 440   |  | 24 |  | 260                                                                                                                             
|Mike Jesanis(iii) |  | 39 |  | 197 |  | 1,687 |  | 1,278 |  | 409   |  | 39 |  | 375                                                                                                                             
|Rick Sergel(iv)   |  | 5  |  | 377 |  | 5,025 |  | 4,576 |  | 449   |  | 5  |  | 272                                                                                                                             

---

3.    Directors' interests in share options

The table below gives details of the Executive Directors' holdings of share options awarded under the ESOP, the Share Matching Plan and Sharesave schemes.

Table 3

|            |  | Options held
at 1 April 2004
or, if later,
on appointment* |  | Options exercised
or lapsed
during the year |  | Market price
at date of
exercise (pence) |  | Options granted
during the year |  | Options held at
31 March 2005
or, if earlier,
on retirement |  | Exercise price
per share
(pence) |     | Normal exercise period
|----------- |  | ---------------------------------------------------------- |  | ------------------------------------------- |  | ---------------------------------------- |  | ------------------------------- |  | ------------------------------------------------------------ |  | -------------------------------- | --- | ----------------------
|Roger Urwin |  |                                                            |  |                                             |  |                                          |  |                                 |  |                                                              |  |                                  |     |                       
|ESOP        |  | 169,340                                                    |  |                                            |  |                                         |  |                                |  | 169,340                                                      |  | 280.50                           |     | Sep 2000              
|            |  | 91,656                                                     |  |                                            |  |                                         |  |                                |  | 91,656                                                       |  | 375.75                           |     | June 2001             
|            |  | 22,098                                                     |  |                                            |  |                                         |  |                                |  | 22,098                                                       |  | 455.25                           |     | June 2002             
|            |  | 33,867                                                     |  |                                            |  |                                         |  |                                |  | 33,867                                                       |  | 531.50                           |     | June 2003             
|            |  | 133,214                                                    |  |                                            |  |                                         |  |                                |  | 133,214                                                      |  | 563.00                           |     | June 2004             
|            |  | 186,915                                                    |  |                                            |  |                                         |  |                                |  | 186,915                                                      |  | 481.50                           |     | June 2005             
|Share Match |  | 4,047                                                      |  |                                            |  |                                         |  |                                |  | 4,047                                                        |  | 100 in total                     |     | June 2001             
|            |  | 3,884                                                      |  |                                            |  |                                         |  |                                |  | 3,884                                                        |  | 100 in total                     |     | Jan 2002              
|            |  | 3,859                                                      |  |                                            |  |                                         |  |                                |  | 3,859                                                        |  | 100 in total                     |     | Jan 2002              
|            |  | 5,635                                                      |  |                                            |  |                                         |  |                                |  | 5,635                                                        |  | 100 in total                     |     | June 2004             
|            |  | 18,644                                                     |  |                                            |  |                                         |  |                                |  | 18,644                                                       |  | 100 in total                     |     | June 2005             
|            |  | 25,000                                                     |  |                                            |  |                                         |  |                                |  | 25,000                                                       |  | 100 in total                     |     | June 2006             
|            |  |                                                           |  |                                            |  |                                         |  | 30,762                          |  | 30,762                                                       |  | nil                              | (i) | May 2007              
|Sharesave   |  | 2,910                                                      |  |                                            |  |                                         |  |                                |  | 2,910                                                        |  | 317.00                           |     | Apr 2007              
|            |  |                                                            |  |                                             |  |                                          |  |                                 |  |                                                              |  |                                  |     |                       
|Total       |  | 701,069                                                    |  |                                            |  |                                         |  | 30,762                          |  | 731,831                                                      |  |                                  |     |                       
|Steve Lucas |  |                                                            |  |                                             |  |                                          |  |                                 |  |                                                              |  |                                  |     |                       
|ESOP        |  | 54,404                                                     |  |                                            |  |                                         |  |                                |  | 54,404                                                       |  | 434.25                           |     | Dec 2005              
|Share Match |  |                                                           |  |                                            |  |                                         |  | 16,909                          |  | 16,909                                                       |  | nil                              | (i) | May 2007              
|Sharesave   |  | 2,700                                                      |  |                                            |  |                                         |  |                                |  | 2,700                                                        |  | 350.00                           |     | Mar 2006              
|            |  |                                                            |  |                                             |  |                                          |  |                                 |  |                                                              |  |                                  |     |                       
|Total       |  | 57,104                                                     |  |                                            |  |                                         |  | 16,909                          |  | 74,013                                                       |  |                                  |     |                       

75

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|Edward Astle                             |  |         |   |       |  |        |      |        |  |         |  |                        |     |           |  |          
|---------------------------------------- |  | ------- | - | ----- |  | ------ | ---- | ------ |  | ------- |  | ---------------------- | --- | --------- |  | ---------
|ESOP                                     |  | 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 
|                                         |  | 131,086 |   |      |  |       |      |       |  | 131,086 |  | 400.50                 |     | June 2006 |  | June 2013
|Share Match                              |  | 6,553   |   |      |  |       |      |       |  | 6,553   |  | 100 in total           |     | June 2005 |  | June 2012
|                                         |  | 13,812  |   |      |  |       |      |       |  | 13,812  |  | 100 in total           |     | June 2006 |  | June 2013
|                                         |  |        |   |      |  |       |      | 15,716 |  | 15,716  |  | nil                    | (i) | May 2007  |  | May 2014 
|Sharesave                                |  | 2,392   |   |      |  |       |      |       |  | 2,392   |  | 397.00                 |     | Sep 2005  |  | Feb 2006 
|                                         |  |         |   |       |  |        |      |        |  |         |  |                        |     |           |  |          
|Total                                    |  | 561,303 |   |      |  |       |      | 15,716 |  | 577,019 |  |                        |     |           |  |          
|Steve Holliday                           |  |         |   |       |  |        |      |        |  |         |  |                        |     |           |  |          
|ESOP                                     |  | 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
|                                         |  | 14,083  |   |      |  |       |      |       |  | 14,083  |  | 100 in total June 2006 |     | June 2013 |  |          
|                                         |  |        |   |      |  |       |      | 18,713 |  | 18,713  |  | nil                    | (i) | May 2007  |  | May 2014 
|Sharesave                                |  | 4,692   |   |      |  |       |      |       |  | 4,692   |  | 350.00                 |     | Mar 2008  |  | Aug 2008 
|                                         |  |         |   |       |  |        |      |        |  |         |  |                        |     |           |  |          
|Total                                    |  | 352,307 |   |      |  |       |      | 18,713 |  | 371,020 |  |                        |     |           |  |          
|Nick Winser                              |  |         |   |       |  |        |      |        |  |         |  |                        |     |           |  |          
|ESOP                                     |  | 10,633  |   |      |  |       |      |       |  | 10,633  |  | 375.75                 |     | June 2001 |  | June 2008
|                                         |  | 47,236  |   |      |  |       |      |       |  | 47,236  |  | 455.25                 |     | June 2002 |  | June 2009
|                                         |  | 19,755  |   |      |  |       |      |       |  | 19,755  |  | 531.50                 |     | June 2003 |  | June 2010
|                                         |  | 24,156  |   |      |  |       |      |       |  | 24,156  |  | 563.00                 |     | June 2004 |  | June 2011
|                                         |  | 37,383  |   |      |  |       |      |       |  | 37,383  |  | 481.50                 |     | June 2005 |  | June 2012
|Share Match                              |  | 872     |   | 872   |  | 465    | (iv) |       |  |        |  | 100 in total Jan 2002  |     | June 2006 |  |          
|                                         |  | 980     |   | 980   |  | 465    | (iv) |       |  |        |  | 100 in total Jan 2002  |     | June 2007 |  |          
|                                         |  | 1,694   |   | 1,694 |  | 465    | (iv) |       |  |        |  | 100 in total June 2004 |     | June 2008 |  |          
|                                         |  | 2,509   |   |      |  |       |      |       |  | 2,509   |  | 100 in total June 2005 |     | June 2012 |  |          
|                                         |  | 3,937   |   |      |  |       |      |       |  | 3,937   |  | 100 in total June 2006 |     | June 2013 |  |          
|                                         |  |        |   |      |  |       |      | 14,059 |  | 14,059  |  | nil                    | (i) | May 2007  |  | May 2014 
|Sharesave                                |  | 5,007   |   | 5,007 |  | 464.75 |      |       |  |        |  | 337.00                 |     | Sep 2004  |  | Feb 2005 
|                                         |  |         |   |       |  |        |      |        |  |         |  |                        |     |           |  |          
|Total                                    |  | 154,162 |   | 8,553 |  |       |      | 14,059 |  | 159,668 |  |                        |     |           |  |          
|Mike Jesanis                             |  |         |   |       |  |        |      |        |  |         |  |                        |     |           |  |          
|(appointed to the Board on 26 July 2004) |  |         |   |       |  |        |      |        |  |         |  |                        |     |           |  |          
|ESOP                                     |  | 77,861  | * |      |  |       |      |       |  | 77,861  |  | 566.50                 |     | Mar 2003  |  | Mar 2010 
|                                         |  | 51,169  | * |      |  |       |      |       |  | 51,169  |  | 563.00                 |     | June 2004 |  | June 2011
|                                         |  | 66,099  | * |      |  |       |      |       |  | 66,099  |  | 481.50                 |     | June 2005 |  | June 2012
|                                         |  |         |   |       |  |        |      |        |  |         |  |                        |     |           |  |          
|Total (shares)                           |  | 195,129 |   |      |  |       |      |       |  | 195,129 |  |                        |     |           |  |          
|Phantom ADSs(ii)                         |  | 639     | * |      |  |       |      | 27     |  | 666     |  | $39.590                |     |          |  |         
|                                         |  | 2,740   | * |      |  |       |      | 117    |  | 2,857   |  | $34.270                |     |          |  |         
|                                         |  | 3,154   | * |      |  |       |      | 134    |  | 3,288   |  | $32.320                |     |          |  |         
|                                         |  | 2,777   | * |      |  |       |      | 118    |  | 2,895   |  | $39.376                |     |          |  |         
|                                         |  |         |   |       |  |        |      |        |  |         |  |                        |     |           |  |          
|Total (Phantom ADSs)                     |  | 9,310   |   |      |  |       |      | 396    |  | 9,706   |  |                        |     |           |  |          

76

---



|Rick Sergel (retired from the Board on 26 July 2004) ESOP |  | 201,845 |     |  |  |  |  |      |  | 201,845 |  | 566.50  |  | July 2004 |  | July 2005
|--------------------------------------------------------- |  | ------- | --- | - |  | - |  | ----- |  | ------- | - | ------- |  | --------- |  | ---------
|                                                          |  | 134,321 |     |  |  |  |  |      |  | 134,321 |  | 563.00  |  | July 2004 |  | July 2005
|                                                          |  | 172,836 |     |  |  |  |  |      |  | 172,836 |  | 481.50  |  | July 2004 |  | July 2005
|                                                          |  |         |     |   |  |   |  |       |  |         |   |         |  |           |  |          
|Total (shares)                                            |  | 509,002 |     |  |  |  |  |      |  | 509,002 |   |         |  |           |  |          
|Phantom ADSs(iii)                                         |  | 4,782   | (v) |  |  |  |  |      |  | 4,782   |  | $39.590 |  |          |  |         
|                                                          |  | 5,658   | (v) |  |  |  |  |      |  | 5,658   |  | $34.270 |  |          |  |         
|                                                          |  | 6,144   | (v) |  |  |  |  |      |  | 6,144   |  | $32.320 |  |          |  |         
|                                                          |  |        |     |  |  |  |  | 5,455 |  | 5,455   |  | $39.376 |  |          |  |         
|Total (Phantom ADSs)                                      |  | 16,584  |     |  |  |  |  | 5,455 |  | 22,039  |   |         |  |           |  |          

---



No further awards will be made under this plan but there are outstanding options granted in previous years. Such options will normally be exercisable between the
third and tenth anniversaries of the 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 then it will be re-tested as indicated.

For
options granted in June 2000, options worth up to 100% of an optionholder's base salary will become exercisable in full if Total Shareholder Return (TSR), measured over the
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. Grants in excess of 100% of salary, vest on a
sliding scale, becoming fully exercisable if the Group'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. These options remain unvested. For options granted from March 2001, the same TSR test is used but the performance condition may only be re-tested in years
four and five. These options remain unvested and a final re-test will be undertaken in March 2006.

The
comparator group was revised in June 2002 and 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 plc                          |  | 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        |  |                           
|                         

These
options have now vested having reached median performance, such that 100% of salary has vested. Details of the exercise periods are shown in table 3.

Details
of the closing price of National Grid Transco shares as at 31 March 2005 and the high and low prices during the year are shown below table 6.

77

---



4.    Directors' interests in the Performance Share Plan

The table below gives details of the Executive Directors' holdings of conditional shares awarded under the National Grid Transco Performance Share Plan (PSP).
Under this Plan Executive Directors receive a conditional award of shares, up to a maximum of 125% of salary, which is subject to a TSR performance condition over a three-year performance
period. Shares are then released following a further one-year retention period.

Table 4

|                |  | Conditional
shares at
31 March 2004
or, if later,
on appointment* |   | Awards
exercised/
lapsed
during year |  | Awards
granted
during year |  | Market
price at
award
(pence) |         | Date
of award |           | Vested
in year |   | Lapsed
without
vesting
in year |         | Conditional
shares at
31 March 2005
or, if earlier,
on retirement |             | Release
date
|--------------- |  | ----------------------------------------------------------------- | - | ------------------------------------ |  | -------------------------- |  | ----------------------------- | ------- | ------------- | --------- | -------------- | - | ------------------------------ | ------- | ------------------------------------------------------------------ | ----------- | ------------
|Roger Urwin     |  | 195,866                                                           |   |                                     |  |                           |  |                               | 405.25  |               | June 2003 |                |  |                                |        |                                                                    | 195,866     |             
|                |  |                                                                  |   |                                     |  | 198,587                    |  |                               | 424.875 |               | June 2004 |                |  |                                |        |                                                                    | 198,587     |             
|                |  |                                                                   |   |                                      |  |                            |  |                               |         |               |           |                |   |                                |         |                                                                    |             |             
|Total           |  | 195,866                                                           |   |                                     |  | 198,587                    |  |                               |         |               |           |                |  |                                |        |                                                                    | 394,453     |             
|Steve Lucas     |  | 115,669                                                           |   |                                     |  |                           |  |                               | 405.25  |               | June 2003 |                |  |                                |        |                                                                    | 115,669     |             
|                |  |                                                                  |   |                                     |  | 116,210                    |  |                               | 424.875 |               | June 2004 |                |  |                                |        |                                                                    | 116,210     |             
|                |  |                                                                   |   |                                      |  |                            |  |                               |         |               |           |                |   |                                |         |                                                                    |             |             
|Total           |  | 115,669                                                           |   |                                     |  | 116,210                    |  |                               |         |               |           |                |  |                                |        |                                                                    | 231,879     |             
|Edward Astle    |  | 107,958                                                           |   |                                     |  |                           |  |                               | 405.25  |               | June 2003 |                |  |                                |        |                                                                    | 107,958     |             
|                |  |                                                                  |   |                                     |  | 110,326                    |  |                               | 424.875 |               | June 2004 |                |  |                                |        |                                                                    | 110,326     |             
|                |  |                                                                   |   |                                      |  |                            |  |                               |         |               |           |                |   |                                |         |                                                                    |             |             
|Total           |  | 107,958                                                           |   |                                     |  | 110,326                    |  |                               |         |               |           |                |  |                                |        |                                                                    | 218,284     |             
|Steve Holliday  |  | 115,669                                                           |   |                                     |  |                           |  |                               | 405.25  |               | June 2003 |                |  |                                |        |                                                                    | 115,669     |             
|                |  |                                                                  |   |                                     |  | 117,681                    |  |                               | 424.875 |               | June 2004 |                |  |                                |        |                                                                    | 117,681     |             
|                |  |                                                                   |   |                                      |  |                            |  |                               |         |               |           |                |   |                                |         |                                                                    |             |             
|Total           |  | 115,669                                                           |   |                                     |  | 117,681                    |  |                               |         |               |           |                |  |                                |        |                                                                    | 233,350     |             
|Nick Winser     |  | 92,535                                                            |   |                                     |  |                           |  |                               | 405.25  |               | June 2003 |                |  |                                |        |                                                                    | 92,535      |             
|                |  |                                                                  |   |                                     |  | 98,558                     |  |                               | 424.875 |               | June 2004 |                |  |                                |        |                                                                    | 98,558      |             
|                |  |                                                                   |   |                                      |  |                            |  |                               |         |               |           |                |   |                                |         |                                                                    |             |             
|Total           |  | 92,535                                                            |   |                                     |  | 98,558                     |  |                               |         |               |           |                |  |                                |        |                                                                    | 191,093     |             
|Mike Jesanis(i) |  | 41,871                                                            | * |                                     |  |                           |  |                               | 405.25  |               | June 2003 |                |  |                                |        |                                                                    | 41,871      |             
|                |  | ADSs 19,987                                                       | * |                                     |  |                           |  | $                             | 39.40   |               | June 2004 |                |  |                                |        |                                                                    | ADSs 19,987 |             
|                |  |                                                                   |   |                                      |  |                            |  |                               |         |               |           |                |   |                                |         |                                                                    |             |             
|Total           |  | 41,871                                                            | * |                                     |  |                           |  |                               |         |               |           |                |  |                                |        |                                                                    | 41,871      |             
|                |  | ADSs 19,987                                                       | * |                                     |  |                           |  |                               |         |               |           |                |  |                                |        |                                                                    | ADSs 19,987 |             
|Rick Sergel     |  | 152,063                                                           |   |                                     |  |                           |  |                               | 405.25  |               | June 2003 |                |  |                                | 152,063 |                                                                    |            |            
|                |  |                                                                   |   |                                      |  |                            |  |                               |         |               |           |                |   |                                |         |                                                                    |             |             
|Total           |  | 152,063                                                           |   |                                     |  |                           |  |                               |         |               |           |                |  |                                | 152,063 |                                                                    |            |            

---

5.    Directors' interests under the Lattice Long Term Incentive Scheme

The following table shows awards under the Lattice Long Term Incentive Scheme (LTIS) that were rolled over at the time of the merger between National Grid Group
plc and Lattice Group plc by Steve Lucas and that were still held at 31 March 2005.

|            |  | Original
award
date |  | Award held at 1 April 2004 including dividend reinvestment shares |  | Adjusted market
price for award
at rollover |  | Shares resulting
from dividend
reinvestment
in year |  | Award
released
during year |  | Market price
at date of
release
(pence) |  | Award held
at 31 March
2005 or on
retirement |  | Date award
released
|----------- |  | ------------------- |  | ----------------------------------------------------------------- |  | ------------------------------------------- |  | --------------------------------------------------- |  | -------------------------- |  | --------------------------------------- |  | --------------------------------------------- |  | -------------------
|Steve Lucas |  | Nov 2000            |  | 81,492                                                            |  | 350.43                                      |  | 2,122                                               |  | 83,614                     |  | 461.80                                  |  |                                              |  | Nov 2004           
|            |  | Nov 2001            |  | 96,589                                                            |  | 388.24                                      |  | 1,612                                               |  |                           |  |                                        |  | 98,201                                        |  | Nov 2005           
|            |  |                     |  |                                                                   |  |                                             |  |                                                     |  |                            |  |                                         |  |                                               |  |                    
|Total       |  |                     |  | 178,081                                                           |  |                                             |  | 3,734                                               |  | 83,614                     |  |                                        |  | 98,201                                        |  |                    



No awards have been made under this Plan since November 2001. Under the terms of the Lattice LTIS, notional allocations of shares were made to key
individuals. The allocations were subject to a performance condition over three years as set out below and a further retention period of one year. The number of shares actually released to
participants depended on the Group's TSR compared with that of other regulated utility companies operating in a similar environment.

The
2000 and 2001 LTIS awards held by Steve Lucas continued over a number of National Grid Transco shares shown above and remain subject to the rules of the LTIS except that
(i) since 21 October 2002, the performance target measures the Group's TSR against the original comparator group of each award; and (ii) the awards will not be forfeited on
ceasing employment unless the Remuneration Committee decides otherwise.

78

---



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

|Powergen plc                   |  | 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)

No awards vested if the Group's TSR over the performance period, when compared with that of the other companies in the comparator group, fell
below median. For TSR between that of the median and upper quartile of comparator group constituent companies the proportion of shares that vested was calculated on a straight-line basis
between 40% and 100%, and for TSR performance at or above upper quartile the awards vested in full.

During
2004/05, the 2000 award was released to Steve Lucas following the end of the retention period. The 2001 award vested when the Group's TSR was measured against the comparator group
at the end of the performance period such that 100% of the award vested. Shares under this award will be held for a further year, the retention period, and will be released in November 2005.

6.    Directors' beneficial interests

The Directors' beneficial interests (which include those of their families) in the ordinary shares of National Grid Transco of 10p each are shown below.

|                            |  | Ordinary shares at
ordinary shares at
31 March 2005(i)
or, if earlier,
on retirement |   | Ordinary shares at
1 April 2004
or, if later,
on appointment* |   | Options/awards over
ordinary shares at
31 March 2005
or, if earlier,
on resignation(iii) |   | Options/awards over
ordinary shares at
1 April 2004
or, if later,
on appointment* |  
|--------------------------- |  | ------------------------------------------------------------------------------------- | - | ------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------- | - | --------------------------------------------------------------------------------- | -
|Roger Urwin(ii)(iv)         |  | 249,517                                                                               |   | 231,292                                                       |   | 1,126,284                                                                                 |   | 896,935                                                                           |  
|Steve Lucas(ii)(v)(vi)(vii) |  | 102,063                                                                               |   | 42,961                                                        |   | 404,093                                                                                   |   | 350,854                                                                           |  
|Edward Astle(ii)            |  | 21,118                                                                                |   | 11,973                                                        |   | 795,303                                                                                   |   | 669,261                                                                           |  
|Steve Holliday(ii)(iv)      |  | 25,843                                                                                |   | 14,629                                                        |   | 604,370                                                                                   |   | 467,976                                                                           |  
|Nick Winser(ii)             |  | 36,515                                                                                |   | 19,781                                                        |   | 350,761                                                                                   |   | 246,697                                                                           |  
|Mike Jesanis(ii)            |  | 3,557                                                                                 |   | 3,412                                                         | * | 336,935                                                                                   |   | 336,935                                                                           | *
|Rick Sergel(ii)             |  | 3,058                                                                                 |  | 3,058                                                         |   | 509,002                                                                                   |  | 661,065                                                                           |  
|Sir John Parker             |  | 52,229                                                                                |   | 40,229                                                        |   |                                                                                          |   |                                                                                  |  
|James Ross                  |  | 19,000                                                                                |  | 19,000                                                        |   |                                                                                          |   |                                                                                  |  
|John Grant                  |  | 10,000                                                                                |   | 10,000                                                        |   |                                                                                          |   |                                                                                  |  
|Ken Harvey                  |  | 3,874                                                                                 |   | 1,874                                                         |   |                                                                                          |   |                                                                                  |  
|Paul Joskow                 |  | 5,000                                                                                 |   | 5,000                                                         |   |                                                                                          |   |                                                                                  |  
|Stephen Pettit              |  | 3,000                                                                                 |   | 1,875                                                         |   |                                                                                          |   |                                                                                  |  
|Maria Richter               |  | 2,000                                                                                 |   |                                                              |   |                                                                                          |   |                                                                                  |  
|George Rose                 |  | 5,025                                                                                 |   | 5,025                                                         |   |                                                                                          |   |                                                                                  |  
|John Allan (viii)           |  |                                                                                      |   |                                                              |   |                                                                                          |   |                                                                                  |  

---

The
closing price of a National Grid Transco share on 31 March 2005 was 490.25p. The range during the year was 549.50p (high) and 421.25p (low). Please note that the Register of
Directors' Interests contains full details of shareholdings and options/awards held by Directors as at 31 March 2005.

On
behalf of the Board

Helen MahyGroup Company Secretary and General Counsel
18 May 2005

79

---





International Financial Reporting Standards

Overview

All companies listed on a European Union stock exchange are required to adopt International Financial Reporting Standards (IFRS) as published by the International
Accounting Standards Board and endorsed by the European Commission. We are required to adopt IFRS in our next consolidated financial statements, for the financial year commencing on 1
April 2005.

The
Group commenced a programme of work in 2003, to enable a smooth transition to IFRS. This involved examining all implementation aspects, including changes to accounting policies,
systems impacts, staff training, restatement of comparative periods, assessment of IFRS accounting developments and related business issues arising from the conversion to IFRS. This work is almost
completed and remains on course to meet the requirements of the publication of full IFRS financial statements for 2005/06.

Unaudited impact of adopting IFRS

The adoption of IFRS will have a significant impact on the Group's reported financial results, initially leading to higher reported operating profit, profit
before tax, profit for the year and earnings per share together with higher reported net assets. The unaudited tables below show the impact that the adoption of IFRS would have, compared with the
equivalent UK GAAP measures of operating profit, profit before tax, profit for the year and earnings per share for 2004/05, together with a reconciliation from UK GAAP to IFRS for net assets as at 31
March 2005. The impact on adjusted operating profit, adjusted profit before tax, adjusted profit for the year and adjusted earnings per share is also shown.



|For the year ended 31 March 2005 |                                             | Adjusted
operating
profit |     | Goodwill
amortisation
and
exception
items |     | Operating
profit |    
|-------------------------------- | ------------------------------------------- | ------------------------- | --- | ----------------------------------------- | --- | ---------------- | ---
|
|UK GAAP                          |                                             | 2,212                     |     | (360                                      | )   | 1,852            |    
|IFRS adjustments:                |                                             |                           |     |                                           |     |                  |    
|                                 | Replacement expenditure                     |                           | 336 |                                           |    |                  | 336
|                                 | Regulatory assets                           |                           | 269 |                                           | (60 | )                | 209
|                                 | Pensions and other post-retirement benefits |                           | 6   |                                           | 15  |                  | 21 
|                                 | Goodwill amortisation                       |                           |    |                                           | 109 |                  | 109
|                                 | Profits on disposal of properties           |                           | 62  |                                           |    |                  | 62 
|                                 | Reclassification of share of joint ventures |                           | (7  | )                                         |    |                  | (7 
|                                 | Other                                       |                           | (12 | )                                         |    |                  | (12
|                                 |                                             |                           |     |                                           |     |                  |    
|IFRS                             |                                             | 2,866                     |     | (296                                      | )   | 2,570            |    
|                                 |                                             |                           |     |                                           |     |                  |    



|For the year ended 31 March 2005 |                                             | Adjusted
profit
before
tax |     | Goodwill
amortisation
and
exceptional
items |     | Profit
before
tax |    
|-------------------------------- | ------------------------------------------- | -------------------------- | --- | ------------------------------------------- | --- | ----------------- | ---
|
|UK GAAP                          |                                             | 1,429                      |     | (277                                        | )   | 1,152             |    
|IFRS adjustments:                |                                             |                            |     |                                             |     |                   |    
|                                 | Replacement expenditure                     |                            | 336 |                                             |    |                   | 336
|                                 | Regulatory assets                           |                            | 306 |                                             | (60 | )                 | 246
|                                 | Pensions and other post-retirement benefits |                            | 42  |                                             | 15  |                   | 57 
|                                 | Goodwill amortisation                       |                            |    |                                             | 109 |                   | 109
|                                 | Profits on disposal of properties           |                            | 62  |                                             | (62 | )                 |   
|                                 | Reclassification of share of joint ventures |                            | (2  | )                                           |    |                   | (2 
|                                 | Other                                       |                            | (18 | )                                           |    |                   | (18
|                                 |                                             |                            |     |                                             |     |                   |    
|IFRS                             |                                             | 2,155                      |     | (275                                        | )   | 1,880             |    
|                                 |                                             |                            |     |                                             |     |                   |    



|For the year ended 31 March 2005 |                                             | Adjusted
profit for
the year |     | Goodwill
amortisation
and
exceptional
items |     | Profit for
the year |    
|-------------------------------- | ------------------------------------------- | ---------------------------- | --- | ------------------------------------------- | --- | ------------------- | ---
|
|UK GAAP                          |                                             | 1,106                        |     | (198                                        | )   | 908                 |    
|IFRS adjustments:                |                                             |                              |     |                                             |     |                     |    
|                                 | Replacement expenditure                     |                              | 236 |                                             |    |                     | 236
|                                 | Regulatory assets                           |                              | 187 |                                             | (36 | )                   | 151
|                                 | Pensions and other post-retirement benefits |                              | 31  |                                             | 10  |                     | 41 
|                                 | Goodwill amortisation                       |                              |    |                                             | 109 |                     | 109
|                                 | Deferred taxation                           |                              | (11 | )                                           |    |                     | (11
|                                 | Profits on disposal of properties           |                              | 62  |                                             | (62 | )                   |   
|                                 | Other                                       |                              | (10 | )                                           |    |                     | (10
|                                 |                                             |                              |     |                                             |     |                     |    
|IFRS (net income)                |                                             | 1,601                        |     | (177                                        | )   | 1,424               |    
|                                 |                                             |                              |     |                                             |     |                     |    



|For the year ended 31 March 2005 |                                             | Adjusted
earnings
per share |      | Goodwill
amortisation
and
exceptional
items |      | Earnings
per share |     
|-------------------------------- | ------------------------------------------- | --------------------------- | ---- | ------------------------------------------- | ---- | ------------------ | ----
|
|UK GAAP                          |                                             | 35.9                        |      | (6.4                                        | )    | 29.5               |     
|IFRS adjustments:                |                                             |                             |      |                                             |      |                    |     
|                                 | Replacement expenditure                     |                             | 7.7  |                                             |     |                    | 7.7 
|                                 | Regulatory assets                           |                             | 6.0  |                                             | (1.1 | )                  | 4.9 
|                                 | Pensions and other post-retirement benefits |                             | 1.0  |                                             | 0.3  |                    | 1.3 
|                                 | Goodwill amortisation                       |                             |     |                                             | 3.5  |                    | 3.5 
|                                 | Deferred taxation                           |                             | (0.4 | )                                           |     |                    | (0.4
|                                 | Profits on disposal of properties           |                             | 2.0  |                                             | (2.0 | )                  |    
|                                 | Other                                       |                             | (0.3 | )                                           |     |                    | (0.3
|                                 |                                             |                             |      |                                             |      |                    |     
|IFRS                             |                                             | 51.9                        |      | (5.7                                        | )    | 46.2               |     
|                                 |                                             |                             |      |                                             |      |                    |     



|As at 31 March 2005 |                                             | Net assets |       
|------------------- | ------------------------------------------- | ---------- | ------
|
|UK GAAP             |                                             | 1,391      |       
|IFRS adjustments:   |                                             |            |       
|                    | Replacement expenditure                     |            | 4,305 
|                    | Regulatory assets                           |            | (2,663
|                    | Pensions and other post-retirement benefits |            | (1,741
|                    | Intangible assets other than goodwill       |            | 182   
|                    | Goodwill                                    |            | 18    
|                    | Deferred taxation                           |            | 179   
|                    | Proposed final dividend                     |            | 469   
|                    | Non-equity minority interests               |            | (22   
|                    | Other                                       |            | (23   
|                    |                                             |            |       
|IFRS                |                                             | 2,095      |       
|                    |                                             |            |       

The
adjustments to net assets are measurement adjustments only. This reconciliation is not intended to represent adjustments relating to balance sheet reclassifications that do not
affect net assets, but will arise as a result of conversion to IFRS.

80

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Basis of preparation

IFRS is subject to interpretation by the International Financial Reporting Interpretations Committee. Further standards may be issued that need to be adopted for
financial years beginning on or after 1 April 2005. Also, the number of new and revised standards within IFRS means that there is not yet a significant established practice from which to draw
conclusions on the application and interpretation of IFRS.

In
addition, at 31 March 2005, the planned sales of four of our gas distribution networks did not meet the criteria to be treated as discontinued operations under IFRS. As a
consequence, the results of those networks are included within IFRS operating profit, profit before tax, profit for the year (net income) and earnings per share without being separately identified as
discontinued.

When
the Group's results for the year ending 31 March 2006 are published, the comparatives (for the year ended 31 March 2005) will need to be re-presented on
the basis that the operations of the networks that are to be
sold will by then have become discontinued. As a consequence, the Group's results and financial position as at 31 March 2005, reported next year, will differ from the unaudited IFRS results and
financial position shown in the tables on page 80.

The
following notes explain the primary adjustments arising from the conversion to IFRS.



This represents the cost of planned maintenance on gas mains and services assets, the vast majority of which relate to the Group's UK Gas Distribution business.
Under UK GAAP, repex is written off to the profit and loss account as incurred. Under IFRS, it is capitalised and depreciated over its useful life.



These assets arise when a US-based public utility, authorised by its regulator, defers to its balance sheet certain costs or revenues which would
otherwise be charged or credited to the income statement. These assets are currently recognised in the balance sheet under UK GAAP. Under IFRS, regulatory assets are not permitted to be recognised in
the balance sheet. Instead, costs are charged to the income statement when incurred and recoveries from customers are recognised when receivable.



Under UK GAAP, the Group's pensions and post-retirement benefits are accounted for under SSAP 24. Under IFRS, these benefits are accounted for under
IAS 19. This results in the Group recognising all of its net pension and other post-retirement benefit obligations in the balance sheet at 1 April 2004 with a corresponding
adjustment to opening reserves. There are also differences in the measurement of the annual pension expense under IAS 19 compared with SSAP 24.



In a business combination IFRS requires fair values to be attributed to intangible assets that are not recognised under UK GAAP together with associated deferred
tax balances. A corresponding reduction in goodwill arises as a consequence. The acquisition of the UK operations of Crown Castle International Corp. in 2004/05 resulted in the recognition under IFRS
of certain intangibles, amounting to £188 million at the date of acquisition, which are being amortised on a straight-line basis on periods ranging from 10 to
25 years. In accordance with IFRS 1, the Group has not restated any business combinations that occurred prior to 31 March 2004.



The goodwill recorded in the accounts as at 31 March 2005 primarily arose from the acquisition of our US businesses and from the acquisition of the UK
operations of Crown Castle International Corp. Under UK GAAP, goodwill is amortised over 20 years. Under IFRS, we are no longer required to amortise goodwill, however, it must be reviewed for
impairment on an annual basis. This adjustment affects operating profit, profit before tax, profit for the year and earnings per share, but does not affect adjusted operating profit, adjusted profit
before tax, adjusted profit for the year or adjusted earnings per share as goodwill amortisation is excluded from adjusted profit measures under UK GAAP.



Under UK GAAP, certain items must be shown below operating profit within exceptional items on the face of the profit and loss account, in particular material
gains and losses on the disposal of fixed assets. Gains and losses on disposal of properties held by SecondSite Property, our property management business, will be included within both adjusted
operating profit and operating profit under IFRS, as these are considered to be part of the normal recurring operating activities of the Group.



Most of the IFRS adjustments give rise to temporary differences (differences between the tax base and the book value of assets and liabilities). Deferred taxation
is provided in respect of these temporary differences in accordance with IAS 12. This is different to the timing differences method used under UK GAAP.



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



Under UK GAAP, non-equity minority interests are shown separately from shareholders' equity within capital and reserves. Under IFRS this amount is
included within liabilities, resulting in lower net assets.

Financial instruments

The unaudited adjustments reconciling UK GAAP and IFRS as at 31 March 2005 shown on page 80 do not reflect the impact of IAS 39, which is being
adopted by the Group with effect from 1 April 2005.

81

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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.

84

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Accounting Policies

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 from US GAAP. An explanation of the main differences between UK and US GAAP is set out in
note 32 to the accounts, and a summary of the results under US GAAP is shown in note 33.

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 has adopted Financial Reporting Standard (FRS) 20 'Sharebased Payment' during the year. The impact of the adoption is shown in note 1.

The
Group is following the transitional arrangements of FRS 17 'Retirement Benefits'. The required disclosures are shown in note 7.

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 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 the 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 and associated undertakings 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 years ended 31 March 2003 and
2004, 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 where the effect is material is shown as part
of the Group's exceptional financing costs (see note 4(c)).

The
21 October 2002 business combination of National Grid and Lattice met the merger accounting criteria under UK GAAP and the Companies Act 1985 and therefore the transaction was
accounted for as a merger. The consolidated accounts have been prepared as if National Grid and Lattice had always comprised the Group. The combined accounts were 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.

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.

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.

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 foreign exchange derivative, the relevant asset or liability is translated at the rate of exchange under the related derivative.

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 and extensions to or significant increases in the capacity of existing 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.

|Depreciation periods for categories of tangible fixed assets |                                                    | Years   
|------------------------------------------------------------ | -------------------------------------------------- | --------
|Plant and machinery                                          |                                                    |         
|                                                             | Electricity transmission plant                     |         
|                                                             | Electricity distribution plant                     |         
|                                                             | Interconnector plant                               |         
|                                                             | Gas plantmains, services and regulating equipment |         
|                                                             | Gas plantstorage                                  |         
|                                                             | Gas plantmeters                                   |         
|                                                             | Wireless towers/infrastructure                     |         
|Freehold and leasehold buildings                             |                                                    | up to 65
|Motor vehicles and office equipment                          |                                                    | up to 10

85

---



No
depreciation is provided on freehold land and assets in the course 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 on the previous page.

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 assets are only recognised to the extent that they are considered recoverable.

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.

k)    Decommissioning and environmental costs

Decommissioning and environmental costs, based on discounted future estimated expenditures, 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 sales value derived from the transmission and distribution of energy and recovery of stranded costs together with the sales
value derived from the provision of other services, including wireless infrastructure services, to customers during the year and excludes value added tax and intra-group sales.

Turnover
from the transmission and distribution of energy and recovery of stranded costs originates from the value of units supplied during the year and includes an estimate of the value
of units supplied to customers between the date of their last meter reading and the year end. No liability is recognised when revenues received or receivable exceed the maximum amount permitted by
regulatory agreement and reductions will be made to future prices to reflect this over-recovery.

Turnover
from wireless infrastructure services consists mainly of the value of managed broadcast transmission services (for both television and radio networks) and site rentals earned by
leasing antenna space on our sites to a range of customers who provide mobile telephony and transmission services. Site rental and transmission service revenue is recognised on a
straight-line basis over agreed contracted periods with terms generally ranging from one to twenty years.

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

Operating lease payments are charged to the profit and loss account on a straight-line basis over the term of the lease.

86

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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, with a view to providing 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.

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.

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.

All
other currency swaps and forward currency agreements are translated 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.

Liabilities
recognised in respect of index-linked swap contracts relating to the purchase of energy are measured on the basis of their estimated market value. In addition, 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. Redundancy costs are classified as
part of 'other operating charges' as these costs do not relate to services provided by employees for the year.

q)    Share-based payments

Equity-settled share-based payments are measured at fair value at the date of grant. The fair value determined at the grant date of the equity-settled share-based
payments is expensed on a straight-line basis over the vesting period, based on an estimate of shares that will eventually vest.

87

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Group Profit and Loss Account  for the years ended 31 March

|                                                                                |                                                                          | Notes |     | 2005   |       | 2004
(restated)(i) |       | 2003
(restated)(i) |      
|------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ----- | --- | ------ | ----- | ------------------ | ----- | ------------------ | -----
|
|Turnover, including share of joint ventures'                                    |                                                                          |       |     | 8,583  |       | 9,104              |       | 9,566              |      
|Less: share of joint ventures' turnovercontinuing operations                   |                                                                          |       |     | (49    | )     | (48                | )     | (73                | )    
|Less: share of joint ventures' turnoverdiscontinued operations                 |                                                                          |       |     | (13    | )     | (23                | )     | (93                | )    
|                                                                                |                                                                          |       |     |        |       |                    |       |                    |      
|Group turnovercontinuing operations before acquisition                         |                                                                          |       |     | 8,373  |       | 8,875              |       | 8,833              |      
|Group turnoveracquisition                                                      |                                                                          |       |     | 148    |       |                   |       |                   |      
|Group turnovercontinuing operations                                            |                                                                          |       |     | 8,521  |       | 8,875              |       | 8,833              |      
|Group turnoverdiscontinued operations                                          |                                                                          |       |     |       |       | 158                |       | 567                |      
|Group turnover                                                                  |                                                                          | 2(a   | )   | 8,521  |       | 9,033              |       | 9,400              |      
|Operating costs                                                                 |                                                                          | 3     |     | (6,676 | )     | (7,203             | )     | (7,828             | )    
|                                                                                |                                                                          |       |     |        |       |                    |       |                    |      
|Operating profit of Group undertakingscontinuing operations before acquisition |                                                                          |       |     | 1,829  |       | 1,830              |       | 1,766              |      
|Operating profit of Group undertakingsacquisition                              |                                                                          |       |     | 16     |       |                   |       |                   |      
|Operating profit of Group undertakingscontinuing operations                    |                                                                          | 2(b   | )   | 1,845  |       | 1,830              |       | 1,766              |      
|Operating loss of Group undertakingsdiscontinued operations                    |                                                                          | 2(b   | )   |       |       |                   |       | (194               | )    
|                                                                                |                                                                          |       |     | 1,845  |       | 1,830              |       | 1,572              |      
|Share of joint ventures' operating profitcontinuing operations                 |                                                                          | 2(b   | )   | 6      |       | 7                  |       | 9                  |      
|Share of joint ventures' operating profitdiscontinued operations               |                                                                          | 2(b   | )   | 1      |       |                   |       | 115                |      
|                                                                                |                                                                          |       |     | 7      |       | 7                  |       | 124                |      
|                                                                                |                                                                          |       |     |        |       |                    |       |                    |      
|Operating profit                                                                |                                                                          |       |     |        |       |                    |       |                    |      
|                                                                                | Before exceptional items and goodwill amortisation                      |       | 2(b | )      | 2,212 |                    | 2,213 |                    | 2,148
|                                                                                | Exceptional itemscontinuing operations                                 |       | 4(a | )      | (251  | )                  | (277  | )                  | (311 
|                                                                                | Exceptional itemsdiscontinued operations                               |       | 4(a | )      |      |                    |      |                    | (39  
|                                                                                | Goodwill amortisation                                                   |       |     |        | (109  | )                  | (99   | )                  | (102 
|Total operating profit                                                          |                                                                          | 2(b   | )   | 1,852  |       | 1,837              |       | 1,696              |      
|Profit on disposal of tangible fixed assetscontinuing operations               |                                                                          | 4(b   | )   | 70     |       | 96                 |       | 48                 |      
|Profit/(loss) on sale or termination of operationsdiscontinued operations      |                                                                          | 4(b   | )   | 13     |       |                   |       | (68                | )    
|Gain on assets held for exchangediscontinued operations                        |                                                                          | 4(b   | )   |       |       | 226                |       |                   |      
|Merger costscontinuing operations                                              |                                                                          | 4(b   | )   |       |       |                   |       | (79                | )    
|Net interest                                                                    |                                                                          |       |     |        |       |                    |       |                    |      
|                                                                                | Excluding exceptional items                                             |       | 8   |        | (783  | )                  | (822  | )                  | (939 
|                                                                                | Exceptional items                                                       |       | 4(c | ),8    |      |                    |      |                    | (31  
|Total interest                                                                  |                                                                          | 8     |     | (783   | )     | (822               | )     | (970               | )    
|                                                                                |                                                                          |       |     |        |       |                    |       |                    |      
|Profit on ordinary activities before taxation                                   |                                                                          |       |     | 1,152  |       | 1,337              |       | 627                |      
|Taxation                                                                        |                                                                          |       |     |        |       |                    |       |                    |      
|                                                                                | Excluding exceptional items                                             |       | 9   |        | (324  | )                  | (350  | )                  | (373 
|                                                                                | Exceptional items                                                       |       | 4(d | ),9    | 79    |                    | 89    |                    | 128  
|Total taxation                                                                  |                                                                          | 9     |     | (245   | )     | (261               | )     | (245               | )    
|                                                                                |                                                                          |       |     |        |       |                    |       |                    |      
|Profit on ordinary activities after taxation                                    |                                                                          |       |     | 907    |       | 1,076              |       | 382                |      
|Minority interests                                                              |                                                                          |       |     |        |       |                    |       |                    |      
|                                                                                | Excluding exceptional items                                             |       |     |        | 1     |                    | (2    | )                  | (3   
|                                                                                | Exceptional items                                                       |       | 4(e | )      |      |                    |      |                    | (28  
|Total minority interests                                                        |                                                                          |       |     | 1      |       | (2                 | )     | (31                | )    
|                                                                                |                                                                          |       |     |        |       |                    |       |                    |      
|Profit for the year                                                             |                                                                          |       |     |        |       |                    |       |                    |      
|                                                                                | Before exceptional items and goodwill amortisation                      |       |     |        | 1,106 |                    | 1,039 |                    | 833  
|                                                                                | Exceptional itemsoperating                                             |       | 4(a | )      | (251  | )                  | (277  | )                  | (350 
|                                                                                | Exceptional itemsnon-operating                                         |       | 4(b | )      | 83    |                    | 322   |                    | (99  
|                                                                                | Exceptional itemsfinancing                                             |       | 4(c | )      |      |                    |      |                    | (31  
|                                                                                | Exceptional itemstaxation                                              |       | 4(d | )      | 79    |                    | 89    |                    | 128  
|                                                                                | Exceptional itemsminority interests                                    |       | 4(e | )      |      |                    |      |                    | (28  
|                                                                                | Goodwill amortisation                                                   |       |     |        | (109  | )                  | (99   | )                  | (102 
|Profit for the year                                                             |                                                                          |       |     | 908    |       | 1,074              |       | 351                |      
|Dividends                                                                       |                                                                          | 10    |     | (731   | )     | (609               | )     | (530               | )    
|                                                                                |                                                                          |       |     |        |       |                    |       |                    |      
|Profit/(loss) transferred to/(from) profit and loss account reserve             |                                                                          | 24    |     | 177    |       | 465                |       | (179               | )    
|                                                                                |                                                                          |       |     |        |       |                    |       |                    |      
|Earnings per ordinary share                                                     |                                                                          |       |     |        |       |                    |       |                    |      
|                                                                                | Basic, including exceptional items and goodwill amortisation            |       | 11  |        | 29.5p |                    | 35.0p |                    | 11.4p
|                                                                                | Adjusted basic, excluding exceptional items and goodwill amortisation   |       | 11  |        | 35.9p |                    | 33.9p |                    | 27.1p
|                                                                                | Diluted, including exceptional items and goodwill amortisation          |       | 11  |        | 29.3p |                    | 34.9p |                    | 11.6p
|                                                                                | Adjusted diluted, excluding exceptional items and goodwill amortisation |       | 11  |        | 35.7p |                    | 33.8p |                    | 26.7p

---

The continuing operations of the Group include the results of the four UK gas distribution networks that the Group has agreed to sell. Additional
information regarding these networks is shown in note 2 to the Accounts.

The
notes on pages 91 to 143 form part of the Accounts.

88

---





Balance Sheets  at 31 March

|                                                         |                             |    |  | Group   |      | Company |     
|-------------------------------------------------------- | --------------------------- | -- |  | ------- | ---- | ------- | ----
|
|
|Fixed assets                                             |                             |    |  |         |      |         |     
|Intangible assets                                        |                             | 12 |  | 2,003   |      | 1,537   |     
|Tangible assets                                          |                             | 13 |  | 17,746  |      | 16,706  |     
|Investments in joint ventures                            |                             |    |  |         |      |         |     
|                                                         | Share of gross assets      |    |  |         | 194  |         | 395 
|                                                         | Share of gross liabilities |    |  |         | (177 | )       | (376
|                                                         | Share of net assets        |    |  |         | 17   |         | 19  
|Other investments                                        |                             |    |  | 131     |      | 132     |     
|Total investments                                        |                             | 14 |  | 148     |      | 151     |     
|                                                         |                             |    |  |         |      |         |     
|                                                         |                             |    |  | 19,897  |      | 18,394  |     
|                                                         |                             |    |  |         |      |         |     
|Current assets                                           |                             |    |  |         |      |         |     
|Stocks                                                   |                             | 16 |  | 101     |      | 91      |     
|Debtors (amounts falling due within one year)            |                             | 17 |  | 1,545   |      | 1,588   |     
|Debtors (amounts falling due after more than one year)   |                             | 17 |  | 2,498   |      | 2,708   |     
|Current asset investments                                |                             |    |  | 570     |      | 520     |     
|Cash at bank and in hand                                 |                             |    |  | 100     |      | 96      |     
|                                                         |                             |    |  |         |      |         |     
|                                                         |                             |    |  | 4,814   |      | 5,003   |     
|Creditors (amounts falling due within one year)          |                             |    |  |         |      |         |     
|Borrowings                                               |                             |    |  | (3,256  | )    | (1,706  | )   
|Other creditors                                          |                             |    |  | (2,892  | )    | (2,807  | )   
|                                                         |                             | 18 |  | (6,148  | )    | (4,513  | )   
|                                                         |                             |    |  |         |      |         |     
|Net current (liabilities)/assets                         |                             |    |  | (1,334  | )    | 490     |     
|                                                         |                             |    |  |         |      |         |     
|Total assets less current liabilities                    |                             |    |  | 18,563  |      | 18,884  |     
|Creditors (amounts falling due after more than one year) |                             |    |  |         |      |         |     
|Borrowings                                               |                             |    |  | (10,963 | )    | (11,542 | )   
|Other creditors                                          |                             |    |  | (1,837  | )    | (1,922  | )   
|                                                         |                             | 19 |  | (12,800 | )    | (13,464 | )   
|Provisions for liabilities and charges                   |                             |    |  |         |      |         |     
|Deferred taxation                                        |                             |    |  | (3,036  | )    | (2,944  | )   
|Other provisions                                         |                             |    |  | (1,336  | )    | (1,205  | )   
|                                                         |                             | 22 |  | (4,372  | )    | (4,149  | )   
|                                                         |                             |    |  |         |      |         |     
|Net assets employed                                      |                             |    |  | 1,391   |      | 1,271   |     
|                                                         |                             |    |  |         |      |         |     
|Capital and reserves                                     |                             |    |  |         |      |         |     
|Called up share capital                                  |                             | 23 |  | 309     |      | 309     |     
|Share premium account                                    |                             | 24 |  | 1,289   |      | 1,280   |     
|Other reserves                                           |                             | 24 |  | (5,131  | )    | (5,131  | )   
|Profit and loss account                                  |                             | 24 |  | 4,892   |      | 4,763   |     
|                                                         |                             |    |  |         |      |         |     
|Equity shareholders' funds                               |                             | 26 |  | 1,359   |      | 1,221   |     
|Minority interests                                       |                             |    |  |         |      |         |     
|Equity                                                   |                             |    |  | 10      |      | 12      |     
|Non-equity                                               |                             | 25 |  | 22      |      | 38      |     
|                                                         |                             |    |  | 32      |      | 50      |     
|                                                         |                             |    |  |         |      |         |     
|                                                         |                             |    |  | 1,391   |      | 1,271   |     
|                                                         |                             |    |  |         |      |         |     

---

Commitments and contingencies are shown in note 29.

The
notes on pages 91 to 143 form part of the Accounts which were approved by the Board of Directors on 18 May 2005 and were signed on its behalf by:

Sir John ParkerChairman

Stever LucasGroup Finance Director

89

---





Group Cash Flow Statement  for the years ended 31 March

|                                                                                  |  | Notes     |  | 2005   |   | 2004   |   | 2003   |  
|--------------------------------------------------------------------------------- |  | --------- |  | ------ | - | ------ | - | ------ | -
|
|Net cash inflow from operating activities before exceptional items                |  | 27(a)     |  | 3,103  |   | 3,058  |   | 3,154  |  
|Expenditure relating to exceptional items                                         |  |           |  | (194   | ) | (248   | ) | (328   | )
|Net cash inflow from operating activities                                         |  |           |  | 2,909  |   | 2,810  |   | 2,826  |  
|Dividends from joint ventures                                                     |  |           |  | 5      |   | 8      |   | 11     |  
|Returns on investments and servicing of finance                                   |  |           |  |        |   |        |   |        |  
|Interest received and similar income                                              |  |           |  | 75     |   | 137    |   | 56     |  
|Interest paid and similar charges                                                 |  |           |  | (830   | ) | (823   | ) | (957   | )
|Dividends paid to minority interests                                              |  |           |  | (3     | ) | (6     | ) | (11    | )
|Net cash outflow for returns on investments and servicing of finance              |  |           |  | (758   | ) | (692   | ) | (912   | )
|Taxation                                                                          |  |           |  |        |   |        |   |        |  
|Net corporate tax paid                                                            |  |           |  | (150   | ) | (18    | ) | (112   | )
|Capital expenditure and financial investment                                      |  |           |  |        |   |        |   |        |  
|Net payments to acquire intangible and tangible fixed assets                      |  |           |  | (1,354 | ) | (1,400 | ) | (1,518 | )
|Receipts from disposals of tangible fixed assets                                  |  |           |  | 92     |   | 146    |   | 111    |  
|Net cash outflow for capital expenditure and financial investment                 |  |           |  | (1,262 | ) | (1,254 | ) | (1,407 | )
|Acquisitions and disposals                                                        |  |           |  |        |   |        |   |        |  
|Payments to acquire Group undertakings                                            |  |           |  | (1,151 | ) |       |   |       |  
|Less: Cash acquired with Group undertaking                                        |  |           |  | 29     |   |       |   |       |  
|                                                                                  |  | 27(c)     |  | (1,122 | ) |       |   |       |  
|Payments to acquire investments                                                   |  |           |  | (16    | ) | (26    | ) | (165   | )
|Receipts from disposals of investments                                            |  | 27(b)     |  | 8      |   | 33     |   | 328    |  
|Net cash (outflow)/inflow for acquisitions and disposals                          |  |           |  | (1,130 | ) | 7      |   | 163    |  
|Equity dividends paid                                                             |  |           |  | (628   | ) | (560   | ) | (571   | )
|                                                                                  |  |           |  |        |   |        |   |        |  
|Net cash (outflow)/inflow before the management of liquid resources and financing |  |           |  | (1,014 | ) | 301    |   | (2     | )
|Management of liquid resources                                                    |  |           |  |        |   |        |   |        |  
|Increase in short-term deposits                                                   |  |           |  | (54    | ) | (48    | ) | (138   | )
|Net cash outflow from the management of liquid resources                          |  | 27(d),(e) |  | (54    | ) | (48    | ) | (138   | )
|Financing                                                                         |  |           |  |        |   |        |   |        |  
|Issue of ordinary shares                                                          |  |           |  | 13     |   | 38     |   | 4      |  
|Payments to repurchase ordinary shares                                            |  |           |  |       |   |       |   | (97    | )
|Termination of cross currency swaps                                               |  | 27(d)     |  |       |   | 148    |   |       |  
|Increase/(decrease) in borrowings                                                 |  | 27(d),(e) |  | 1,068  |   | (426   | ) | 267    |  
|Net cash inflow/(outflow) from financing                                          |  |           |  | 1,081  |   | (240   | ) | 174    |  
|                                                                                  |  |           |  |        |   |        |   |        |  
|Movement in cash and overdrafts                                                   |  | 27(d),(e) |  | 13     |   | 13     |   | 34     |  
|                                                                                  |  |           |  |        |   |        |   |        |  

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

|                                                                                  |  | 2005 |  | 2004 |   | 2003 |  
|--------------------------------------------------------------------------------- |  | ---- |  | ---- | - | ---- | -
|
|Net cash inflow/(outflow) from operating activities                               |  |     |  | 5    |   | (70  | )
|Net cash outflow for returns on investments and servicing of finance              |  |     |  | (2   | ) | (14  | )
|Net cash (outflow)/inflow for taxation                                            |  |     |  |     |   | (1   | )
|Net cash outflow for capital expenditure and financial investment                 |  |     |  | (1   | ) | (123 | )
|Net cash outflow for acquisitions and disposals                                   |  |     |  |     |   | (3   | )
|                                                                                  |  |      |  |      |   |      |  
|Net cash inflow/(outflow) before the management of liquid resources and financing |  |     |  | 2    |   | (211 | )
|                                                                                  |  |      |  |      |   |      |  

Liquid
resources comprise money market deposits, equities and gilts.

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

|                                                                            |  | 2005 |   | 2004
(restated)(i) |   | 2003
(restated)(i) |  
|--------------------------------------------------------------------------- |  | ---- | - | ------------------ | - | ------------------ | -
|
|Profit for the year                                                         |  | 908  |   | 1,074              |   | 351                |  
|Exchange adjustments                                                        |  | (73  | ) | (417               | ) | (322               | )
|Tax on exchange adjustments                                                 |  |     |   | (12                | ) | 12                 |  
|Unrealised gain on transfer of fixed assets to a joint venture (net of tax) |  |     |   |                   |   | 6                  |  
|                                                                            |  |      |   |                    |   |                    |  
|Total recognised gains and losses relating to the year                      |  | 835  |   | 645                |   | 47                 |  
|                                                                            |  |      |   |                    |   |                    |  
|Prior year adjustment(i)                                                    |  | (140 | ) |                    |   |                    |  
|                                                                            |  |      |   |                    |   |                    |  
|Total recognised gains and losses since last annual report                  |  | 695  |   |                    |   |                    |  
|                                                                            |  |      |   |                    |   |                    |  

---

The
notes on pages 91 to 143 form part of the Accounts.

90

---





Notes to the Accounts

1.    Adoption of Financial Reporting Standard (FRS) 20

During the year, the Group adopted FRS 20 'Share-based Payment'. The adoption of this standard constitutes a change in accounting policy. Therefore, the impact
has been reflected as a prior year adjustment in accordance with Financial Reporting Standard 3.

The
standard requires that where shares or rights to shares are granted to third parties, including employees, a charge should be recognised in the profit and loss account based on the
fair value of the shares at the date the grant of shares or right to shares is made.

For
the year ended 31 March 2005, the adoption of FRS 20 has reduced both basic and adjusted operating profit by £16m, reduced basic and adjusted profit for the year
by £9m, reduced basic and adjusted earnings per share by 2.9p, and increased net assets employed by £19m.

The
effect of the adoption of FRS 20 on prior year comparatives is as follows:

|                                 |                                                     | Year ended 31 March 2004 |       | Year ended 31 March 2003 |     
|-------------------------------- | --------------------------------------------------- | ------------------------ | ----- | ------------------------ | ----
|
|
|Operating profit                 |                                                     |                          |       |                          |     
|                                 | Before exceptional items and goodwill amortisation |                          | 2,238 |                          | (25 
|                                 | After exceptional items and goodwill amortisation  |                          | 1,862 |                          | (25 
|Profit for the year              |                                                     |                          |       |                          |     
|                                 | Before exceptional items and goodwill amortisation |                          | 1,064 |                          | (25 
|                                 | After exceptional items and goodwill amortisation  |                          | 1,099 |                          | (25 
|Net assets employed              |                                                     | 1,263                    |       | 8                        |     
|Basic earnings per share (pence) |                                                     |                          |       |                          |     
|                                 | Before exceptional items and goodwill amortisation |                          | 34.7  | p                        | (0.8
|                                 | After exceptional items and goodwill amortisation  |                          | 35.8  | p                        | (0.8

The
prior year adjustment recorded in the Group Statement of Total Recognised Gains and Losses reflects the cumulative profit and loss impact of FRS 20 at 31 March 2004 of
£140m after deferred tax (£148m before deferred tax). The corresponding entry to the pre-tax FRS 20 charge is recorded through the profit and loss account reserve.
Therefore, the impact of restatements for FRS 20 on the profit and loss account reserve at 31 March 2004 represents only the deferred tax credit of £8m.

For
National Grid Transco plc (the parent company), the adoption of FRS 20 has increased the carrying value of fixed asset investments and net assets at 31 March 2004 by
£50m (2003: £27m). The adoption of FRS 20 has had no impact on the profit and loss account of the parent company.

2.    Segmental analysis

Segmental information is presented in accordance with the management responsibilities and economic characteristics of the Group's business activities.

As
a result of the acquisition of the UK operations of Crown Castle International Corp. (Crown Castle UK) as described in note 15, a new business segment has been presented. The
results of Crown Castle UK have been combined with similar activities of the existing operations of the Group and presented as a new segment shown as 'Wireless infrastructure' below. The comparative
numbers relating to this segment were previously reported within 'Other activities'.

We
have changed the segments in our US operations, combining our US electricity distribution and US gas distribution activities to form a new segment: 'US electricity and gas
distribution'. The Directors believe that their economic characteristics are similar as they receive revenues under similar regulatory schemes. We have also created a new 'US stranded cost recoveries'
segment in order to enhance the visibility of this activity.

The
following table describes the main activities for each business segment:

|UK electricity and gas transmission |  | High-voltage electricity transmission networks and the gas National Transmission System in the UK                                 
|----------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|US electricity transmission         |  | High-voltage electricity transmission networks and management of electricity transmission operations for other utilities in the US
|UK gas distribution                 |  | The majority of Britain's gas distribution system                                                                                 
|US electricity and gas distribution |  | Electricity and gas distribution in New York and electricity distribution in New England                                          
|US stranded cost recoveries         |  | The recovery of stranded costs from US customers as permitted by regulatory agreements                                            
|Wireless infrastructure             |  | Broadcast and mobile telephony infrastructure in the UK and US                                                                    

'Continuing
operationsOther activities' primarily relates to: UK based gas metering activities; our UK liquefied natural gas storage activities; the electricity
interconnectors business; and Advantica, the energy technology and systems solutions business.

Included
within the continuing operations of the UK gas distribution activity are amounts relating to four gas distribution networks that the Group has agreed to sell. These amounts have
been disclosed in the analyses of continuing operations of Group undertakings below as 'Existing businessesbusinesses to be disposed'.

Discontinued
operations include: the results of Citelec, an Argentinian joint venture, for all years presented and telecom joint ventures in 2003 which are included within the result of
joint ventures; and the results of EnMO for 2004 and 2003 together with The Leasing Group and 186k Limited for 2003 which are included within the results of Group undertakings.

The
Group assesses the performance of its businesses principally on the basis of operating profit before exceptional items and goodwill amortisation.

91

---



a)    Turnover

|                                                      |                            | Total
sales
2005 |       | Sales
between
businesses
2005 |     | Sales
to third
parties
2005 |       | Total
sales
2004
(restated) |       | Sales
between
businesses
2004
(restated) |     | Sales
to third
parties
2004
(restated) |       | Total
sales
2003
(restated) |       | Sales
between
businesses
2003
(restated) |     | Sales
to third
parties
2003
(restated) |      
|----------------------------------------------------- | -------------------------- | ---------------- | ----- | ----------------------------- | --- | --------------------------- | ----- | --------------------------- | ----- | ---------------------------------------- | --- | -------------------------------------- | ----- | --------------------------- | ----- | ---------------------------------------- | --- | -------------------------------------- | -----
|
|Turnover, including share of joint ventures'          |                            |                  |       |                               |     |                             |       |                             |       |                                          |     |                                        |       |                             |       |                                          |     |                                        |      
|                                                      | continuing operations     |                  | 9,063 |                               | 493 |                             | 8,570 |                             | 9,385 |                                          | 462 |                                        | 8,923 |                             | 9,276 |                                          | 370 |                                        | 8,906
|                                                      | discontinued operations   |                  | 13    |                               |    |                             | 13    |                             | 181   |                                          |    |                                        | 181   |                             | 679   |                                          | 19  |                                        | 660  
|Less: share of joint ventures' turnover               |                            |                  |       |                               |     |                             |       |                             |       |                                          |     |                                        |       |                             |       |                                          |     |                                        |      
|                                                      | continuing operations     |                  | (49   | )                             |    |                             | (49   | )                           | (48   | )                                        |    |                                        | (48   | )                           | (73   | )                                        |    |                                        | (73  
|                                                      | discontinued operations   |                  | (13   | )                             |    |                             | (13   | )                           | (23   | )                                        |    |                                        | (23   | )                           | (93   | )                                        |    |                                        | (93  
|                                                      |                            |                  |       |                               |     |                             |       |                             |       |                                          |     |                                        |       |                             |       |                                          |     |                                        |      
|Group turnover                                        |                            | 9,014            |       | 493                           |     | 8,521                       |       | 9,495                       |       | 462                                      |     | 9,033                                  |       | 9,789                       |       | 389                                      |     | 9,400                                  |      
|                                                      |                            |                  |       |                               |     |                             |       |                             |       |                                          |     |                                        |       |                             |       |                                          |     |                                        |      
|Continuing operations                                 |                            |                  |       |                               |     |                             |       |                             |       |                                          |     |                                        |       |                             |       |                                          |     |                                        |      
|UK electricity and gas transmission                   |                            | 1,930            |       | 37                            |     | 1,893                       |       | 1,867                       |       | 35                                       |     | 1,832                                  |       | 1,893                       |       | 29                                       |     | 1,864                                  |      
|US electricity transmission                           |                            | 283              |       | 45                            |     | 238                         |       | 318                         |       | 48                                       |     | 270                                    |       | 407                         |       | 5                                        |     | 402                                    |      
|UK gas distribution                                   |                            | 2,215            |       | 135                           |     | 2,080                       |       | 2,245                       |       | 120                                      |     | 2,125                                  |       | 2,089                       |       | 47                                       |     | 2,042                                  |      
|US electricity and gas distribution                   |                            | 3,114            |       | 2                             |     | 3,112                       |       | 3,494                       |       | 1                                        |     | 3,493                                  |       | 3,306                       |       | 1                                        |     | 3,305                                  |      
|US stranded cost recoveries                           |                            | 420              |       |                              |     | 420                         |       | 507                         |       |                                         |     | 507                                    |       | 586                         |       |                                         |     | 586                                    |      
|Wireless infrastructure                               |                            | 208              |       |                              |     | 208                         |       | 72                          |       |                                         |     | 72                                     |       | 61                          |       |                                         |     | 61                                     |      
|Other activities                                      |                            | 844              |       | 274                           |     | 570                         |       | 834                         |       | 258                                      |     | 576                                    |       | 861                         |       | 288                                      |     | 573                                    |      
|                                                      |                            |                  |       |                               |     |                             |       |                             |       |                                          |     |                                        |       |                             |       |                                          |     |                                        |      
|                                                      |                            | 9,014            |       | 493                           |     | 8,521                       |       | 9,337                       |       | 462                                      |     | 8,875                                  |       | 9,203                       |       | 370                                      |     | 8,833                                  |      
|Discontinued operations                               |                            |                 |       |                              |     |                            |       | 158                         |       |                                         |     | 158                                    |       | 586                         |       | 19                                       |     | 567                                    |      
|                                                      |                            |                  |       |                               |     |                             |       |                             |       |                                          |     |                                        |       |                             |       |                                          |     |                                        |      
|Group turnover                                        |                            | 9,014            |       | 493                           |     | 8,521                       |       | 9,495                       |       | 462                                      |     | 9,033                                  |       | 9,789                       |       | 389                                      |     | 9,400                                  |      
|                                                      |                            |                  |       |                               |     |                             |       |                             |       |                                          |     |                                        |       |                             |       |                                          |     |                                        |      
|UK                                                    |                            |                  |       |                               |     | 4,723                       |       |                             |       |                                          |     | 4,736                                  |       |                             |       |                                          |     | 5,096                                  |      
|US                                                    |                            |                  |       |                               |     | 3,798                       |       |                             |       |                                          |     | 4,297                                  |       |                             |       |                                          |     | 4,304                                  |      
|                                                      |                            |                  |       |                               |     |                             |       |                             |       |                                          |     |                                        |       |                             |       |                                          |     |                                        |      
|                                                      |                            |                  |       |                               |     | 8,521                       |       |                             |       |                                          |     | 9,033                                  |       |                             |       |                                          |     | 9,400                                  |      
|                                                      |                            |                  |       |                               |     |                             |       |                             |       |                                          |     |                                        |       |                             |       |                                          |     |                                        |      
|Continuing operations of Group undertakings comprise: |                            |                  |       |                               |     |                             |       |                             |       |                                          |     |                                        |       |                             |       |                                          |     |                                        |      
|Existing businesses                                   |                            |                  |       |                               |     |                             |       |                             |       |                                          |     |                                        |       |                             |       |                                          |     |                                        |      
|                                                      | businesses to be disposed |                  | 1,102 |                               | 73  |                             | 1,029 |                             | 1,115 |                                          | 63  |                                        | 1,052 |                             | 1,031 |                                          | 24  |                                        | 1,007
|                                                      | other                     |                  | 7,764 |                               | 420 |                             | 7,344 |                             | 8,222 |                                          | 399 |                                        | 7,823 |                             | 8,172 |                                          | 346 |                                        | 7,826
|Acquisition (Crown Castle UK)                         |                            | 148              |       |                              |     | 148                         |       |                            |       |                                         |     |                                       |       |                            |       |                                         |     |                                       |      
|                                                      |                            |                  |       |                               |     |                             |       |                             |       |                                          |     |                                        |       |                             |       |                                          |     |                                        |      
|                                                      |                            | 9,014            |       | 493                           |     | 8,521                       |       | 9,337                       |       | 462                                      |     | 8,875                                  |       | 9,203                       |       | 370                                      |     | 8,833                                  |      
|                                                      |                            |                  |       |                               |     |                             |       |                             |       |                                          |     |                                        |       |                             |       |                                          |     |                                        |      

The analysis of turnover by geographical area is on the basis of origin. Turnover on a destination basis would not be materially different. There
is no turnover between the UK and US geographical areas.

Approximately
14% (2004: 15%) of the Group's turnover for the year ended 31 March 2005 amounting to approximately £1.2bn (2004: £1.4bn) 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.

b)    Operating profit

|                                                              |  | Operating profit | 
|------------------------------------------------------------- |  | ---------------- | 
|
|
|
|Group undertakingscontinuing operations                      |  |                  | 
|UK electricity and gas transmission                           |  | 809              | 
|US electricity transmission                                   |  | 123              | 
|UK gas distribution                                           |  | 570              | 
|US electricity and gas distribution                           |  | 374              | 
|US stranded cost recoveries                                   |  | 121              | 
|Wireless infrastructure                                       |  | 46               | 
|Other activities                                              |  | 162              | 
|                                                              |  |                  | 
|                                                              |  | 2,205            | 
|Group undertakingsdiscontinued operations                    |  |                 | 
|                                                              |  |                  | 
|Operating profit of Group undertakings                        |  | 2,205            | 
|                                                              |  |                  | 
|Joint venturescontinuing operations (electricity activities) |  | 6                | 
|Joint venturesdiscontinued operations                        |  | 1                | 
|                                                              |  |                  | 
|Operating profit/(loss) of joint ventures                     |  | 7                | 
|                                                              |  |                  | 
|Total operating profit                                        |  | 2,212            | 
|                                                              |  |                  | 
|UK                                                            |  | 1,583            | 
|US                                                            |  | 623              | 
|Latin America                                                 |  | 1                | 
|Rest of the World                                             |  | 5                | 
|                                                              |  |                  | 
|                                                              |  | 2,212            | 
|                                                              |  |                  | 

92

---



|                                                      |                            | Operating profit
|----------------------------------------------------- | -------------------------- | ----------------
|
|
|
|Continuing operations of Group undertakings comprise: |                            |                 
|Existing businesses                                   |                            |                 
|                                                      | businesses to be disposed |                 
|                                                      | other                     |                 
|Acquisition (Crown Castle UK)                         |                            | 39              
|                                                      |                            |                 
|                                                      |                            | 2,205           
|                                                      |                            |                 

c)     Information relating to businesses to be disposed

Included within the continuing operations of the UK gas distribution activity are the following amounts relating to four gas distribution networks that the Group
has agreed to sell:

|                        |                                          | 2005  |      | 2004  |      | 2003  |     
|----------------------- | ---------------------------------------- | ----- | ---- | ----- | ---- | ----- | ----
|
|Turnover                |                                          | 1,102 |      | 1,115 |      | 1,031 |     
|Depreciation            |                                          | (97   | )    | (98   | )    | (90   | )   
|Payroll costs           |                                          | (132  | )    | (133  | )    | (152  | )   
|Other operating charges |                                          |       |      |       |      |       |     
|                        | Purchases of gas                        |       | (28  | )     | (20  | )     | (25 
|                        | Rates and property taxes                |       | (84  | )     | (82  | )     | (89 
|                        | Replacement expenditure                 |       | (235 | )     | (201 | )     | (199
|                        | Exceptional operating items             |       | (74  | )     | (56  | )     | (57 
|                        | Other non-exceptional operating charges |       | (181 | )     | (174 | )     | (150
|                        |                                          | (602  | )    | (533  | )    | (520  | )   
|                        |                                          |       |      |       |      |       |     
|Operating profit        |                                          | 271   |      | 351   |      | 269   |     
|                        |                                          |       |      |       |      |       |     

The
above results include shared service centre expenditure in 2005 of £27m (2004: £27m; 2003: £28m) that will continue to be recharged for a period
of 18 months following completion of the sales.

d)    Total and net assets

|                                                              |                            | Total assets |        | Net assets |       
|------------------------------------------------------------- | -------------------------- | ------------ | ------ | ---------- | ------
|
|
|Group undertakingscontinuing operations                      |                            |              |        |            |       
|UK electricity and gas transmission                           |                            | 6,448        |        | 6,284      |       
|US electricity transmission                                   |                            | 1,469        |        | 1,539      |       
|UK gas distribution                                           |                            | 5,167        |        | 4,928      |       
|US electricity and gas distribution                           |                            | 5,311        |        | 5,423      |       
|US stranded cost recoveries                                   |                            | 2,311        |        | 2,598      |       
|Wireless infrastructure                                       |                            | 1,462        |        | 156        |       
|Other activities                                              |                            | 1,818        |        | 1,734      |       
|                                                              |                            |              |        |            |       
|                                                              |                            | 23,986       |        | 22,662     |       
|Group undertakingsdiscontinued operations                    |                            |             |        |           |       
|                                                              |                            |              |        |            |       
|Group undertakings                                            |                            | 23,986       |        | 22,662     |       
|                                                              |                            |              |        |            |       
|Joint venturescontinuing operations (electricity activities) |                            | 17           |        | 19         |       
|Unallocated                                                   |                            | 708          |        | 716        |       
|                                                              |                            |              |        |            |       
|                                                              |                            | 24,711       |        | 23,397     |       
|                                                              |                            |              |        |            |       
|UK                                                            |                            | 14,494       |        | 12,846     |       
|US                                                            |                            | 9,229        |        | 9,679      |       
|Rest of the World                                             |                            | 280          |        | 156        |       
|Unallocated                                                   |                            | 708          |        | 716        |       
|                                                              |                            |              |        |            |       
|                                                              |                            | 24,711       |        | 23,397     |       
|                                                              |                            |              |        |            |       
|Continuing operations of Group undertakings comprise:         |                            |              |        |            |       
|Existing businesses                                           |                            |              |        |            |       
|                                                              | businesses to be disposed |              | 2,888  |            | 2,707 
|                                                              | other                     |              | 19,799 |            | 19,955
|Acquisition (Crown Castle UK)                                 |                            | 1,299        |        |           |       
|                                                              |                            |              |        |            |       
|                                                              |                            | 23,986       |        | 22,662     |       
|                                                              |                            |              |        |            |       

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

93

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e)     Other segmental information

|                                                      |                            | Capital expenditure |       | Depreciation and amortisation
|----------------------------------------------------- | -------------------------- | ------------------- | ----- | -----------------------------
|
|
|Group undertakingscontinuing operations              |                            |                     |       |                              
|UK electricity and gas transmission                   |                            | 522                 |       | 584                          
|US electricity transmission                           |                            | 74                  |       | 53                           
|UK gas distribution                                   |                            | 272                 |       | 293                          
|US electricity and gas distribution                   |                            | 234                 |       | 277                          
|US stranded costs recoveries                          |                            |                    |       |                             
|Wireless infrastructure                               |                            | 19                  |       | 2                            
|Other activities                                      |                            | 310                 |       | 272                          
|                                                      |                            |                     |       |                              
|                                                      |                            | 1,431               |       | 1,481                        
|Group undertakingsdiscontinued operations            |                            |                    |       |                             
|                                                      |                            |                     |       |                              
|Group undertakings                                    |                            | 1,431               |       | 1,481                        
|                                                      |                            |                     |       |                              
|UK                                                    |                            | 981                 |       | 1,071                        
|US                                                    |                            | 312                 |       | 332                          
|Rest of the World                                     |                            | 138                 |       | 78                           
|                                                      |                            |                     |       |                              
|                                                      |                            | 1,431               |       | 1,481                        
|                                                      |                            |                     |       |                              
|Continuing operations of Group undertakings comprise: |                            |                     |       |                              
|Existing businesses                                   |                            |                     |       |                              
|                                                      | businesses to be disposed |                     | 152   |                              
|                                                      | others                    |                     | 1,265 |                              
|Acquisition (Crown Castle UK)                         |                            | 14                  |       |                             
|                                                      |                            |                     |       |                              
|                                                      |                            | 1,431               |       | 1,481                        
|                                                      |                            |                     |       |                              

Capital
expenditure comprises additions to tangible and intangible fixed assets (excluding goodwill) amounting to £1,431m (2004: £1,479m; 2003:
£1,519m) and £nil (2004: £2m; 2003: £1m) respectively.

Depreciation
and amortisation includes depreciation of tangible fixed assets, amortisation of intangible fixed assets and amortisation of regulatory assets.

Depreciation
and amortisation includes amortisation of goodwill of £109m (2004: £99m; 2003: £102m). Amortisation of goodwill has arisen in the
following segments: US electricity transmission £18m (2004: £19m; 2003: £21m); US electricity and gas distribution £68m (2004: £75m; 2003:
£81m); Wireless infrastructure £23m (2004: £4m; 2003: £nil); and Other activities £nil (2004: £1m; 2003: £nil).

94

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3.    Operating costs

|                                                        |                                                        | Continuing operations                                                             |       | Discontinued operations |       | Total |      
|------------------------------------------------------- | ------------------------------------------------------ | --------------------------------------------------------------------------------- | ----- | ----------------------- | ----- | ----- | -----
|
|
|
|Total operating costs                                   |                                                        | 6,676                                                                             |       | 7,045                   |       | 7,067 |      
|Charged from discontinued operations                    |                                                        |                                                                                  |       |                        |       | (19   | )    
|                                                        |                                                        |                                                                                   |       |                         |       |       |      
|External operating costs                                |                                                        | 6,676                                                                             |       | 7,045                   |       | 7,048 |      
|                                                        |                                                        |                                                                                   |       |                         |       |       |      
|Depreciation                                            |                                                        | 860                                                                               |       | 866                     |       | 825   |      
|Payroll costs (note 5(a))                               |                                                        | 941                                                                               |       | 1,045                   |       | 1,130 |      
|Other operating charges:                                |                                                        |                                                                                   |       |                         |       |       |      
|                                                        | Purchases of electricity                              |                                                                                   | 1,678 |                         | 1,998 |       | 1,901
|                                                        | Purchases of gas                                      |                                                                                   | 385   |                         | 371   |       | 357  
|                                                        | Rates and property taxes                              |                                                                                   | 490   |                         | 516   |       | 537  
|                                                        | Electricity transmission services scheme direct costs |                                                                                   | 301   |                         | 277   |       | 252  
|                                                        | EnMO direct costs                                     |                                                                                   |      |                         |      |       |     
|                                                        | Replacement expenditure                               |                                                                                   | 474   |                         | 388   |       | 405  
|                                                        | Exceptional operating items (note 4)                  |                                                                                   | 251   |                         | 277   |       | 311  
|                                                        | Other non-exceptional operating charges               |                                                                                   | 1,296 |                         | 1,307 |       | 1,330
|                                                        |                                                        | 4,875                                                                             |       | 5,134                   |       | 5,093 |      
|                                                        |                                                        |                                                                                   |       |                         |       |       |      
|                                                        |                                                        | 6,676                                                                             |       | 7,045                   |       | 7,048 |      
|                                                        |                                                        |                                                                                   |       |                         |       |       |      
|Operating costs (except where otherwise noted) include: |                                                        |                                                                                   |       |                         |       |       |      
|Research and development costs                          |                                                        |                                                                                   |       |                         |       |       |      
|Operating lease rentals                                 |                                                        |                                                                                   |       |                         |       |       |      
|                                                        | Plant and machinery                                   |                                                                                   |       |                         |       |       |      
|                                                        | Other                                                 |                                                                                   |       |                         |       |       |      
|Amortisation of intangible fixed assets(i)              |                                                        |                                                                                   |       |                         |       |       |      
|Amortisation of regulatory assets(ii)                   |                                                        |                                                                                   |       |                         |       |       |      
|Auditors' remuneration:                                 |                                                        |                                                                                   |       |                         |       |       |      
|                                                        | Statutory audit services                               |                                                                                   |       |                         |       |       |      
|                                                        |                                                        | Annual audit (audit fee for the Company was £9,100 (2004: £8,700; 2003: £8,500)) |       |                         |       |       |      
|                                                        |                                                        | Regulatory reporting                                                             |       |                         |       |       |      
|                                                        | Further audit related services(iii)                    |                                                                                   |       |                         |       |       |      
|                                                        | Tax compliance and advisory services                   |                                                                                   |       |                         |       |       |      
|                                                        | Other non-audit services(iv)                           |                                                                                   |       |                         |       |       |      

---

For the year ended 31 March 2005, operating costs from continuing operations include £132m relating to an acquired business
(Crown Castle UK). These costs comprise depreciation (£26m), payroll costs (£16m), purchases of electricity (£7m), rates and property taxes (£1m),
exceptional operating items (£3m) and other non-exceptional operating charges (£79m).

4.    Exceptional items

The Group has categorised the following items as exceptional items under UK GAAP because, by either their size, incidence or because they are specifically
prescribed, they need to be separately disclosed for the accounts to show a true and fair view.

a)    Operating

Certain exceptional items are shown below as 'operating exceptional items'. The Directors believe these items require separate disclosure, as permitted by FRS 3,
within operating profit to show a true and fair view. These items include: restructuring costs; costs arising from the recognition of employee and property costs arising as a direct result of the
Merger; share of exceptional operating items of a joint venture; impairment of business; impairment of investments in joint ventures and associate; impairment of assets; and environmental provision
which are all disclosed by virtue of their size.

95

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|                                                |  | 2005 |  | 2004 |  | 2003
(restated) |  
|----------------------------------------------- |  | ---- |  | ---- |  | --------------- | -
|
|Continuing operations                           |  |      |  |      |  |                 |  
|Restructuring costs(i)                          |  | 210  |  | 249  |  | 203             |  
|Environmental provision(ii)                     |  | 41   |  | 28   |  |                |  
|Merger costs(iii)                               |  |     |  |     |  | 108             |  
|                                                |  |      |  |      |  |                 |  
|                                                |  | 251  |  | 277  |  | 311             |  
|                                                |  |      |  |      |  |                 |  
|Discontinued operations                         |  |      |  |      |  |                 |  
|Restructuring costs(i)                          |  |     |  |     |  | 6               |  
|Impairment of investments in joint ventures(iv) |  |     |  |     |  | (135            | )
|Impairment of business(v)                       |  |     |  |     |  | 168             |  
|                                                |  |      |  |      |  |                 |  
|                                                |  |     |  |     |  | 39              |  
|                                                |  |      |  |      |  |                 |  
|Total operating exceptional items               |  | 251  |  | 277  |  | 350             |  
|                                                |  |      |  |      |  |                 |  

---

b)    Non-operating

Paragraph 20 of FRS 3 requires that certain items should be disclosed after operating profit and are shown below as 'non-operating exceptional
items'. These items comprise: a) costs associated with a fundamental reorganisation which in the case of the Group relate to the transaction costs relating to the Merger; b) profit on
disposal of fixed assets (including the gain on assets held for exchange and other fixed asset investments); and c) profit or loss on the sale or termination of operations.

|                                                       |  | 2005 |   | 2004 |   | 2003 |  
|------------------------------------------------------ |  | ---- | - | ---- | - | ---- | -
|
|Continuing operations                                  |  |      |   |      |   |      |  
|Profit on disposal of tangible fixed assets(vi)        |  | (70  | ) | (96  | ) | (48  | )
|Merger costs(vii)                                      |  |     |   |     |   | 79   |  
|                                                       |  |      |   |      |   |      |  
|                                                       |  | (70  | ) | (96  | ) | 31   |  
|                                                       |  |      |   |      |   |      |  
|Discontinued operations                                |  |      |   |      |   |      |  
|Gain on assets held for exchange(viii)                 |  |     |   | (226 | ) |     |  
|(Profit)/loss on sale or termination of operations(ix) |  | (13  | ) |     |   | 68   |  
|                                                       |  |      |   |      |   |      |  
|                                                       |  | (13  | ) | (226 | ) | 68   |  
|                                                       |  |      |   |      |   |      |  
|Total non-operating exceptional items                  |  | (83  | ) | (322 | ) | 99   |  
|                                                       |  |      |   |      |   |      |  

---

c)     Financing costs

For 2003, the exceptional net interest cost of £31m (£31m after tax) related to the Group's share of foreign exchange losses incurred on
foreign currency borrowings by joint ventures (£98m), partially offset by the Group's share of a gain on net monetary liabilities (£67m). The gain on the net monetary
liabilities related to Citelec, a joint venture operating in Argentina which is now classified as a discontinued operation, and reflected the net gain that arose on net monetary liabilities that were
financing the operation in a hyper-inflationary economy.

d)    Taxation

The exceptional tax credit of £79m in 2005 includes a credit of £22m associated with the prior period disposal of Energis, a former
associate company; a £3m credit associated with the prior period write-down of investments; and a £12m charge relating to the settlement of the liabilities arising
from operating the Group's Qualifying Employee Share Ownership Trust. The exceptional tax credit for 2004 of £89m included a net credit amounting to £10m relating to
investments disposed of in prior periods.

e)     Minority interests

The 2003 exceptional minority interest charge of £28m related to the Group's share of the minority interest in the after taxation exceptional items of
Citelec, a joint venture which is now classified as a discontinued operation, and primarily reflected the minority interest's share of the gain on net monetary liabilities referred to in
note 4(c).

96

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5.    Payroll costs and employees

a)    Payroll costs

|                          |                                                   | 2005  |     | 2004
(restated) |     | 2003
(restated) |    
|------------------------- | ------------------------------------------------- | ----- | --- | --------------- | --- | --------------- | ---
|
|Wages and salaries        |                                                   | 990   |     | 1,050           |     | 1,161           |    
|Social security costs     |                                                   | 70    |     | 79              |     | 84              |    
|Other pension costs       |                                                   | 142   |     | 150             |     | 117             |    
|                          |                                                   |       |     |                 |     |                 |    
|                          |                                                   | 1,202 |     | 1,279           |     | 1,362           |    
|Less: Amounts capitalised |                                                   | (192  | )   | (175            | )   | (158            | )  
|                          | Payroll costs included in replacement expenditure |       | (69 | )               | (59 | )               | (60
|                          |                                                   |       |     |                 |     |                 |    
|                          |                                                   | 941   |     | 1,045           |     | 1,144           |    
|                          |                                                   |       |     |                 |     |                 |    

b)    Number of employees

|                        |  | 31 March
2005
Number |  | Average
2005
Number |  | Average
2004
Number |  | Average
2003
Number
|----------------------- |  | -------------------- |  | ------------------- |  | ------------------- |  | -------------------
|UK                      |  | 15,841               |  | 15,931              |  | 16,241              |  | 18,399             
|US                      |  | 8,554                |  | 8,663               |  | 9,402               |  | 10,120             
|Rest of the World       |  | 11                   |  | 13                  |  | 10                  |  | 14                 
|                        |  |                      |  |                     |  |                     |  |                    
|Continuing operations   |  | 24,406               |  | 24,607              |  | 25,653              |  | 28,533             
|Discontinued operations |  |                     |  |                    |  | 5                   |  | 407                
|                        |  |                      |  |                     |  |                     |  |                    
|                        |  | 24,406               |  | 24,607              |  | 25,658              |  | 28,940             
|                        |  |                      |  |                     |  |                     |  |                    

The
vast majority of employees in:



In
addition to the payroll costs shown above, there were restructuring costs of £210m (2004: £249m; 2003: £209m), primarily in respect
of severance costs, which have been included as part of restructuring costs within other operating chargesexceptional items.

6.    Directors' emoluments

Details of Directors' emoluments are contained in the auditable part of the Directors' Remuneration Report on pages 74 to 78, which form part of these accounts.

7.    Pensions and other post-retirement benefits

Substantially all the Group's employees are members of defined benefit pension schemes. In the UK, the principal schemes are the Lattice Group Pension Scheme, the
Electricity Supply Pension Scheme and the Crown Castle UK Pension Scheme.

Lattice Group Pension Scheme

The Lattice Group Pension Scheme provides final salary defined benefits for employees who joined Lattice Group plc prior to 31 March 2002. A defined
contribution section was added to the scheme from 1 April 2002 for employees joining Lattice Group plc from that date. The scheme is funded with assets held in a separate trustee administered
fund. 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 was carried out by Watson Wyatt LLP at 31 March 2003. The projected unit method was used and the principal actuarial assumptions adopted were
that the annual rate of inflation would be 2.5% and that future real increases in pensionable earnings would be 1.5%. Investments held in respect of pensions before they become payable would average
5.05% real annual rate of return and investments held in respect of pensions after they become payable would average 2.7% real annual rate of return and that pensions would increase at a real annual
rate of 0.05%. The aggregate market value of the scheme's assets was £10,141m and the value of the assets represented approximately 92% of the actuarial value of benefits due to members
calculated on the basis of pensionable earnings and service at 31 March 2003 on an ongoing basis and allowing for projected increases in pensionable earnings. The actuarial valuation carried
out at 31 March 2003 showed that based on long-term financial assumptions the contribution rate required to meet future benefit accrual was 23.7% of pensionable earnings (20.7%
employers and 3% employees). This contribution rate will be reviewed when the next independent actuarial valuation is carried out, which will be no later than 31 March 2006. The ongoing
contribution rate does not include an allowance for administration expenses. These contributions are reviewed annually. From 1 April 2004 the rate used for the recovery of administration costs
was 1.6% of salary. From 1 April 2005 the rate was 2.6% of salary. Employers are currently, therefore, paying a total contribution rate of 23.3%. The actuarial valuation revealed that the
pre-tax deficit was £879m (£615m net of tax) in the defined benefit section on the basis of the funding assumptions adopted by the actuary. An interim annual
assessment of the Lattice Scheme was conducted at 31 March 2004. This assessment showed that the deficit has decreased in the defined benefit section on the basis of the funding assumptions
adopted by the actuary. It has been agreed that no funding of the deficit identified in the 2003 actuarial valuation will need to be provided to the scheme until the outcome of an interim actuarial
assessment at 31 March 2007 is known. At this point, the Group will pay the gross amount of any deficit up to a maximum amount of £520m (£364m net of tax) into the
scheme. Until the 31 March 2007 actuarial valuation has been completed, the Group has arranged for banks to provide the trustees of the Lattice Scheme with letters of credit. The main
conditions under which these letters of credit could be drawn relate to events which would imperil the interests of the scheme, such as Transco plc, a Group undertaking, becoming insolvent or the
Group failing to make agreed payments into the fund.

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.

97

---





The latest full actuarial valuation was carried out by Hewitt Bacon Woodrow at 31 March 2004. The projected unit method was used and the principal actuarial assumptions adopted
were that the annual rate of inflation would be 2.9% and that future real increases in pensionable earnings would be 1.0%. Investments held in respect of pensions before they become payable would
average 3.8% real annual rate of return and investments held in respect of pensions after they become payable would average 2.8% real annual rate of return and that pensions would increase at a real
annual rate of 0.1%. The aggregate market value of the scheme's assets was £1,110m and the value of the assets represented approximately 80.4% of the actuarial value of benefits due to
members calculated on the basis of pensionable earnings and service at 31 March 2004 on an ongoing basis and allowing for projected increases in pensionable earnings. The results of the
actuarial valuation carried out at 31 March 2004 showed that, based on long-term financial assumptions, the contribution rate required to meet future benefit accrual was 19.1% of
pensionable earnings (13.1% employers and 6% employees). This contribution rate will be reviewed when the next independent actuarial valuation is carried out, which will be no later than 31
March 2007. The actuarial valuation revealed a pre-tax deficit of £272m (£190m net of tax) on the basis of the funding assumptions adopted by the actuary.

It
has been agreed that no funding of the deficit identified in the 2004 actuarial valuation will need to be provided to the scheme until the outcome of the actuarial valuation at 31
March 2007 is known. At this point, the Group will pay the gross amount of any deficit up to a maximum amount of £68m (£48m net of tax) into the scheme. Until the 31
March 2007 actuarial valuation has been completed, the Group has arranged for banks to provide the trustees of the National Grid Scheme with letters of credit. The main conditions under which
these letters of credit could be drawn relate to events which would imperil the interests of the scheme, such as National Grid Company plc, a Group undertaking, becoming insolvent or the Group failing
to make agreed payments into the fund.

Crown Castle UK Pension Scheme

The Crown Castle UK Pension Scheme provides final salary defined benefits for service up to and including 30 June 2003 and a career averaged pension for
service after 1 July 2003 on a funded basis. The scheme was closed to new entrants on 1 August 1997. The assets of the scheme are held in a separate trustee administered fund. 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 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 Deloitte Total Reward and Benefits Limited at 31 December 2002. This valuation has been used to calculate the
charge in accordance with SSAP 24. The attained age method was used and the principal actuarial assumptions adopted were that the annual rate of inflation would be 2.5% and that future real increases
in pensionable earnings would be 1.5%. Investments held in respect of pensions before and after they become payable would average 4.25% real annual rate of return and pensions would increase in line
with
inflation. The aggregate market value of the scheme's assets was £15m and the value of the assets represented approximately 84% of the actuarial value of benefits due to members calculated
on the basis of pensionable earnings and service at 31 December 2002 on an ongoing basis and allowing for projected increases in pensionable earnings.

The
results of the actuarial valuation carried out at 31 December 2002 showed that, based on long-term financial assumptions, the contribution rate required to meet
future benefit accrual was 25.9% of pensionable earnings (18.4% employers and 7.5% employees). This contribution rate will be reviewed when the next independent actuarial valuation is carried out,
which will be no later than 31 December 2005.

US defined benefit pension schemes

Substantially all 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 of these plans were carried out by Hewitt Associates LLC at 1 April 2004. The aggregate market value of the assets relating to the Group's US defined plans at
31 March 2004 totalled US$1,945m and the actuarial value of the assets represented approximately 87% of the actuarial value of the benefits that had accrued to members, after allowing for
future salary increases. These valuations were used to calculate the pension cost for the year ended 31 March 2005 (in compliance with SSAP 24). The valuations have been updated using
assumptions and market values at 31 March 2005. 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 4.25%; that real annual increases in salary would average nil for New York schemes and 1.5% for other US schemes; that inflation would average 3.25%; and that
nominal increases in pensions would be nil. There are no formally agreed contribution rates for the US plans.

SSAP 24 valuation assumptions

Further valuations of the Lattice Group Pension Scheme, using the attained age method, and the Group's section of the Electricity Supply Pension Scheme, using the
projected unit method, were carried out at 31 March 2004 to calculate the charge in accordance with SSAP 24. The results of these valuations were that the regular cost, as a percentage of
salary, was 24.5% for the Lattice Group Pension Scheme and 10.7% for the Electricity Supply Pension Scheme. The scheme deficits were £220m and £225m respectively.

Pension cost, prepayment and provisions for liabilities and charges

The costs recorded relating to the Group's pension plans were as follows:

|                                                                                                                                                                           |  | 2005 |  | 2004 |  | 2003 |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | ---- |  | ---- | -
|
|Defined contribution scheme costs                                                                                                                                          |  | 2    |  | 2    |  | 1    |  
|Defined benefit regular pension costs                                                                                                                                      |  | 114  |  | 106  |  | 136  |  
|Charge/(credit) related to variation from regular pension cost, of which a £2m credit related to the partial release of a pension provision in 2005 (2004: £2m; 2003: £2m) |  | 26   |  | 42   |  | (20  | )
|                                                                                                                                                                           |  |      |  |      |  |      |  
|Pension costs charged to operating profit                                                                                                                                  |  | 142  |  | 150  |  | 117  |  
|Notional interest charged/(credited) to net interest                                                                                                                       |  | 37   |  | 56   |  | (3   | )
|                                                                                                                                                                           |  |      |  |      |  |      |  
|Total pension costs for the year                                                                                                                                           |  | 179  |  | 206  |  | 114  |  
|                                                                                                                                                                           |  |      |  |      |  |      |  

Included
in debtors at 31 March 2005 was a pension prepayment of £38m (2004: £19m).

Included
within provisions for liabilities and charges at 31 March 2005 was a pension and other post-retirement benefits provision of £512m (2004:
£464m)see note 22.

98

---



US 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 1 April 2003. These valuations have been
updated using assumptions and market values at 31 March 2005. The principal assumptions adopted were a discount rate of 5.75% and that medical costs would increase by 10.0% per annum,
decreasing to 5.0% by 2010 and remain at this rate thereafter. The cost of providing healthcare and life insurance to retired US employees for the year ended 31 March 2005 amounted to
£14m net of amounts capitalised and amounts deferred as regulatory assets (2004: £31m; 2003: £37m).

FRS 17 Retirement Benefits

On 20 November 2000, the Accounting Standards Board introduced a new accounting standard, FRS 17 'Retirement Benefits', replacing

SSAP
24. 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:

|                                                              |  | 2005 |  | 2004 |  | 2003
|------------------------------------------------------------- |  | ---- |  | ---- |  | ----
|
|
|Rate of increase in salaries(i)                               |  | 3.9  |  | 4.1  |  |    
|Rate of increase in pensions in payment and deferred pensions |  | 3.0  |  |     |  |    
|Discount rate for liabilities                                 |  | 5.4  |  | 5.8  |  | 5.8 
|Rate of increase in Retail Price Index or equivalent          |  | 2.9  |  |     |  |    
|Initial healthcare cost trend rate                            |  |     |  |     |  | 10.0
|Ultimate healthcare cost trend rate                           |  |     |  |     |  | 5.0 

---

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 2005, 31 March 2004 and 31 March 2003 were as follows:

|                                    |  | UK Pensions |  | US Pensions |  | US Other post-
retirement benefits |  
|----------------------------------- |  | ----------- |  | ----------- |  | ---------------------------------- | -
|
|
|Equities                            |  | 7.8         |  | 41.5        |  | 5,414                              |  
|Bonds                               |  | 4.8         |  | 49.1        |  | 6,412                              |  
|Property                            |  | 6.5         |  | 8.1         |  | 1,049                              |  
|Other                               |  | 4.0         |  | 1.3         |  | 175                                |  
|                                    |  |             |  |             |  |                                    |  
|Total market value of assets        |  |             |  |             |  | 13,050                             |  
|Present value of scheme liabilities |  |             |  |             |  | (14,154                            | )
|                                    |  |             |  |             |  |                                    |  
|Deficit in schemes                  |  |             |  |             |  | (1,104                             | )
|Related deferred tax asset          |  |             |  |             |  | 331                                |  
|                                    |  |             |  |             |  |                                    |  
|Net liability                       |  |             |  |             |  | (773                               | )
|                                    |  |             |  |             |  |                                    |  

|                                    |  | UK Pensions |  | US Pensions |  | US Other post-
retirement benefits |  
|----------------------------------- |  | ----------- |  | ----------- |  | ---------------------------------- | -
|
|
|Equities                            |  | 8.0         |  | 42.5        |  | 5,260                              |  
|Bonds                               |  | 4.9         |  | 47.7        |  | 5,896                              |  
|Property                            |  | 6.5         |  | 7.4         |  | 913                                |  
|Other                               |  | 4.0         |  | 2.4         |  | 300                                |  
|                                    |  |             |  |             |  |                                    |  
|Total market value of assets        |  |             |  |             |  | 12,369                             |  
|Present value of scheme liabilities |  |             |  |             |  | (13,790                            | )
|                                    |  |             |  |             |  |                                    |  
|Deficit in schemes                  |  |             |  |             |  | (1,421                             | )
|Related deferred tax asset          |  |             |  |             |  | 426                                |  
|                                    |  |             |  |             |  |                                    |  
|Net liability                       |  |             |  |             |  | (995                               | )
|                                    |  |             |  |             |  |                                    |  

99

---



|                                    |  | UK Pensions |  | US Pensions |  | US Other post-
retirement benefits |  
|----------------------------------- |  | ----------- |  | ----------- |  | ---------------------------------- | -
|
|
|Equities                            |  | 8.5         |  | 41.4        |  | 4,590                              |  
|Bonds                               |  | 4.6         |  | 49.0        |  | 5,436                              |  
|Property                            |  | 6.5         |  | 8.1         |  | 901                                |  
|Other                               |  | 4.0         |  | 1.5         |  | 171                                |  
|                                    |  |             |  |             |  |                                    |  
|Total market value of assets        |  |             |  |             |  | 11,098                             |  
|Present value of scheme liabilities |  |             |  |             |  | (13,269                            | )
|                                    |  |             |  |             |  |                                    |  
|Deficit in schemes                  |  |             |  |             |  | (2,171                             | )
|Related deferred tax asset          |  |             |  |             |  | 651                                |  
|                                    |  |             |  |             |  |                                    |  
|Net liability                       |  |             |  |             |  | (1,520                             | )
|                                    |  |             |  |             |  |                                    |  

The net liability for UK Pensions comprises net pension liabilities relating to funded schemes in deficit of £752m (2004:
£976m) and net pension liabilities relating to unfunded schemes of £21m (2004: £19m).

The
net liability for US Pensions comprises net pension liabilities relating to funded schemes in deficit of £235m (2004: £221m) and net pension liabilities
relating to unfunded schemes of £36m (2004: £38m).

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

At
31 March 2005, an increase of 0.1% in the discount rate would decrease the present value of liabilities for all schemes by around £247m and decrease the liability
net of deferred tax by £170m and vice versa.

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:

|                                                                                              |  | 2005   |   | 2004
(restated) |  
|--------------------------------------------------------------------------------------------- |  | ------ | - | --------------- | -
|
|Net assets employed excluding net SSAP 24 liabilities and related impact on regulatory assets |  | 1,647  |   | 1,490           |  
|Net FRS 17 liabilities                                                                        |  | (1,363 | ) | (1,563          | )
|                                                                                              |  |        |   |                 |  
|Net assets/(liabilities) including net FRS 17 liabilities                                     |  | 284    |   | (73             | )
|                                                                                              |  |        |   |                 |  

The
impact of the implementation of FRS 17 on net assets employed, as shown above, would be reflected within the profit and loss account reserve. The pension and other
post-retirement benefits deficit has moved during the year ended 31 March 2004 and 31 March 2005 as set out below:

|                                        |  | 2005   |   | 2004   |  
|--------------------------------------- |  | ------ | - | ------ | -
|
|At 1 April                              |  | (2,352 | ) | (3,401 | )
|Acquisition of Group undertaking        |  | (10    | ) |       |  
|Current service cost                    |  | (150   | ) | (146   | )
|Past service cost                       |  | (44    | ) | (3     | )
|Net loss on settlements or curtailments |  | (17    | ) | (130   | )
|Contributions                           |  | 219    |   | 393    |  
|Other financial income/(costs)          |  | 2      |   | (43    | )
|Actuarial gains                         |  | 240    |   | 822    |  
|Exchange adjustments                    |  | 30     |   | 156    |  
|                                        |  |        |   |        |  
|At 31 March                             |  | (2,082 | ) | (2,352 | )
|                                        |  |        |   |        |  

If
FRS 17 had been implemented for the years ended 31 March 2003, 31 March 2004 or 31 March 2005, 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:

|                                           |  | 2005 |   | 2004 |   | 2003 |  
|------------------------------------------ |  | ---- | - | ---- | - | ---- | -
|
|Operating charge                           |  |      |   |      |   |      |  
|Current service cost                       |  | 150  |   | 146  |   | 171  |  
|Past service cost                          |  | 44   |   | 3    |   | 8    |  
|Net loss on settlements or curtailments    |  | 17   |   | 130  |   | 118  |  
|                                           |  |      |   |      |   |      |  
|Total charge to operating profit           |  | 211  |   | 279  |   | 297  |  
|                                           |  |      |   |      |   |      |  
|Other financial (income)/costs             |  |      |   |      |   |      |  
|Expected return on scheme assets(i)        |  | (881 | ) | (806 | ) | (977 | )
|Interest on scheme liabilities             |  | 879  |   | 849  |   | 888  |  
|                                           |  |      |   |      |   |      |  
|Impact on financial income                 |  | (2   | ) | 43   |   | (89  | )
|                                           |  |      |   |      |   |      |  
|Net profit and loss charge before taxation |  | 209  |   | 322  |   | 208  |  
|                                           |  |      |   |      |   |      |  

---

As
the Lattice Group Pension Scheme is a closed scheme, the current service cost under the projected unit method of valuation is expected to increase as the members of the scheme
approach retirement.

100

---



If
the Group were to prepare its accounts under FRS 17, the net loss on settlements or curtailments and past service costs in 2005 above (2004 and 2003: net loss on settlements or
curtailments) would be reported as part of exceptional items. The net FRS 17 profit and loss account impact before tax excluding these exceptional items amounted to £148m (2004:
£192m; 2003: £90m) and compares with the current UK GAAP gross charge, before amounts capitalised and amounts deferred as regulatory assets, in respect of pensions and other
post-retirement benefits of £231m (2004: £264m; 2003: £151m). The FRS 17 pre-exceptional profit and loss account charge
(pre-tax) would therefore be £83m lower (2004: £72m lower; 2003: £61m lower) than the SSAP 24 charge.

The
following pre-tax amounts would have been recognised in the statement of total recognised gains and losses:

|                                                                          |  | 2005 |   | 2004  |   | 2003   |  
|------------------------------------------------------------------------- |  | ---- | - | ----- | - | ------ | -
|
|Difference between actual and expected return on scheme assets            |  | 390  |   | 1,310 |   | (2,529 | )
|Experience gains arising on scheme liabilities                            |  | 117  |   | 51    |   | 11     |  
|Changes in assumptions                                                    |  | (267 | ) | (539  | ) | (690   | )
|                                                                          |  |      |   |       |   |        |  
|Actuarial gains/(losses)                                                  |  | 240  |   | 822   |   | (3,208 | )
|Exchange adjustments                                                      |  | 30   |   | 156   |   | 64     |  
|                                                                          |  |      |   |       |   |        |  
|Net credit/(charge) to the statement of total recognised gains and losses |  | 270  |   | 978   |   | (3,144 | )
|                                                                          |  |      |   |       |   |        |  

History
of experience gains and losses that would be recognised on an FRS 17 basis is set out below:

|                                                                    |                                                    | 2005 |   | 2004  |   | 2003   |    
|------------------------------------------------------------------- | -------------------------------------------------- | ---- | - | ----- | - | ------ | ---
|Difference between actual and expected return on scheme assets (£m) |                                                    | 390  |   | 1,310 |   | (2,529 | )  
|                                                                    | percentage of scheme assets                       |      | 3 | %     | 9 | %      | (20
|Experience gains arising on scheme liabilities (£m)                 |                                                    | 117  |   | 51    |   | 11     |    
|                                                                    | percentage of present value of scheme liabilities |      | 1 | %     |  |        |   
|Actuarial gains/(losses) (£m)                                       |                                                    | 240  |   | 822   |   | (3,208 | )  
|                                                                    | percentage of present value of scheme liabilities |      | 1 | %     | 5 | %      | (20

8.    Net interest

|                                                                                                                                               |  | 2005 |   | 2004 |   | 2003 |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | - | ---- | - | ---- | -
|
|Bank loans and overdrafts                                                                                                                      |  | 45   |   | 51   |   | 36   |  
|Other                                                                                                                                          |  | 846  |   | 869  |   | 945  |  
|                                                                                                                                               |  |      |   |      |   |      |  
|Interest payable and similar charges                                                                                                           |  | 891  |   | 920  |   | 981  |  
|Unwinding of discount on provisions                                                                                                            |  | 7    |   | 11   |   | 13   |  
|Interest capitalised                                                                                                                           |  | (63  | ) | (55  | ) | (28  | )
|                                                                                                                                               |  |      |   |      |   |      |  
|Interest payable and similar charges net of interest capitalised                                                                               |  | 835  |   | 876  |   | 966  |  
|Interest receivable and similar income                                                                                                         |  | (62  | ) | (58  | ) | (55  | )
|                                                                                                                                               |  |      |   |      |   |      |  
|                                                                                                                                               |  | 773  |   | 818  |   | 911  |  
|Joint ventures (including exceptional net interest of £nil (2004: £nil; 2003: £31m), net of interest capitalised £nil (2004: £nil; 2003: £1m)) |  | 10   |   | 4    |   | 59   |  
|                                                                                                                                               |  |      |   |      |   |      |  
|Net interest                                                                                                                                   |  | 783  |   | 822  |   | 970  |  
|                                                                                                                                               |  |      |   |      |   |      |  
|Comprising:                                                                                                                                    |  |      |   |      |   |      |  
|Net interest, excluding exceptional net interest                                                                                               |  | 783  |   | 822  |   | 939  |  
|Exceptional net interest (note 4(c))                                                                                                           |  |     |   |     |   | 31   |  
|                                                                                                                                               |  |      |   |      |   |      |  
|Net interest, including exceptional net interest                                                                                               |  | 783  |   | 822  |   | 970  |  
|                                                                                                                                               |  |      |   |      |   |      |  

Interest
on the funding attributable to assets in the course of construction was capitalised during the year at a rate of 5.6% (2004: 5.7%; 2003: 5.9%).

Interest
payable and similar charges includes £12m (2004: £4m; 2003: £12m) relating to losses incurred on the repurchase of debt during the year.

101

---





9.    Taxation

|                                        |  | 2005 |   | 2004 |   | 2003 |  
|--------------------------------------- |  | ---- | - | ---- | - | ---- | -
|
|United Kingdom                          |  |      |   |      |   |      |  
|Corporation tax at 30%                  |  | 123  |   | 193  |   | 12   |  
|Adjustment in respect of prior years(i) |  | (19  | ) | (35  | ) |     |  
|Deferred tax                            |  | 4    |   | (15  | ) | 107  |  
|                                        |  |      |   |      |   |      |  
|                                        |  | 108  |   | 143  |   | 119  |  
|                                        |  |      |   |      |   |      |  
|Overseas                                |  |      |   |      |   |      |  
|Corporate tax                           |  | 33   |   | 16   |   | 27   |  
|Adjustment in respect of prior years    |  | (21  | ) |     |   |     |  
|Deferred tax                            |  | 123  |   | 99   |   | 94   |  
|                                        |  |      |   |      |   |      |  
|                                        |  | 135  |   | 115  |   | 121  |  
|                                        |  |      |   |      |   |      |  
|                                        |  | 243  |   | 258  |   | 240  |  
|Joint ventures                          |  | 2    |   | 3    |   | 5    |  
|                                        |  |      |   |      |   |      |  
|Taxation                                |  | 245  |   | 261  |   | 245  |  
|                                        |  |      |   |      |   |      |  
|Comprising:                             |  |      |   |      |   |      |  
|Taxationexcluding exceptional items    |  | 324  |   | 350  |   | 373  |  
|Taxationexceptional items (note 4(d))  |  | (79  | ) | (89  | ) | (128 | )
|                                        |  |      |   |      |   |      |  
|                                        |  | 245  |   | 261  |   | 245  |  
|                                        |  |      |   |      |   |      |  

---

A
reconciliation of the UK corporation tax rate to the effective tax rate of the Group is as follows:

|                                                                                                                        |                                                        | % of profit before taxation |      
|----------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------ | --------------------------- | -----
|
|UK corporation tax rate                                                                                                 |                                                        | 30.0                        |      
|Effect on tax charge of:                                                                                                |                                                        |                             |      
|                                                                                                                        | Origination and reversal of timing differences        |                             | (11.2
|                                                                                                                        | Permanent differences                                 |                             | (3.9 
|                                                                                                                        | Overseas income taxed at other than UK statutory rate |                             |     
|                                                                                                                        | Other                                                 |                             | (0.1 
|                                                                                                                        |                                                        |                             |      
|Current tax charge                                                                                                      |                                                        | 14.8                        |      
|Deferred taxation                                                                                                       |                                                        | 10.0                        |      
|                                                                                                                        |                                                        |                             |      
|Effective tax rate before goodwill amortisation, prior year adjustments in respect of current tax and exceptional items |                                                        | 24.8                        |      
|Effect of goodwill amortisation                                                                                         |                                                        | 2.0                         |      
|                                                                                                                        |                                                        |                             |      
|Effective tax rate before prior year adjustments in respect of current tax and exceptional items                        |                                                        | 26.8                        |      
|Current tax adjustment in respect of prior years                                                                        |                                                        | (2.3                        | )    
|                                                                                                                        |                                                        |                             |      
|Effective tax rate after adjustments in respect of prior years and before exceptional items                             |                                                        | 24.5                        |      
|Exceptional items                                                                                                       |                                                        | (3.2                        | )    
|                                                                                                                        |                                                        |                             |      
|Effective tax rate after exceptional items                                                                              |                                                        | 21.3                        |      
|                                                                                                                        |                                                        |                             |      

Factors that may affect future tax charges

The
Group has brought forward non-trading debits of £39m (2004: £75m; 2003: £75m), which may reduce taxable profits in future years.

No
provision has been made for deferred tax arising on gains recognised in respect of 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 at 31 March 2005
was £73m (2004: £58m; 2003: £58m). At present, it is not envisaged that any tax on amounts rolled over will become payable in the foreseeable future.

102

---



10.    Dividends

The following table shows the dividends paid or proposed:

|                   |  | 2005
pence
(per ordinary
share) |  | 2005 |  | 2004
pence
(per ordinary
share) |  | 2004 |  | 2003
pence
(per ordinary
share) |  | 2003
|------------------ |  | ------------------------------- |  | ---- |  | ------------------------------- |  | ---- |  | ------------------------------- |  | ----
|
|Ordinary dividends |  |                                 |  |      |  |                                 |  |      |  |                                 |  |     
|Interim            |  | 8.5                             |  | 262  |  | 7.91                            |  | 243  |  | 6.86                            |  | 213 
|Proposed final     |  | 15.2                            |  | 469  |  | 11.87                           |  | 366  |  | 10.34                           |  | 317 
|                   |  |                                 |  |      |  |                                 |  |      |  |                                 |  |     
|                   |  | 23.7                            |  | 731  |  | 19.78                           |  | 609  |  | 17.20                           |  | 530 
|                   |  |                                 |  |      |  |                                 |  |      |  |                                 |  |     

11.    Earnings per share and adjusted profit on ordinary activities before taxation

|                                                                        |  | Earnings
per
share
2005 |   | Profit
for the
year
2005 |   | Weighted
average
number
shares
2005 |  | Earnings
per
share
2004
(restated) |   | Profit
for the
year
2004
(restated) |   | Weighted
average
number
shares
2004 |  | Earnings
per
share
2003
(restated) |   | Profit
for the
year
2003
(restated) |   | Weighted
average
number
shares
2003
|----------------------------------------------------------------------- |  | ----------------------- | - | ------------------------ | - | ----------------------------------- |  | ---------------------------------- | - | ----------------------------------- | - | ----------------------------------- |  | ---------------------------------- | - | ----------------------------------- | - | -----------------------------------
|
|Basic, including exceptional items and goodwill amortisation            |  | 29.5                    |   | 908                      |   | 3,082                               |  | 35.0                               |   | 1,074                               |   | 3,070                               |  | 11.4                               |   | 351                                 |   | 3,078                              
|Exceptional operating items (note 4(a))                                 |  | 8.1                     |   | 251                      |   |                                    |  | 9.0                                |   | 277                                 |   |                                    |  | 11.4                               |   | 350                                 |   |                                   
|Exceptional non-operating items (note 4(b))                             |  | (2.7                    | ) | (83                      | ) |                                    |  | (10.4                              | ) | (322                                | ) |                                    |  | 3.2                                |   | 99                                  |   |                                   
|Exceptional financing charge (note 4(c))                                |  |                        |   |                         |   |                                    |  |                                   |   |                                    |   |                                    |  | 1.0                                |   | 31                                  |   |                                   
|Exceptional tax credit (note 4(d))                                      |  | (2.5                    | ) | (79                      | ) |                                    |  | (2.9                               | ) | (89                                 | ) |                                    |  | (4.1                               | ) | (128                                | ) |                                   
|Exceptional minority interests (note 4(e))                              |  |                        |   |                         |   |                                    |  |                                   |   |                                    |   |                                    |  | 0.9                                |   | 28                                  |   |                                   
|Goodwill amortisation                                                   |  | 3.5                     |   | 109                      |   |                                    |  | 3.2                                |   | 99                                  |   |                                    |  | 3.3                                |   | 102                                 |   |                                   
|                                                                        |  |                         |   |                          |   |                                     |  |                                    |   |                                     |   |                                     |  |                                    |   |                                     |   |                                    
|Adjusted basic, excluding exceptional items and goodwill amortisation   |  | 35.9                    |   | 1,106                    |   | 3,082                               |  | 33.9                               |   | 1,039                               |   | 3,070                               |  | 27.1                               |   | 833                                 |   | 3,078                              
|Dilutive impact of employee share options                               |  | (0.2                    | ) |                         |   | 14                                  |  | (0.1                               | ) |                                    |   | 7                                   |  | (0.1                               | ) |                                    |   | 10                                 
|Dilutive impact of 4.25% Exchangeable Bonds                             |  | n/a                     |   | n/a                      |   | n/a                                 |  | n/a                                |   | n/a                                 |   | n/a                                 |  | (0.3                               | ) | 22                                  |   | 110                                
|                                                                        |  |                         |   |                          |   |                                     |  |                                    |   |                                     |   |                                     |  |                                    |   |                                     |   |                                    
|Adjusted diluted, excluding exceptional items and goodwill amortisation |  | 35.7                    |   | 1,106                    |   | 3,096                               |  | 33.8                               |   | 1,039                               |   | 3,077                               |  | 26.7                               |   | 855                                 |   | 3,198                              
|Exceptional operating items (note 4(a))                                 |  | (8.1                    | ) | (251                     | ) |                                    |  | (9.0                               | ) | (277                                | ) |                                    |  | (10.9                              | ) | (350                                | ) |                                   
|Exceptional non-operating items (note 4(b))                             |  | 2.7                     |   | 83                       |   |                                    |  | 10.4                               |   | 322                                 |   |                                    |  | (3.1                               | ) | (99                                 | ) |                                   
|Exceptional financing charge (note 4(c))                                |  |                        |   |                         |   |                                    |  |                                   |   |                                    |   |                                    |  | (1.0                               | ) | (31                                 | ) |                                   
|Exceptional tax credit (note 4(d))                                      |  | 2.5                     |   | 79                       |   |                                    |  | 2.9                                |   | 89                                  |   |                                    |  | 4.0                                |   | 128                                 |   |                                   
|Exceptional minority interests (note 4(e))                              |  |                        |   |                         |   |                                    |  |                                   |   |                                    |   |                                    |  | (0.9                               | ) | (28                                 | ) |                                   
|Goodwill amortisation                                                   |  | (3.5                    | ) | (109                     | ) |                                    |  | (3.2                               | ) | (99                                 | ) |                                    |  | (3.2                               | ) | (102                                | ) |                                   
|                                                                        |  |                         |   |                          |   |                                     |  |                                    |   |                                     |   |                                     |  |                                    |   |                                     |   |                                    
|Diluted, including exceptional items and goodwill amortisation          |  | 29.3                    |   | 908                      |   | 3,096                               |  | 34.9                               |   | 1,074                               |   | 3,077                               |  | 11.6                               |   | 373                                 |   | 3,198                              
|                                                                        |  |                         |   |                          |   |                                     |  |                                    |   |                                     |   |                                     |  |                                    |   |                                     |   |                                    

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

As
at 31 March 2005, there were 7,108,201 outstanding share options in respect of the executive share schemes that were anti-dilutive instruments.

In
respect of the year ended 31 March 2003, the potential ordinary shares that related to the 4.25% Exchangeable Bonds were dilutive as they decreased earnings from continuing
operations. Consequently, the diluted earnings per share were higher than basic earnings per share for this year because of the effect of losses that arose 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.

|                                                       |  | 2005  |   | 2004
(restated) |   | 2003
(restated)
|------------------------------------------------------ |  | ----- | - | --------------- | - | ---------------
|
|Profit on ordinary activities before taxation          |  | 1,152 |   | 1,337           |   | 627            
|Exceptional operating items (note 4(a))                |  | 251   |   | 277             |   | 350            
|Exceptional non-operating items (note 4(b))            |  | (83   | ) | (322            | ) | 99             
|Exceptional financing charge (note 4(c))               |  |      |   |                |   | 31             
|Goodwill amortisation                                  |  | 109   |   | 99              |   | 102            
|                                                       |  |       |   |                 |   |                
|Adjusted profit on ordinary activities before taxation |  | 1,429 |   | 1,391           |   | 1,209          
|                                                       |  |       |   |                 |   |                

103

---



12.    Intangible fixed assets

|Group                             |  | £m    |  
|--------------------------------- |  | ----- | -
|Cost at 1 April 2003              |  | 2,146 |  
|Exchange adjustments              |  | (292  | )
|Additions                         |  | 3     |  
|                                  |  |       |  
|Cost at 31 March 2004             |  | 1,857 |  
|Exchange adjustments              |  | (59   | )
|Acquisition of Group undertakings |  | 625   |  
|                                  |  |       |  
|Cost at 31 March 2005             |  | 2,423 |  
|                                  |  |       |  
|Amortisation at 1 April 2003      |  | 253   |  
|Exchange adjustments              |  | (46   | )
|Amortisation charge for the year  |  | 101   |  
|Impairment charge                 |  | 12    |  
|                                  |  |       |  
|Amortisation at 31 March 2004     |  | 320   |  
|Exchange adjustments              |  | (11   | )
|Amortisation charge for the year  |  | 109   |  
|Impairment charge                 |  | 2     |  
|                                  |  |       |  
|Amortisation at 31 March 2005     |  | 420   |  
|                                  |  |       |  
|Net book value at 31 March 2005   |  | 2,003 |  
|                                  |  |       |  
|Net book value at 31 March 2004   |  | 1,537 |  
|                                  |  |       |  

The
net book value of intangible fixed assets at 31 March 2005 included £nil (2004: £1m) relating to telecoms licences. The remaining net book value of
intangible fixed assets related entirely to goodwill. The charge for the year relating to goodwill amortisation amounted to £109m (2004: £99m).

13.    Tangible fixed assets

|Group                             |  | Land and
buildings |   | Plant
and
machinery |   | Assets
in the
course of
construction |   | Motor
vehicles
and office
equipment |   | Total  |  
|--------------------------------- |  | ------------------ | - | ------------------- | - | ------------------------------------ | - | ----------------------------------- | - | ------ | -
|
|Cost at 1 April 2003              |  | 1,037              |   | 22,665              |   | 1,035                                |   | 870                                 |   | 25,607 |  
|Exchange adjustments              |  | (67                | ) | (965                | ) | (17                                  | ) | (6                                  | ) | (1,055 | )
|Additions                         |  | 13                 |   | 345                 |   | 1,020                                |   | 101                                 |   | 1,479  |  
|Disposals                         |  | (128               | ) | (144                | ) | (2                                   | ) | (124                                | ) | (398   | )
|Reclassifications                 |  | 3                  |   | 760                 |   | (907                                 | ) | 144                                 |   |       |  
|                                  |  |                    |   |                     |   |                                      |   |                                     |   |        |  
|Cost at 31 March 2004             |  | 858                |   | 22,661              |   | 1,129                                |   | 985                                 |   | 25,633 |  
|Exchange adjustments              |  | (13                | ) | (202                | ) | (2                                   | ) | (1                                  | ) | (218   | )
|Acquisition of Group undertakings |  | 29                 |   | 592                 |   |                                     |   | 11                                  |   | 632    |  
|Additions                         |  | 32                 |   | 334                 |   | 980                                  |   | 85                                  |   | 1,431  |  
|Disposals                         |  | (34                | ) | (117                | ) |                                     |   | (31                                 | ) | (182   | )
|Reclassifications                 |  | 39                 |   | 776                 |   | (838                                 | ) | 23                                  |   |       |  
|                                  |  |                    |   |                     |   |                                      |   |                                     |   |        |  
|Cost at 31 March 2005             |  | 911                |   | 24,044              |   | 1,269                                |   | 1,072                               |   | 27,296 |  
|                                  |  |                    |   |                     |   |                                      |   |                                     |   |        |  
|Depreciation at 1 April 2003      |  | 343                |   | 7,818               |   |                                     |   | 599                                 |   | 8,760  |  
|Exchange adjustments              |  | (12                | ) | (358                | ) |                                     |   | (4                                  | ) | (374   | )
|Depreciation charge for the year  |  | 19                 |   | 732                 |   |                                     |   | 115                                 |   | 866    |  
|Impairment charge                 |  |                   |   | 5                   |   |                                     |   | 3                                   |   | 8      |  
|Disposals                         |  | (74                | ) | (140                | ) |                                     |   | (119                                | ) | (333   | )
|                                  |  |                    |   |                     |   |                                      |   |                                     |   |        |  
|Depreciation at 31 March 2004     |  | 276                |   | 8,057               |   |                                     |   | 594                                 |   | 8,927  |  
|Exchange adjustments              |  | (3                 | ) | (75                 | ) |                                     |   | (1                                  | ) | (79    | )
|Depreciation charge for the year  |  | 19                 |   | 718                 |   |                                     |   | 123                                 |   | 860    |  
|Impairment charge                 |  | 2                  |   |                    |   |                                     |   |                                    |   | 2      |  
|Disposals                         |  | (12                | ) | (121                | ) |                                     |   | (27                                 | ) | (160   | )
|                                  |  |                    |   |                     |   |                                      |   |                                     |   |        |  
|Depreciation at 31 March 2005     |  | 282                |   | 8,579               |   |                                     |   | 689                                 |   | 9,550  |  
|                                  |  |                    |   |                     |   |                                      |   |                                     |   |        |  
|Net book value at 31 March 2005   |  | 629                |   | 15,465              |   | 1,269                                |   | 383                                 |   | 17,746 |  
|                                  |  |                    |   |                     |   |                                      |   |                                     |   |        |  
|Net book value at 31 March 2004   |  | 582                |   | 14,604              |   | 1,129                                |   | 391                                 |   | 16,706 |  
|                                  |  |                    |   |                     |   |                                      |   |                                     |   |        |  

104

---





The
net book value of land and buildings comprised:

|                                 |  | 2005 |  | 2004
|-------------------------------- |  | ---- |  | ----
|
|Freehold                         |  | 590  |  | 564 
|Long leasehold (over 50 years)   |  | 12   |  | 4   
|Short leasehold (under 50 years) |  | 27   |  | 14  
|                                 |  |      |  |     
|                                 |  | 629  |  | 582 
|                                 |  |      |  |     

The
cost of tangible fixed assets at 31 March 2005 included £449m (2004: £402m) relating to interest capitalised.

Included
within creditors (amounts falling due within one year) and creditors (amounts falling due after more than one year) at 31 March 2005 are contributions to the cost of
tangible fixed assets amounting to £53m (2004: £46m) and £1,150m (2004: £1,130m) respectively.

14.    Fixed asset investments

|                                         |  | Group |   | Company |  
|---------------------------------------- |  | ----- | - | ------- | -
|
|
|At 1 April 2003 (as previously reported) |  | 44    |   | 170     |  
|Prior year adjustment (note 1)           |  |      |   |        |  
|                                         |  |       |   |         |  
|At 1 April 2003 (restated)               |  | 44    |   | 170     |  
|Exchange adjustments                     |  | (5    | ) | (21     | )
|Additions                                |  | 1     |   | 5       |  
|Disposals                                |  | (17   | ) | (22     | )
|Share of retained loss                   |  | (4    | ) |        |  
|                                         |  |       |   |         |  
|At 31 March 2004 (restated)              |  | 19    |   | 132     |  
|Exchange adjustments                     |  |      |   | (4      | )
|Additions                                |  |      |   | 9       |  
|Disposals                                |  | 5     |   | (6      | )
|Share of retained loss                   |  | (7    | ) |        |  
|                                         |  |       |   |         |  
|At 31 March 2005                         |  | 17    |   | 131     |  
|                                         |  |       |   |         |  

With
the exception of investments in unlisted joint ventures, which are carried in the balance sheet at the Group's share of their net assets, all investments are carried at cost.

The
names of the principal Group undertakings and joint ventures are included in note 30.

15.    Acquisitions

On 31 August 2004, the Group acquired the UK operations of Crown Castle International Corp. for a total consideration of £1,138m, including
acquisition costs of £14m. This transaction has been recorded using the acquisition method of accounting.

Goodwill
arising on this acquisition, being the difference between the purchase consideration and the fair value of the assets and liabilities acquired, amounted to £622m and
is being amortised over a period of 20 years from the date of the acquisition, being its estimated useful economic life.

The
other acquisition that was carried out during the year ended 31 March 2005 was that of a telecommunications tower operation in the US. The book and fair value of assets
acquired was £10m compared with total cash consideration of £13m, giving rise to goodwill of £3m, which is being amortised over a period of 20 years.

The
acquired businesses are presented within the Wireless infrastructure segment.

|                                       |  | Crown Castle acquisition |   | Other
acquisition |   |     | 
|-------------------------------------- |  | ------------------------ | - | ----------------- | - | --- | 
|
|
|Tangible fixed assets                  |  | 519                      |   | (4                | ) | 111 | 
|Stocks                                 |  | 3                        |   |                  |   |    | 
|Debtors                                |  | 43                       |   |                  |   |    | 
|Cash and deposits                      |  | 29                       |   |                  |   |    | 
|Creditors                              |  | (152                     | ) |                  |   |    | 
|Provisions for liabilities and charges |  | (34                      | ) | 1                 |   |    | 
|                                       |  |                          |   |                   |   |     | 
|Net assets acquired                    |  | 408                      |   | (3                | ) | 111 | 
|                                       |  |                          |   |                   |   |     | 
|Goodwill arising on acquisition        |  |                          |   |                   |   |     | 
|                                       |  |                          |   |                   |   |     | 
|Total consideration                    |  |                          |   |                   |   |     | 
|                                       |  |                          |   |                   |   |     | 

The
adjustments recorded to book value reflect accounting alignments to bring the accounting policies of the acquired businesses into line with those of the Group, which resulted in a
reduction of £4m to tangible fixed assets relating to the accounting for leasehold properties; and an increase of £1m to provisions for liabilities and charges relating to
decommissioning provisions, offset by associated decreases in the provision for deferred tax of £2m.

Fair
value adjustments primarily related to the revaluation of tangible fixed assets to their fair value at the date of acquisition.

105

---



The
profit after tax of the UK operations of Crown Castle International Corp. for the period from 1 January 2004 to 31 August 2004 was £3m, reflecting turnover
of £160m, operating profit of £22m, profit before tax of £15m and taxation of £12m. This compared with the reported profit after tax for the year ended
31 December 2003 of £2m.

The
following unaudited pro forma summary information is provided for illustrative purposes and presents the effect of the acquisition of the UK operations of Crown Castle International
Corp. on the continuing operations of the Group as if the acquisition had occurred on 1 April 2003. The pro forma summary reflects estimates of the effect of adopting the fair value adjustments
for the acquisition and the increased net interest costs, together with the associated tax effects, that would have resulted if the acquisition had taken place at that earlier date. The pro forma
summary does not necessarily reflect the results of operations as they would have been if the acquired business had been part of the Group during the years presented.

|Continuing operationspro forma |  | 2005
Pro forma
(unaudited) |  | 2004
Pro forma
(unaudited)
|------------------------------- |  | -------------------------- |  | --------------------------
|
|Turnover                        |  | 8,624                      |  | 9,111                     
|Profit for the financial year   |  | 881                        |  | 1,013                     
|                                |  |                            |  |                           

|                   |  | pence |  | pence
|------------------ |  | ----- |  | -----
|Earnings per share |  | 28.6  |  | 33.0 
|                   |  |       |  |      

The
accounting policy adjustments made did not affect the profit for the year.

16.    Stocks

|                              |  | Group
|----------------------------- |  | -----
|
|
|Raw materials and consumables |  | 60   
|Work in progress              |  | 27   
|Fuel stocks                   |  | 14   
|                              |  |      
|                              |  | 101  
|                              |  |      

17.    Debtors

|                                              |  | Group |  | Company
|--------------------------------------------- |  | ----- |  | -------
|
|
|Amounts falling due within one year:          |  |       |  |        
|Trade debtors                                 |  | 553   |  | 496    
|Amounts owed by Group undertakings            |  |      |  |       
|Regulatory assets                             |  | 369   |  | 472    
|Other debtors                                 |  | 79    |  | 158    
|Prepayments and accrued income                |  | 544   |  | 462    
|                                              |  |       |  |        
|                                              |  | 1,545 |  | 1,588  
|                                              |  |       |  |        
|Amounts falling due after more than one year: |  |       |  |        
|Regulatory assets                             |  | 2,402 |  | 2,639  
|Other debtors                                 |  | 96    |  | 69     
|                                              |  |       |  |        
|                                              |  | 2,498 |  | 2,708  
|                                              |  |       |  |        
|                                              |  | 4,043 |  | 4,296  
|                                              |  |       |  |        

|Provision for doubtful debts                        |  | Group |  
|--------------------------------------------------- |  | ----- | -
|
|At 1 April 2003                                     |  | 116   |  
|Exchange adjustments                                |  | (13   | )
|Reinstatement of amounts previously written off     |  | 14    |  
|Charge for the year                                 |  | 50    |  
|Uncollectable amounts written off net of recoveries |  | (39   | )
|                                                    |  |       |  
|At 31 March 2004                                    |  | 128   |  
|Exchange adjustments                                |  | (3    | )
|Charge for the year                                 |  | 42    |  
|Uncollectable amounts written off net of recoveries |  | (34   | )
|                                                    |  |       |  
|At 31 March 2005                                    |  | 133   |  
|                                                    |  |       |  

106

---



18.    Creditors (amounts falling due within one year)

|                                          |  | Group |  | Company
|----------------------------------------- |  | ----- |  | -------
|
|
|Borrowings (note 20)                      |  | 3,256 |  | 1,706  
|Trade creditors and accruals              |  | 1,111 |  | 1,031  
|Amounts owed to Group undertakings        |  |      |  |       
|Purchased power obligations               |  | 54    |  | 57     
|Corporate tax                             |  | 103   |  | 122    
|Social security and other taxes           |  | 219   |  | 191    
|Proposed dividend                         |  | 469   |  | 366    
|Liability for index-linked swap contracts |  | 99    |  | 100    
|Other creditors                           |  | 512   |  | 606    
|Deferred income                           |  | 325   |  | 334    
|                                          |  |       |  |        
|                                          |  | 6,148 |  | 4,513  
|                                          |  |       |  |        

Other
creditors include interest payable of £255m (2004: £286m).

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

|                                          |  | Group  |  | Company
|----------------------------------------- |  | ------ |  | -------
|
|
|Borrowings (note 20)                      |  | 10,963 |  | 11,542 
|Purchased power obligations               |  | 90     |  | 149    
|Liability for index-linked swap contracts |  | 228    |  | 291    
|Other creditors                           |  | 282    |  | 289    
|Deferred income                           |  | 1,237  |  | 1,193  
|                                          |  |        |  |        
|                                          |  | 12,800 |  | 13,464 
|                                          |  |        |  |        

Other
creditors include £nil (2004: £9m) of corporate tax.

Purchased power obligations

As part of the sale of substantially all 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 17), represents the net present value of these monthly payments discounted at 4.5%. At 31 March 2005, amounts falling due after more than five years totalled £nil
(2004: £1m).

Liability for index-linked swap contracts

National Grid USA has entered into indexed swap contracts that expire in 2008. A further three swap contracts expired 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  |  | Company
|--------------------------------------------- |  | ------ |  | -------
|
|
|Amounts falling due within one year:          |  |        |  |        
|Bank loans and overdrafts                     |  | 420    |  | 314    
|Commercial paper                              |  | 1,469  |  | 557    
|Other bonds                                   |  | 1,348  |  | 832    
|Other loans                                   |  | 19     |  | 3      
|                                              |  |        |  |        
|                                              |  | 3,256  |  | 1,706  
|                                              |  |        |  |        
|Amounts falling due after more than one year: |  |        |  |        
|Bank loans                                    |  | 910    |  | 823    
|Other bonds                                   |  | 10,043 |  | 10,587 
|Other loans                                   |  | 10     |  | 132    
|                                              |  |        |  |        
|                                              |  | 10,963 |  | 11,542 
|                                              |  |        |  |        
|Total borrowings                              |  | 14,219 |  | 13,248 
|                                              |  |        |  |        

107

---



|                                                       |  | Group  |  | Company
|------------------------------------------------------ |  | ------ |  | -------
|
|
|Total borrowings are repayable as follows:             |  |        |  |        
|In one year or less                                    |  | 3,256  |  | 1,706  
|In more than one year, but not more than two years     |  | 2,004  |  | 877    
|In more than two years, but not more than three years  |  | 467    |  | 2,043  
|In more than three years, but not more than four years |  | 1,213  |  | 458    
|In more than four years, but not more than five years  |  | 1,293  |  | 1,575  
|In more than five years                                |  |        |  |        
|by instalments                                        |  | 35     |  | 35     
|other than by instalments                             |  | 5,951  |  | 6,554  
|                                                       |  |        |  |        
|                                                       |  | 14,219 |  | 13,248 
|                                                       |  |        |  |        

Charges
over property, plant and other assets of the Group were provided as collateral over borrowings totalling £729m at 31 March 2005 (2004: £925m).

The
notional amount outstanding of the Group's debt portfolio at 31 March 2005 was £14,564m (2004: £14,164m).

The
principal items included within Other bonds are listed below. Unless otherwise indicated, these instruments were outstanding at both 31 March 2005 and 31 March 2004.

|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(i) |  | USD 300 million 6.0% Fixed Rate Instruments due 2004                                   
|British Transco International Finance BV(i) |  | USD 350 million 6.625% Fixed Rate Instruments due 2004                                 
|British Transco International Finance BV(i) |  | 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                   |  | GBP 240 million 8.0% Fixed Rate Instruments due 2006                                   
|National Grid Company plc                   |  | EUR 600 million 4.125% Fixed Rate Instruments due 2008                                 
|National Grid Company plc                   |  | GBP 250 million 4.75% Fixed Rate Instruments due 2010                                  
|National Grid Company plc                   |  | GBP 300 million 2.983% Guaranteed Retail Price Index-Linked Instruments due 2018       
|National Grid Company plc                   |  | 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                   |  | GBP 70 million 3.589% Limited Retail Price Index-Linked Instruments due 2030           
|National Grid Company plc                   |  | GBP 50 million 2.817% Guaranteed Limited Retail Price Index-Linked Instruments due 2032
|National Grid Company plc(ii)               |  | GBP 75 million 5.0% Fixed Rate Instruments due 2035                                    
|National Grid Transco plc(ii)               |  | EUR 200 million Floating Rate Instruments due 2005                                     
|National Grid Transco plc(ii)               |  | EUR 500 million Floating Rate Instruments due 2006                                     
|National Grid Transco plc                   |  | EUR 500 million 3.75% Fixed Rate Instruments due 2008                                  
|National Grid Transco plc                   |  | EUR 600 million 5.0% Fixed Rate Instruments due 2018                                   
|National Grid Transco plc(ii)               |  | EUR 500 million 4.375% Fixed Rate Instruments due 2020                                 
|New England Power Company                   |  | USD 135.85 million Tax-Exempt Pollution Control Revenue Bonds, Variable Rate due 2020  
|New England Power Company                   |  | USD 106.15 million Tax-Exempt Pollution Control Revenue Bonds, Variable Rate due 2022  
|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 300 million 8.0% Taxable First Mortgage Bonds due 2004                             
|Niagara Mohawk Power Corporation(i)         |  | 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 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                                 |  | EUR 650 million 5.25% Fixed Rate Instruments due 2006                                  
|Transco plc                                 |  | GBP 250 million 6.125% Fixed Rate Instruments due 2006                                 
|Transco plc(iii)                            |  | GBP 300 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 300 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                                    

---

108

---





21.    Financial instruments

The Group's treasury policy, described on pages 50 to 52, includes details of the objectives, policies and strategies of the Group associated with financial
instruments with off-balance sheet risk.

The
Group's counterparty exposure under foreign currency swaps and foreign exchange contracts at 31 March 2005 was £576m (2004: £442m) and under interest
rate swaps and forward rate agreements was £95m (2004: £115m).

The
Group had no significant exposure to either individual counterparties or geographical groups of counterparties at 31 March 2005.

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:

|                                         |  |        |  |       |  | Fixed rate liabilities | 
|---------------------------------------- |  | ------ |  | ----- |  | ---------------------- | 
|
|
|At 31 March 2005                         |  |        |  |       |  |                        | 
|Sterling                                 |  | 9,639  |  | 6,656 |  | 2,983                  | 
|US dollars                               |  | 4,580  |  | 1,814 |  | 2,766                  | 
|                                         |  |        |  |       |  |                        | 
|Borrowings                               |  | 14,219 |  | 8,470 |  | 5,749                  | 
|Other financial liabilities (sterling)   |  | 61     |  | 61    |  |                       | 
|Other financial liabilities (US dollars) |  | 501    |  | 479   |  | 22                     | 
|                                         |  |        |  |       |  |                        | 
|                                         |  | 14,781 |  | 9,010 |  | 5,771                  | 
|                                         |  |        |  |       |  |                        | 
|At 31 March 2004                         |  |        |  |       |  |                        | 
|Sterling                                 |  | 8,988  |  | 5,231 |  | 3,757                  | 
|US dollars                               |  | 4,260  |  | 1,376 |  | 2,884                  | 
|                                         |  |        |  |       |  |                        | 
|Borrowings                               |  | 13,248 |  | 6,607 |  | 6,641                  | 
|Other financial liabilities (sterling)   |  | 40     |  | 40    |  |                       | 
|Other financial liabilities (US dollars) |  | 602    |  | 564   |  | 38                     | 
|                                         |  |        |  |       |  |                        | 
|                                         |  | 13,890 |  | 7,211 |  | 6,679                  | 
|                                         |  |        |  |       |  |                        | 

---

At
31 March 2005 the weighted average interest rate on short-term borrowings of £3,256m (2004: £1,706m) was 4.6% (2004: 4.0%).

Foreign
exchange forward deals held to manage the currency mix of the Group's borrowings portfolio comprising a £463m (2004: £141m) forward sale of US dollars
have not been adjusted in the table above.

Other
sterling financial liabilities comprised onerous leases of £61m (2004: £40m).

Other
US dollar financial liabilities comprised index-linked energy swap contracts of £327m (2004: £391m), purchased power obligations of £144m (2004:
£149m), non-equity minority interests of £22m (2004: £38m), onerous leases of £6m (2004: £nil), forward currency contracts of
£2m (2004: £nil), and interest rate swaps of £nil (2004: £24m) which are shown at fair value as they are no longer considered a hedge.

Substantially
all 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.

The
maturity profile of the Group's financial liabilities is shown in the table below after taking into account currency and interest rate swaps:

|                                                       |  | 2005   |  | 2004  
|------------------------------------------------------ |  | ------ |  | ------
|
|Maturity of financial liabilities at 31 March          |  |        |  |       
|In one year or less                                    |  | 3,328  |  | 1,848 
|In more than one year, but not more than two years     |  | 2,171  |  | 1,029 
|In more than two years, but not more than three years  |  | 618    |  | 2,189 
|In more than three years, but not more than four years |  | 1,316  |  | 589   
|In more than four years, but not more than five years  |  | 1,316  |  | 1,598 
|In more than five years                                |  | 6,032  |  | 6,637 
|                                                       |  |        |  |       
|                                                       |  | 14,781 |  | 13,890
|                                                       |  |        |  |       

109

---



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
|----------------------------------- |  | --- |  | -- |  | --- |  | -----------------
|
|
|At 31 March 2005                    |  |     |  |    |  |     |  |                  
|Sterling                            |  | 455 |  |   |  | 455 |  |                 
|US dollars                          |  | 189 |  |   |  | 189 |  |                 
|Other currencies                    |  | 26  |  |   |  | 26  |  |                 
|                                    |  |     |  |    |  |     |  |                  
|Cash and investments                |  | 670 |  |   |  | 670 |  |                 
|Other financial assets (sterling)   |  | 41  |  |   |  |    |  | 41               
|Other financial assets (US dollars) |  | 72  |  | 27 |  | 9   |  | 36               
|                                    |  |     |  |    |  |     |  |                  
|                                    |  | 783 |  | 27 |  | 679 |  | 77               
|                                    |  |     |  |    |  |     |  |                  
|At 31 March 2004                    |  |     |  |    |  |     |  |                  
|Sterling                            |  | 428 |  |   |  | 428 |  |                 
|US dollars                          |  | 165 |  |   |  | 165 |  |                 
|Other currencies                    |  | 23  |  |   |  | 23  |  |                 
|                                    |  |     |  |    |  |     |  |                  
|Cash and investments                |  | 616 |  |   |  | 616 |  |                 
|Other financial assets (sterling)   |  | 45  |  |   |  |    |  | 45               
|Other financial assets (US dollars) |  | 34  |  |   |  |    |  | 34               
|                                    |  |     |  |    |  |     |  |                  
|                                    |  | 695 |  |   |  | 616 |  | 79               
|                                    |  |     |  |    |  |     |  |                  

Cash
and investments earned interest at local prevailing rates for maturity periods generally not exceeding 12 months, and included listed investments with a cost of
£242m (2004: £241m) and market value of £245m (2004: £241m). Other financial assets at 31 March 2005 related to a net investment in a finance
lease of £41m (2004: £45m), fixed asset investments of £36m (2004: £34m), forward foreign currency contracts of £9m (2004:
£nil), equities of £16m (2004: £nil) and mutual funds of £11m (2004: £nil).

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

|                                                       |  | 2005 |  | 2004
|------------------------------------------------------ |  | ---- |  | ----
|
|Maturity of financial assets at 31 March               |  |      |  |     
|In one year or less                                    |  | 687  |  | 625 
|In more than one year, but not more than two years     |  | 12   |  | 11  
|In more than two years, but not more than three years  |  | 11   |  | 10  
|In more than three years, but not more than four years |  | 12   |  | 11  
|In more than four years, but not more than five years  |  | 4    |  | 10  
|In more than five years                                |  | 57   |  | 28  
|                                                       |  |      |  |     
|                                                       |  | 783  |  | 695 
|                                                       |  |      |  |     

Fair values of financial instruments at 31 March

|                                                                          |  | 2005    |   | 2004    |  
|------------------------------------------------------------------------- |  | ------- | - | ------- | -
|
|
|Short-term debt                                                           |  | (3,264  | ) | (3,284  | )
|Long-term debt                                                            |  | (11,308 | ) | (12,291 | )
|Cash and investments                                                      |  | 670     |   | 670     |  
|Other financial liabilities                                               |  | (560    | ) | (560    | )
|Net investment in finance lease                                           |  | 41      |   | 41      |  
|Other financial assets                                                    |  | 63      |   | 73      |  
|                                                                          |  |         |   |         |  
|Financial instruments held to manage interest rate and currency profiles: |  |         |   |         |  
|Interest rate swaps                                                       |  |        |   | (46     | )
|Forward foreign currency contracts and cross-currency swaps               |  | 360     |   | 480     |  
|                                                                          |  |         |   |         |  

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 at 31 March 2005 amounted to £7,420m (2004: £14,301m) and £8,017m (2004: £7,898m) respectively.

110

---



Gains and losses on hedges

|                                                                    |  | Unrecognised
gains |   | Unrecognised
losses |   | Unrecognised
net gain |   | Deferred
gains |   | Deferred
losses |   | Deferred
net (loss)/gain |  
|------------------------------------------------------------------- |  | ------------------ | - | ------------------- | - | --------------------- | - | -------------- | - | --------------- | - | ------------------------ | -
|
|Gains/(losses) on hedges at 1 April 2003                            |  | 458                |   | (229                | ) | 229                   |   | 39             |   | (88             | ) | (49                      | )
|(Gains)/losses arising in previous years recognised in the year     |  | (50                | ) | 18                  |   | (32                   | ) | (12            | ) | 12              |   |                         |  
|                                                                    |  |                    |   |                     |   |                       |   |                |   |                 |   |                          |  
|Gains/(losses) arising in previous years not recognised in the year |  | 408                |   | (211                | ) | 197                   |   | 27             |   | (76             | ) | (49                      | )
|Gains/(losses) arising in the year                                  |  | 22                 |   | (115                | ) | (93                   | ) | 104            |   | (6              | ) | 98                       |  
|                                                                    |  |                    |   |                     |   |                       |   |                |   |                 |   |                          |  
|Gains/(losses) on hedges at 31 March 2004                           |  | 430                |   | (326                | ) | 104                   |   | 131            |   | (82             | ) | 49                       |  
|(Gains)/losses arising in previous years recognised in the year     |  | (25                | ) | 23                  |   | (2                    | ) | (19            | ) | 10              |   | (9                       | )
|                                                                    |  |                    |   |                     |   |                       |   |                |   |                 |   |                          |  
|Gains/(losses) arising in previous years not recognised in the year |  | 405                |   | (303                | ) | 102                   |   | 112            |   | (72             | ) | 40                       |  
|Gains/(losses) arising in the year                                  |  | (64                | ) | 36                  |   | (28                   | ) | 36             |   | (8              | ) | 28                       |  
|                                                                    |  |                    |   |                     |   |                       |   |                |   |                 |   |                          |  
|Gains/(losses) on hedges at 31 March 2005                           |  | 341                |   | (267                | ) | 74                    |   | 148            |   | (80             | ) | 68                       |  
|                                                                    |  |                    |   |                     |   |                       |   |                |   |                 |   |                          |  
|Of which:                                                           |  |                    |   |                     |   |                       |   |                |   |                 |   |                          |  
|Gains/(losses) expected to be recognised within one year            |  | 12                 |   | (7                  | ) | 5                     |   | 25             |   | (14             | ) | 11                       |  
|Gains/(losses) expected to be recognised after one year             |  | 329                |   | (260                | ) | 69                    |   | 123            |   | (66             | ) | 57                       |  
|                                                                    |  |                    |   |                     |   |                       |   |                |   |                 |   |                          |  

Borrowing facilities

At 31 March 2005, the Group had bilateral committed credit facilities of £1,985m (2004: £1,823m), of which £1,985m
(2004: £1,808m) were undrawn. The Group also had committed credit facilities from syndicates of banks of £1,437m at 31 March 2005 (2004: £1,313m),
£1,237m (2004: £1,201m) of which were undrawn. An analysis of the maturity of these undrawn committed facilities is shown below:

Undrawn committed borrowing facilities

|                                                   |  | 2005  |  | 2004 
|-------------------------------------------------- |  | ----- |  | -----
|
|Expiring:                                          |  |       |  |      
|In one year or less                                |  | 3,165 |  | 2,269
|In more than one year, but not more than two years |  | 57    |  | 575  
|In more than two years                             |  |      |  | 165  
|                                                   |  |       |  |      
|                                                   |  | 3,222 |  | 3,009
|                                                   |  |       |  |      

Of
the unused facilities at 31 March 2005 £2,805m (2004: £2,604m) was held as back-up to commercial paper and similar borrowings. The remainder
was available as additional back-up to commercial paper and for other general corporate purposes.

22.    Provisions for liabilities and charges

|                                 |  | Group |  
|-------------------------------- |  | ----- | -
|
|
|At 1 April 2003 (restated)       |  | 143   |  
|Exchange adjustments             |  | (21   | )
|Additions                        |  | 24    |  
|Unwinding of discount            |  | 7     |  
|Unused amounts reversed          |  |      |  
|Utilised                         |  | (22   | )
|Other                            |  |      |  
|                                 |  |       |  
|At 31 March 2004 (restated)      |  | 131   |  
|Exchange adjustments             |  | (4    | )
|Acquisition of Group undertaking |  | 1     |  
|Additions                        |  | (2    | )
|Unwinding of discount            |  | 5     |  
|Unused amounts reversed          |  |      |  
|Utilised                         |  | (26   | )
|Other                            |  |      |  
|                                 |  |       |  
|At 31 March 2005                 |  | 105   |  
|                                 |  |       |  

The
decommissioning provision of £105m at 31 March 2005 represented the net present value of the estimated expenditure (discounted at a nominal rate of 4.90%) expected
to be incurred in respect of the decommissioning of certain nuclear generating units. Related regulatory assets were also recognised (note 17). Expenditure is expected to be incurred between
2006 and 2010. Additions in the year included £2m in respect of a change in a discount rate.

The
post-retirement benefits provision was in respect of pensions £342m (2004: £273m) and other post-retirement benefits (health care and
life insurance) £170m (2004: £191m).

The
environmental provision represented the estimated environmental restoration and remediation costs relating to a number of sites owned and managed by the Group.

111

---



At
31 March 2005, £262m (2004: £252m) of the environmental provision represented the net present value of the estimated statutory decontamination costs of
old gas manufacturing sites in the UK (discounted using a nominal rate of 5.25%). The anticipated timing of the cash flows for statutory decontamination cannot be predicted with certainty, but it is
expected to be incurred over the period 2006 to 2057 with some 64% of the spend projected to be spent over the next five years. During the year ended 31 March 2005, a review of the provision
was undertaken to take into account the impact of recent changes to the regulations on waste disposal. This review together with related revisions to the expected expenditure profile has resulted in
an additional provision being made as an exceptional charge of £41m in the profit and loss accountsee note 4(a).

There
are a number of uncertainties that affect the calculation of the provision for UK gas site decontamination, including the impact of regulation, the accuracy of the site surveys,
unexpected contaminants, transportation costs, the impact of alternative technologies and changes in the discount rate. The Group has made its best estimate of the financial effect of these
uncertainties in the calculation of the provision, but future material changes in any of the assumptions could materially impact on the calculation of the provision and hence the profit and loss
account.

The
undiscounted amount of the provision at 31 March 2005 relating to UK gas site decontamination was £340m (2004: £341m), being the undiscounted best
estimate of the liability having regard to the uncertainties referred to above (excluding the impact of changes in discount rate).

The
environmental provision at 31 March 2005 also included £219m (2004: £165m) which represented the net present value of estimated remediation expenditure
in the US which has been discounted at a nominal rate of 5.75%. This expenditure is expected to be incurred between 2006 and 2044. The uncertainties regarding the calculation of this provision are
similar to those considered in respect of UK gas decontamination. However, unlike the UK, with the exception of immaterial amounts of such costs, this expenditure is recoverable from rate payers under
the terms of the Group's various rate agreements in the US. As a consequence, any movement in the calculation of the best estimate of the Group's liability is matched by a corresponding movement in
the value of regulatory assets (note 17). Therefore, there is no material impact on the Group's profit and loss account arising from changes in the calculation of this liability.

The
undiscounted amount of environmental provision relating to the Group's US-based sites amounted to £324m at 31 March 2005. The Group does not have
sufficient information to calculate a range of outcomes, but it is expected that any outcome of the liability would be recovered from rate payers.

The
remainder of the environmental provision of £10m related to the expected cost of remediation of certain other sites in the UK, is calculated on an undiscounted basis and
is expected to be utilised within the next five years.

The
undiscounted amount of the total Group environmental provision at 31 March 2005 was £674m.

At
31 March 2005, £36m of the total restructuring provision (2004: £42m) consisted 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. The remainder of the restructuring provision related to business reorganisation costs in
the UK.

Other
provisions at 31 March 2005 included £59m (2004: £54m) 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. Other provisions at 31 March 2005 also included £11m (2004: £12m) in respect of obligations associated with the impairment of investments in
joint ventures.

Deferred
taxation comprised:

|                               |  | Provided
|------------------------------ |  | --------
|
|
|Accelerated capital allowances |  | 2,770   
|Other timing differences       |  | 266     
|                               |  |         
|                               |  | 3,036   
|                               |  |         

A
deferred tax asset in respect of substantial capital losses and non-trading debits has not been recognised because their future recovery is uncertain. Final agreement of
these losses is outstanding. As at 31 March 2005, the Group has capital losses in excess of £300m which have been agreed with the relevant tax authorities.

23.    Share capital

|Group                    |  | Allotted, called up and fully paid |  
|------------------------ |  | ---------------------------------- | -
|
|At 1 April 2002(i)       |  | 3,100                              |  
|Issued during the year   |  | 1                                  |  
|Redeemed during the year |  | (24                                | )
|                         |  |                                    |  
|At 31 March 2003         |  | 3,077                              |  
|Issued during the year   |  | 11                                 |  
|                         |  |                                    |  
|At 31 March 2004         |  | 3,088                              |  
|Issued during the year   |  | 2                                  |  
|                         |  |                                    |  
|At 31 March 2005         |  | 3,090                              |  
|                         |  |                                    |  

Nil
£1 special rights non-voting redeemable preference share (2004: one; 2003: one).

---

The
total consideration received by the Group and Company in respect of ordinary shares issued during the year ended 31 March 2005 was £9m.

112

---





|Company                                   |  | Allotted and issued |   | Called up and partly paid |   | Called up and fully paid |    
|----------------------------------------- |  | ------------------- | - | ------------------------- | - | ------------------------ | ---
|
|At 1 April 2002                           |  | 1,776,932,870       |   | 177,693,287               |   | 23,450                   | (i)
|Issued during the year                    |  | 1,324,195,509       |   | 132,419,551               |   |                         |    
|Fully paid up during the year             |  |                    |   |                          |   | (23,450                  | )  
|Repurchased and cancelled during the year |  | (24,225,000         | ) | (2,422,500                | ) |                         |    
|                                          |  |                     |   |                           |   |                          |    
|At 31 March 2003                          |  | 3,076,903,379       |   | 307,690,338               |   |                         |    
|Issued during the year                    |  | 10,700,377          |   | 1,070,038                 |   |                         |    
|                                          |  |                     |   |                           |   |                          |    
|At 31 March 2004                          |  | 3,087,603,756       |   | 308,760,376               |   |                         |    
|Issued during the year                    |  | 2,599,199           |   | 259,920                   |   |                         |    
|                                          |  |                     |   |                           |   |                          |    
|At 31 March 2005                          |  | 3,090,202,955       |   | 309,020,296               |   |                         |    
|                                          |  |                     |   |                           |   |                          |    

Nil
£1 special rights non-voting redeemable preference share (2004: one; 2003: one).

---

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 and 31 March 2004. During the year ended 31 March 2005 the one £1 special
rights non-voting redeemable preference share was removed from the authorised share capital of the Company.

During
the year ended 31 March 2003, the Group purchased for cancellation 24,225,000 of its ordinary shares at an average price per ordinary share of 401.59p.

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 was redeemed at par on 5 May 2004 and on 26 July 2004, an
ordinary resolution was passed cancelling this share from being included in the authorised share capital of the Company. The Special Share did not carry any rights to vote at general meetings but
entitled 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, required the prior
written consent of the holder of the Special Share. The Special Share conferred no right to participate in the capital or profits of the Company, except that on a winding-up the holder of
the Special Share was 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 and award schemes

The Group operates two principal forms of share option scheme. They are an employee Sharesave scheme and an Executive Share Option Plan ('the Executive Plan').
The details given below relate to the schemes operated by the Group and the Sharesave scheme formerly operated by Lattice. Following the Merger, most Lattice scheme options were converted into 0.375
National Grid Transco plc options. The remaining Lattice scheme options lapsed on 29 April 2003.

In
any 10-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.

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 Plan 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 and have now vested. Options granted for the 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.

The
Company also operates a number of share award schemes including a Performance Share Plan (PSP), a Share Matching Plan and a Transitional Share Award and Special Share Award in
relation to former Crown Castle UK employees.

Under
the PSP, awards have been made to Executive Directors and approximately 350 senior employees who have significant influence over the Group's ability to meet its strategic
objectives. Under the PSP, awards are conditional on the Group's total shareholder return over a three-year period. Awards are delivered in National Grid Transco plc shares. At 31
March 2005 the number of conditional awards of ordinary share equivalents outstanding under the PSP was 5,864,904 (2004: 3,458,055) of which nil (2004: nil) were exercisable. The number
of conditional awards during the year ended 31 March 2005 was 2,846,546 (2004: 3,458,055) with lapses/forfeits during the year of 436,700 (2004: nil) and exercises of 2,997 (2004: nil).

The
Share Matching Plan applies to Executive Directors whereby a predetermined part of each Director's bonus entitlement is automatically deferred into National Grid Transco plc shares
and a matching award may be made under the Plan after a three-year period provided the Director is still employed by the Group. At 31 March 2005 the number of conditional awards of
ordinary share equivalents outstanding under the Share Matching Plan was 341,482 (2004: 212,185) of which 28,534 (2004: nil) were exercisable. The number of conditional awards during the year ended 31
March 2005 was 171,460 (2004: 88,455) with exercises during the year of 42,163 (2004: 11,245).

The
Transitional Share Awards and Special Share Awards were made during the year ended 31 March 2005 to former Crown Castle UK employees and have a vesting period of four
and two years respectively, provided the employee is still employed by the Group. The number of awards made during the year were 188,650 and 45,700 respectively.

113

---



Movement
in options to subscribe for ordinary shares under the Group's various options schemes for the three years ended 31 March 2005 are shown below and include those options
related to shares issued to employee benefit trusts:

|                                        |  | Sharesave
scheme options |  | Executive Plan
options |   | Total
options | 
|--------------------------------------- |  | ------------------------ |  | ---------------------- | - | ------------- | 
|
|
|At 1 April 2002                         |  | 3.33                     |  | 9.8                    |   | 4.81          | 
|Converted from Lattice Sharesave scheme |  | 3.18                     |  | 26.7                   |   |              | 
|Granted                                 |  | 3.62                     |  | 9.9                    |   | 4.78          | 
|Lapsedforfeited                        |  | 4.14                     |  | (3.7                   | ) | 5.10          | 
|Lapsedexpired                          |  | 3.68                     |  | (1.0                   | ) | 2.85          | 
|Exercised                               |  | 2.39                     |  | (3.7                   | ) | 2.84          | 
|                                        |  |                          |  |                        |   |               | 
|At 31 March 2003                        |  | 3.31                     |  | 38.0                   |   | 4.86          | 
|Granted                                 |  | 3.17                     |  | 10.4                   |   | 4.05          | 
|Lapsedexpired                          |  | 3.52                     |  | (5.1                   | ) | 5.24          | 
|Exercised                               |  | 3.16                     |  | (11.6                  | ) | 2.90          | 
|                                        |  |                          |  |                        |   |               | 
|At 31 March 2004                        |  | 3.32                     |  | 31.7                   |   | 4.84          | 
|Granted                                 |  | 3.83                     |  | 4.8                    |   |              | 
|Lapsedexpired                          |  | 3.36                     |  | (1.5                   | ) | 5.02          | 
|Exercised                               |  | 3.37                     |  | (3.8                   | ) | 3.90          | 
|                                        |  |                          |  |                        |   |               | 
|At 31 March 2005                        |  | 3.35                     |  | 31.2                   |   | 4.86          | 
|                                        |  |                          |  |                        |   |               | 

Included
within options outstanding at 31 March 2005 and 31 March 2004 were the following options which were exercisable:

|At 31 March 2005 |  | 3.25 |  | 0.3 |  | 4.99 |  | 6.3 |  | 6.6
|---------------- |  | ---- |  | --- |  | ---- |  | --- |  | ---
|                 |  |      |  |     |  |      |  |     |  |    
|At 31 March 2004 |  | 3.32 |  | 0.8 |  | 3.78 |  | 2.4 |  | 3.2
|                 |  |      |  |     |  |      |  |     |  |    
|At 31 March 2003 |  | 3.34 |  | 1.7 |  | 3.72 |  | 2.4 |  | 4.1
|                 |  |      |  |     |  |      |  |     |  |    

The
weighted average remaining contractual life of options in the employee Sharesave scheme at 31 March 2005 was 2 years and 1 month. These options have exercise
prices between £3.12 and £4.57.

The
weighted average share price at the exercise dates were as follows:

|                         |  | 2005 |  | 2004 |  | 2003
|------------------------ |  | ---- |  | ---- |  | ----
|Sharesave scheme options |  | 4.49 |  | 3.97 |  | 4.38
|Executive Plan options   |  | 4.65 |  | 3.99 |  | 4.48

Lattice Sharesave scheme

|                                           |  | Weighted
average price |  | Sharesave
scheme |  
|------------------------------------------ |  | ---------------------- |  | ---------------- | -
|
|At 1 April 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              |  
|Lapsedexpired                             |  | 1.20                   |  | (1.3             | )
|                                           |  |                        |  |                  |  
|At 31 March 2004 and 31 March 2005         |  |                       |  |                 |  
|                                           |  |                        |  |                  |  

Following
the merger of Lattice Group plc and National Grid Group plc, a number of employees did not convert their Lattice Sharesave options into National Grid Transco options. These
options lapsed on 29 April 2003 if they had not been exercised by that date.

Options
outstanding and exercisable and their weighted average exercise prices for the respective ranges of exercise prices and years at 31 March 2005 are as follows:

|               |  | Weighted average
exercise price of
exercisable options |  | Number
exercisable |  | Weighted average
exercise price of
outstanding options |  | Number
outstanding |  | Exercise price
per share |  | Normal dates
of exercise
|-------------- |  | ------------------------------------------------------ |  | ------------------ |  | ------------------------------------------------------ |  | ------------------ |  | ------------------------ |  | ------------------------
|
|Executive Plan |  | 2.81                                                   |  | 0.6                |  | 2.81                                                   |  | 0.6                |  | 258.0 - 280.5            |  | 2001 - 2008             
|               |  | 3.79                                                   |  | 0.6                |  | 3.79                                                   |  | 0.6                |  | 375.8 - 490.0            |  | 2002 - 2009             
|               |  | 5.41                                                   |  | 1.6                |  | 5.41                                                   |  | 1.6                |  | 424.0 - 566.5            |  | 2003 - 2010             
|               |  | 5.32                                                   |  | 1.1                |  | 5.32                                                   |  | 1.1                |  | 526.0 - 623.0            |  | 2004 - 2011             
|               |  | 5.49                                                   |  | 2.1                |  | 5.49                                                   |  | 2.1                |  | 479.5 - 563.0            |  | 2005 - 2012             
|               |  | 4.71                                                   |  | 0.3                |  | 4.68                                                   |  | 4.3                |  | 434.3 - 481.5            |  | 2006 - 2013             
|               |  | 4.05                                                   |  |                   |  | 4.05                                                   |  | 0.1                |  | 405.0                    |  | 2007 - 2014             
|               |  |                                                        |  |                    |  |                                                        |  |                    |  |                          |  |                         
|               |  | 4.99                                                   |  | 6.3                |  | 4.86                                                   |  | 10.4               |  |                          |  |                         
|               |  |                                                        |  |                    |  |                                                        |  |                    |  |                          |  |                         

114

---



Share-based payment charges

Under UK GAAP, a charge is made to the profit and loss account based on the fair value of grants in accordance with FRS 20 'Share-based Payment'. All share awards
are equity settled.

The
charge to the profit and loss account for the year ended 31 March 2005 was £16m (2004: £25m; 2003: £40m, of which £3m
was included within exceptional merger costs).

Awards under share option plans

The average share prices at the date of options being granted during each of the three financial years ended 31 March were as follows:

|                                                                            |  | 2005   |  | 2004   |  | 2003  
|--------------------------------------------------------------------------- |  | ------ |  | ------ |  | ------
|Where the exercise price is less than the market price at the date of grant |  | 496.0p |  | 400.0p |  | 429.9p
|Where the exercise price is equal to the market price at the date of grant  |  |       |  | 408.0p |  | 464.0p

The
average exercise prices of the options granted during each of the three financial years ended 31 March were as follows:

|                                                                            |  | 2005   |  | 2004   |  | 2003  
|--------------------------------------------------------------------------- |  | ------ |  | ------ |  | ------
|Where the exercise price is less than the market price at the date of grant |  | 383.0p |  | 317.0p |  | 362.0p
|Where the exercise price is equal to the market price at the date of grant  |  |       |  | 405.0p |  | 478.0p

The
average fair values of the options granted during each of the three financial years ended 31 March were estimated as follows:

|                                                                            |  | 2005  |  | 2004  |  | 2003  
|--------------------------------------------------------------------------- |  | ----- |  | ----- |  | ------
|Where the exercise price is less than the market price at the date of grant |  | 90.4p |  | 67.4p |  | 123.0p
|Where the exercise price is equal to the market price at the date of grant  |  |      |  | 73.6p |  | 50.0p 

The
fair values of the options granted were estimated using the following principal assumptions:

|                              |  | 2005    |  | 2004 |  | 2003
|----------------------------- |  | ------- |  | ---- |  | ----
|Dividend yield (%)            |  | 5.5-5.8 |  | 7.0  |  | 3.5 
|Volatility (%)                |  | 15.4    |  | 20.4 |  | 35.0
|Risk-free investment rate (%) |  | 4.5     |  | 4.6  |  | 4.4 
|Average life (years)          |  | 4.0     |  | 3.4  |  | 4.0 

The
fair values of awards under the Sharesave scheme have been calculated using the Black-Scholes model. This is considered appropriate given the short exercise window of sharesave
options.

Volatility
has been derived based on the following:



Volatility
is assumed to revert from its current implied level to its long run mean, based on historical volatility under (ii) above.

Awards under other share scheme plans

The average share prices and fair values at the date share awards were granted during each of the three financial years ended 31 March were as follows:

|                    |  | 2005   |  | 2004   |  | 2003  
|------------------- |  | ------ |  | ------ |  | ------
|Average share price |  | 431.7p |  | 407.8p |  | 477.5p
|Average fair value  |  | 210.6p |  | 390.3p |  | 477.5p

The
fair values of the awards granted were estimated using the following principal assumptions:

|                              |  | 2005    |  | 2004 |  | 2003
|----------------------------- |  | ------- |  | ---- |  | ----
|Dividend yield (%)            |  | 5.3-5.7 |  | 7.0  |  | 3.5 
|Volatility (%)                |  | 15.4    |  | 20.4 |  | 35.0
|Risk-free investment rate (%) |  | 4.5-5.2 |  | 4.6  |  | 4.4 

In
2003 the fair value of awards under the PSP were estimated using the Black-Scholes model. In 2004 the awards were estimated using the share price at the date of grant less an
adjustment for dividends not payable in the vesting period. In
2005 fair values have been calculated using a Monte Carlo simulation model, which better reflects the total shareholder return performance conditions of the plan.

For
other share scheme awards, where the primary vesting condition is that employees complete a specified number of years service, the fair value has been calculated as the share price
at date of grant, adjusted to recognise the extent to which participants do not receive dividends over the vesting period.

Volatility
for share awards has been calculated on the same basis as used for share options, as described above.

115

---



24.    Reserves

|                                                                      |  | Group |  | Company |  
|--------------------------------------------------------------------- |  | ----- |  | ------- | -
|
|
|At 1 April 2002 (restated)                                            |  | 1,243 |  | (5,139  | )
|Exchange adjustments                                                  |  |      |  |        |  
|Tax on exchange adjustments                                           |  |      |  |        |  
|Ordinary shares issued during the year                                |  | 2     |  |        |  
|Repurchase and cancellation of ordinary shares                        |  |      |  | 2       |  
|Transfer on issue of certain shares under share option schemes        |  | 2     |  |        |  
|Unrealised gain on transfer of assets to a joint venture (net of tax) |  |      |  | 6       |  
|Movement in shares held by employee share trusts                      |  |      |  |        |  
|Employee option scheme issues                                         |  |      |  |        |  
|Retained (loss)/profit for the year (restated)                        |  |      |  |        |  
|                                                                      |  |       |  |         |  
|At 31 March 2003 (restated)                                           |  | 1,247 |  | (5,131  | )
|Exchange adjustments                                                  |  |      |  |        |  
|Tax on exchange adjustments                                           |  |      |  |        |  
|Ordinary shares issued during the year                                |  | 33    |  |        |  
|Movement in shares held by employee share trusts                      |  |      |  |        |  
|Employee option scheme issues                                         |  |      |  |        |  
|Retained profit for the year (restated)                               |  |      |  |        |  
|                                                                      |  |       |  |         |  
|At 31 March 2004 (restated)                                           |  | 1,280 |  | (5,131  | )
|Exchange adjustments                                                  |  |      |  |        |  
|Ordinary shares issued during the year                                |  | 9     |  |        |  
|Movement in shares held by employee share trusts                      |  |      |  |        |  
|Employee option scheme issues                                         |  |      |  |        |  
|Deferred tax on employee option schemes                               |  |      |  |        |  
|Retained profit for the year                                          |  |      |  |        |  
|Unrealised gain on sale of investment to a Group undertaking          |  |      |  |        |  
|                                                                      |  |       |  |         |  
|At 31 March 2005                                                      |  | 1,289 |  | (5,131  | )
|                                                                      |  |       |  |         |  

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 £2,652m
(2004: £795m; 2003: £1,264m). Of the Company's profit and loss account reserve of £7,535m at 31 March 2005, £4,567m relating to gains on
intra-group transactions was not distributable to shareholders.

Other
reserves are non-distributable reserves. They primarily represent 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. The reserve also included 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.

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.

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.

Own
shares are included in the profit and loss account reserve at 31 March 2005 and related to 7 million 10p ordinary shares in National Grid Transco plc, held by employee
share trusts for the purpose of satisfying certain obligations under various share option schemes operated by the Group. The carrying value of £29m (market value £33m) at 31
March 2005 represented the exercise amounts receivable in respect of those 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 2004 related to 9 million 10p ordinary shares in National Grid Transco plc (book value £34m, market value £43m).

Own
shares at 31 March 2003 related to 10 million 10p ordinary shares in National Grid Transco plc (book value £39m, market value £37m).

25.    Non-equity minority interests

The non-equity minority interests of £22m (2004: £38m) comprised cumulative preference stock issued by Group undertakings.

116

---





26.    Reconciliation of movement in equity shareholders' funds

|                                                                      |  | 2005  |   | 2004
(restated) |   | 2003
(restated) |  
|--------------------------------------------------------------------- |  | ----- | - | --------------- | - | --------------- | -
|
|Profit for the year                                                   |  | 908   |   | 1,074           |   | 351             |  
|Dividends                                                             |  | (731  | ) | (609            | ) | (530            | )
|                                                                      |  |       |   |                 |   |                 |  
|                                                                      |  | 177   |   | 465             |   | (179            | )
|Issue of ordinary shares                                              |  | 9     |   | 34              |   | 2               |  
|Repurchase and cancellation of ordinary shares                        |  |      |   |                |   | (97             | )
|Exchange adjustments                                                  |  | (73   | ) | (417            | ) | (322            | )
|Tax on exchange adjustments                                           |  |      |   | (12             | ) | 12              |  
|Movement in shares held by employee share trusts                      |  | 5     |   | 5               |   | 14              |  
|Employee option scheme issues                                         |  | 16    |   | 25              |   | 40              |  
|Deferred tax on employee option schemes                               |  | 4     |   |                |   |                |  
|Unrealised gain on transfer of assets to a joint venture (net of tax) |  |      |   |                |   | 6               |  
|                                                                      |  |       |   |                 |   |                 |  
|Net increase/(decrease) in equity shareholders' funds                 |  | 138   |   | 100             |   | (524            | )
|Equity shareholders' funds at start of year                           |  | 1,221 |   | 1,121           |   | 1,645           |  
|                                                                      |  |       |   |                 |   |                 |  
|Equity shareholders' funds at end of year                             |  | 1,359 |   | 1,221           |   | 1,121           |  
|                                                                      |  |       |   |                 |   |                 |  

27.    Group cash flow statement

a)    Reconciliation of operating profit to net cash inflow from operating activities before exceptional items

|                                                                   |  | 2005  |   | 2004
(restated) |   | 2003
(restated) |  
|------------------------------------------------------------------ |  | ----- | - | --------------- | - | --------------- | -
|
|Operating profit of Group undertakings                             |  | 1,845 |   | 1,830           |   | 1,572           |  
|Group exceptional operating items                                  |  | 251   |   | 277             |   | 479             |  
|Depreciation and amortisation                                      |  | 1,132 |   | 1,117           |   | 1,088           |  
|(Increase)/decrease in stocks                                      |  | (10   | ) | 31              |   | (16             | )
|Decrease/(increase) in debtors                                     |  | 15    |   | (121            | ) | (149            | )
|(Decrease)/increase in creditors                                   |  | (111  | ) | (6              | ) | 159             |  
|Decrease in provisions                                             |  | (35   | ) | (95             | ) | (16             | )
|Share-based payment charges                                        |  | 16    |   | 25              |   | 37              |  
|                                                                   |  |       |   |                 |   |                 |  
|Net cash inflow from operating activities before exceptional items |  | 3,103 |   | 3,058           |   | 3,154           |  
|                                                                   |  |       |   |                 |   |                 |  

b)    Disposal of investments

|                               |  | 2005 |  | 2004 |  | 2003
|------------------------------ |  | ---- |  | ---- |  | ----
|
|Cash consideration received    |  | 8    |  | 33   |  | 328 
|                               |  |      |  |      |  |     
|Comprises:                     |  |      |  |      |  |     
|Disposal of Group undertakings |  |     |  |     |  | 92  
|Disposal of joint venture      |  | 8    |  |     |  |    
|Disposal of other investments  |  |     |  | 33   |  | 236 
|                               |  |      |  |      |  |     
|                               |  | 8    |  | 33   |  | 328 
|                               |  |      |  |      |  |     

c)     Acquisition of Group undertakings

|                                            |  | 2005   |   | 2004 |  | 2003
|------------------------------------------- |  | ------ | - | ---- |  | ----
|
|Payments to acquire Group undertakings      |  | (1,151 | ) |     |  |    
|Cash at bank of Group undertakings acquired |  | 29     |   |     |  |    
|                                            |  |        |   |      |  |     
|                                            |  | (1,122 | ) |     |  |    
|                                            |  |        |   |      |  |     

117

---



d)    Reconciliation of net cash flow to movement in net debt

|                                                         |  | 2005    |   | 2004    |   | 2003    |  
|-------------------------------------------------------- |  | ------- | - | ------- | - | ------- | -
|
|Movement in cash and overdrafts                          |  | 13      |   | 13      |   | 34      |  
|Net cash outflow from the management of liquid resources |  | 54      |   | 48      |   | 138     |  
|(Increase)/decrease in borrowings                        |  | (1,068  | ) | 426     |   | (267    | )
|                                                         |  |         |   |         |   |         |  
|Change in net debt resulting from cash flows             |  | (1,001  | ) | 487     |   | (95     | )
|Disposal of Group undertaking                            |  |        |   |        |   | (62     | )
|Exchange adjustments                                     |  | 112     |   | 534     |   | 593     |  
|Settlement of EPICs (see note 4(b))                      |  |        |   | 243     |   |        |  
|Other non-cash movements                                 |  | (28     | ) | (18     | ) | (15     | )
|                                                         |  |         |   |         |   |         |  
|Movement in net debt in the year                         |  | (917    | ) | 1,246   |   | 421     |  
|Net debt at start of year                                |  | (12,632 | ) | (13,878 | ) | (14,299 | )
|                                                         |  |         |   |         |   |         |  
|Net debt at end of year                                  |  | (13,549 | ) | (12,632 | ) | (13,878 | )
|                                                         |  |         |   |         |   |         |  

During
the year ended 31 March 2004 certain cross-currency swaps were terminated and £209m of cash was received. £61m of this cash flow was reported in the
cash flow statement within the total of net cash outflow for returns on investments and servicing of finance amounting to £(692)m, and £148m was reported within net cash inflow
from financing. Termination of these cross-currency swaps also necessitated a retranslation of Euro denominated debt at new swapped rates amounting to £(140)m, which was reported within
the net exchange adjustments of £534m reported above.

e)     Analysis of changes in net debt

|                               |  | At 1 April
2002 |   | Cash
flow |   | Disposal
of Group
undertakings |   | Exchange
adjustments |   | Other
non-cash
movements |   | At 31 March
2003 |  
|------------------------------ |  | --------------- | - | --------- | - | ------------------------------ | - | -------------------- | - | ------------------------ | - | ---------------- | -
|
|Cash at bank and in hand       |  | 110             |   | 12        |   |                               |   | (3                   | ) |                         |   | 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          | )
|                               |  |                 |   |           |   |                                |   |                      |   |                          |   |                  |  

|                               |  | At 1 April
2003 |   | Cash
flow |   | Exchange
adjustments |   | Settlement
of EPICs |  | Other
non-cash
movements |   | At 31 March
2004 |  
|------------------------------ |  | --------------- | - | --------- | - | -------------------- | - | ------------------- |  | ------------------------ | - | ---------------- | -
|
|Cash at bank and in hand       |  | 119             |   | (21       | ) | (2                   | ) |                    |  |                         |   | 96               |  
|Bank overdrafts                |  | (62             | ) | 34        |   | 2                    |   |                    |  |                         |   | (26              | )
|                               |  |                 |   | 13        |   |                      |   |                     |  |                          |   |                  |  
|Current asset investments      |  | 482             |   | 48        |   | (10                  | ) |                    |  |                         |   | 520              |  
|Borrowings due after one year  |  | (12,233         | ) | (1,117    | ) | 448                  |   |                    |  | 1,360                    |   | (11,542          | )
|Borrowings due within one year |  | (2,184          | ) | 1,543     |   | 96                   |   | 243                 |  | (1,378                   | ) | (1,680           | )
|                               |  |                 |   | 426       |   |                      |   |                     |  |                          |   |                  |  
|                               |  |                 |   |           |   |                      |   |                     |  |                          |   |                  |  
|                               |  | (13,878         | ) | 487       |   | 534                  |   | 243                 |  | (18                      | ) | (12,632          | )
|                               |  |                 |   |           |   |                      |   |                     |  |                          |   |                  |  

|                               |  | At 1 April
2004 |   | Cash
flow |   | Exchange
adjustments |   | Other
non-cash
movements |   | At 31 March
2005 |  
|------------------------------ |  | --------------- | - | --------- | - | -------------------- | - | ------------------------ | - | ---------------- | -
|
|Cash at bank and in hand       |  | 96              |   | 5         |   | (1                   | ) |                         |   | 100              |  
|Bank overdrafts                |  | (26             | ) | 8         |   |                     |   |                         |   | (18              | )
|                               |  |                 |   | 13        |   |                      |   |                          |   |                  |  
|Current asset investments      |  | 520             |   | 54        |   | (4                   | ) |                         |   | 570              |  
|Borrowings due after one year  |  | (11,542         | ) | (301      | ) | 80                   |   | 800                      |   | (10,963          | )
|Borrowings due within one year |  | (1,680          | ) | (767      | ) | 37                   |   | (828                     | ) | (3,238           | )
|                               |  |                 |   | (1,068    | ) |                      |   |                          |   |                  |  
|                               |  |                 |   |           |   |                      |   |                          |   |                  |  
|                               |  | (12,632         | ) | (1,001    | ) | 112                  |   | (28                      | ) | (13,549          | )
|                               |  |                 |   |           |   |                      |   |                          |   |                  |  

118

---



28.    Related party transactions

Transactions with related parties were in the normal course of business and are summarised below. Transactions with subsidiaries or associated undertakings
disposed of during the year are deemed to be related party transactions from the date of disposal and have been included within the following table:

|                      |  | 2005 |  | 2004 |  | 2003
|--------------------- |  | ---- |  | ---- |  | ----
|
|Sales:                |  |      |  |      |  |     
|Services supplied     |  | 4    |  | 6    |  | 10  
|Finance lease rentals |  |     |  |     |  | 11  
|Purchases:            |  |      |  |      |  |     
|Services received     |  | 24   |  | 25   |  | 59  
|Finance lease rentals |  |     |  |     |  | 1   
|Tangible fixed assets |  |     |  |     |  | 12  

At
31 March 2005, the Group had amounts receivable and payable amounting to £1m (2004: £1m) and £1m (2004: £1m) respectively with
related parties.

During
2002/03, 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 that
year amounted to £153m, all of which had been provided for at 31 March 2002.

At
31 March 2003, amounts due to and from The Leasing Group plc, a former subsidiary undertaking, amounted to £73m and £79m respectively. In addition, at
31 March 2003 the Group had a net investment in a finance lease with a related party amounting to £50m, of which £5m fell due within one year. Rentals received and
receivable relating to this lease in 2003 amounted to £11m.

29.    Commitments and contingencies

a)    Future capital expenditure

|                                |  | 2005 |  | 2004
|------------------------------- |  | ---- |  | ----
|
|Contracted for but not provided |  | 927  |  | 448 

b)    Lease commitments

At
31 March 2005, the Group's operating lease commitments for the financial year ending 31 March 2006 amounted to £99m (2004: £59m)
and are analysed by lease expiry date as follows:

|                           |  | Land and buildings |  | Other |  | Total
|-------------------------- |  | ------------------ |  | ----- |  | -----
|
|
|Within one year            |  | 1                  |  | 2     |  | 3    
|Between two and five years |  | 10                 |  | 5     |  | 18   
|After five years           |  | 57                 |  | 21    |  | 10   
|                           |  |                    |  |       |  |      
|                           |  | 68                 |  | 28    |  | 31   
|                           |  |                    |  |       |  |      

Total
Group commitments under non-cancellable operating leases were as follows:

|                                                       |  | 2005 |  | 2004
|------------------------------------------------------ |  | ---- |  | ----
|
|In one year or less                                    |  | 99   |  | 59  
|In more than one year, but not more than two years     |  | 91   |  | 45  
|In more than two years, but not more than three years  |  | 83   |  | 40  
|In more than three years, but not more than four years |  | 79   |  | 32  
|In more than four years, but not more than five years  |  | 77   |  | 31  
|In more than five years                                |  | 501  |  | 271 
|                                                       |  |      |  |     
|                                                       |  | 930  |  | 478 
|                                                       |  |      |  |     

c)     Power commitments

At
31 March 2005, 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):

|                                                       |  | 2005  |  | 2004 
|------------------------------------------------------ |  | ----- |  | -----
|
|In one year or less                                    |  | 1,058 |  | 1,065
|In more than one year, but not more than two years     |  | 623   |  | 629  
|In more than two years, but not more than three years  |  | 583   |  | 592  
|In more than three years, but not more than four years |  | 567   |  | 575  
|In more than four years, but not more than five years  |  | 462   |  | 559  
|In more than five years                                |  | 1,622 |  | 2,135
|                                                       |  |       |  |      
|                                                       |  | 4,915 |  | 5,555
|                                                       |  |       |  |      

119

---



d)    Other commitments, contingencies and guarantees

The value of other Group commitments, contingencies and guarantees at 31 March 2005 amounted to £349m (2004: £263m), including
guarantees amounting to £189m (2004: £168m).

Details
of the guarantees entered into by the Group at 31 March 2005 are shown below:



The
Company has also guaranteed the lease obligations of a former associate to a Group undertaking, amounting to £37m (2004: £45m).

e)     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 2005, the sterling equivalent amounted to £2,019m (2004: £1,892m). The guarantees are for varying terms between four and ten years.

f)     Larkhall prosecution

Following a fatal accident at Larkhall, Lanarkshire in December 1999 in which four people died, our subsidiary Transco plc faces charges alleging breaches
of sections 3 and 33 of the Health and Safety at Work Act 1974. The case is currently being tried in Edinburgh. The maximum penalty for breach of either of the above sections is an unlimited fine.

g)     Cavendish Mill prosecution

Following a fatal accident at Cavendish Mill, Lancashire in November 2001 in which one person died, our subsidiary Transco plc has been charged with a
breach of section 3 of the Health and Safety at Work Act 1974. The prosecution is ongoing. The maximum penalty for breach of this section is an unlimited fine.

120

---





30.    Group undertakings and joint ventures

Principal Group undertakings

The principal Group undertakings included in the Group accounts at 31 March 2005 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 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
|GridAmerica LLC (formed in the US)(i)                                           |  | Management of electricity transmission assets       
|Gridcom (UK) Limited(i)                                                         |  | Telecommunications infrastructure                   
|Crown Castle UK Limited(i)                                                      |  | Telecommunications and broadcast infrastructure     
|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(i)                                                            |  | 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                                     

---

Principal joint ventures(at 31 March 2005)

|                                     |  | Group holding         |  | Country of
incorporation
and operation |  | Principal activity                                  
|------------------------------------ |  | --------------------- |  | -------------------------------------- |  | ----------------------------------------------------
|Copperbelt Energy Corporation Plc(i) |  | 38.5% ordinary shares |  | Zambia                                 |  | Transmission, distribution and supply of electricity

---

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 and General Counsel.

31.    Subsequent events

Subsequent to 31 March 2005, we have made further substantial progress in respect of the planned sales of four of our regional gas networks, currently
scheduled for 1 June 2005. This has included the adoption of a new regulatory regime by Ofgem, the transfer of the networks into four new subsidiary companies on 1 May 2005 and obtaining
separate licences for each network.

32.    Differences between UK and US accounting principles

The Group prepares its consolidated accounts in accordance with generally accepted accounting principles in the United Kingdom (UK GAAP), which differ in certain
respects from generally accepted accounting principles in the United States (US GAAP).

The
most significant difference between UK GAAP and US GAAP is that, under UK GAAP, the business combination of the then National Grid Group plc (now National Grid Transco plc) and
Lattice Group plc was accounted for as a merger (pooling of interests), while under US GAAP this transaction was accounted for as an acquisition (purchase accounting) of Lattice Group plc.
Consequently, under UK GAAP, the accounts represent the combined accounts of National Grid Group plc and Lattice Group plc on an historical cost basis for all periods presented. Under US GAAP, the
accounts presented prior to the Merger are those of National Grid Group plc only.

Condensed
income statements, statements of comprehensive income and changes in shareholders' equity, balance sheets and segmental information in a US GAAP format are presented in
note 33. The balance sheets at 31 March 2004 and 31 March 2005 include the impact of the fair value of the acquired assets and liabilities of Lattice Group plc prepared under US
GAAP at the date of acquisition. The effect of the US GAAP adjustments to profit for the financial year and equity shareholders' funds is set out below.

121

---



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:

|                                                                      |  | Notes |  | 2005  |   | 2004
(restated)(i) |   | 2003
(restated)(i) |  
|--------------------------------------------------------------------- |  | ----- |  | ----- | - | ------------------ | - | ------------------ | -
|
|Net income under UK GAAP                                              |  |       |  | 908   |   | 1,074              |   | 351                |  
|Adjustments to conform with US GAAP                                   |  |       |  |       |   |                    |   |                    |  
|Elimination of Lattice pre-acquisition losses, measured under UK GAAP |  | (a)   |  |      |   |                   |   | 304                |  
|Merger costs                                                          |  | (a)   |  |      |   |                   |   | 32                 |  
|Fixed assetspurchase of Lattice                                      |  | (a)   |  | (356  | ) | (364               | ) | (169               | )
|Replacement expenditure (net of depreciation)                         |  | (a)   |  | 459   |   | 383                |   | 166                |  
|Pensions and other post-retirement benefits                           |  | (b)   |  | 59    |   | 7                  |   | 35                 |  
|Impairment of goodwill and other intangible assets                    |  | (c)   |  |      |   | (31                | ) |                   |  
|Financial instruments                                                 |  | (d)   |  | 254   |   | 82                 |   | 40                 |  
|Carrying value of EPICs liability                                     |  | (e)   |  |      |   | (226               | ) | 2                  |  
|Severance and integration costs                                       |  | (f)   |  | 62    |   |                   |   | (110               | )
|Recognition of income                                                 |  | (g)   |  | 13    |   | (9                 | ) | 2                  |  
|Goodwill amortisation                                                 |  | (h)   |  | 109   |   | 99                 |   | 70                 |  
|Intangibles amortisation                                              |  | (i)   |  | (8    | ) |                   |   |                   |  
|Restructuringpurchase of Lattice                                     |  | (j)   |  | 2     |   | 2                  |   | 46                 |  
|Share of joint ventures' and associate's adjustments                  |  | (k)   |  |      |   |                   |   | (27                | )
|Deferred taxation                                                     |  | (o)   |  | (188  | ) | (24                | ) | 7                  |  
|Other                                                                 |  | (p)   |  | (10   | ) | 5                  |   | 2                  |  
|                                                                      |  |       |  | 396   |   | (76                | ) | 400                |  
|                                                                      |  |       |  |       |   |                    |   |                    |  
|Net income under US GAAP                                              |  |       |  | 1,304 |   | 998                |   | 751                |  
|                                                                      |  |       |  |       |   |                    |   |                    |  

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:

|                                                                                                                  |  | Notes |  | 2005   |   | 2004
(restated)(i) |  
|----------------------------------------------------------------------------------------------------------------- |  | ----- |  | ------ | - | ------------------ | -
|
|Equity shareholders' funds under UK GAAP                                                                          |  |       |  | 1,359  |   | 1,221              |  
|Adjustments to conform with US GAAP                                                                               |  |       |  |        |   |                    |  
|Fixed assetsimpact of Lattice Group plc purchase accounting and replacement expendituregross                    |  | (a)   |  | 8,202  |   | 7,776              |  
|Fixed assetsimpact of Lattice Group plc purchase accounting and replacement expenditureaccumulated depreciation |  | (a)   |  | (781   | ) | (458               | )
|Goodwillpurchase of Lattice                                                                                      |  | (a)   |  | 3,820  |   | 3,820              |  
|Pensions and other post-retirement benefits                                                                       |  | (b)   |  | (1,001 | ) | (1,069             | )
|Financial instruments                                                                                             |  | (d)   |  | 117    |   | (285               | )
|Severance and integration liabilities                                                                             |  | (f)   |  | 65     |   | 3                  |  
|Recognition of income                                                                                             |  | (g)   |  | (21    | ) | (35                | )
|Goodwillother acquisitions                                                                                       |  | (h)   |  | 233    |   | 245                |  
|Intangiblesother acquisitions                                                                                    |  | (i)   |  | 212    |   |                   |  
|Restructuringpurchase of Lattice                                                                                 |  | (j)   |  | (2     | ) | (4                 | )
|Ordinary dividends                                                                                                |  | (l)   |  | 469    |   | 366                |  
|Tangible fixed assetsreversal of partial release of impairment provision                                         |  | (m)   |  | (29    | ) | (32                | )
|Regulatory assets                                                                                                 |  | (n)   |  | 162    |   | 128                |  
|Deferred taxation                                                                                                 |  | (o)   |  | (2,224 | ) | (1,876             | )
|Other                                                                                                             |  | (p)   |  | 10     |   | 21                 |  
|                                                                                                                  |  |       |  | 9,232  |   | 8,600              |  
|                                                                                                                  |  |       |  |        |   |                    |  
|Equity shareholders' funds under US GAAP                                                                          |  |       |  | 10,591 |   | 9,821              |  
|                                                                                                                  |  |       |  |        |   |                    |  

---

The
principal differences between UK and US GAAP, as applied in preparing the Group accounts under US GAAP, are set out below:

a)    Business combination with Lattice Group plc

Under UK GAAP the business combination with Lattice Group plc was accounted for using merger accounting which combines the results of both companies for the
entire year. Under US GAAP, the business combination was accounted for
using purchase accounting. As a consequence, the results of Lattice Group plc and its group undertakings are included in the Group accounts only from the date of combination.

Under
UK GAAP merger costs are expensed. Under US GAAP merger costs are part of the consideration paid in connection with the acquisition. Consequently, merger costs have been excluded
from net income under US GAAP.

122

---



Fixed assetsimpact of Lattice Group plc purchase accounting and replacement expenditure

Under US GAAP the tangible fixed assets of Lattice Group plc and its group undertakings were recorded at their fair value at the date of the business combination,
and depreciation subsequent to that date has been calculated based 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' expected useful economic lives.

Goodwillbusiness combination with Lattice Group plc

Under UK GAAP, the business combination of National Grid Group plc and Lattice Group plc has been accounted for as a merger (pooling of interests) while under US
GAAP this transaction was accounted for as an acquisition (purchase accounting) of Lattice Group plc. In accordance with US GAAP, goodwill arising on the purchase has been recognised, but is not
amortised.

b)    Pensions and other post-retirement benefits

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(R). 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 has been amortised over 15 years commencing
1 April 1989.

Under
UK GAAP, as explained in note 7, net interest includes a charge of £37m (2004: £56m charge; 2003: £3m credit) in respect of the notional
interest element of the variation from the regular pension cost. Under US GAAP, this cost is not recognised.

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

|                                               |  | Pensions |   | Other post-retirement benefits |  
|---------------------------------------------- |  | -------- | - | ------------------------------ | -
|
|
|Service cost                                   |  | 135      |   | 143                            |  
|Interest cost                                  |  | 828      |   | 799                            |  
|Settlements                                    |  |         |   | 14                             |  
|Expected return on assets                      |  | (860     | ) | (814                           | )
|Amortisation of prior service cost             |  | 6        |   | 5                              |  
|Amortisation of previously unrecognised losses |  | 45       |   | 39                             |  
|Amortisation of transitional asset             |  |         |   | (11                            | )
|                                               |  |          |   |                                |  
|                                               |  | 154      |   | 175                            |  
|Release of pension provision                   |  | (2       | ) | (2                             | )
|                                               |  |          |   |                                |  
|                                               |  | 152      |   | 173                            |  
|                                               |  |          |   |                                |  

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:

|                                              |  | 2005 |  | 2004 |  | 2003
|--------------------------------------------- |  | ---- |  | ---- |  | ----
|
|Cost of termination benefits and curtailments |  | 30   |  | 129  |  | 119 

The
principal financial assumptions used for the SFAS 87 calculations of net periodic charge, based on a measurement date of 31 March 2004 in respect of the US and UK defined
benefit schemes are shown below:

|                         |  | US      |  | UK     
|------------------------ |  | ------- |  | -------
|
|
|Discount rate            |  | 5.8     |  | 6.3    
|Return on assets         |  | 8.3     |  | 8.5    
|General salary increases |  | 3.3-5.3 |  | 3.3-5.3
|Pension increases        |  | nil     |  | nil    

In
respect of US schemes, the estimated rate of return for various passive asset classes is based both on analysis of historical rates of return and forward-looking analysis of risk
premiums and yields. Current market conditions, such as inflation and interest rates, are evaluated in connection with the setting of our long-term assumptions. A small premium is added
for active management of both equity and fixed income. The rates of return for each asset class are then weighted in accordance with our target asset allocation, and the resulting
long-term return on asset rate is then applied to the market-related value of assets. The long-term target asset allocation for the US pension schemes is 60% equities, 35%
bonds and 5% property and other. The long-term target asset allocation for other post-retirement benefit schemes is 65% equities and 35% bonds.

In
respect of UK schemes, the expected long-term rate of return on assets has been set reflecting the price inflation expectation, the expected real return on each major
asset class and the long-term asset allocation strategy adopted for each plan. The expected real returns on specific asset classes reflect historical returns, investment yields on the
measurement date and general future return expectations, and have been set after taking advice from the schemes' actuaries. The long-term target asset allocation for the Lattice Group
Pension Scheme is 40% equities, 52% bonds and 8% property and other. The long-term asset allocation for the Group's section of the Electricity Supply Pension Scheme is 63% equities, 30%
bonds and 7% property and other.

The
assumptions used for other post-retirement costs relate solely to US schemes. These assumptions were that the discount rate used would be 5.75% (2004: 5.75%; 2003: 6.25%)
and that medical costs would increase by 10% (2004: 10%; 2003: 10%), decreasing to 5% (2004: 5%; 2003: 5%) by 2010 and remain at 5% (2004: 5%; 2003: 5%) thereafter.

123

---



A
reconciliation of the funded status of the Group pension and other post-retirement schemes to the net accrued benefit liability that was included in the Group's balance
sheet prepared under US GAAP is as follows:

|                                                                  |  | Pensions |   | Other post-retirement
benefits |  
|----------------------------------------------------------------- |  | -------- | - | ------------------------------ | -
|
|
|Projected benefit obligation                                      |  | (15,758  | ) | (15,394                        | )
|Fair value of plan assets                                         |  | 14,086   |   | 13,432                         |  
|                                                                  |  |          |   |                                |  
|Excess of projected benefit obligation over plan assets           |  | (1,672   | ) | (1,962                         | )
|Unrecognised net loss                                             |  | 1,180    |   | 1,493                          |  
|Unrecognised prior service cost/(credit)                          |  | 60       |   | 48                             |  
|                                                                  |  |          |   |                                |  
|Net accrued benefit liabilitybefore minimum liability adjustment |  | (432     | ) | (421                           | )
|Additional minimum liability adjustment                           |  | (811     | ) | (840                           | )
|                                                                  |  |          |   |                                |  
|Net accrued benefit liability                                     |  | (1,243   | ) | (1,261                         | )
|                                                                  |  |          |   |                                |  

At
31 March 2005, as required under SFAS 87, an intangible asset of £60m (2004: £48m) was recognised in relation to the additional minimum liability, being
equal to the unrecognised prior service cost. A regulatory asset of £133m (2004: £120m) was also created. The remaining additional minimum liability of £618m (2004:
£672m) has been included in other comprehensive income.

The
net accrued benefit liability above is shown net of a prepaid cost of £181m in respect of one Group scheme.

The
principal financial assumptions used for the SFAS 87 calculations of the projected benefit obligation, based on a measurement date of 31 March 2005, in respect of the US and
UK defined benefit schemes are shown below:

|                         |  | US      |  | UK     
|------------------------ |  | ------- |  | -------
|
|
|Discount rate            |  | 5.8     |  | 5.8    
|General salary increases |  | 3.9-4.3 |  | 3.3-5.3
|Pension increases        |  | nil     |  | nil    

All
pension schemes had an additional minimum liability adjustment except the Lattice Group Pension Scheme and the Crown Castle Pension Scheme. The accumulated benefit obligation for
pensions was £14,825m at 31 March 2005 (2004: £14,507m). 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 |   | Other post-retirement
benefits |  
|--------------------------------------------- |  | -------- | - | ------------------------------ | -
|
|
|Projected benefit obligation at start of year |  | 15,394   |   | 15,030                         |  
|Service cost                                  |  | 135      |   | 143                            |  
|Interest cost                                 |  | 828      |   | 799                            |  
|Plan participants' contributions              |  | 17       |   | 18                             |  
|Plan amendmentprior service cost             |  | 17       |   |                               |  
|Terminations                                  |  | 30       |   | 129                            |  
|Curtailments                                  |  |         |   | (2                             | )
|Settlements                                   |  | (1       | ) | (80                            | )
|Actuarial loss                                |  | 136      |   | 322                            |  
|Benefits paid                                 |  | (783     | ) | (736                           | )
|Acquisition of Group undertakings             |  | 31       |   |                               |  
|Transfers                                     |  | 1        |   |                               |  
|Exchange adjustments                          |  | (47      | ) | (229                           | )
|                                              |  |          |   |                                |  
|Projected benefit obligation at end of year   |  | 15,758   |   | 15,394                         |  
|                                              |  |          |   |                                |  
|Fair value of plan assets at start of year    |  | 13,432   |   | 12,115                         |  
|Actual return on assets                       |  | 1,248    |   | 2,023                          |  
|Employer contributions                        |  | 184      |   | 244                            |  
|Plan participants' contributions              |  | 17       |   | 18                             |  
|Benefits paid                                 |  | (783     | ) | (736                           | )
|Acquisition of Group undertakings             |  | 21       |   |                               |  
|Settlements                                   |  | (1       | ) | (80                            | )
|Exchange adjustments                          |  | (32      | ) | (152                           | )
|                                              |  |          |   |                                |  
|Fair value of plan assets at end of year      |  | 14,086   |   | 13,432                         |  
|                                              |  |          |   |                                |  

124

---



It
is estimated that a 1% change in the assumed healthcare cost trends would have increased or decreased the accumulated post-retirement benefit obligation at 31
March 2005 by £104m (2004: £106m; 2003: £106m) and £90m (2004: £96m; 2003: £96m) respectively. The net periodic cost for
the year ended 31 March 2005 would have increased or decreased by £7m and £6m respectively (2004: £7m and £8m respectively).

Estimated
contributions for all pensions and other post-retirement plans for the year ending 31 March 2006 are £214m.

As
at 31 March 2005 the following benefit payments, which reflect future service as appropriate, are expected to be paid:

|Year ended 31 March |  | Pensions |  | Other
post-
retirement
benefits
|------------------- |  | -------- |  | -------------------------------
|
|2006                |  | 747      |  | 53                             
|2007                |  | 755      |  | 56                             
|2008                |  | 759      |  | 57                             
|2009                |  | 767      |  | 58                             
|2010                |  | 784      |  | 59                             
|2011 - 2015         |  | 4,300    |  | 295                            

In
the UK, the trustees for each plan are responsible for setting the long-term strategy after consultation with the Group and professional advisers. The trustees' objectives
are to invest in assets of appropriate liquidity, which together with future contributions from employers and members, would expect to generate income and capital growth to meet the cost of benefits
from the plans; and to limit the risk and minimise the long-term cost. In the US, the Group manages its pension plan investments to minimise the long-term cost of operating the
plan, with a reasonable level of risk.

Risk
tolerance is determined as a result of periodic asset/liability studies which analyse plan liabilities and funded status and results in the determination of the allocation of
assets.

Equity
investments, fixed income and index-linked portfolios are broadly diversified. Investments are also held in property, private equity and timber with the objective of enhancing
long-term returns whilst improving diversification. Investment risk and return are reviewed by investment committees on a quarterly basis.

c)     Impairment of goodwill and other intangible assets

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.

An
impairment assessment was carried out during 2004 which resulted in an impairment of goodwill being recorded in respect of Advantica, which was acquired by the Group as part of the
Lattice Group plc acquisition.

d)    Financial instruments

Under UK GAAP, derivative financial instruments that qualify for hedge accounting are recorded at their historical cost, if any, and are not
re-measured. 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
Group has elected not to adopt hedge accounting for the purposes of SFAS 133 except for certain hedges of net investments in foreign operations. Excluding the certain hedges
of net investments that have been designated and qualify as hedges under SFAS 133, the reconciliation to net income fully reflects the changes in fair value of derivative financial instruments.
There is no reconciling adjustment for the hedges of net investments for which the Group has adopted hedge accounting under SFAS 133, as realised and unrealised gains and losses are taken to
reserves under both US GAAP and UK GAAP.

Contracts
that qualify as normal purchases and normal sales are excluded from the requirements of SFAS 133. The realised gains and losses on these contracts are reflected in the
income statement at the contract settlement date.

e)     Equity Plus Income Convertible Securities (EPICs)

Under UK GAAP, EPICs were carried in the balance sheet at the gross proceeds of the issue. This resulted in a gain being recognised on disposal during 2004. 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 required that the carrying value of the EPICs be adjusted to the settlement amount of the debt, which was linked to the Energis plc share price and therefore no gain was recorded
on the disposal.

f)     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 in respect of
the Group's voluntary severance arrangements 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.

125

---



Similarly,
under UK GAAP future costs related to property leases have been accrued for in connection with vacating certain premises. Under US GAAP a liability would not be recognised
until the 'cease use' date is reached, which is expected some time in the near future. This represents a timing difference between UK and US GAAP on the recognition of such costs.

g)     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, even where
prices will be reduced in a future period.

h)    Goodwillother

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.

i)     Intangible assets

Under US GAAP, in a business combination, intangible assets that meet certain criteria are recognised as assets, separate from goodwill, at fair value. The
criteria for separate recognition are met if the intangible asset arises from contractual or legal rights or if it is separable; that is, capable of being separated and sold, transferred or exchanged.

In
the acquisition of the UK operations of Crown Castle International Corp., £220m of intangible assets relating to customer contracts and relationships were recognised and
are being amortised on a straight-line basis over periods ranging from 10 to 25 years, being the expected life of these intangible assets.

j)     Restructuringpurchase of Lattice Group plc

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.

k)    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.

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 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 interest in Manquehue net and Silica Networks were disposed of in October 2002 and September 2002 respectively. The Group ceased equity accounting for Manquehue
net and Silica Networks from the date of disposal. In the case of Energis Polska, the interest reduced to a level where the Group had no significant influence on the activities of this business as of
November 2002. As a result, these entities are no longer equity accounted for, and any losses arising from the disposal or reduction in interest have previously been reflected in the income
statement.

l)     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.

m)   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. As required under UK GAAP,
part of this impairment provision was subsequently released and shareholders' equity credited. Under US GAAP, this partial release is not permitted.

n)    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 UK.

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. Under UK GAAP, in certain circumstances, regulatory assets may be reported net of related regulatory liabilities. Such amounts are shown gross in the US
GAAP balance sheet.

126

---





o)    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 taxation 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.

The
deferred taxation adjustment principally reflects the tax effect of the other measurement and recognition differences between UK and US GAAP.

The
corporate tax charge on continuing operations under US GAAP is analysed between current taxes and deferred taxes as follows:

|               |  | 2005 |  | 2004 |  | 2003
|-------------- |  | ---- |  | ---- |  | ----
|
|Current taxes  |  | 118  |  | 177  |  | 44  
|Deferred taxes |  | 313  |  | 105  |  | 214 
|               |  |      |  |      |  |     
|Tax charge     |  | 431  |  | 282  |  | 258 
|               |  |      |  |      |  |     

The
net deferred tax liability under US GAAP is analysed as follows:

|                                                         |  | 2005  |   | 2004   |  
|-------------------------------------------------------- |  | ----- | - | ------ | -
|
|Deferred taxation liabilities:                           |  |       |   |        |  
|Excess of book value over taxation value of fixed assets |  | 5,029 |   | 4,943  |  
|Other temporary differences                              |  | 1,162 |   | 1,169  |  
|                                                         |  |       |   |        |  
|                                                         |  | 6,191 |   | 6,112  |  
|Deferred taxation assets:                                |  |       |   |        |  
|Other temporary differences(i)                           |  | (900  | ) | (1,245 | )
|                                                         |  |       |   |        |  
|                                                         |  | 5,291 |   | 4,867  |  
|                                                         |  |       |   |        |  
|Analysed as follows:                                     |  |       |   |        |  
|Current                                                  |  | (184  | ) | 63     |  
|Non-current                                              |  | 5,475 |   | 4,804  |  
|                                                         |  |       |   |        |  
|                                                         |  | 5,291 |   | 4,867  |  
|                                                         |  |       |   |        |  

---

p)    Other

Other differences between UK GAAP and US GAAP are not individually material and relate to non-discounting of environmental provisions under US GAAP
(discounted under UK GAAP), differences arising from the recognition of amortisation expense on certain assets and other interest income.

Other US GAAP disclosures

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:

|                                                                                     |  | 2005   |   | 2004   |   | 2003   |  
|------------------------------------------------------------------------------------ |  | ------ | - | ------ | - | ------ | -
|
|Net cash provided by operating activities(i)                                         |  | 2,483  |   | 2,500  |   | 2,000  |  
|Investing activities                                                                 |  |        |   |        |   |        |  
|Payments to acquire tangible fixed assets                                            |  | (1,828 | ) | (1,788 | ) | (1,170 | )
|Acquisition of Group undertakings (net of cash acquired)                             |  | (1,122 | ) |       |   | 338    |  
|Payments to acquire investments                                                      |  | (16    | ) |       |   | (163   | )
|Receipts from disposal of tangible fixed assets                                      |  | 89     |   | 146    |   | 53     |  
|Receipts from disposal of investments                                                |  | 11     |   | 7      |   | 328    |  
|Net movement in investments with an original maturity date of more than three months |  | (59    | ) | (65    | ) |       |  
|Other                                                                                |  |       |   |       |   | (22    | )
|Net cash used in investing activities(ii)                                            |  | (2,925 | ) | (1,700 | ) | (636   | )
|Net cash provided by/(used in) financing activities(iii)                             |  | 440    |   | (828   | ) | (962   | )
|                                                                                     |  |        |   |        |   |        |  
|Net (decrease)/increase in cash and cash equivalents                                 |  | (2     | ) | (28    | ) | 402    |  
|Cash and cash equivalents at beginning of year                                       |  | 528    |   | 570    |   | 178    |  
|Exchange adjustments                                                                 |  | (1     | ) | (14    | ) | (10    | )
|                                                                                     |  |        |   |        |   |        |  
|Cash and cash equivalents at end of year                                             |  | 525    |   | 528    |   | 570    |  
|                                                                                     |  |        |   |        |   |        |  

127

---



Set
out below is an explanation of the reconciliation from US GAAP to UK GAAP cash flow headings:



Businesses to be disposed

On 31 August 2004, the Group announced that it had reached agreement on the sales of four of its regional gas distribution networks. The sales are subject
to certain conditions to prepare the assets for sale and regulatory consents and approvals. The Group determined that it had substantially met the required conditions on 1 May 2005. The sales
are expected to complete, subject to final regulatory approval, on or around 1 June 2005.

With
effect from 1 May 2005, the Group has classified the assets, liabilities and results of operations for the four gas networks as discontinued operations under US GAAP. The
following table reflects the US GAAP carrying values of the primary components of the networks to be disposed of as at 31 March 2005.

|                              |  | 2005  |  
|----------------------------- |  | ----- | -
|
|Property, plant and equipment |  | 5,752 |  
|Other assets                  |  | 96    |  
|                              |  |       |  
|Total assets                  |  | 5,848 |  
|Accounts payable              |  | (765  | )
|Other liabilities             |  | (50   | )
|                              |  |       |  
|Net assets                    |  | 5,033 |  
|                              |  |       |  

Certain
other assets and liabilities may be part of the disposed group dependent upon continued trading and operations up until the date of completion of the sales. The above table does
not include any deferred taxation.

Non-GAAP measures

In preparing the accounts in accordance with the Companies Act 1985 and UK GAAP, certain information is presented that would be viewed as 'non-GAAP'
under regulations issued by the SEC. The Group has described such items and provided disclosure of the effects and reasons for presentation along with a condensed US GAAP income statement using the
format prescribed by the SEC. The disclosure of each of the exceptional items would be prohibited within the Form 20-F if such exceptional items were not expressly permitted by FRS
3.

Management
uses 'adjusted' profit measures in considering the performance of the Group's operating segments and businesses. References to 'adjusted operating profit', 'adjusted profit
before taxation', 'adjusted earnings' or 'adjusted earnings per share' are stated before exceptional items and goodwill amortisation.

The
Directors believe that the use of these adjusted measures better indicates the underlying business performance of the Group than the unadjusted measures because the exclusion of
these items provides a clearer comparison of results from year to year for each of the years presented. This is because this method of presentation removes the distorting impact of exceptional items
and removes the impact of goodwill amortisation in order to enhance comparability with the reporting practices of other UK companies.

Exceptional
items, which are adjusted for in the adjusted measures referred to above, are defined as material items that derive from events that fall within the ordinary activities of
the Group, but that require separate disclosure on the grounds of size or incidence for the accounts to give a true and fair view. Such exceptional items include, for example, material restructuring
costs and impairments. Note 4 on pages 95 and 96 contains a discussion of the nature of these exceptional items for each year.

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 associates 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) arising from discontinued operations of Group undertakings is required to be separately accounted for and disclosed as a single line item.

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 as used in the presentation in note 33.

128

---



New US Accounting Standards adopted during 2004/05

FIN 46(R)

FIN 46(R) requires the primary beneficiary of a variable interest entity for which control is achieved through means other than through voting rights to
consolidate the variable interest entity concerned. The Group adopted FIN 46(R) for the financial year beginning 1 April 2004 and has considered the impact of this standard. Following this
assessment, the Group has determined that the adoption of FIN 46(R) did not have a material impact on the Group's accounts.

FSP 106-2

In May 2004, the Financial Accounting Standards Board (FASB) issued the FASB Staff Position No. FAS 106-2 'Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003' (FSP 106-2), which supersedes FSP 106-1 of the same title issued in
January 2004. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Medicare Act) introduces a federal subsidy to sponsors of retiree healthcare benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part D. The Group has concluded that, if provisions are finalised in their current form, benefits provided under the
Group's plan meet the 'actuarially equivalent' standard set forth in the Medicare Act. As permitted, the Group prospectively adopted FSP 106-2 in the year ended 31 March 2005,
thereby reducing accumulated benefit obligation by £43m and realising a related £4m tax benefit. Any decrease in future net periodic post-retirement benefit expense
that results from the Act will be deferred and will be credited to customers.

EITF 03-1

In March 2004, the EITF reached a consensus on EITF Issue 03-1 'The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments'. EITF 03-1 provides new guidance on assessing impairment loss, prescribing a three-step impairment model. In September 2004, the FASB
issued FASB Staff Position EITF 03-1-1 'Effective Date of Paragraphs 10-20 of EITF Issue 03-1' which delays the effective date for the measurement and
recognition guidance in paragraphs 10-20 of EITF 03-1. The disclosure requirements of EITF 03-1 remained effective. The impact of adopting the disclosure
requirements of EITF 03-1 did not impact on the Group's consolidated financial statements.

Recent US pronouncements not yet adopted

SFAS 123(R)

In December 2004, the FASB issued FASB Statement No. 123 (revised 2004) 'Share-Based Payment' (SFAS 123(R)), which is a revision of FASB
Statement No. 123 'Accounting for Stock-Based Compensation' (SFAS 123). SFAS 123(R) supersedes APB Opinion No. 25 'Accounting for Stock Issued to Employees', and amends
FASB Statement No. 95 'Statement of Cash Flows'. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all
share-based payments to employees, including grants of employee stock options, to be recognised in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
The Group expects to adopt SFAS 123(R) as of 1 April 2006.

SFAS 123(R)
permits adoption of the requirements using one of two methods: a 'modified prospective' method where the requirements are applied to all share-based payments granted
after the effective date of the pronouncement; or a 'modified retrospective' method which allows entities to restate prior periods based on the amounts previously recognised under SFAS 123 for
the purposes of pro forma disclosures. The Group plans to adopt SFAS 123(R) using the modified prospective method.

The
Group adopted the fair-value based method of accounting for share-based payments using the 'retroactive restatement method' described in FASB Statement No. 148
'Accounting for Stock-Based CompensationTransition and Disclosure'. Currently, the Group uses the Black-Scholes European option pricing model to estimate the value of stock options
granted to employees and expects to continue to use this acceptable option valuation model upon the required adoption of SFAS 123(R) on 1 April 2006. The Group does not anticipate that
adoption of SFAS 123(R) will have a material impact on its results of operations or its financial position. However, SFAS 123(R) also requires that the benefits of tax deductions in
excess of recognised compensation cost be reported as a financing cash flow, rather than as an operating cash flow as currently required. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after the effective date.

SFAS 153

In December 2004, as part of the FASB's short-term convergence project with the International Accounting Standards Board, the FASB issued FASB
Statement No. 153 'Exchanges of Non-Monetary Assets' (SFAS 153), which is an amendment to APB Opinion No. 29 'Accounting for Non-Monetary Transactions'
(APB 29). APB 29 provided an exemption to its general principle of measuring such transactions at fair value where the exchange related to similar productive assets. The exemption permitted the
exchange to be valued at the recorded amount of the assets relinquished. SFAS 153 removes this exemption so that all non-monetary transactions (apart from those without commercial
substance) are recorded at fair value. The Group expects to adopt SFAS 153 prospectively for all transactions taking place after 1 April 2006. The impact of the adoption of
SFAS 153 cannot be predicted at this time because it will depend on whether applicable non-monetary transactions take place after the effective date.

FIN 47

FASB Interpretation No. 47 'Accounting for Conditional Asset Retirement Obligations' (FIN 47) clarifies that the term 'conditional asset retirement
obligation', as used in SFAS No. 143 'Accounting for Asset Retirement Obligation' (SFAS 143), refers to a legal obligation to perform an asset retirement activity in which the timing
and/or method of settlement are conditional on a future event that may or may not be within the control of the Group. FIN 47 is effective for financial years ending after 15 December 2005. The
Group does not believe the adoption of FIN 47 will have a material impact on its accounts.

129

---



33.    Condensed US GAAP financial information

As described in note 32, the October 2002 business combination of National Grid Group plc and Lattice Group plc was accounted for as a merger
(pooling of interests) under UK GAAP and as an acquisition (purchase accounting) under US GAAP. The different treatments result in the UK GAAP financial statements being fundamentally different
compared to the amounts presented under US GAAP. Due to these differences, condensed US GAAP financial information is presented to more clearly show the operating and financial position that would
have been reported under US GAAP.

Condensed US GAAP income statement

|                                                                       |  | 2005
National
Grid
Transco
(UK GAAP) |   | 2005
US GAAP
adjustments |   | 2005
National
Grid
Transco
(US GAAP) |  
|---------------------------------------------------------------------- |  | ------------------------------------ | - | ------------------------ | - | ------------------------------------ | -
|
|Turnover                                                               |  | 8,521                                |   | 13                       |   | 8,534                                |  
|Operating costs                                                        |  |                                      |   |                          |   |                                      |  
|Depreciation                                                           |  | (860                                 | ) | (319                     | ) | (1,179                               | )
|Payroll and severance costs                                            |  | (941                                 | ) | (56                      | ) | (997                                 | )
|Purchases of electricity                                               |  | (1,678                               | ) |                         |   | (1,678                               | )
|Purchases of gas                                                       |  | (385                                 | ) |                         |   | (385                                 | )
|Rates and property taxes                                               |  | (490                                 | ) |                         |   | (490                                 | )
|Electricity transmission services scheme direct costs                  |  | (301                                 | ) |                         |   | (301                                 | )
|EnMO direct costs                                                      |  |                                     |   |                         |   |                                     |  
|Replacement expenditure                                                |  | (474                                 | ) | 474                      |   |                                     |  
|Provision for doubtful debts                                           |  | (42                                  | ) |                         |   | (42                                  | )
|Other operating charges                                                |  | (1,505                               | ) | 205                      |   | (1,300                               | )
|                                                                       |  | (6,676                               | ) | 304                      |   | (6,372                               | )
|                                                                       |  |                                      |   |                          |   |                                      |  
|Operating profit                                                       |  | 1,845                                |   | 317                      |   | 2,162                                |  
|Share of joint ventures' operating profit                              |  | 7                                    |   | (7                       | ) |                                     |  
|Non-operating items                                                    |  | 83                                   |   | (46                      | ) | 37                                   |  
|                                                                       |  |                                      |   |                          |   |                                      |  
|Profit before interest and taxation                                    |  | 1,935                                |   | 264                      |   | 2,199                                |  
|Net interest                                                           |  | (783                                 | ) | 323                      |   | (460                                 | )
|                                                                       |  |                                      |   |                          |   |                                      |  
|Profit on ordinary activities before taxation                          |  | 1,152                                |   | 587                      |   | 1,739                                |  
|Taxation                                                               |  | (245                                 | ) | (186                     | ) | (431                                 | )
|                                                                       |  |                                      |   |                          |   |                                      |  
|Profit on ordinary activities after taxation                           |  | 907                                  |   | 401                      |   | 1,308                                |  
|Minority interests                                                     |  | 1                                    |   | (3                       | ) | (2                                   | )
|Interest in equity accounted affiliates (net of tax of £2m)            |  |                                      |   | (2                       | ) | (2                                   | )
|                                                                       |  |                                      |   |                          |   |                                      |  
|Net income from continuing operations                                  |  | 908                                  |   | 396                      |   | 1,304                                |  
|Net loss from discontinued operations (net of tax of £nil)             |  |                                      |   |                         |   |                                     |  
|                                                                       |  |                                      |   |                          |   |                                      |  
|Net income for the year                                                |  | 908                                  |   | 396                      |   | 1,304                                |  
|                                                                       |  |                                      |   |                          |   |                                      |  
|Basic earnings per share under US GAAP (pence)continuing operations   |  |                                      |   |                          |   | 42.3                                 | p
|Diluted earnings per share under US GAAP (pence)continuing operations |  |                                      |   |                          |   | 42.1                                 | p
|                                                                       |  |                                      |   |                          |   |                                      |  
|Basic earnings per ADS under US GAAP (pence)continuing operations     |  |                                      |   |                          |   | 211.5                                | p
|Diluted earnings per ADS under US GAAP (pence)continuing operations   |  |                                      |   |                          |   | 210.5                                | p
|                                                                       |  |                                      |   |                          |   |                                      |  
|Basic earnings per share under US GAAP (pence)total Group             |  |                                      |   |                          |   | 42.3                                 | p
|Diluted earnings per share under US GAAP (pence)total Group           |  |                                      |   |                          |   | 42.1                                 | p
|                                                                       |  |                                      |   |                          |   |                                      |  
|Basic earnings per ADS under US GAAP (pence)total Group               |  |                                      |   |                          |   | 211.5                                | p
|Diluted earnings per ADS under US GAAP (pence)total Group             |  |                                      |   |                          |   | 210.5                                | p
|                                                                       |  |                                      |   |                          |   |                                      |  
|Weighted average number of shares in issue (million)for basic EPS     |  |                                      |   |                          |   | 3,082                                |  
|                                                                       |  |                                      |   |                          |   |                                      |  
|Weighted average number of shares in issue (million)for diluted EPS   |  |                                      |   |                          |   | 3,096                                |  
|                                                                       |  |                                      |   |                          |   |                                      |  

130

---



|                                                                       |  | 2004
National
Grid
Transco
(UK GAAP)
(restated) |   | 2004
US GAAP
adjustments
(restated) |   | 2004
National
Grid
Transco
(US GAAP) |  
|---------------------------------------------------------------------- |  | ----------------------------------------------- | - | ----------------------------------- | - | ------------------------------------ | -
|
|Turnover                                                               |  | 9,033                                           |   | (167                                | ) | 8,866                                |  
|Operating costs                                                        |  |                                                 |   |                                     |   |                                      |  
|Depreciation                                                           |  | (866                                            | ) | (298                                | ) | (1,164                               | )
|Payroll and severance costs                                            |  | (1,045                                          | ) | (252                                | ) | (1,297                               | )
|Purchases of electricity                                               |  | (1,998                                          | ) |                                    |   | (1,998                               | )
|Purchases of gas                                                       |  | (371                                            | ) |                                    |   | (371                                 | )
|Rates and property taxes                                               |  | (516                                            | ) |                                    |   | (516                                 | )
|Electricity transmission services scheme direct costs                  |  | (277                                            | ) |                                    |   | (277                                 | )
|EnMO direct costs                                                      |  | (158                                            | ) | 158                                 |   |                                     |  
|Replacement expenditure                                                |  | (388                                            | ) | 388                                 |   |                                     |  
|Provision for doubtful debts                                           |  | (50                                             | ) |                                    |   | (50                                  | )
|Other operating charges                                                |  | (1,534                                          | ) | 263                                 |   | (1,271                               | )
|                                                                       |  | (7,203                                          | ) | 259                                 |   | (6,944                               | )
|                                                                       |  |                                                 |   |                                     |   |                                      |  
|Operating profit                                                       |  | 1,830                                           |   | 92                                  |   | 1,922                                |  
|Share of joint ventures' operating profit                              |  | 7                                               |   | (7                                  | ) |                                     |  
|Non-operating items                                                    |  | 322                                             |   | (290                                | ) | 32                                   |  
|                                                                       |  |                                                 |   |                                     |   |                                      |  
|Profit before interest and taxation                                    |  | 2,159                                           |   | (205                                | ) | 1,954                                |  
|Net interest                                                           |  | (822                                            | ) | 150                                 |   | (672                                 | )
|                                                                       |  |                                                 |   |                                     |   |                                      |  
|Profit on ordinary activities before taxation                          |  | 1,337                                           |   | (55                                 | ) | 1,282                                |  
|Taxation                                                               |  | (261                                            | ) | (21                                 | ) | (282                                 | )
|                                                                       |  |                                                 |   |                                     |   |                                      |  
|Profit on ordinary activities after taxation                           |  | 1,076                                           |   | (76                                 | ) | 1,000                                |  
|Minority interests                                                     |  | (2                                              | ) |                                    |   | (2                                   | )
|Interest in equity accounted affiliates (net of tax of £nil)           |  |                                                 |   |                                    |   |                                     |  
|                                                                       |  |                                                 |   |                                     |   |                                      |  
|Net income from continuing operations                                  |  | 1,074                                           |   | (76                                 | ) | 998                                  |  
|Net loss from discontinued operations (net of tax of £nil)             |  |                                                 |   |                                    |   |                                     |  
|                                                                       |  |                                                 |   |                                     |   |                                      |  
|Net income for the year                                                |  | 1,074                                           |   | (76                                 | ) | 998                                  |  
|                                                                       |  |                                                 |   |                                     |   |                                      |  
|Basic earnings per share under US GAAP (pence)continuing operations   |  |                                                 |   |                                     |   | 32.5p                                |  
|Diluted earnings per share under US GAAP (pence)continuing operations |  |                                                 |   |                                     |   | 32.4p                                |  
|                                                                       |  |                                                 |   |                                     |   |                                      |  
|Basic earnings per ADS under US GAAP (pence)continuing operations     |  |                                                 |   |                                     |   | 162.5                                | p
|Diluted earnings per ADS under US GAAP (pence)continuing operations   |  |                                                 |   |                                     |   | 162.0                                | p
|                                                                       |  |                                                 |   |                                     |   |                                      |  
|Basic earnings per share under US GAAP (pence)total Group             |  |                                                 |   |                                     |   | 32.5                                 | p
|Diluted earnings per share under US GAAP (pence)total Group           |  |                                                 |   |                                     |   | 32.4                                 | p
|                                                                       |  |                                                 |   |                                     |   |                                      |  
|Basic earnings per ADS under US GAAP (pence)total Group               |  |                                                 |   |                                     |   | 162.5                                | p
|Diluted earnings per ADS under US GAAP (pence)total Group             |  |                                                 |   |                                     |   | 162.0                                | p
|                                                                       |  |                                                 |   |                                     |   |                                      |  
|Weighted average number of shares in issue (million)for basic EPS     |  |                                                 |   |                                     |   | 3,070                                |  
|                                                                       |  |                                                 |   |                                     |   |                                      |  
|Weighted average number of shares in issue (million)for diluted EPS   |  |                                                 |   |                                     |   | 3,077                                |  
|                                                                       |  |                                                 |   |                                     |   |                                      |  

131

---





|                                                                                     |  |        |   | US GAAP adjustments |   |      |  
|------------------------------------------------------------------------------------ |  | ------ | - | ------------------- | - | ---- | -
|
|
|
|Turnover                                                                             |  | 9,400  |   | (1,470              | ) | (529 | )
|Operating costs                                                                      |  |        |   |                     |   |      |  
|Depreciation                                                                         |  | (851   | ) | 249                 |   | (129 | )
|Payroll and severance costs                                                          |  | (1,144 | ) | 316                 |   | (276 | )
|Purchases of electricity                                                             |  | (1,901 | ) |                    |   |     |  
|Purchases of gas                                                                     |  | (357   | ) | 53                  |   |     |  
|Rates and property taxes                                                             |  | (537   | ) | 130                 |   |     |  
|Electricity transmission services scheme direct costs                                |  | (252   | ) |                    |   |     |  
|EnMO direct costs                                                                    |  | (530   | ) |                    |   | 530  |  
|Replacement expenditure                                                              |  | (405   | ) | 239                 |   | 166  |  
|Provision for doubtful debts                                                         |  | (24    | ) | 1                   |   |     |  
|Other operating charges                                                              |  | (1,827 | ) | 545                 |   | 320  |  
|                                                                                     |  | (7,828 | ) | 1,533               |   | 611  |  
|                                                                                     |  |        |   |                     |   |      |  
|Operating profit                                                                     |  | 1,572  |   | 63                  |   | 82   |  
|Share of joint ventures' operating profit                                            |  | 124    |   | 1                   |   | (125 | )
|Non-operating expenses                                                               |  | (99    | ) | 67                  |   | 27   |  
|                                                                                     |  |        |   |                     |   |      |  
|Profit before interest and taxation                                                  |  | 1,597  |   | 131                 |   | (16  | )
|Net interest                                                                         |  | (970   | ) | 203                 |   | 103  |  
|                                                                                     |  |        |   |                     |   |      |  
|Profit on ordinary activities before taxation                                        |  | 627    |   | 334                 |   | 87   |  
|Taxation                                                                             |  | (245   | ) | (29                 | ) | 16   |  
|                                                                                     |  |        |   |                     |   |      |  
|Profit on ordinary activities after taxation                                         |  | 382    |   | 305                 |   | 103  |  
|Minority interests                                                                   |  | (31    | ) | (1                  | ) | 29   |  
|Interest in equity accounted affiliates (net of tax of £5m)                          |  |        |   |                     |   | 3    |  
|                                                                                     |  |        |   |                     |   |      |  
|Net income from continuing operations                                                |  | 351    |   | 304                 |   | 135  |  
|Net loss from discontinued operations (net of tax of £nil)                           |  |        |   |                     |   | (39  | )
|                                                                                     |  |        |   |                     |   |      |  
|Net income for the year                                                              |  | 351    |   | 304                 |   | 96   |  
|                                                                                     |  |        |   |                     |   |      |  
|Basic earnings per share under US GAAP (pence)continuing operations                 |  |        |   |                     |   |      |  
|Diluted earnings per share under US GAAP (pence)continuing operations               |  |        |   |                     |   |      |  
|                                                                                     |  |        |   |                     |   |      |  
|Basic earnings per ADS under US GAAP (pence)continuing operations                   |  |        |   |                     |   |      |  
|Diluted earnings per ADS under US GAAP (pence)continuing operations                 |  |        |   |                     |   |      |  
|                                                                                     |  |        |   |                     |   |      |  
|Basic earnings per share under US GAAP (pence)total Group                           |  |        |   |                     |   |      |  
|Diluted earnings per share under US GAAP (pence)total Group                         |  |        |   |                     |   |      |  
|                                                                                     |  |        |   |                     |   |      |  
|Basic earnings per ADS under US GAAP (pence)total Group                             |  |        |   |                     |   |      |  
|Diluted earnings per ADS under US GAAP (pence)total Group                           |  |        |   |                     |   |      |  
|                                                                                     |  |        |   |                     |   |      |  
|                                                                                     |  |        |   |                     |   |      |  
|Net income under US GAAP after £22m dilutive impact of 4.25% Exchangeable Bonds 2008 |  |        |   |                     |   |      |  
|                                                                                     |  |        |   |                     |   |      |  
|Weighted average number of shares in issue (million)for basic EPS                   |  |        |   |                     |   |      |  
|Weighted average number of shares in issue (million)for diluted EPS                 |  |        |   |                     |   |      |  
|                                                                                     |  |        |   |                     |   |      |  

Basic
loss per share and per ADS for discontinued operations under US GAAP was (1.7)p and (8.5)p respectively. Diluted loss per share and per ADS for discontinued
operations under US GAAP was (1.6)p and (8.0)p respectively.

Under
UK GAAP, the weighted average number of shares in issue for basic EPS for the year ended 31 March 2003 was 3,078m compared with 2,348m under US GAAP. The difference related
to shares issued on the business combination of National Grid Group plc and Lattice Group plc. As this transaction was accounted for as a merger (pooling of interests) under UK GAAP, shares issued
were included in the weighted average share capital as if they were in issue throughout the year. Under US GAAP, they are included from the date of issue (21 October 2002). This difference
impacted 2003 and earlier periods but did not affect 2004 and 2005 and will not affect future accounting periods.

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

|                                                                                                |  | 2005   |   | 2004  |   | 2003  |  
|----------------------------------------------------------------------------------------------- |  | ------ | - | ----- | - | ----- | -
|
|Net income                                                                                      |  | 1,304  |   | 998   |   | 751   |  
|Additional minimum pension liability (net of tax of £16m charge, £188m charge and £417m credit) |  | 33     |   | 415   |   | (886  | )
|Exchange adjustments (net of tax of £nil, £12m charge and £12m credit)                          |  | (80    | ) | (438  | ) | (322  | )
|Mark to market of financial instruments (net of tax of £43m charge, £26m credit and £nil)       |  | 111    |   | (84   | ) |      |  
|Share of joint ventures' other comprehensive loss                                               |  |       |   |      |   | (10   | )
|Other                                                                                           |  |       |   |      |   | 9     |  
|                                                                                                |  |        |   |       |   |       |  
|Comprehensive income/(loss)                                                                     |  | 1,368  |   | 891   |   | (458  | )
|Dividends                                                                                       |  | (628   | ) | (560  | ) | (382  | )
|Shares issued to purchase Lattice                                                               |  |       |   |      |   | 6,566 |  
|Other shares issued                                                                             |  | 9      |   | 34    |   | 2     |  
|Share options granted                                                                           |  | 16     |   | 25    |   | 29    |  
|Repurchase of shares                                                                            |  |       |   |      |   | (97   | )
|Movement in treasury stock                                                                      |  | 5      |   | 5     |   | 7     |  
|Shareholders' equity at 1 April                                                                 |  | 9,821  |   | 9,426 |   | 3,759 |  
|                                                                                                |  |        |   |       |   |       |  
|Shareholders' equity at 31 March                                                                |  | 10,591 |   | 9,821 |   | 9,426 |  
|                                                                                                |  |        |   |       |   |       |  

132

---



Condensed US GAAP balance sheet

|                                                                                                             |  | 2005    |   | 2004   |  
|------------------------------------------------------------------------------------------------------------ |  | ------- | - | ------ | -
|
|Assets                                                                                                       |  |         |   |        |  
|Current assets                                                                                               |  |         |   |        |  
|Cash and cash equivalents                                                                                    |  | 525     |   | 528    |  
|Marketable securities                                                                                        |  | 156     |   | 102    |  
|Accounts and notes receivable                                                                                |  | 553     |   | 496    |  
|Inventories                                                                                                  |  | 101     |   | 91     |  
|Regulatory assets                                                                                            |  | 443     |   | 512    |  
|Prepaid expenses and other current assets                                                                    |  | 599     |   | 596    |  
|                                                                                                             |  |         |   |        |  
|Total current assets                                                                                         |  | 2,377   |   | 2,325  |  
|Property, plant and equipment cost                                                                           |  | 34,282  |   | 32,216 |  
|Property, plant and equipment accumulated depreciation                                                       |  | (10,022 | ) | (9,091 | )
|                                                                                                             |  | 24,260  |   | 23,125 |  
|Goodwill cost                                                                                                |  | 6,156   |   | 5,698  |  
|Goodwill accumulated amortisation and impairments                                                            |  | (97     | ) | (93    | )
|                                                                                                             |  | 6,059   |   | 5,605  |  
|Intangible assets                                                                                            |  | 272     |   | 50     |  
|Investments                                                                                                  |  | 152     |   | 155    |  
|Regulatory assets                                                                                            |  | 2,907   |   | 3,136  |  
|Other debtors                                                                                                |  | 1,247   |   | 951    |  
|                                                                                                             |  |         |   |        |  
|Total assets                                                                                                 |  | 37,274  |   | 35,347 |  
|                                                                                                             |  |         |   |        |  
|Liabilities and shareholders' equity                                                                         |  |         |   |        |  
|Current liabilities                                                                                          |  |         |   |        |  
|Bank overdrafts                                                                                              |  | 18      |   | 26     |  
|Accounts payable                                                                                             |  | 1,111   |   | 1,036  |  
|Short-term borrowings                                                                                        |  | 3,229   |   | 1,644  |  
|Accrued income taxes                                                                                         |  | 79      |   | 122    |  
|Purchased power obligations                                                                                  |  | 54      |   | 57     |  
|Liability for index-linked swap contracts                                                                    |  | 99      |   | 100    |  
|Other accrued liabilities                                                                                    |  | 1,263   |   | 1,402  |  
|                                                                                                             |  |         |   |        |  
|Total current liabilities                                                                                    |  | 5,853   |   | 4,387  |  
|Long-term borrowings                                                                                         |  | 11,475  |   | 12,256 |  
|Purchased power obligations                                                                                  |  | 90      |   | 149    |  
|Liability for index-linked swap contracts                                                                    |  | 228     |   | 291    |  
|Post-retirement benefits                                                                                     |  | 1,515   |   | 1,681  |  
|Deferred income taxes                                                                                        |  | 5,475   |   | 4,867  |  
|Other liabilities                                                                                            |  | 2,009   |   | 1,841  |  
|                                                                                                             |  |         |   |        |  
|Total liabilities                                                                                            |  | 26,645  |   | 25,472 |  
|                                                                                                             |  |         |   |        |  
|Minority interestequity                                                                                     |  | 10      |   | 12     |  
|Cumulative preference stock issued by Group undertakings                                                     |  | 28      |   | 42     |  
|Shareholders' equity                                                                                         |  |         |   |        |  
|Common stock (par value £0.10 per share; shares authorised 5,000m; shares issued 2005: 3,090m; 2004: 3,088m) |  | 309     |   | 309    |  
|Additional paid in capital                                                                                   |  | 7,793   |   | 7,768  |  
|Other reserves                                                                                               |  | 359     |   | 359    |  
|Retained earnings                                                                                            |  | 3,377   |   | 2,701  |  
|Other comprehensive loss                                                                                     |  | (1,218  | ) | (1,282 | )
|Treasury stock                                                                                               |  | (29     | ) | (34    | )
|                                                                                                             |  |         |   |        |  
|Equity shareholders' funds                                                                                   |  | 10,591  |   | 9,821  |  
|                                                                                                             |  |         |   |        |  
|Total liabilities and shareholders' equity                                                                   |  | 37,274  |   | 35,347 |  
|                                                                                                             |  |         |   |        |  

Other comprehensive loss can be analysed as follows:

|                                        |  | 2005   |   | 2004   |  
|--------------------------------------- |  | ------ | - | ------ | -
|
|Foreign exchange losses                 |  | (901   | ) | (821   | )
|Additional minimum pension liability    |  | (623   | ) | (672   | )
|Mark to market of financial instruments |  | 66     |   | (88    | )
|Taxation                                |  | 236    |   | 295    |  
|Other                                   |  | 4      |   | 4      |  
|                                        |  |        |   |        |  
|                                        |  | (1,218 | ) | (1,282 | )
|                                        |  |        |   |        |  

133

---



Segmental information under US GAAP

Segments have been determined in accordance with SFAS 131 and segmented financial information has been presented in accordance with US GAAP.

|                                       |  | 2005  |   | 2004(i) |   | 2003(i) |  
|-------------------------------------- |  | ----- | - | ------- | - | ------- | -
|
|Turnover by business segment           |  |       |   |         |   |         |  
|Continuing operations                  |  |       |   |         |   |         |  
|UK electricity and gas transmission    |  | 1,937 |   | 1,875   |   | 1,615   |  
|US electricity transmission            |  | 283   |   | 318     |   | 400     |  
|UK gas distribution                    |  | 2,223 |   | 2,229   |   | 1,239   |  
|US electricity and gas distribution    |  | 3,112 |   | 3,495   |   | 3,306   |  
|US stranded cost recoveries            |  | 420   |   | 505     |   | 586     |  
|Wireless infrastructure                |  | 208   |   | 72      |   | 61      |  
|Other activities                       |  | 844   |   | 834     |   | 401     |  
|Sales between businesses               |  | (493  | ) | (462    | ) | (207    | )
|                                       |  |       |   |         |   |         |  
|Group turnovercontinuing operations   |  | 8,534 |   | 8,866   |   | 7,401   |  
|                                       |  |       |   |         |   |         |  
|Operating profit by business segment   |  |       |   |         |   |         |  
|Continuing operations                  |  |       |   |         |   |         |  
|UK electricity and gas transmission    |  | 711   |   | 676     |   | 573     |  
|US electricity transmission            |  | 121   |   | 124     |   | 116     |  
|UK gas distribution                    |  | 712   |   | 758     |   | 567     |  
|US electricity and gas distribution    |  | 356   |   | 237     |   | 350     |  
|US stranded cost recoveries            |  | 121   |   | 135     |   | 148     |  
|Wireless infrastructure                |  | 4     |   | 6       |   | (23     | )
|Other activities                       |  | 137   |   | (14     | ) | (14     | )
|                                       |  |       |   |         |   |         |  
|Operating profitcontinuing operations |  | 2,162 |   | 1,922   |   | 1,717   |  
|                                       |  |       |   |         |   |         |  

Turnover
and operating profit in the other segment relates primarily to the UK.

---

|                                    |  | Property, plant and equipment
|----------------------------------- |  | -----------------------------
|
|
|Analysis by business segment        |  |                              
|Continuing operations               |  |                              
|UK electricity and gas transmission |  | 6,642                        
|US electricity transmission         |  | 1,176                        
|UK gas distribution                 |  | 10,479                       
|US electricity and gas distribution |  | 3,401                        
|US stranded cost recoveries         |  | 7                            
|Wireless infrastructure             |  | 681                          
|Other activities                    |  | 1,874                        
|                                    |  |                              
|                                    |  | 24,260                       
|                                    |  |                              
|Analysis by geographical region     |  |                              
|UK                                  |  | 19,350                       
|US                                  |  | 4,633                        
|Rest of the World                   |  | 277                          
|                                    |  |                              
|                                    |  | 24,260                       
|                                    |  |                              

---

134

---



Goodwill

|                                      |  | UK electricity
and gas
transmission |  | US electricity
transmission |   | UK gas
distribution |   | US electricity
and gas
distribution |   | US stranded
cost
recoveries |  | Wireless
infrastructure |   | Other
activities |   | Total |  
|------------------------------------- |  | ----------------------------------- |  | --------------------------- | - | ------------------- | - | ----------------------------------- | - | --------------------------- |  | ----------------------- | - | ---------------- | - | ----- | -
|
|1 April 2003                          |  | 753                                 |  | 403                         |   | 3,040               |   | 1,568                               |   |                            |  | 86                      |   | 50               |   | 5,900 |  
|Exchange adjustments                  |  |                                    |  | (55                         | ) |                    |   | (214                                | ) |                            |  | (3                      | ) | (15              | ) | (287  | )
|Additions                             |  |                                    |  |                            |   |                    |   |                                    |   |                            |  |                        |   | 1                |   | 1     |  
|Impairment                            |  |                                    |  |                            |   |                    |   |                                    |   |                            |  |                        |   | (20              | ) | (20   | )
|Adjustments to provisional fair value |  | 3                                   |  |                            |   | (50                 | ) |                                    |   |                            |  |                        |   | 58               |   | 11    |  
|                                      |  |                                     |  |                             |   |                     |   |                                     |   |                             |  |                         |   |                  |   |       |  
|1 April 2004                          |  | 756                                 |  | 348                         |   | 2,990               |   | 1,354                               |   |                            |  | 83                      |   | 74               |   | 5,605 |  
|Exchange adjustments                  |  |                                    |  | (11                         | ) |                    |   | (44                                 | ) |                            |  | (3                      | ) |                 |   | (58   | )
|Additions                             |  |                                    |  |                            |   |                    |   |                                    |   |                            |  | 512                     |   |                 |   | 512   |  
|                                      |  |                                     |  |                             |   |                     |   |                                     |   |                             |  |                         |   |                  |   |       |  
|31 March 2005                         |  | 756                                 |  | 337                         |   | 2,990               |   | 1,310                               |   |                            |  | 592                     |   | 74               |   | 6,059 |  
|                                      |  |                                     |  |                             |   |                     |   |                                     |   |                             |  |                         |   |                  |   |       |  

34.    Transco plc additional US GAAP disclosures

The following condensed consolidating financial information, comprising income statements, balance sheets and cash flow statements, is given in respect of Transco
plc ('Subsidiary Guarantor'), which became joint full and unconditional guarantor on 11 May 2004 with National Grid Transco plc ('Parent Guarantor') of the 6.625% Guaranteed Notes due 2018
issued in June 1998 by British Transco Finance Inc. (then known as British Gas Finance Inc.) ('Issuer of notes'). Transco plc and British Transco Finance Inc. are
wholly-owned subsidiaries of National Grid Transco plc.

The
following financial information for National Grid Transco plc, Transco plc and British Transco Finance Inc. on a condensed consolidating basis is intended to provide investors
with meaningful and comparable financial information and is provided pursuant to Rule 3-10 of Regulation S-X in lieu of the separate financial statements of each
subsidiary issuer of public debt securities.

Summary
income statements are presented, on a consolidating basis, for the three years ended 31 March 2005. Summary income statements of National Grid Transco plc and
Transco plc are presented under UK and US GAAP measurement principles, as modified by the inclusion of the results of subsidiary undertakings on the basis of equity accounting principles.

The
summary balance sheets of National Grid Transco plc and Transco plc include the investments in subsidiaries recorded under the equity method for the purposes of presenting condensed
consolidating financial information under UK and US GAAP. The UK GAAP balance sheet presents these investments as 'Net assets/(liabilities) of subsidiaries (equity accounted)'. The US GAAP summary
balance sheet presents these investments within 'Investments'.

The
consolidation adjustments column includes the necessary amounts to eliminate the inter-company balances and transactions between National Grid Transco plc, Transco plc, British
Transco Finance Inc. and other subsidiaries.

Transco
plc and British Transco Finance Inc. were treated as acquired (as part of the business combination with Lattice Group plc) under US GAAP. As a consequence, under US GAAP,
their results only feature in the following tables for the period after acquisition on 21 October 2002.

135

---





Summary income statement for the twelve months to 31 March 2005UK GAAP

|                                                            |  | Parent
Guarantor |   | Issuer of
notes |     | Subsidiary
Guarantor |   |        |   |        |   |        |  
|----------------------------------------------------------- |  | ---------------- | - | --------------- | --- | -------------------- | - | ------ | - | ------ | - | ------ | -
|
|
|Turnover                                                    |  | 1                |   |                |     | 3,135                |   | 5,899  |   | (514   | ) | 8,521  |  
|Operating costs                                             |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Depreciation                                                |  |                 |   |                |     | (404                 | ) | (456   | ) |       |   | (860   | )
|Payroll costs                                               |  | (2               | ) |                |     | (389                 | ) | (550   | ) |       |   | (941   | )
|Purchases of electricity                                    |  |                 |   |                |     |                     |   | (1,678 | ) |       |   | (1,678 | )
|Purchases of gas                                            |  |                 |   |                |     | (113                 | ) | (272   | ) |       |   | (385   | )
|Rates and property taxes                                    |  |                 |   |                |     | (244                 | ) | (246   | ) |       |   | (490   | )
|Electricity transmission services scheme direct costs       |  |                 |   |                |     |                     |   | (301   | ) |       |   | (301   | )
|EnMO direct costs                                           |  |                 |   |                |     |                     |   |       |   |       |   |       |  
|Replacement expenditure                                     |  |                 |   |                |     | (474                 | ) |       |   |       |   | (474   | )
|Provision for doubtful debts                                |  |                 |   |                |     | 3                    |   | (45    | ) |       |   | (42    | )
|Other operating charges (including exceptional items)       |  | (29              | ) |                |     | (3,616               | ) | (1,210 | ) | 3,350  |   | (1,505 | )
|                                                            |  | (31              | ) |                |     | (5,237               | ) | (4,758 | ) | 3,350  |   | (6,676 | )
|                                                            |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Operating profit                                            |  | (30              | ) |                |     | (2,102               | ) | 1,141  |   | 2,836  |   | 1,845  |  
|Share of joint ventures' operating profit                   |  |                 |   |                |     |                     |   | 7      |   |       |   | 7      |  
|Non-operating exceptional items                             |  |                 |   |                |     |                     |   | 83     |   |       |   | 83     |  
|                                                            |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Profit before interest and taxation                         |  | (30              | ) |                |     | (2,102               | ) | 1,231  |   | 2,836  |   | 1,935  |  
|Net interest                                                |  | (20              | ) |                |     | (427                 | ) | (336   | ) |       |   | (783   | )
|Dividends receivable                                        |  |                 |   |                |     |                     |   | 500    |   | (500   | ) |       |  
|                                                            |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Profit on ordinary activities before taxation               |  | (50              | ) |                |     | (2,529               | ) | 1,395  |   | 2,336  |   | 1,152  |  
|Taxation                                                    |  | 23               |   |                |     | (86                  | ) | (182   | ) |       |   | (245   | )
|                                                            |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Profit on ordinary activities after taxation                |  | (27              | ) |                |     | (2,615               | ) | 1,213  |   | 2,336  |   | 907    |  
|Minority interests                                          |  |                 |   |                |     |                     |   | 1      |   |       |   | 1      |  
|Interest in Group undertakings on an equity accounted basis |  | 935              |   |                |     | 2,918                |   |       |   | (3,853 | ) |       |  
|                                                            |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Net income for the year                                     |  | 908              |   |                | (i) | 303                  |   | 1,214  |   | (1,517 | ) | 908    |  
|                                                            |  |                  |   |                 |     |                      |   |        |   |        |   |        |  

Summary income statement for the twelve months to 31 March 2005US GAAP

|                                                      |  | Parent
Guarantor |   | Issuer of
notes |     | Subsidiary
Guarantor |   |        |   |        |   |        |  
|----------------------------------------------------- |  | ---------------- | - | --------------- | --- | -------------------- | - | ------ | - | ------ | - | ------ | -
|
|
|Turnover                                              |  | 1                |   |                |     | 3,151                |   | 5,896  |   | (514   | ) | 8,534  |  
|Operating costs                                       |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Depreciation                                          |  |                 |   |                |     | (711                 | ) | (468   | ) |       |   | (1,179 | )
|Payroll and severance costs                           |  | (2               | ) |                |     | (408                 | ) | (587   | ) |       |   | (997   | )
|Purchases of electricity                              |  |                 |   |                |     |                     |   | (1,678 | ) |       |   | (1,678 | )
|Purchases of gas                                      |  |                 |   |                |     | (113                 | ) | (272   | ) |       |   | (385   | )
|Rates and property taxes                              |  |                 |   |                |     | (244                 | ) | (246   | ) |       |   | (490   | )
|Electricity transmission services scheme direct costs |  |                 |   |                |     |                     |   | (301   | ) |       |   | (301   | )
|Provision for doubtful debts                          |  |                 |   |                |     | 3                    |   | (45    | ) |       |   | (42    | )
|Other operating charges                               |  | (29              | ) |                |     | (3,530               | ) | (1,091 | ) | 3,350  |   | (1,300 | )
|                                                      |  | (31              | ) |                |     | (5,003               | ) | (4,688 | ) | 3,350  |   | (6,372 | )
|                                                      |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Operating profit                                      |  | (30              | ) |                |     | (1,852               | ) | 1,208  |   | 2,836  |   | 2,162  |  
|Non-operating expenses                                |  |                 |   |                |     |                     |   | 37     |   |       |   | 37     |  
|                                                      |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Profit before interest and taxation                   |  | (30              | ) |                |     | (1,852               | ) | 1,245  |   | 2,836  |   | 2,199  |  
|Net interest                                          |  | 123              |   |                |     | (443                 | ) | (146   | ) | 6      |   | (460   | )
|Dividends receivable                                  |  |                 |   |                |     |                     |   | 500    |   | (500   | ) |       |  
|                                                      |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Profit on ordinary activities before taxation         |  | 93               |   |                |     | (2,295               | ) | 1,599  |   | 2,342  |   | 1,739  |  
|Taxation                                              |  | (20              | ) |                |     | (160                 | ) | (249   | ) | (2     | ) | (431   | )
|                                                      |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Profit on ordinary activities after taxation          |  | 73               |   |                |     | (2,455               | ) | 1,350  |   | 2,340  |   | 1,308  |  
|Minority interests                                    |  |                 |   |                |     |                     |   | (2     | ) |       |   | (2     | )
|Interest in equity accounted affiliates               |  | 1,231            |   |                |     | 2,930                |   | (2     | ) | (4,161 | ) | (2     | )
|                                                      |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Net income from continuing operations                 |  | 1,304            |   |                |     | 475                  |   | 1,346  |   | (1,821 | ) | 1,304  |  
|Net loss from discontinued operations                 |  |                 |   |                |     |                     |   |       |   |       |   |       |  
|                                                      |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Net income for the year                               |  | 1,304            |   |                | (i) | 475                  |   | 1,346  |   | (1,821 | ) | 1,304  |  
|                                                      |  |                  |   |                 |     |                      |   |        |   |        |   |        |  

136

---



Summary income statement for the twelve months to 31 March 2005US GAAP

|                                                            |  | Parent
Guarantor |   | Issuer of
notes |     | Subsidiary
Guarantor |   |        |   |        |   |        |  
|----------------------------------------------------------- |  | ---------------- | - | --------------- | --- | -------------------- | - | ------ | - | ------ | - | ------ | -
|
|
|Turnover                                                    |  |                 |   |                |     | 3,194                |   | 6,310  |   | (471   | ) | 9,033  |  
|Operating costs                                             |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Depreciation                                                |  |                 |   |                |     | (423                 | ) | (443   | ) |       |   | (866   | )
|Payroll costs                                               |  |                 |   |                |     | (407                 | ) | (638   | ) |       |   | (1,045 | )
|Purchases of electricity                                    |  |                 |   |                |     |                     |   | (1,998 | ) |       |   | (1,998 | )
|Purchases of gas                                            |  |                 |   |                |     | (86                  | ) | (285   | ) |       |   | (371   | )
|Rates and property taxes                                    |  |                 |   |                |     | (238                 | ) | (278   | ) |       |   | (516   | )
|Electricity transmission services scheme direct costs       |  |                 |   |                |     |                     |   | (277   | ) |       |   | (277   | )
|EnMO direct costs                                           |  |                 |   |                |     |                     |   | (158   | ) |       |   | (158   | )
|Replacement expenditure                                     |  |                 |   |                |     | (388                 | ) |       |   |       |   | (388   | )
|Provision for doubtful debts                                |  |                 |   |                |     | 2                    |   | (64    | ) |       |   | (62    | )
|Other operating charges (including exceptional items)       |  | (13              | ) |                |     | (634                 | ) | (1,343 | ) | 468    |   | (1,522 | )
|                                                            |  | (13              | ) |                |     | (2,174               | ) | (5,484 | ) | 468    |   | (7,203 | )
|                                                            |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Operating profit                                            |  | (13              | ) |                |     | 1,020                |   | 826    |   | (3     | ) | 1,830  |  
|Share of joint ventures' operating profit                   |  |                 |   |                |     |                     |   | 7      |   |       |   | 7      |  
|Non-operating exceptional items                             |  |                 |   |                |     |                     |   | 322    |   |       |   | 322    |  
|                                                            |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Profit before interest and taxation                         |  | (13              | ) |                |     | 1,020                |   | 1,155  |   | (3     | ) | 2,159  |  
|Net interest                                                |  | (17              | ) |                |     | (304                 | ) | (501   | ) |       |   | (822   | )
|Dividends receivable                                        |  |                 |   |                |     |                     |   | 70     |   | (70    | ) |       |  
|                                                            |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Profit on ordinary activities before taxation               |  | (30              | ) |                |     | 716                  |   | 724    |   | (73    | ) | 1,337  |  
|Taxation                                                    |  | 13               |   |                |     | (184                 | ) | (90    | ) |       |   | (261   | )
|                                                            |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Profit on ordinary activities after taxation                |  | (17              | ) |                |     | 532                  |   | 634    |   | (73    | ) | 1,076  |  
|Minority interests                                          |  |                 |   |                |     |                     |   | (2     | ) |       |   | (2     | )
|Interest in Group undertakings on an equity accounted basis |  | 1,091            |   |                |     | 11                   |   |       |   | (1,102 | ) |       |  
|                                                            |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Net income for the year                                     |  | 1,074            |   |                | (i) | 543                  |   | 632    |   | (1,175 | ) | 1,074  |  
|                                                            |  |                  |   |                 |     |                      |   |        |   |        |   |        |  

Summary income statement for the twelve months to 31 March 2004US GAAP

|                                                      |  | Parent
Guarantor |   | Issuer of
notes |     | Subsidiary
Guarantor |   |        |   |        |   |        |  
|----------------------------------------------------- |  | ---------------- | - | --------------- | --- | -------------------- | - | ------ | - | ------ | - | ------ | -
|
|
|Turnover                                              |  |                 |   |                |     | 3,186                |   | 6,151  |   | (471   | ) | 8,866  |  
|Operating costs                                       |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Depreciation                                          |  |                 |   |                |     | (726                 | ) | (438   | ) |       |   | (1,164 | )
|Payroll and severance costs                           |  |                 |   |                |     | (484                 | ) | (813   | ) |       |   | (1,297 | )
|Purchases of electricity                              |  |                 |   |                |     |                     |   | (1,998 | ) |       |   | (1,998 | )
|Purchases of gas                                      |  |                 |   |                |     | (86                  | ) | (285   | ) |       |   | (371   | )
|Rates and property taxes                              |  |                 |   |                |     | (238                 | ) | (278   | ) |       |   | (516   | )
|Electricity transmission services scheme direct costs |  |                 |   |                |     |                     |   | (277   | ) |       |   | (277   | )
|Provision for doubtful debts                          |  |                 |   |                |     | 2                    |   | (64    | ) |       |   | (62    | )
|Other operating charges                               |  | (13              | ) |                |     | (553                 | ) | (1,161 | ) | 468    |   | (1,259 | )
|                                                      |  | (13              | ) |                |     | (2,085               | ) | (5,314 | ) | 468    |   | (6,944 | )
|                                                      |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Operating profit                                      |  | (13              | ) |                |     | 1,101                |   | 837    |   | (3     | ) | 1,922  |  
|Non-operating expenses                                |  |                 |   |                |     |                     |   | 32     |   |       |   | 32     |  
|                                                      |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Profit before interest and taxation                   |  | (13              | ) |                |     | 1,101                |   | 869    |   | (3     | ) | 1,954  |  
|Net interest                                          |  | (34              | ) |                |     | (365                 | ) | (273   | ) |       |   | (672   | )
|Dividends receivable                                  |  |                 |   |                |     |                     |   | 70     |   | (70    | ) |       |  
|                                                      |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Profit on ordinary activities before taxation         |  | (47              | ) |                |     | 736                  |   | 666    |   | (73    | ) | 1,282  |  
|Taxation                                              |  | 18               |   |                |     | (189                 | ) | (111   | ) |       |   | (282   | )
|                                                      |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Profit on ordinary activities after taxation          |  | (29              | ) |                |     | 547                  |   | 555    |   | (73    | ) | 1,000  |  
|Minority interests                                    |  |                 |   |                |     |                     |   | (2     | ) |       |   | (2     | )
|Interest in equity accounted affiliates               |  | 1,027            |   |                |     | 64                   |   |       |   | (1,091 | ) |       |  
|                                                      |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Net income from continuing operations                 |  | 998              |   |                |     | 611                  |   | 553    |   | (1,164 | ) | 998    |  
|Net loss from discontinued operations                 |  |                 |   |                |     |                     |   |       |   |       |   |       |  
|                                                      |  |                  |   |                 |     |                      |   |        |   |        |   |        |  
|Net income for the year                               |  | 998              |   |                | (i) | 611                  |   | 553    |   | (1,164 | ) | 998    |  
|                                                      |  |                  |   |                 |     |                      |   |        |   |        |   |        |  

---

137

---



Summary income statement for the twelve months to 31 March 2003UK GAAP

|                                                            |  | Parent
Guarantor |   | Issuer of
notes |     | Subsidiary
Guarantor |   |        |   |      |   |        |  
|----------------------------------------------------------- |  | ---------------- | - | --------------- | --- | -------------------- | - | ------ | - | ---- | - | ------ | -
|
|
|Turnover                                                    |  |                 |   |                |     | 3,083                |   | 6,764  |   | (447 | ) | 9,400  |  
|Operating costs                                             |  |                  |   |                 |     |                      |   |        |   |      |   |        |  
|Depreciation                                                |  |                 |   |                |     | (385                 | ) | (466   | ) |     |   | (851   | )
|Payroll costs                                               |  |                 |   |                |     | (440                 | ) | (704   | ) |     |   | (1,144 | )
|Purchases of electricity                                    |  |                 |   |                |     |                     |   | (1,901 | ) |     |   | (1,901 | )
|Purchases of gas                                            |  |                 |   |                |     | (108                 | ) | (249   | ) |     |   | (357   | )
|Rates and property taxes                                    |  |                 |   |                |     | (235                 | ) | (302   | ) |     |   | (537   | )
|Electricity transmission services scheme direct costs       |  |                 |   |                |     |                     |   | (252   | ) |     |   | (252   | )
|EnMO direct costs                                           |  |                 |   |                |     |                     |   | (530   | ) |     |   | (530   | )
|Replacement expenditure                                     |  |                 |   |                |     | (405                 | ) |       |   |     |   | (405   | )
|Provision for doubtful debts                                |  |                 |   |                |     | (4                   | ) | (20    | ) |     |   | (24    | )
|Other operating charges (including exceptional items)       |  | (21              | ) |                |     | (735                 | ) | (1,521 | ) | 450  |   | (1,827 | )
|                                                            |  | (21              | ) |                |     | (2,312               | ) | (5,945 | ) | 450  |   | (7,828 | )
|                                                            |  |                  |   |                 |     |                      |   |        |   |      |   |        |  
|Operating profit                                            |  | (21              | ) |                |     | 771                  |   | 819    |   | 3    |   | 1,572  |  
|Share of joint ventures' operating profit                   |  |                 |   |                |     |                     |   | 124    |   |     |   | 124    |  
|Non-operating exceptional items                             |  | (32              | ) |                |     | (12                  | ) | (51    | ) | (4   | ) | (99    | )
|                                                            |  |                  |   |                 |     |                      |   |        |   |      |   |        |  
|Profit before interest and taxation                         |  | (53              | ) |                |     | 759                  |   | 892    |   | (1   | ) | 1,597  |  
|Net interest                                                |  | 21               |   |                |     | (343                 | ) | (648   | ) |     |   | (970   | )
|Dividends receivable                                        |  |                 |   |                |     |                     |   | 244    |   | (244 | ) |       |  
|                                                            |  |                  |   |                 |     |                      |   |        |   |      |   |        |  
|Profit on ordinary activities before taxation               |  | (32              | ) |                |     | 416                  |   | 488    |   | (245 | ) | 627    |  
|Taxation                                                    |  | (5               | ) |                |     | (140                 | ) | (100   | ) |     |   | (245   | )
|                                                            |  |                  |   |                 |     |                      |   |        |   |      |   |        |  
|Profit on ordinary activities after taxation                |  | (37              | ) |                |     | 276                  |   | 388    |   | (245 | ) | 382    |  
|Minority interests                                          |  |                 |   |                |     |                     |   | (31    | ) |     |   | (31    | )
|Interest in Group undertakings on an equity accounted basis |  | 388              |   |                |     | 23                   |   |       |   | (411 | ) |       |  
|                                                            |  |                  |   |                 |     |                      |   |        |   |      |   |        |  
|Net income for the year                                     |  | 351              |   |                | (i) | 299                  |   | 357    |   | (656 | ) | 351    |  
|                                                            |  |                  |   |                 |     |                      |   |        |   |      |   |        |  

Summary income statement for the twelve months to 31 March 2003US GAAP

|                                                      |  | Parent
Guarantor |   | Issuer of
notes |     | Subsidiary
Guarantor |   |        |   |      |   |        |  
|----------------------------------------------------- |  | ---------------- | - | --------------- | --- | -------------------- | - | ------ | - | ---- | - | ------ | -
|
|
|Turnover                                              |  |                 |   |                |     | 1,673                |   | 5,945  |   | (217 | ) | 7,401  |  
|Operating costs                                       |  |                  |   |                 |     |                      |   |        |   |      |   |        |  
|Depreciation                                          |  |                 |   |                |     | (311                 | ) | (420   | ) |     |   | (731   | )
|Payroll and severance costs                           |  |                 |   |                |     | (191                 | ) | (913   | ) |     |   | (1,104 | )
|Purchases of electricity                              |  |                 |   |                |     |                     |   | (1,901 | ) |     |   | (1,901 | )
|Purchases of gas                                      |  |                 |   |                |     | (56                  | ) | (248   | ) |     |   | (304   | )
|Rates and property taxes                              |  |                 |   |                |     | (105                 | ) | (302   | ) |     |   | (407   | )
|Electricity transmission services scheme direct costs |  |                 |   |                |     |                     |   | (252   | ) |     |   | (252   | )
|Provision for doubtful debts                          |  |                 |   |                |     | (3                   | ) | (20    | ) |     |   | (23    | )
|Other operating charges                               |  | (21              | ) |                |     | (298                 | ) | (864   | ) | 221  |   | (962   | )
|                                                      |  | (21              | ) |                |     | (964                 | ) | (4,920 | ) | 221  |   | (5,684 | )
|                                                      |  |                  |   |                 |     |                      |   |        |   |      |   |        |  
|Operating profit                                      |  | (21              | ) |                |     | 709                  |   | 1,025  |   | 4    |   | 1,717  |  
|Non-operating expenses                                |  | (32              | ) |                |     | (10                  | ) | 37     |   |     |   | (5     | )
|                                                      |  |                  |   |                 |     |                      |   |        |   |      |   |        |  
|Profit before interest and taxation                   |  | (53              | ) |                |     | 699                  |   | 1,062  |   | 4    |   | 1,712  |  
|Net interest                                          |  | 21               |   |                |     | (97                  | ) | (588   | ) |     |   | (664   | )
|Dividends receivable                                  |  |                 |   |                |     |                     |   | 120    |   | (120 | ) |       |  
|                                                      |  |                  |   |                 |     |                      |   |        |   |      |   |        |  
|Profit on ordinary activities before taxation         |  | (32              | ) |                |     | 602                  |   | 594    |   | (116 | ) | 1,048  |  
|Taxation                                              |  | (5               | ) |                |     | (193                 | ) | (60    | ) |     |   | (258   | )
|                                                      |  |                  |   |                 |     |                      |   |        |   |      |   |        |  
|Profit on ordinary activities after taxation          |  | (37              | ) |                |     | 409                  |   | 534    |   | (116 | ) | 790    |  
|Minority interests                                    |  |                 |   |                |     |                     |   | (3     | ) |     |   | (3     | )
|Interest in equity accounted affiliates               |  | 788              |   |                |     | 17                   |   | 3      |   | (805 | ) | 3      |  
|                                                      |  |                  |   |                 |     |                      |   |        |   |      |   |        |  
|Net income from continuing operations                 |  | 751              |   |                |     | 426                  |   | 534    |   | (921 | ) | 790    |  
|Net loss from discontinued operations                 |  |                 |   |                |     |                     |   | (39    | ) |     |   | (39    | )
|                                                      |  |                  |   |                 |     |                      |   |        |   |      |   |        |  
|Net income for the year                               |  | 751              |   |                | (i) | 426                  |   | 495    |   | (921 | ) | 751    |  
|                                                      |  |                  |   |                 |     |                      |   |        |   |      |   |        |  

---

138

---



Balance sheet as at 31 March 2005UK GAAP

|                                                            |            | Parent
Guarantor |   | Issuer of
notes |   | Subsidiary
Guarantor |   |         |    |         |   |         |   
|----------------------------------------------------------- | ---------- | ---------------- | - | --------------- | - | -------------------- | - | ------- | -- | ------- | - | ------- | --
|
|
|Fixed assets                                                |            |                  |   |                 |   |                      |   |         |    |         |   |         |   
|Intangible assets                                           |            |                 |   |                |   |                     |   | 2,003   |    |        |   | 2,003   |   
|Tangible assets                                             |            |                 |   |                |   | 7,942                |   | 9,811   |    | (7      | ) | 17,746  |   
|Investments                                                 |            |                 |   |                |   |                     |   | 13,732  |    | (13,584 | ) | 148     |   
|Net (liabilities)/assets of subsidiaries (equity accounted) |            | (5,414           | ) |                |   | 1,708                |   |        |    | 3,706   |   |        |   
|                                                            |            |                  |   |                 |   |                      |   |         |    |         |   |         |   
|                                                            |            | (5,414           | ) |                |   | 9,650                |   | 25,546  |    | (9,885  | ) | 19,897  |   
|                                                            |            |                  |   |                 |   |                      |   |         |    |         |   |         |   
|Current assets                                              |            |                  |   |                 |   |                      |   |         |    |         |   |         |   
|Stocks                                                      |            |                 |   |                |   | 30                   |   | 71      |    |        |   | 101     |   
|Debtors (amounts falling due within one year)               |            | 10,697           |   |                |   | 373                  |   | 6,166   |    | (15,691 | ) | 1,545   |   
|Debtors (amounts falling due after one year)                |            |                 |   | 194             |   | 2,648                |   | 3,334   |    | (3,678  | ) | 2,498   |   
|Current asset investments                                   |            | 118              |   |                |   | 201                  |   | 451     |    | (200    | ) | 570     |   
|Cash at bank and in hand                                    |            |                 |   |                |   | 3                    |   | 97      |    |        |   | 100     |   
|                                                            |            |                  |   |                 |   |                      |   |         |    |         |   |         |   
|                                                            |            | 10,815           |   | 194             |   | 3,255                |   | 10,119  |    | (19,569 | ) | 4,814   |   
|Creditors (amounts falling due within one year)             |            |                  |   |                 |   |                      |   |         |    |         |   |         |   
|Borrowings                                                  |            | (781             | ) |                |   | (1,212               | ) | (1,662  | )  | 399     |   | (3,256  | ) 
|Other creditors                                             |            | (2,233           | ) |                |   | (3,601               | ) | (12,278 | )  | 15,220  |   | (2,892  | ) 
|                                                            |            | (3,014           | ) |                |   | (4,813               | ) | (13,940 | )  | 15,619  |   | (6,148  | ) 
|                                                            |            |                  |   |                 |   |                      |   |         |    |         |   |         |   
|Net current assets/(liabilities)                            |            | 7,801            |   | 194             |   | (1,558               | ) | (3,821  | )  | (3,950  | ) | (1,334  | ) 
|                                                            |            |                  |   |                 |   |                      |   |         |    |         |   |         |   
|Total assets less current liabilities                       |            | 2,387            |   | 194             |   | 8,092                |   | 21,725  |    | (13,835 | ) | 18,563  |   
|Creditors (amounts falling due after more than one year)    |            |                  |   |                 |   |                      |   |         |    |         |   |         |   
|Borrowings                                                  |            | (1,020           | ) | (194            | ) | (2,757               | ) | (7,264  | )  | 272     |   | (10,963 | ) 
|Other creditors                                             |            | (8               | ) |                |   | (1,941               | ) | (3,566  | )  | 3,678   |   | (1,837  | ) 
|                                                            |            | (1,028           | ) | (194            | ) | (4,698               | ) | (10,830 | )  | 3,950   |   | (12,800 | ) 
|Provisions for liabilities and charges                      |            |                 |   |                |   | (1,448               | ) | (2,924  | )  |        |   | (4,372  | ) 
|                                                            |            |                  |   |                 |   |                      |   |         |    |         |   |         |   
|Net assets employed                                         |            | 1,359            |   |                |   | 1,946                |   | 7,971   |    | (9,885  | ) | 1,391   |   
|                                                            |            |                  |   |                 |   |                      |   |         |    |         |   |         |   
|Capital and reserves                                        |            |                  |   |                 |   |                      |   |         |    |         |   |         |   
|Called up share capital                                     |            | 309              |   |                |   | 45                   |   | 2,191   |    | (2,236  | ) | 309     |   
|Share premium account                                       |            | 1,289            |   |                |   | 204                  |   | 1,830   |    | (2,034  | ) | 1,289   |   
|Other reserves                                              |            | (5,131           | ) |                |   | 1,332                |   | (181    | )  | (1,151  | ) | (5,131  | ) 
|Profit and loss account                                     |            | 4,892            |   |                |   | 365                  |   | 4,099   |    | (4,464  | ) | 4,892   |   
|                                                            |            |                  |   |                 |   |                      |   |         |    |         |   |         |   
|Equity shareholders' funds                                  |            | 1,359            |   |                |   | 1,946                |   | 7,939   |    | (9,885  | ) | 1,359   |   
|Minority interests                                          |            |                  |   |                 |   |                      |   |         |    |         |   |         |   
|                                                            | Equity     |                  |  |                 |  |                      |  |         | 10 |         |  |         | 10
|                                                            | Non-equity |                  |  |                 |  |                      |  |         | 22 |         |  |         | 22
|                                                            |            |                 |   |                |   |                     |   | 32      |    |        |   | 32      |   
|                                                            |            |                  |   |                 |   |                      |   |         |    |         |   |         |   
|                                                            |            | 1,359            |   |                |   | 1,946                |   | 7,971   |    | (9,885  | ) | 1,391   |   
|                                                            |            |                  |   |                 |   |                      |   |         |    |         |   |         |   

139

---





Balance sheet as at 31 March 2005US GAAP

|                                                         |  | Parent
Guarantor |   | Issuer of
notes |  | Subsidiary
Guarantor |  |        |   |         |   |        |  
|-------------------------------------------------------- |  | ---------------- | - | --------------- |  | -------------------- |  | ------ | - | ------- | - | ------ | -
|
|
|Assets                                                   |  |                  |   |                 |  |                      |  |        |   |         |   |        |  
|Current assets                                           |  |                  |   |                 |  |                      |  |        |   |         |   |        |  
|Cash and cash equivalents                                |  | 118              |   |                |  | 204                  |  | 403    |   | (200    | ) | 525    |  
|Marketable securities                                    |  |                 |   |                |  |                     |  | 156    |   |        |   | 156    |  
|Accounts and notes receivable                            |  |                 |   |                |  | 37                   |  | 516    |   |        |   | 553    |  
|Inventories                                              |  |                 |   |                |  | 30                   |  | 71     |   |        |   | 101    |  
|Amounts owed by Group undertakings                       |  | 10,695           |   |                |  | 72                   |  | 4,529  |   | (15,296 | ) |       |  
|Regulatory assets                                        |  |                 |   |                |  |                     |  | 443    |   |        |   | 443    |  
|Prepaid expenses and other current assets                |  | 2                |   |                |  | 264                  |  | 333    |   |        |   | 599    |  
|                                                         |  |                  |   |                 |  |                      |  |        |   |         |   |        |  
|Total current assets                                     |  | 10,815           |   |                |  | 607                  |  | 6,451  |   | (15,496 | ) | 2,377  |  
|Property, plant and equipment                            |  |                 |   |                |  | 13,950               |  | 10,317 |   | (7      | ) | 24,260 |  
|Goodwill                                                 |  |                 |   |                |  | 3,746                |  | 2,313  |   |        |   | 6,059  |  
|Intangible assets                                        |  |                 |   |                |  |                     |  | 272    |   |        |   | 272    |  
|Investments                                              |  | 3,332            |   |                |  | 1,605                |  | 16,314 |   | (21,099 | ) | 152    |  
|Amounts owed by Group undertakings                       |  | 9                |   | 178             |  | 2,644                |  | 840    |   | (3,671  | ) |       |  
|Regulatory assets                                        |  |                 |   |                |  |                     |  | 2,907  |   |        |   | 2,907  |  
|Other debtors                                            |  | 226              |   |                |  | 151                  |  | 870    |   |        |   | 1,247  |  
|                                                         |  |                  |   |                 |  |                      |  |        |   |         |   |        |  
|Total assets                                             |  | 14,382           |   | 178             |  | 22,703               |  | 40,284 |   | (40,273 | ) | 37,274 |  
|                                                         |  |                  |   |                 |  |                      |  |        |   |         |   |        |  
|Liabilities and shareholders' equity                     |  |                  |   |                 |  |                      |  |        |   |         |   |        |  
|Current liabilities                                      |  |                  |   |                 |  |                      |  |        |   |         |   |        |  
|Bank overdrafts                                          |  |                 |   |                |  |                     |  | 18     |   |        |   | 18     |  
|Accounts payable                                         |  |                 |   |                |  | 342                  |  | 769    |   |        |   | 1,111  |  
|Short-term borrowings                                    |  | 792              |   |                |  | 1,233                |  | 1,204  |   |        |   | 3,229  |  
|Accrued income taxes                                     |  |                 |   |                |  | 22                   |  | 57     |   |        |   | 79     |  
|Purchased power obligations                              |  |                 |   |                |  |                     |  | 54     |   |        |   | 54     |  
|Liability for index-linked swap contracts                |  |                 |   |                |  |                     |  | 99     |   |        |   | 99     |  
|Amounts owed to Group undertakings                       |  | 1,752            |   |                |  | 2,777                |  | 10,695 |   | (15,224 | ) |       |  
|Other accrued liabilities                                |  | 63               |   |                |  | 552                  |  | 725    |   | (77     | ) | 1,263  |  
|                                                         |  |                  |   |                 |  |                      |  |        |   |         |   |        |  
|Total current liabilities                                |  | 2,607            |   |                |  | 4,926                |  | 13,621 |   | (15,301 | ) | 5,853  |  
|Long-term borrowings                                     |  | 1,168            |   | 178             |  | 2,811                |  | 7,591  |   | (273    | ) | 11,475 |  
|Amounts owed to Group undertakings                       |  |                 |   |                |  | 840                  |  | 2,831  |   | (3,671  | ) |       |  
|Purchased power obligations                              |  |                 |   |                |  |                     |  | 90     |   |        |   | 90     |  
|Liability for index-linked swap contracts                |  |                 |   |                |  |                     |  | 228    |   |        |   | 228    |  
|Post-retirement benefits                                 |  |                 |   |                |  |                     |  | 1,515  |   |        |   | 1,515  |  
|Deferred income taxes                                    |  | 8                |   |                |  | 3,421                |  | 2,046  |   |        |   | 5,475  |  
|Other liabilities                                        |  | 8                |   |                |  | 158                  |  | 1,843  |   |        |   | 2,009  |  
|                                                         |  |                  |   |                 |  |                      |  |        |   |         |   |        |  
|Total liabilities                                        |  | 3,791            |   | 178             |  | 12,156               |  | 29,765 |   | (19,245 | ) | 26,645 |  
|                                                         |  |                  |   |                 |  |                      |  |        |   |         |   |        |  
|Minority interestequity                                 |  |                 |   |                |  |                     |  | 10     |   |        |   | 10     |  
|Cumulative preference stock issued by Group undertakings |  |                 |   |                |  |                     |  | 28     |   |        |   | 28     |  
|Shareholders' equity                                     |  |                  |   |                 |  |                      |  |        |   |         |   |        |  
|Common stock                                             |  | 309              |   |                |  | 45                   |  | 2,191  |   | (2,236  | ) | 309    |  
|Additional paid in capital                               |  | 7,793            |   |                |  | 9,680                |  | 8,072  |   | (17,752 | ) | 7,793  |  
|Other reserves                                           |  | 359              |   |                |  |                     |  |       |   |        |   | 359    |  
|Retained earnings                                        |  | 3,377            |   |                |  | 822                  |  | 1,357  |   | (2,179  | ) | 3,377  |  
|Other comprehensive loss                                 |  | (1,218           | ) |                |  |                     |  | (1,110 | ) | 1,110   |   | (1,218 | )
|Treasury stock                                           |  | (29              | ) |                |  |                     |  | (29    | ) | 29      |   | (29    | )
|                                                         |  |                  |   |                 |  |                      |  |        |   |         |   |        |  
|Equity shareholders' funds                               |  | 10,591           |   |                |  | 10,547               |  | 10,481 |   | (21,028 | ) | 10,591 |  
|                                                         |  |                  |   |                 |  |                      |  |        |   |         |   |        |  
|Total liabilities and shareholders' equity               |  | 14,382           |   | 178             |  | 22,703               |  | 40,284 |   | (40,273 | ) | 37,274 |  
|                                                         |  |                  |   |                 |  |                      |  |        |   |         |   |        |  

140

---



Balance sheet as at 31 March 2004UK GAAP

|                                                         |  | Parent
Guarantor |   | Issuer of
notes |   | Subsidiary
Guarantor |   |         |   |         |   |         |  
|-------------------------------------------------------- |  | ---------------- | - | --------------- | - | -------------------- | - | ------- | - | ------- | - | ------- | -
|
|
|Fixed assets                                             |  |                  |   |                 |   |                      |   |         |   |         |   |         |  
|Intangible assets                                        |  |                 |   |                |   |                     |   | 1,537   |   |        |   | 1,537   |  
|Tangible assets                                          |  |                 |   |                |   | 7,880                |   | 8,829   |   | (3      | ) | 16,706  |  
|Investments                                              |  |                 |   |                |   |                     |   | 7,303   |   | (7,152  | ) | 151     |  
|Net assets of subsidiaries (equity accounted)            |  | 534              |   |                |   | 22                   |   |        |   | (556    | ) |        |  
|                                                         |  |                  |   |                 |   |                      |   |         |   |         |   |         |  
|                                                         |  | 534              |   |                |   | 7,902                |   | 17,669  |   | (7,711  | ) | 18,394  |  
|                                                         |  |                  |   |                 |   |                      |   |         |   |         |   |         |  
|Current assets                                           |  |                  |   |                 |   |                      |   |         |   |         |   |         |  
|Stocks                                                   |  |                 |   |                |   | 32                   |   | 59      |   |        |   | 91      |  
|Debtors (amounts falling due within one year)            |  | 3,884            |   |                |   | 292                  |   | 4,291   |   | (6,879  | ) | 1,588   |  
|Debtors (amounts falling due after one year)             |  |                 |   | 168             |   | 2,544                |   | 3,792   |   | (3,796  | ) | 2,708   |  
|Current asset investments                                |  | 6                |   |                |   | 264                  |   | 440     |   | (190    | ) | 520     |  
|Cash at bank and in hand                                 |  |                 |   | 1               |   |                     |   | 95      |   |        |   | 96      |  
|                                                         |  |                  |   |                 |   |                      |   |         |   |         |   |         |  
|                                                         |  | 3,890            |   | 169             |   | 3,132                |   | 8,677   |   | (10,865 | ) | 5,003   |  
|Creditors (amounts falling due within one year)          |  |                  |   |                 |   |                      |   |         |   |         |   |         |  
|Borrowings                                               |  | (388             | ) |                |   | (861                 | ) | (947    | ) | 490     |   | (1,706  | )
|Other creditors                                          |  | (2,056           | ) | (4              | ) | (1,801               | ) | (5,286  | ) | 6,340   |   | (2,807  | )
|                                                         |  | (2,444           | ) | (4              | ) | (2,662               | ) | (6,233  | ) | 6,830   |   | (4,513  | )
|                                                         |  |                  |   |                 |   |                      |   |         |   |         |   |         |  
|Net current assets/(liabilities)                         |  | 1,446            |   | 165             |   | 470                  |   | 2,444   |   | (4,035  | ) | 490     |  
|                                                         |  |                  |   |                 |   |                      |   |         |   |         |   |         |  
|Total assets less current liabilities                    |  | 1,980            |   | 165             |   | 8,372                |   | 20,113  |   | (11,746 | ) | 18,884  |  
|Creditors (amounts falling due after more than one year) |  |                  |   |                 |   |                      |   |         |   |         |   |         |  
|Borrowings                                               |  | (746             | ) | (165            | ) | (2,768               | ) | (8,103  | ) | 240     |   | (11,542 | )
|Other creditors                                          |  | (13              | ) |                |   | (2,111               | ) | (3,593  | ) | 3,795   |   | (1,922  | )
|                                                         |  | (759             | ) | (165            | ) | (4,879               | ) | (11,696 | ) | 4,035   |   | (13,464 | )
|Provisions for liabilities and charges                   |  |                 |   |                |   | (1,352               | ) | (2,797  | ) |        |   | (4,149  | )
|                                                         |  |                  |   |                 |   |                      |   |         |   |         |   |         |  
|Net assets employed                                      |  | 1,221            |   |                |   | 2,141                |   | 5,620   |   | (7,711  | ) | 1,271   |  
|                                                         |  |                  |   |                 |   |                      |   |         |   |         |   |         |  
|Capital and reserves                                     |  |                  |   |                 |   |                      |   |         |   |         |   |         |  
|Called up share capital                                  |  | 309              |   |                |   | 45                   |   | 540     |   | (585    | ) | 309     |  
|Share premium account                                    |  | 1,280            |   |                |   | 204                  |   | 1,557   |   | (1,761  | ) | 1,280   |  
|Other reserves                                           |  | (5,131           | ) |                |   | 1,332                |   | (181    | ) | (1,151  | ) | (5,131  | )
|Profit and loss account                                  |  | 4,763            |   |                |   | 560                  |   | 3,654   |   | (4,214  | ) | 4,763   |  
|                                                         |  |                  |   |                 |   |                      |   |         |   |         |   |         |  
|Equity shareholders' funds                               |  | 1,221            |   |                |   | 2,141                |   | 5,570   |   | (7,711  | ) | 1,221   |  
|Minority interests                                       |  |                  |   |                 |   |                      |   |         |   |         |   |         |  
|Equity                                                   |  |                 |   |                |   |                     |   | 12      |   |        |   | 12      |  
|Non-equity                                               |  |                 |   |                |   |                     |   | 38      |   |        |   | 38      |  
|                                                         |  |                 |   |                |   |                     |   | 50      |   |        |   | 50      |  
|                                                         |  |                  |   |                 |   |                      |   |         |   |         |   |         |  
|                                                         |  | 1,221            |   |                |   | 2,141                |   | 5,620   |   | (7,711  | ) | 1,271   |  
|                                                         |  |                  |   |                 |   |                      |   |         |   |         |   |         |  

141

---



Balance sheet as at 31 March 2004US GAAP

|                                                         |  | Parent
Guarantor |   | Issuer of
notes |  | Subsidiary
Guarantor |   |        |   |         |   |        |  
|-------------------------------------------------------- |  | ---------------- | - | --------------- |  | -------------------- | - | ------ | - | ------- | - | ------ | -
|
|
|Assets                                                   |  |                  |   |                 |  |                      |   |        |   |         |   |        |  
|Current assets                                           |  |                  |   |                 |  |                      |   |        |   |         |   |        |  
|Cash and cash equivalents                                |  | 6                |   | 1               |  | 264                  |   | 447    |   | (190    | ) | 528    |  
|Marketable securities                                    |  |                 |   |                |  |                     |   | 102    |   |        |   | 102    |  
|Accounts and notes receivable                            |  |                 |   |                |  | 16                   |   | 480    |   |        |   | 496    |  
|Inventories                                              |  |                 |   |                |  | 32                   |   | 59     |   |        |   | 91     |  
|Amounts owed by Group undertakings                       |  | 3,883            |   |                |  | 22                   |   | 2,430  |   | (6,335  | ) |       |  
|Regulatory assets                                        |  |                 |   |                |  |                     |   | 512    |   |        |   | 512    |  
|Prepaid expenses and other current assets                |  | 1                |   |                |  | 254                  |   | 395    |   | (54     | ) | 596    |  
|                                                         |  |                  |   |                 |  |                      |   |        |   |         |   |        |  
|Total current assets                                     |  | 3,890            |   | 1               |  | 588                  |   | 4,425  |   | (6,579  | ) | 2,325  |  
|Property, plant and equipment                            |  |                 |   |                |  | 13,785               |   | 9,343  |   | (3      | ) | 23,125 |  
|Goodwill                                                 |  |                 |   |                |  | 3,746                |   | 1,859  |   |        |   | 5,605  |  
|Intangible assets                                        |  |                 |   |                |  |                     |   | 50     |   |        |   | 50     |  
|Investments                                              |  | 8,851            |   |                |  | (94                  | ) | 9,881  |   | (18,483 | ) | 155    |  
|Amounts owed by Group undertakings                       |  |                 |   | 161             |  | 2,544                |   | 1,084  |   | (3,789  | ) |       |  
|Regulatory assets                                        |  |                 |   |                |  |                     |   | 3,136  |   |        |   | 3,136  |  
|Other debtors                                            |  | 161              |   |                |  | 196                  |   | 629    |   | (35     | ) | 951    |  
|                                                         |  |                  |   |                 |  |                      |   |        |   |         |   |        |  
|Total assets                                             |  | 12,902           |   | 162             |  | 20,765               |   | 30,407 |   | (28,889 | ) | 35,347 |  
|                                                         |  |                  |   |                 |  |                      |   |        |   |         |   |        |  
|Liabilities and shareholders' equity                     |  |                  |   |                 |  |                      |   |        |   |         |   |        |  
|Current liabilities                                      |  |                  |   |                 |  |                      |   |        |   |         |   |        |  
|Bank overdrafts                                          |  |                 |   |                |  | 6                    |   | 20     |   |        |   | 26     |  
|Accounts payable                                         |  |                 |   |                |  | 406                  |   | 630    |   |        |   | 1,036  |  
|Short-term borrowings                                    |  | 389              |   |                |  | 856                  |   | 399    |   |        |   | 1,644  |  
|Accrued income taxes                                     |  |                 |   |                |  | 176                  |   |       |   | (54     | ) | 122    |  
|Purchased power obligations                              |  |                 |   |                |  |                     |   | 57     |   |        |   | 57     |  
|Liability for index-linked swap contracts                |  |                 |   |                |  |                     |   | 100    |   |        |   | 100    |  
|Amounts owed to Group undertakings                       |  | 1,680            |   |                |  | 750                  |   | 3,856  |   | (6,286  | ) |       |  
|Other accrued liabilities                                |  | 127              |   | 4               |  | 561                  |   | 787    |   | (77     | ) | 1,402  |  
|                                                         |  |                  |   |                 |  |                      |   |        |   |         |   |        |  
|Total current liabilities                                |  | 2,196            |   | 4               |  | 2,755                |   | 5,849  |   | (6,417  | ) | 4,387  |  
|Long-term borrowings                                     |  | 872              |   | 158             |  | 2,894                |   | 8,572  |   | (240    | ) | 12,256 |  
|Amounts owed to Group undertakings                       |  |                 |   |                |  | 1,084                |   | 2,705  |   | (3,789  | ) |       |  
|Purchased power obligations                              |  |                 |   |                |  |                     |   | 149    |   |        |   | 149    |  
|Liability for index-linked swap contracts                |  |                 |   |                |  |                     |   | 291    |   |        |   | 291    |  
|Post-retirement benefits                                 |  |                 |   |                |  |                     |   | 1,681  |   |        |   | 1,681  |  
|Deferred income taxes                                    |  |                 |   |                |  | 3,312                |   | 1,590  |   | (35     | ) | 4,867  |  
|Other liabilities                                        |  | 13               |   |                |  | 148                  |   | 1,680  |   |        |   | 1,841  |  
|                                                         |  |                  |   |                 |  |                      |   |        |   |         |   |        |  
|Total liabilities                                        |  | 3,081            |   | 162             |  | 10,193               |   | 22,517 |   | (10,481 | ) | 25,472 |  
|                                                         |  |                  |   |                 |  |                      |   |        |   |         |   |        |  
|Minority interestequity                                 |  |                 |   |                |  |                     |   | 12     |   |        |   | 12     |  
|Cumulative preference stock issued by Group undertakings |  |                 |   |                |  |                     |   | 42     |   |        |   | 42     |  
|Shareholders' equity                                     |  |                  |   |                 |  |                      |   |        |   |         |   |        |  
|Common stock                                             |  | 309              |   |                |  | 45                   |   | 540    |   | (585    | ) | 309    |  
|Additional paid in capital                               |  | 7,768            |   |                |  | 9,680                |   | 7,799  |   | (17,479 | ) | 7,768  |  
|Other reserves                                           |  | 359              |   |                |  |                     |   |       |   |        |   | 359    |  
|Retained earnings                                        |  | 2,701            |   |                |  | 847                  |   | 712    |   | (1,559  | ) | 2,701  |  
|Other comprehensive loss                                 |  | (1,282           | ) |                |  |                     |   | (1,181 | ) | 1,181   |   | (1,282 | )
|Treasury stock                                           |  | (34              | ) |                |  |                     |   | (34    | ) | 34      |   | (34    | )
|                                                         |  |                  |   |                 |  |                      |   |        |   |         |   |        |  
|Equity shareholders' funds                               |  | 9,821            |   |                |  | 10,572               |   | 7,836  |   | (18,408 | ) | 9,821  |  
|                                                         |  |                  |   |                 |  |                      |   |        |   |         |   |        |  
|Total liabilities and shareholders' equity               |  | 12,902           |   | 162             |  | 20,765               |   | 30,407 |   | (28,889 | ) | 35,347 |  
|                                                         |  |                  |   |                 |  |                      |   |        |   |         |   |        |  

142

---



Cash flow statements

|                                                                |  | Parent
Guarantor |   | Issuer of
notes |  | Subsidiary
Guarantor |   |        |   |        |   |        |  
|--------------------------------------------------------------- |  | ---------------- | - | --------------- |  | -------------------- | - | ------ | - | ------ | - | ------ | -
|
|
|UK GAAP cash flow statements
Twelve months to 31 March 2005     |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|Cash flow from operating activities                             |  |                 |   |                |  | 1,153                |   | 1,756  |   |       |   | 2,909  |  
|Dividends from subsidiary undertakings and joint ventures       |  | 1,139            |   |                |  | 2,883                |   | 505    |   | (4,522 | ) | 5      |  
|Returns on investments and servicing of finance                 |  | (31              | ) |                |  | (372                 | ) | (355   | ) |       |   | (758   | )
|Taxation                                                        |  |                 |   |                |  | (95                  | ) | (55    | ) |       |   | (150   | )
|Capital expenditure and financial investment                    |  |                 |   |                |  | (474                 | ) | (788   | ) |       |   | (1,262 | )
|Acquisitions and disposals                                      |  | (273             | ) |                |  | (4,490               | ) | (1,130 | ) | 4,763  |   | (1,130 | )
|Equity dividends paid                                           |  | (628             | ) |                |  | (500                 | ) | (4,022 | ) | 4,522  |   | (628   | )
|                                                                |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|Net cash inflow/(outflow) before management of liquid resources |  | 207              |   |                |  | (1,895               | ) | (4,089 | ) | 4,763  |   | (1,014 | )
|Management of liquid resources                                  |  | (112             | ) |                |  | 62                   |   | (4     | ) |       |   | (54    | )
|Financing                                                       |  | (95              | ) |                |  | 1,836                |   | 4,103  |   | (4,763 | ) | 1,081  |  
|                                                                |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|Increase in cash in the year                                    |  |                 |   |                |  | 3                    |   | 10     |   |       |   | 13     |  
|                                                                |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|Twelve months to 31 March 2004                                  |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|Cash flow from operating activities                             |  | (7               | ) |                |  | 1,397                |   | 1,420  |   |       |   | 2,810  |  
|Dividends from subsidiary undertakings and joint ventures       |  | 352              |   |                |  | 2                    |   | 78     |   | (424   | ) | 8      |  
|Returns on investments and servicing of finance                 |  | 8                |   |                |  | (243                 | ) | (457   | ) |       |   | (692   | )
|Taxation                                                        |  |                 |   |                |  | (61                  | ) | 43     |   |       |   | (18    | )
|Capital expenditure and financial investment                    |  |                 |   |                |  | (497                 | ) | (757   | ) |       |   | (1,254 | )
|Acquisitions and disposals                                      |  |                 |   |                |  |                     |   | 7      |   |       |   | 7      |  
|Equity dividends paid                                           |  | (560             | ) |                |  | (70                  | ) | (354   | ) | 424    |   | (560   | )
|                                                                |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|Net cash (outflow)/inflow before management of liquid resources |  | (207             | ) |                |  | 528                  |   | (20    | ) |       |   | 301    |  
|Management of liquid resources                                  |  | 117              |   |                |  | (56                  | ) | (109   | ) |       |   | (48    | )
|Financing                                                       |  | 90               |   |                |  | (465                 | ) | 135    |   |       |   | (240   | )
|                                                                |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|Increase in cash in the year                                    |  |                 |   |                |  | 7                    |   | 6      |   |       |   | 13     |  
|                                                                |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|Twelve months to 31 March 2003                                  |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|Cash flow from operating activities                             |  | (53              | ) |                |  | 1,291                |   | 1,588  |   |       |   | 2,826  |  
|Dividends from subsidiary undertakings and joint ventures       |  | 1,301            |   |                |  | 28                   |   | 348    |   | (1,666 | ) | 11     |  
|Returns on investments and servicing of finance                 |  | 14               |   |                |  | (335                 | ) | (591   | ) |       |   | (912   | )
|Taxation                                                        |  |                 |   |                |  | (50                  | ) | (62    | ) |       |   | (112   | )
|Capital expenditure and financial investment                    |  |                 |   |                |  | (605                 | ) | (802   | ) |       |   | (1,407 | )
|Acquisitions and disposals                                      |  | (90              | ) |                |  | 860                  |   | 240    |   | (847   | ) | 163    |  
|Equity dividends paid                                           |  | (382             | ) |                |  | (337                 | ) | (2,365 | ) | 2,513  |   | (571   | )
|                                                                |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|Net cash inflow/(outflow) before management of liquid resources |  | 790              |   |                |  | 852                  |   | (1,644 | ) |       |   | (2     | )
|Management of liquid resources                                  |  | (123             | ) |                |  | 2                    |   | (17    | ) |       |   | (138   | )
|Financing                                                       |  | (670             | ) |                |  | (833                 | ) | 1,677  |   |       |   | 174    |  
|                                                                |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|(Decrease)/increase in cash in the year                         |  | (3               | ) |                |  | 21                   |   | 16     |   |       |   | 34     |  
|                                                                |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|US GAAP cash flow statements
Twelve months to 31 March 2005     |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|Net cash provided by operating activities                       |  | 1,108            |   |                |  | 4,043                |   | 1,854  |   | (4,522 | ) | 2,483  |  
|Net cash used in investing activities                           |  | (385             | ) |                |  | (5,376               | ) | (1,927 | ) | 4,763  |   | (2,925 | )
|Net cash (used in)/provided by financing activities             |  | (723             | ) |                |  | 1,336                |   | 68     |   | (241   | ) | 440    |  
|                                                                |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|Net increase/(decrease) in cash and cash equivalents            |  |                 |   |                |  | 3                    |   | (5     | ) |       |   | (2     | )
|                                                                |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|Twelve months to 31 March 2004                                  |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|Net cash provided by operating activities                       |  | 353              |   |                |  | 1,463                |   | 1,106  |   | (422   | ) | 2,500  |  
|Net cash used in investing activities                           |  | 117              |   |                |  | (921                 | ) | (896   | ) |       |   | (1,700 | )
|Net cash (used in)/provided by financing activities             |  | (470             | ) |                |  | (535                 | ) | (245   | ) | 422    |   | (828   | )
|                                                                |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|Net increase/(decrease) in cash and cash equivalents            |  |                 |   |                |  | 7                    |   | (35    | ) |       |   | (28    | )
|                                                                |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|Twelve months to 31 March 2003                                  |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|Net cash provided by operating activities                       |  | 1,262            |   |                |  | 1,060                |   | 979    |   | (1,301 | ) | 2,000  |  
|Net cash used in investing activities                           |  | (90              | ) |                |  | (438                 | ) | (108   | ) |       |   | (636   | )
|Net cash (used in)/provided by financing activities             |  | (1,175           | ) |                |  | (601                 | ) | (487   | ) | 1,301  |   | (962   | )
|                                                                |  |                  |   |                 |  |                      |   |        |   |        |   |        |  
|Net (decrease)/increase in cash and cash equivalents            |  | (3               | ) |                |  | 21                   |   | 384    |   |       |   | 402    |  
|                                                                |  |                  |   |                 |  |                      |   |        |   |        |   |        |  

143

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Glossary of Terms

|Term used in Annual Report                         |  | US equivalent or brief description                                                                                            
|-------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|Accounts                                           |  | Financial statements                                                                                                          
|Acquisition accounting                             |  | Purchase accounting                                                                                                           
|Allotted                                           |  | Issued                                                                                                                        
|Associate                                          |  | Equity investment                                                                                                             
|Borrowings                                         |  | Debt                                                                                                                          
|Called up share capital                            |  | Common stock issued and fully paid                                                                                            
|Capital allowances                                 |  | Tax depreciation allowances                                                                                                   
|Creditors                                          |  | Accounts payable                                                                                                              
|Debtors                                            |  | Accounts receivable                                                                                                           
|Equity shareholders' funds                         |  | Shareholders' equity                                                                                                          
|Finance lease                                      |  | Capital lease                                                                                                                 
|Financial year                                     |  | Fiscal year                                                                                                                   
|Fixed asset investments                            |  | Non-current investments                                                                                                       
|Freehold                                           |  | Ownership with absolute rights in perpetuity                                                                                  
|Freehold land                                      |  | Land owned                                                                                                                    
|Group accounts                                     |  | Consolidated financial statements                                                                                             
|Interest payable                                   |  | Interest expense                                                                                                              
|Interest receivable                                |  | Interest income                                                                                                               
|Joint venture                                      |  | Equity investment                                                                                                             
|Merger accounting                                  |  | Pooling of interests                                                                                                          
|Net asset value                                    |  | Book value                                                                                                                    
|Operating profit                                   |  | Net operating income                                                                                                          
|Pension scheme                                     |  | Pension plan                                                                                                                  
|Profit                                             |  | Income (or earnings)                                                                                                          
|Profit and loss account                            |  | Income statement                                                                                                              
|Profit and loss account reserve                    |  | Retained earnings                                                                                                             
|Profit for the year                                |  | Net income                                                                                                                    
|Provision for doubtful debts                       |  | Allowance for bad and doubtful accounts receivable                                                                            
|Provisions                                         |  | Long-term liabilities other than debt and specific accounts payable                                                           
|Reconciliation of movements in shareholders' funds |  | Statement of changes in stockholders' equity                                                                                  
|Reserves                                           |  | Stockholders' equity other than common stock                                                                                  
|Share capital                                      |  | Ordinary shares, capital stock or common stock issued and fully paid                                                          
|Share premium account                              |  | Additional paid-in capital relating to proceeds of sale of stock in excess of par value or paid-in surplus (not distributable)
|Stocks                                             |  | Inventories                                                                                                                   
|Tangible fixed assets                              |  | Property, plant and equipment                                                                                                 
|Turnover                                           |  | Revenues                                                                                                                      

144

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Definitions

References in the Annual Report and Accounts to the 'Company', the 'Group', 'we', 'our' and 'us' refer to National Grid Transco and its subsidiaries.

American Depositary Shares, or ADSsSecurities of National Grid Transco listed on the New York Stock Exchange, each of which represents the right to receive five ordinary shares.

Corporate CentreCore Group functions operating from the Group's head office.

Crown Castle UKThe Group's UK wireless infrastructure business.

EMFsThe electric and magnetic fields produced by all electrical equipment and appliances.

FASUS Financial Accounting Standard.

FERCUS Federal Energy Regulatory Commission.

FRSUK Financial Reporting Standard.

GAAPGenerally accepted accounting principles.

GWGigawatt, 109 watts.

GWhGigawatt hours.

HSEHealth and Safety Executive.

kVKilovolt, 103 volts.

kWKilowatt, 103 watts.

kWhKilowatt hours.

LTILost Time Injury. A work-related injury that causes a person to be away from work for at least one normal shift after the shift on which the injury occurs, because
the person is unfit to perform his or her duties.

mcmMillion cubic metres.

MergerThe merger of Lattice Group plc and National Grid Group plc which became effective on 21 October 2002.

MWMegawatt, 106 watts.

MWhMegawatt hours.

National Grid TranscoNational Grid Transco plc.

Niagara MohawkNiagara Mohawk Power Corporation.

NTS or National Transmission SystemThe gas national transmission system owned and operated by the Group.

OfcomThe Office of Communications.

OfgemThe Office of Gas and Electricity Markets.

ordinary sharesOrdinary shares of 10 pence each in the capital of National Grid Transco.

SECUS Securities and Exchange Commission.

tonnes CO2 equivalentMeasure of greenhouse gas emissions in relation to the impact of carbon dioxide.

TWTerawatt, 1012 watts.

TWhTerawatt hours.

145

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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 five financial years ended 31
March 2005. It should be read in conjunction with the Group accounts and related notes, together with the Operating and Financial Review. The profit and loss accounts and balance sheets for
2001 to 2004 have been restated for the impact of FRS 20. At 31 March 2002, net income for US GAAP includes the FAS 133 transitional adjustment of £14m.

|Summary profit and loss account                                                              |                                                     | 31 March
2005 |       | 31 March
2004
(restated) |       | 31 March
2003
(restated) |       | 31 March
2002
(restated) |        | 31 March
2001
(restated) |      
|-------------------------------------------------------------------------------------------- | --------------------------------------------------- | ------------- | ----- | ------------------------ | ----- | ------------------------ | ----- | ------------------------ | ------ | ------------------------ | -----
|
|Group turnover                                                                               |                                                     | 8,521         |       | 9,033                    |       | 9,400                    |       | 7,554                    |        | 6,891                    |      
|Operating costs                                                                              |                                                     | (6,676        | )     | (7,203                   | )     | (7,828                   | )     | (6,513                   | )      | (5,184                   | )    
|                                                                                             |                                                     |               |       |                          |       |                          |       |                          |        |                          |      
|Operating profit of Group undertakings                                                       |                                                     | 1,845         |       | 1,830                    |       | 1,572                    |       | 1,041                    |        | 1,707                    |      
|Share of joint ventures' and associate's operating profit/(loss)                             |                                                     | 7             |       | 7                        |       | 124                      |       | (701                     | )      | (105                     | )    
|                                                                                             |                                                     |               |       |                          |       |                          |       |                          |        |                          |      
|Operating profit                                                                             |                                                     |               |       |                          |       |                          |       |                          |        |                          |      
|                                                                                             | Before exceptional items and goodwill amortisation |               | 2,212 |                          | 2,213 |                          | 2,148 |                          | 1,764  |                          | 1,775
|                                                                                             | Exceptional items                                  |               | (251  | )                        | (277  | )                        | (350  | )                        | (1,327 | )                        | (88  
|                                                                                             | Goodwill amortisation                              |               | (109  | )                        | (99   | )                        | (102  | )                        | (97    | )                        | (85  
|                                                                                             |                                                     | 1,852         |       | 1,837                    |       | 1,696                    |       | 340                      |        | 1,602                    |      
|Non-operating exceptional items                                                              |                                                     | 83            |       | 322                      |       | (99                      | )     | 156                      |        | 306                      |      
|Net interest                                                                                 |                                                     |               |       |                          |       |                          |       |                          |        |                          |      
|                                                                                             | Excluding exceptional items                        |               | (783  | )                        | (822  | )                        | (939  | )                        | (657   | )                        | (635 
|                                                                                             | Exceptional items                                  |               |      |                          |      |                          | (31   | )                        | (142   | )                        |     
|                                                                                             |                                                     |               |       |                          |       |                          |       |                          |        |                          |      
|Profit/(loss) on ordinary activities before taxation                                         |                                                     | 1,152         |       | 1,337                    |       | 627                      |       | (303                     | )      | 1,273                    |      
|Tax on profit on ordinary activitiesexcluding exceptional items                             |                                                     | (324          | )     | (350                     | )     | (373                     | )     | (251                     | )      | (390                     | )    
|Tax on profit on ordinary activitiesexceptional items                                       |                                                     | 79            |       | 89                       |       | 128                      |       | 166                      |        | 243                      |      
|                                                                                             |                                                     |               |       |                          |       |                          |       |                          |        |                          |      
|Profit/(loss) on ordinary activities after taxation                                          |                                                     | 907           |       | 1,076                    |       | 382                      |       | (388                     | )      | 1,126                    |      
|Minority interests including exceptional items                                               |                                                     | 1             |       | (2                       | )     | (31                      | )     | 48                       |        | (7                       | )    
|                                                                                             |                                                     |               |       |                          |       |                          |       |                          |        |                          |      
|Profit/(loss) for the year                                                                   |                                                     | 908           |       | 1,074                    |       | 351                      |       | (340                     | )      | 1,119                    |      
|                                                                                             |                                                     |               |       |                          |       |                          |       |                          |        |                          |      
|Summary statement of net assets                                                              |                                                     |               |       |                          |       |                          |       |                          |        |                          |      
|Fixed assets                                                                                 |                                                     | 19,897        |       | 18,394                   |       | 18,954                   |       | 19,582                   |        | 15,670                   |      
|                                                                                             |                                                     |               |       |                          |       |                          |       |                          |        |                          |      
|Current assets                                                                               |                                                     | 4,814         |       | 5,003                    |       | 5,950                    |       | 6,568                    |        | 2,960                    |      
|Creditors: amounts falling due within one year                                               |                                                     | (6,148        | )     | (4,513                   | )     | (5,046                   | )     | (4,888                   | )      | (4,034                   | )    
|                                                                                             |                                                     |               |       |                          |       |                          |       |                          |        |                          |      
|Net current (liabilities)/assets                                                             |                                                     | (1,334        | )     | 490                      |       | 904                      |       | 1,680                    |        | (1,074                   | )    
|                                                                                             |                                                     |               |       |                          |       |                          |       |                          |        |                          |      
|Total assets less current liabilities                                                        |                                                     | 18,563        |       | 18,884                   |       | 19,858                   |       | 21,262                   |        | 14,596                   |      
|Creditors: amounts falling due after more than one year                                      |                                                     | (12,800       | )     | (13,464                  | )     | (14,255                  | )     | (14,868                  | )      | (9,793                   | )    
|Provisions for liabilities and charges                                                       |                                                     | (4,372        | )     | (4,149                   | )     | (4,398                   | )     | (4,655                   | )      | (3,426                   | )    
|                                                                                             |                                                     |               |       |                          |       |                          |       |                          |        |                          |      
|Net assets                                                                                   |                                                     | 1,391         |       | 1,271                    |       | 1,205                    |       | 1,739                    |        | 1,377                    |      
|                                                                                             |                                                     |               |       |                          |       |                          |       |                          |        |                          |      
|Summary cash flow statement                                                                  |                                                     |               |       |                          |       |                          |       |                          |        |                          |      
|Net cash inflow from operating activities before exceptional items                           |                                                     | 3,103         |       | 3,058                    |       | 3,154                    |       | 2,394                    |        | 2,482                    |      
|Expenditure relating to exceptional items                                                    |                                                     | (194          | )     | (248                     | )     | (328                     | )     | (103                     | )      | (129                     | )    
|                                                                                             |                                                     |               |       |                          |       |                          |       |                          |        |                          |      
|Net cash inflow from operating activities                                                    |                                                     | 2,909         |       | 2,810                    |       | 2,826                    |       | 2,291                    |        | 2,353                    |      
|Dividends from joint ventures                                                                |                                                     | 5             |       | 8                        |       | 11                       |       | 13                       |        | 20                       |      
|Net cash outflow for returns on investments and servicing of finance                         |                                                     | (758          | )     | (692                     | )     | (912                     | )     | (705                     | )      | (691                     | )    
|Net cash outflow for taxation                                                                |                                                     | (150          | )     | (18                      | )     | (112                     | )     | (212                     | )      | (350                     | )    
|Net cash outflow for capital expenditure and financial investment                            |                                                     | (1,262        | )     | (1,254                   | )     | (1,407                   | )     | (1,483                   | )      | (1,179                   | )    
|Net cash (outflow)/inflow for acquisitions and disposals                                     |                                                     | (1,130        | )     | 7                        |       | 163                      |       | (969                     | )      | (587                     | )    
|Equity dividends paid                                                                        |                                                     | (628          | )     | (560                     | )     | (571                     | )     | (478                     | )      | (336                     | )    
|                                                                                             |                                                     |               |       |                          |       |                          |       |                          |        |                          |      
|Net cash (outflow)/inflow before the management of liquid resources and financing activities |                                                     | (1,014        | )     | 301                      |       | (2                       | )     | (1,543                   | )      | (770                     | )    
|Net cash (outflow)/inflow for the management of liquid resources                             |                                                     | (54           | )     | (48                      | )     | (138                     | )     | 347                      |        | 696                      |      
|                                                                                             |                                                     |               |       |                          |       |                          |       |                          |        |                          |      
|Net cash (outflow)/inflow before financing activities                                        |                                                     | (1,068        | )     | 253                      |       | (140                     | )     | (1,196                   | )      | (74                      | )    
|Net cash inflow/(outflow) from financing activities                                          |                                                     | 1,081         |       | (240                     | )     | 174                      |       | 1,218                    |        | 59                       |      
|                                                                                             |                                                     |               |       |                          |       |                          |       |                          |        |                          |      
|Net increase/(decrease) in cash in the year                                                  |                                                     | 13            |       | 13                       |       | 34                       |       | 22                       |        | (15                      | )    
|                                                                                             |                                                     |               |       |                          |       |                          |       |                          |        |                          |      

|Amounts in accordance with US GAAP            |          | 31 March
2005 |       | 31 March
2004 |       | 31 March
2003 |       | 31 March
2002 |       | 31 March
2001 |      
|--------------------------------------------- | -------- | ------------- | ----- | ------------- | ----- | ------------- | ----- | ------------- | ----- | ------------- | -----
|
|Group turnover                                |          | 8,534         |       | 8,866         |       | 7,401         |       | 4,004         |       | 3,583         |      
|Net income/(loss)                             |          | 1,304         |       | 998           |       | 751           |       | (167          | )     | 810           |      
|Earnings/(loss) per ADS                       |          |               |       |               |       |               |       |               |       |               |      
|                                              | Basic   |               | 211.5 | p             | 162.5 | p             | 159.5 | p             | (54.5 | )p            | 274.5
|                                              | Diluted |               | 210.5 | p             | 162.0 | p             | 156.5 | p             | (44.0 | )p            | 260.0
|Total assets                                  |          | 37,274        |       | 35,347        |       | 36,947        |       | 17,727        |       | 10,392        |      
|Net assets employed/total shareholders' funds |          | 10,629        |       | 9,875         |       | 9,515         |       | 3,862         |       | 2,962         |      
|Equity shareholders' funds                    |          | 10,591        |       | 9,821         |       | 9,426         |       | 3,759         |       | 2,920         |      

146

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Shareholder Information

Annual Report and Accounts

National Grid Transco shareholders will automatically be sent an Annual Review each year, unless they have opted to receive the Annual Report and Accounts. If you
wish to receive the Annual Report and Accounts, a larger document containing more detailed information, or wish to stop receiving the larger document and instead receive the shorter Annual Review, you
should contact Capita Registrars (details on page 148).

For
the assistance of visually impaired shareholders, audio tape, braille and large print versions of the Annual Review are available. If you wish to receive any of these documents
please contact Capita Registrars (details on page 148).

Electronic communication

As an alternative to receiving the Annual Review or Annual Report and Accounts through the post, you can choose to receive an email notifying you of their
availability and retrieve them electronically.

For
more information and to register please visit www.ngtgroup.com/shareholders.

For
each shareholder choosing to receive annual documents electronically, National Grid Transco sponsors Climate Saver Projects. These projects are managed by Future Forests Ltd
as part of its CarbonNeutral® programme and aim to reduce CO2 emissions or absorb CO2. For more information on Climate Saver Projects please visit the Group website www.ngtgroup.com.

Share dealing

A low-cost share dealing service is available from Capita Registrars allowing you to buy or sell National Grid Transco shares by telephone or
on-line. These methods allow you to know the price of the trade at the time of dealing.

For
more information call 0870 458 4577 (8am - 4.30pm) or visit www.capitadeal.com.

A
postal dealing service is also available, for a dealing form please call 0870 162 3116.

These
details are provided for information only and any action you take is at your own risk. If you have any doubt as to the action you should take, you are recommended to seek your own
financial advice from your stockbroker, bank manager, accountant or other financial adviser authorised pursuant to the Financial Services and Markets Act 2000.

Individual Savings Accounts

Individual Savings Accounts (ISAs) for National Grid Transco are available. Options include:



National
Grid Transco cannot advise you on what action you should take.

Further
information may be obtained from the Account Manager:



ShareGift

If you hold only a few shares and feel that it would be uneconomical or simply not worthwhile to sell them then you could consider donating your shares to charity
via ShareGift.

ShareGift,
a registered charity no. 1052686, specialises in accepting donations of small numbers of shares. Since its launch in 1996, ShareGift has given millions of pounds to
hundreds of different UK charities. Without ShareGift, this money would remain locked up in unwanted shares and would never otherwise reach charities.

To
find out more visit www.sharegift.org or call 020 7337 0501. Alternatively contact Capita Registrars (details on page 148) who can help arrange the transfer of your shares.

Shareholder networking

National Grid Transco continues its innovative programme allowing shareholders to learn more about the business by visiting operational sites and meeting
Directors and staff. These visits allow us to explain the business to you in person. This year's visit, planned for 5 and 6 December 2005, will include the National Grid Control Centre
(electricity transmission) and the gas holder site at Southall.

If
you would like to take part in this visit, please write to: Shareholder Networking Organiser, NGT House, Warwick Technology Park, Gallows Hill, Warwick CV34 6DA.

Participants
will be selected from those applying, with priority given to those who have not previously attended.

Website

Information about the Group is also available on our website at www.ngtgroup.com. Share price information, previous Annual Report and Accounts and other
shareholder information can be found in the Investors section of the site.

Information
relating to capital gains tax base prices for the Group and its predecessors can also be found on the website.

Analysis of shareholdings

The following analysis of shareholders and shareholdings is at 18 May 2005:

|Size of shareholding |  | Number
of holders |  | % of
holders |  | Number
of shares |  | % of
shares
|-------------------- |  | ----------------- |  | ------------ |  | ---------------- |  | -----------
|1-50                 |  | 177,238           |  | 12.81        |  | 4,777,458        |  | 0.15       
|51-100               |  | 468,360           |  | 33.84        |  | 33,316,101       |  | 1.08       
|101-500              |  | 622,155           |  | 44.95        |  | 129,409,631      |  | 4.19       
|501-1,000            |  | 64,072            |  | 4.63         |  | 44,386,978       |  | 1.44       
|1,001-10,000         |  | 49,578            |  | 3.58         |  | 114,502,857      |  | 3.70       
|10,001-50,000        |  | 1,520             |  | 0.11         |  | 29,987,256       |  | 0.97       
|50,001-100,000       |  | 238               |  | 0.02         |  | 17,284,922       |  | 0.56       
|100,001-500,000      |  | 460               |  | 0.03         |  | 112,344,712      |  | 3.64       
|500,001-1,000,000    |  | 147               |  | 0.01         |  | 103,065,200      |  | 3.33       
|1,000,001 and above  |  | 308               |  | 0.02         |  | 2,501,173,675    |  | 80.94      
|                     |  |                   |  |              |  |                  |  |            
|Total                |  | 1,384,076         |  | 100          |  | 3,090,248,790    |  | 100        
|                     |  |                   |  |              |  |                  |  |            

147

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