The National Grid Group plc Annual Review 1998 99 2 6 12 14 16 18 20 27 32 Joint statement Electricity networks – Electricity Electricity Telecoms Environment The Board of Directors Summary Shareholder by the Chairman UK transmission networks – networks – networks and 22 financial statement information and the Group USA international community Corporate governance 30 Chief Executive 24 Five-year financial 5 Directors’ remuneration summary Our activities 25 Financial review

591.41 600 1 Figures for 1997 have Profit before tax (£m) 2 465.5 445.4 not been restated to 450 reflect the impact of FRS 12, a new £445.4m 300 accounting standard 150 introduced in 1998/99 2 Figures for 1998 have Excluding exceptional items 0 been restated to reflect 97 98 99 FRS 12

24.31 25 22.2 Basic earnings per share (p) 19.72 20 22.2p 15 10

5

Basic earnings per share exclude exceptional items 0 97 98 99

15 13.07 Ordinary dividends 12.07 12 11.13 per share (p) 9 6

13.07p 3

A special dividend of 44.7p per share was paid during 1998 0 97 98 99

Capital expenditure (£m) 450 319.7 309.6 Transmission 300 279.8 £309.6m Energis-related 150 Other

0 97 98 99

A D F B Cover illustration shows the creation of C A artificial lightning produced on an impulse B E C generator at our research and development centre – full picture shown below D

Where our income went*... Operating costs are...

A 62% Operating costs A 14% Depreciation B 9% Interest B 12% Staff costs C 8% Tax C 12% Purchases of electricity D 21% Profit after tax D 27% Transport uplift costs E 11% Rates *excluding exceptional items F 24% Other operating charges Highlights of the year

The year ended 31 March 1999 was an extremely active one – and a good one in which we made strides in creating further value for shareholders

Our transmission system in the UK delivered record system performance

Availability and reliability of our system have never been better, breaking our own records. Customers benefit because the risk of disturbance to supplies is minimised, while the cheapest available generation can be selected, irrespective of location, thus reducing the overall cost of electricity.

We are creating a platform for growth in the USA

In December, we began the process to acquire New England Electric System (NEES), an electricity company based in Massachusetts, USA, for $3.2 billion (approximately £2.0 billion). Bringing together our skills with those of NEES will provide us with an excellent platform for growth in the north-eastern USA on which to build a substantial transmission and distribution business.

We locked in value created by the huge success of Energis

In January, we sold one-third of our holding in Energis, realising £1.2 billion of the value that has been created by Energis since we conceived it in 1992 and created its network. Our remaining 48 per cent economic interest ensures that our shareholders continue to participate in its future progress.

We are taking our telecoms network skills into Brazil

In January, our consortium with Sprint and France Telecom won a licence to operate a new national and international telecommunications service throughout Brazil.

We created shareholder value

We provided a total shareholder return of over 31 per cent between 31 March 1998 and 31 March 1999. The share price rose 98.75 pence to 451.75 pence and during the year we paid dividends of 12.49 pence per share.

Total shareholder returns 75 70.1% for the year, comprising ordinary dividends 60 and share price appreciation. 45 31.5% 30

15 13.0%

0 97 98 99 1 Joint statement by the Chairman and the Group Chief Executive

This has been an exceptional year. At home, our transmission system performed better than ever and the value of our Energis investment rose substantially. Overseas, we took two major initiatives, in the USA and Brazil, that will enable us to build substantial value for shareholders from outside our UK transmission business.

Group operating performance Total operating profit rose £42.0 million to £583.3 million. We made an exceptional profit of £712.7 million after tax on the partial sale of Energis and incurred an exceptional charge of £36.3 million after tax relating to the close-out of some interest rate swaps, which will reduce our interest charges going forward. Excluding exceptional items, profit before tax was £445.4 million (1998: £465.5 million) and basic earnings per share rose 12.7 per cent to 22.2 pence. The weighted average number of shares in issue during the year was down 13 per cent following the share consolidation in February 1998. Year 2000 We have given the Year 2000 issue the highest UK transmission priority and all systems critical to the secure We broke all previous records for the availability and reliability of the operation and control of the transmission transmission system. It was the first full year we operated the system from system are now ready for the millennium date change. Monitoring of Year 2000 a single control centre; ours is now the world’s most complex system to be preparations in the electricity industry as a managed in this way. This operational performance should be seen against whole is being carried out by independent the background of a further reduction in controllable costs by 4 per cent in assessors on behalf of OFFER. OFFER has real terms. Following the 14 per cent real reduction last year, this keeps us reported that the electricity industry’s on track to cut controllable costs by an average of at least 6 per cent real preparations for the Year 2000 are well per annum over the four years of the current price control period. advanced and that, in its view, the date change will pose no threat to electricity supplies. Industry reviews We provide an up-to-date report on our Following the Government’s review of the current arrangements in the compliance on our website. electricity market, OFFER’s proposals for revised trading arrangements were published in July 1998 and endorsed in the Government’s White Paper “Conclusions of the Review of Energy Sources for Power Generation” in October 1998. We are making a significant contribution to the programme to design and develop the new market. A key objective is to ensure that system security can be maintained under the new market arrangements.

International electricity activities Our joint venture in Argentina has benefited from the skills which, as Registered Operator, we were able to bring to bear to achieve impressive improvements in its operational record. These and other improvements have placed Transener’s technical performance on a par with that of leading transmission companies around the world.

The first full year of our operation of the electricity network in the Zambian Copperbelt was successful.

Proposed acquisition of NEES and EUA We have made a significant strategic step this year with our proposed acquisition of New England Electric System (NEES). NEES is an efficient, focused transmission and distribution business with a strong operational track record, which will benefit further from our core skills. It also provides an excellent platform

David Jefferies, Chairman (right) and 2 David Jones, Group Chief Executive (left) for growth in the USA, where the rapid restructuring of the electricity market is giving rise to opportunities to build a substantial transmission and distribution business. Indeed, with our support, NEES is in the process of acquiring Eastern Utility Associates (EUA), an electricity utility whose service territories are interwoven with its own.

National Grid, NEES and EUA shareholders have overwhelmingly supported both these acquisitions and we are making good progress in getting the outstanding regulatory approvals. Both acquisitions will be immediately cashflow enhancing and earnings enhancing before amortisation of goodwill.

US listing We intend to list our shares on a US market later this year. This will broaden our appeal to US investors and provide a currency which may be useful in transactions in the future.

Energis Our role in the building of Energis has been quite specific and has been

central to creating the business concept and sponsoring it through the David Jones thanks David Jefferies for his early stages of operation. huge contribution David Jefferies has been Chairman of National While these skills can be used in other start-up telecoms opportunities, they Grid since 1990, when the Company was are no longer essential to Energis. We therefore consider it non-core and formed as part of the privatisation of the UK realised the value of one-third of our holding, which was £1.2 billion. The electricity sector. His bold and far-sighted reduction of our economic interest to just under 50 per cent enabled Energis leadership has been a key ingredient in our to qualify for the London Stock Exchange FTSE 100, while our remaining success – from the performance of the 48 per cent interest ensures that our shareholders continue to share in the transmission system during a decade of major future progress of Energis. change in the industry, through the conception and development of Energis, to Brazil telecoms the growth of the Group internationally. Many Our consortium with Sprint and France Telecom won a licence to operate of you have met him at our Annual General national and international telecommunications services throughout Brazil. Meetings or on the Networking programmes This enterprise will use our network design and development skills while the and will know how much we will miss him. We thank him for his huge contribution. products, marketing and operational skills will be provided by our partners. And David Jefferies welcomes James Ross National Air Traffic Services I am delighted to welcome James Ross to the Our skills in operating the vital, safety-focused and complex transmission Board. He has a wealth of experience to bring system in real time are relevant to air traffic control and we have reaffirmed to the Group. He brings a combination of our interest in National Air Traffic Services and the opportunity it could knowledge of the energy and telecoms sectors provide to create value from these skills. We have responded to the and experience in overseas markets which is Government’s consultation paper on the Public Private Partnership. ideal at this stage in our development as we expand our activities around the world. The Board David Jefferies, Chairman, is to retire at the Annual General Meeting in July when James Ross, who was appointed Deputy Chairman on 1 March 1999, will take over as Chairman. Malcolm Williamson will also be leaving the Board at the Annual General Meeting, following his appointment as President and Chief Executive Officer of Visa International. Professor Paul Joskow, who is currently a Non-executive Director of NEES, will join the Board on completion of the NEES acquisition.

We shed light on National Grid We ran an advertising campaign during the year to highlight what National Grid does and the innovative and intelligent way in which our people do it. It focused on the complexities of keeping the lights on, the reduction in the cost of electricity, the creation of Energis and our international success based on the experience gained in the competitive electricity market in the UK. The slogan “British Brain Power” drew attention to the fact that our transmission system is a great national asset. 3 A London taxi, showing one of our advertisements Joint statement continued

Our staff This year put great demands on our staff. Thanks to their energy and commitment, our transmission system has broken all performance records in the UK and we have taken the strategic steps to provide a platform for growth. To support the role they play in the development and success of the Group, we have vastly increased the opportunities for training and learning to Environment Our commitment to effective and responsible ensure that we are all ready to face the challenges and opportunities as we environmental management is at the heart grow and become more international. of everything we do. We are well advanced Pensions towards implementing the ISO 14001 The triennial valuation of our pension scheme has shown a surplus of Environmental Management System Standard by the end of the year. You can find our £95 million at 31 March 1998. With the agreement of the Trustees, £52 million annual environmental performance report of the surplus is being allocated to improve benefits to pensioners and to on our website. fund a halving of contributions for employees and the Company for three years, starting in April 1999.

National Grid continues to defend its position in long-running litigation brought by two pensioners who argue that, despite the surplus that then existed, the Group should be forced to pay additional contributions into the Scheme to fund the early payment of pensions granted to employees taking Networking We were again delighted to host a early retirement between December 1992 and February 1995. Our approach two-day visit by 30 private shareholders at some to this issue has consistently been supported by the trades unions of our sites where they met members of staff. representing the majority of our employees, and by Trustees elected by This was the third such visit. We find the visits employees and pensioners. This is a complex legal issue which is to be useful and enlightening because they provide an considered by the House of Lords. opportunity for shareholders to raise the issues which are important to them. We have Outlook continued this dialogue in the Annual Review, A priority in the forthcoming year is to obtain the regulatory approvals for which is again in a question-and-answer format. the NEES and EUA acquisitions, which we expect within six to eight months. If you would like to participate in the next We will integrate the companies swiftly and move to take advantage of the Networking programme, you will find details on consolidation opportunities provided by the changing regulatory environment the inside back cover. and the broader skill set which we have in combination with NEES.

The third regulatory review of our transmission price control will start in the autumn. It will be the first such review carried out by the new regulator, who has indicated that he wishes to explore new approaches to price regulation. As we work with him, our aim will be to maintain the network’s flexibility and high standards of security and to achieve greater stability for shareholders.

Our investment in Energis has created significant value for our shareholders and we are still in a position to benefit from its progress. Similarly, we expect our telecoms investment in Brazil to deliver value in the future. Elsewhere, we are continuing to explore opportunities in countries where telecoms market liberalisation and customer needs suit our skills.

Our success in UK transmission and in creating Energis has provided us with the core skills and reputation to build electricity and telecoms network businesses around the world which can create value for shareholders.

Ordinary dividends The Directors are recommending a final ordinary dividend of 7.82 pence per share, which brings the total ordinary dividend for the year to 13.07 pence net per share, an increase of 8.3 per cent (5.0 per cent real). This is once again at the top end of our target range of delivering real growth in dividend per share of 4 to 5 per cent. If approved, the final dividend will be paid on 16 August 1999 to shareholders on the Company’s share register on 7 June 1999.

David Jefferies CBE, FEng David Jones Chairman Group Chief Executive

24 May 1999 Our activities

We create value for shareholders by building on our skills in electricity and telecommunications networks.

Electricity networks Telecoms networks

We are the world’s largest independent transmission company We recognised the potential for building a national telecoms and have nearly a decade’s experience of facilitating competition network in England and Wales for Energis and gained telecoms in electricity markets. start-up skills which we are now using in Brazil.

England and Wales England and Wales We transport power – we own, operate We brought key skills to the building of and maintain the 7,000 km high-voltage Energis and have been central to creating network connecting generators with the business concept and sponsoring it distribution networks and major customers, through the early stages of operation. together with the interconnectors with These skills are less relevant to Energis’ Scotland and France. We balance supply future development, making it non-core for and demand – second by second, we call us. We have reduced our economic interest on generators to provide power that to just under 50 per cent. matches demand, keeping frequency and voltage stable. We provide market services Brazil to the wholesale electricity market, the Pool. We have 50 per cent of a consortium which is set to become the second national and Argentina international voice and data operator We are Registered Operator and joint in Brazil. Our role is to develop the network owner of the Transener system, at nearly linking Brazil’s major cities. 13,000 km Argentina’s main transmission system – its performance is now on a par with that of leading transmission companies around the world.

Brazil We have an agreement with Electrobras, Brazil’s largest electricity utility, to pursue future transmission opportunities.

Zambia We are joint owner and operator of Copperbelt Energy Corporation which supplies electricity over its high-voltage network to the mines of the Zambian Copperbelt, trading the electricity it transmits on long-term contracts in US dollars to meet demand.

India We have been selected as a joint venture partner with the Karnataka Electricity Board for a 30-year concession to build, own, operate and maintain a 600 km transmission line.

USA Subject to regulatory approvals, we will acquire NEES (New England Electric System), a transmission and distribution business in New England, USA, serving 1.3 million customers. This business will benefit from our skills and experience of competitive electricity markets and will bring into the Group its own expertise in distribution.

5 Electricity networks – UK transmission

System performance How do these record levels benefit customers and National Grid? Availability and reliability are two important measures of how well our transmission system performs. We achieved If the availability of the network is high, there is less risk that 99.34 per cent availability of the transmission system over faults will cause power cuts. Electricity also costs less – the the winter peak period, when demand for electricity is higher the availability of the network, the more competitively greatest. the generation market can operate and therefore the more

Winter peak system availability (%) cheaply electricity can be produced.

100 With a large proportion of the network available, we can select 99.20 98.90 99 98.71 98.77 98.30 the cheapest available generation to meet demand and transfer 98 power to where it is needed, helping to keep operating costs 97 down and increasing profits from performance-based 96 incentive schemes. 95 94 95 96 97 98 What can you do to influence availability and Our reliability, measured by unsupplied energy, was at its best reliability? level ever – only one unit in every eight million units of We ensure that transmission equipment is available as much electricity demand was not met because of faults or incidents as possible and make full use of it. For example, we monitor on our network. the condition of equipment so that we can predict when a problem is likely to occur, and prevent it from happening. We also take advantage of the weather. Overhead lines get hot when electricity is passed down them, which limits their capacity, so on a cool, windy day when cooling occurs naturally, we increase power flows.

I get my electricity from the local regional electricity company, so why does the availability of National Grid’s network affect me?

We perform a vital service throughout England and Wales, delivering the power from the power stations to the regional electricity companies reliably and economically and ensuring second-by-second that there is sufficient generation to meet demand.

Keeping the lights on ... record performance We broke availability and reliability records this year, even though demands on our network 6 increased and total energy transmitted rose. Year 2000

Veronica Frawley (left), Year 2000 Compliance Manager, responds to questions on the millennium.

What about the Year 2000 date change? Can you guarantee this level of availability and reliability over the millennium?

After three years of planning, testing and modification, we are confident that all systems critical for keeping the lights on are now “millennium ready”. There are many links in the electricity supply chain and we alone cannot guarantee supply, so we have been working with the other companies within the electricity industry and with other utilities. We have given the issue the highest priority and have undertaken all the necessary work to prepare for the millennium.

Our website provides an up-to-date report on our compliance and details our involvement with other utilities and Government departments.

“We have developed a rating method for our overhead transmission lines using solar powered equipment which monitors wind, temperature and solar radiation, giving information which lets us optimise power flows through the line. When we applied this method during a recent incident on the system, we saved approximately £400,000 because we increased power flows in such a way that we could take advantage of the cheapest power stations.” Mike Pyke, Research & Development Leatherhead

7 Electricity networks – UK transmission continued

Our performance records are even better when seen in the context of reduced maintenance on the system. We avoid unnecessary maintenance and adopt innovative techniques to improve availability. Strengthening the system economically

below Dissolved Gas Analysis (DGA) is This technique not only avoids using a technique for monitoring the invasive methods, but it is also condition of oil-filled equipment, cheaper, and keeps the plant in such as transformers. We draw on service. We’ve tested approximately laboratory expertise and an extensive 17,000 items of plant this year and database to identify patterns which saved more than £2 million through provide vital indications of a a combination of analytical transformer’s condition and early laboratory techniques which warning of potential problems. include DGA.

Graham Moss, 8 Research & Development, Leatherhead We upgrade parts of the network to ensure that it can operate Secondly, cables take longer to repair and, if used widely, reliably and securely, coping with changes in the pattern of would involve greater risk to the security of electricity generation and demand and increasing flows of power. supplies. This year, we invested just under £300 million in the network, Thirdly, the need to excavate a strip of land up to the width of strengthening it and replacing old equipment to ensure that a dual carriageway for laying underground cable damages or it will deliver to the same high standards in the future. destroys habitats and there is also a small risk of oil leaking How can you avoid building more pylons? from the insulation of underground cables if these are damaged.

By getting as much as possible out of the existing network. Further details on the impact of underground cables and We use better and faster software to analyse real-time data overhead lines can be found in our publication ‘Overhead which enables us to operate equipment to safe limits all the or Underground?’ – also held on our website. time, depending on the conditions prevailing at that moment. We know we can push our assets hard because, through Interconnectors monitoring and collecting information, we know much more We have two large and successful interconnectors linking us about their condition and what circumstances are likely to with the transmission systems in Scotland and France. We are cause problems. building an interconnector to the Isle of Man and studying the So why do you need the second Yorkshire line? feasibility of another to Norway.

In order to bring the network in the north-east of England up Don’t we have sufficient generation in this country to to the security standards required by our transmission licence, meet our demand – why do we need interconnectors? which in this case requires the construction of a second line. We do have sufficient generation, but by linking to other And there will be other benefits – the new line will enable us to countries we can take advantage of their different demand dismantle about 30 km of existing transmission line which runs patterns and prices which helps to keep down the cost of within about 500 metres of some 5,000 homes. electricity to customers. Why can’t you underground it? How much scope is there for more interconnectors? In fact, we will be undergrounding about 10 per cent of it, We have several projects at different stages. The most but there are very strong reasons for keeping underground advanced is the Isle of Man interconnector, which is planned cables to the minimum. First, cables cost between 15 and 25 to open during 2000. We are making good progress on the times more than overhead lines, and so undergrounding even Norwegian feasibility study but commissioning is some a part of our national network would increase electricity prices. six years off. We are also investigating the technical and commercial feasibility of links to Ireland and Holland.

The ability of the transmission Research and development system to meet the transport also plays an important role needs of the electricity market is in identifying how enhanced Colin Ray reviewed regularly to ensure performance or increased Commercial and ‘‘ power needs are met and quality capacity can be achieved from System Strategy levels maintained. Such a review existing assets. In this way, the begins with the examination of ability of the system can be the performance and capability expanded to meet the needs of of existing assets to ensure they the market. Ultimately, however, meet required operating new transmission capability specifications. Research and may be needed, involving the development work helps us installation of new assets at existing understand how assets age and sites or the construction of new anticipate the work required to transmission lines. maintain performance. ’’9 Electricity networks – UK transmission continued

Cost cutting

The transmission price control set by the regulator is steadily reducing our allowable income from transmission charges. The main way in which we can limit the impact of the price control is to cut costs. Our target for the current price control period is to reduce controllable costs by an average of at least 6 per cent per year in real terms (taking inflation into account). We achieved 4 per cent real during the year, on the back of 14 per cent real in the previous year.

One of our biggest savings in costs came from the creation of Mark Fairbairn a single complex out of five for the control of the transmission Operations Manager, National Control Centre system. We completed this major project, which involved Electricity cannot be stored demand, making allowances for closing our regional control centres and transferring all of the – it has to be produced and breakdowns of power stations software associated with controlling the transmission system, transported as it is needed. Our and our own maintenance work on budget and ahead of time. ‘‘ job at the system control centre on the network. We have created is to forecast demand and issue computer systems to monitor the instructions to power stations to network and balance generation 1993 1999 generate the electricity needed and demand, so that we can Overall, second-by-second. Our respond instantly to changes control centres 5 1 controllable costs engineers are highly trained and as they occur. The result is that staff 650 425 have been reduced

they plan for all eventualities, you always get electricity when ➧ predicting the impact of weather you want it from the cheapest running costs down 38% by 50 per cent in and television programmes on possible sources. real terms since ’’ ➧ privatisation.

Still moreefficient

10 Why have you not been able to take out as much Price review cost as last year, and will costs remain at this level? Fiona Smith (left), Company Secretary and We achieved a 14 per cent real reduction last year through General Counsel, answers questions on the substantial reorganisation, which meant that over half the next review – which she will manage. savings planned for the four-year regulatory period were When does your next price review achieved in the first year. While we will always keep costs period start, and what is the timetable? down as much as we can, we do not believe we can sustain this rate of cost reduction if service levels are to be maintained The next price control will come into effect on 1 April 2001. into the next price control period. If the review timetable follows a similar pattern to last time, we can expect discussions to commence this autumn with a final You have driven costs down again, so why hasn’t decision a year later. We will be working closely with the new your transmission operating profit gone up? regulator, Callum McCarthy, who replaced Professor Stephen There are two main reasons. The first is that our cost reductions Littlechild in January this year, to achieve the best result for did not keep pace with the cuts in our charges imposed by the customers and shareholders. regulator. The second is the under-recovery of our “use of What can you do to ensure a fair review? system” income owing to last year’s mild winter, leaving us with nearly £25 million to recover in future years. Our use of We do all that we can to ensure that the regulator understands system charges are usually either under- or over-recovered our business and the reasons behind the decisions we make. because we have to set them a year in advance, based on an At the end of the day, though, the proposals are the regulator’s estimate of the year’s demand for electricity. In the event, our decision and we then have the choice of accepting them or estimate can never be precisely right. There referring them to the Competition Commission. is therefore a mechanism to correct for under- or over-recovery by adjusting our charges in subsequent years.

“Reducing the number of control units from five to one has meant that certain roles which used to be performed by five people at different locations can now be undertaken by one. This has made things simpler to manage and eliminated wasteful duplication.” Paul Garden, System Management 11 Electricity networks – USA

From England and Wales to New England...

We are creating shareholder value by building on our core skills in developing and managing network assets and systems. The restructuring of the USA electricity market has provided an excellent opportunity to do just this.

NEES

In December, we announced our intention to acquire New England Electric System (NEES) in the USA for $3.2 billion (approximately £2 billion). NEES owns and operates transmission and distribution systems in Massachusetts, New Hampshire and Rhode Island. Its transmission network is about half the size of ours and its distribution network is over 45,000 route km, connecting 1.3 million customers. This acquisition will provide a platform to build a significant transmission and distribution business in the USA as opportunities arise as a result of the restructuring of the electricity market, particularly in the north-east. Indeed, the announcement in February that NEES proposes, with our support, to acquire Eastern Utilities Associates (EUA) and consolidate the businesses is an important step in this process.

Rick Sergel President and Chief Executive Officer of NEES

The merger presents a tremendous opportunity for customers to benefit from National Grid’s proven track ‘‘ record of delivering a high-quality, low cost transmission service in the competitive UK market. This experience is highly relevant as the competitive market develops 12 in the north-eastern USA. ’’ Why have you invested in the USA? The acquisition of EUA will enable us to exploit these opportunities on a larger scale and we expect to achieve The electricity market in the United States is the world’s savings by merging the two companies and their operations. largest. It is currently being restructured in ways which closely parallel the changes which have taken place in the UK electricity industry over the past decade. The introduction of competitive markets, involving the separation of generation from transmission and distribution, is creating opportunities for us to apply our expertise. North-eastern USA

Why New England? NEES electricity distribution Each State in the USA is separately regulated. The regulators service area in New England are among the furthest advanced in moving New Hampshire EUA electricity away from the traditional rate of return regulation to more distribution incentive-based mechanisms which incentivise efficiency for service area the benefit of shareholders and customers. We have

considerable experience of operating with such forms Massachusetts of regulation and believe we can bring significant benefits to NEES and EUA in this area.

Why NEES?

We were attracted to NEES by its very Rhode Island strong management team which shares What skills are you taking over to the USA, and our ambitions. NEES is one of the most what do you hope to bring back? efficient utilities in the north-eastern USA and it has been at the forefront of We take our transmission skills – a decade’s experience in restructuring and regulatory change. Together, facilitating competition in generation and supply and our skills we can create a platform for growth in the USA. in creating and managing commercial incentivised schemes. We will gain their in-depth knowledge of the USA regulatory And then, why is NEES buying EUA and why are process and the valuable and very specific skills associated you so supportive of this step? with operating a distribution network. You can see from the map that I understand that NEES has nuclear power the territories of NEES and EUA interests – what does it intend to do about this? are interwoven – to the extent that each company’s maintenance team has to cross the other’s service area. NEES has minority holdings in six nuclear power stations – NEES and EUA operate in the same favourable regulatory only three of which are now operational. NEES does not environment, with the same regulators and similar regulatory actually operate any of them and is actively pursuing settlements. They share the opportunities arising from the opportunities to sell its holdings. introduction of incentive-based regulation. ...from New England to England and Wales

main picture Maintenance team on NEES’ transmission network. 13 Electricity networks – international

The key ingredient in the success of our international partnerships is our ability to transfer the skills and experience gained in the UK. Transferringskills

BRAZIL ZAMBIA INDIA ARGENTINA Joint venture with the state- owned Karnataka Electricity Board Agreement with Our commercial skills have to build a 600 km transmission line. Electrobras, the country’s largest greatly improved operational Continued work on our Utility electricity utility, to pursue future efficiency, reduced manpower Collaboration Agreement with PowerGrid Our operational skills have transmission opportunities. and rationalised Corporation, India’s leading significantly reduced faults. pay structures. transmission company.

14 main picture Transmission tower in Argentina.

Our skills in identifying and implementing efficiency Zambia improvements, managing large-scale structural change and Our joint venture Copperbelt Energy Corporation (CEC) owns negotiating mutually beneficial regulatory settlements have and operates the electricity network supplying the mines brought benefits to our international partnerships. of the Zambian Copperbelt.

Argentina Has the investment in Zambia done well?

Our joint venture has a majority interest in Transener, which Absolutely – it has delivered better than expected returns to owns and operates about 95 per cent of the Argentine National Grid and CINergy, our joint venture partner. transmission system, including Transba, the system in the What other countries are you actively involved in? province of Buenos Aires. We are the Registered Operator of the network. In India, we have a joint venture with the state-run Karnataka Electricity Board to build a 600 km transmission line. What have you achieved as Registered Operator? In Brazil, we have signed an agreement with Electrobras, Through a variety of techniques, some of which we imported Brazil’s largest electricity utility, to pursue transmission from the UK, Transener has reduced faults by 60 per cent during opportunities. a period when electricity demand has increased significantly. What other business skills are you hoping to Rising demand vs annual fault index transfer? 70 1.48 65 We look for every opportunity to take advantage of existing

60 skills by transferring them to new markets. For example,

55 our metering and data collection business, Datum Solutions, 0.67 0.6 0.59 which is now the largest independent provider of such 50 0.5 45 services in the UK, is taking its expertise to the USA. 93 94 95 96 97 98 Through a small acquisition, of a company called Teldata,

System demand (TWh) we can build on our skills in the USA market as it becomes Faults per 100 km line per year increasingly competitive.

Can you expand the business in Argentina? The regulatory settlement we We will increase our income from unregulated activities such achieved this year broke new as the installation of new connections and lines and we intend ground. The old regime, of tariffs to be involved in any future expansion of the Argentine network. ‘‘ based on volumes transferred and cost of electricity produced, We have introduced a technical exchange programme to help has gone and for the first time transfer skills between the UK and Argentina. ever we now have a regulatory structure which we can influence. The penalty factors in the settlement are unchanged and we Brian Henderson are confident that our improving President, Transener performance will enable us to achieve the maximum income allowable – as we have since its introduction in July 1998. ’’ 15 Telecoms networks

We conceived and created the Energis network in the UK and we now have significant expertise in the technical aspects of the design, installation and maintenance of fibre optic networks. Realisingpotential

Energis

Energis has been a tremendous success. In 1992, we recognised the opportunities offered by the liberalised UK telecoms market and the increasing demand for advanced data transmission services. Realising the potential in our transmission infrastructure, we designed and created a national fibre optic network in just 18 months. Our skills are in the development and maintenance of the network, not those required for directly managing a telecommunications company. Our economic interest in Energis is non-core and we would not expect still to own it in three to five years’ time.

Brazil

In Brazil we have found an ideal opportunity to take advantage of our telecommunications skills. Our consortium with Sprint and France Telecom won a telecommunications licence to operate national and international telecommunications services throughout Brazil. The enterprise will use our network design and development skills, while the products, marketing and operational skills will be provided by our partners.

Mike Grabiner Energis has a strong balance sheet, interest, taxation, depreciation Chief Executive, a fast-growing customer base and and amortisation tripled to a distinctive technological edge £49.7 million, while the loss before Energis plc ‘‘ over competitors. We are well tax halved to £31.1 million. placed to take advantage of Our acquisition of Planet Online booming demand for value-added enabled us to help Dixons launch and Internet services. In 1998/99, Freeserve, which has transformed sales rose 70 per cent, with strong the UK home Internet access growth in higher-value advanced market, and we continue to services, particularly Internet and introduce new technologies which data, and turnover increased to enable us to offer new services. £285.5 million. Earnings before 16 ’’ Why Brazil? Are you considering anywhere else?

For us to be able to take full advantage of our telecoms skills, We are investigating opportunities in a number of countries we look for the following characteristics: that show similar characteristics. liberalisation of telecoms, allowing the introduction of • Why did you sell down your holding in Energis competition in the form of an alternative network; when it was doing so well? • an inadequate existing infrastructure which will benefit from competition or expansion; We recognised that we could no longer contribute directly • a level of commercial activity which needs and is prepared to the development of Energis and that it was a non-core to pay for better telecoms; and investment for us – and a big investment at that. It made up • a geographic spread of cities which could be linked by some 43 per cent of our market capitalisation, putting too a network. many eggs in one basket. By selling down around one-third And Brazil fits! of our holding, we realised £1.2 billion of the value created. As a result of the reduction in our holding, Energis qualified for the FTSE 100 index which increased its attractions to many investors.

below Freeserve, Dixons’ Internet service, which utilises the Energis network.

17 Environment and community

The country relies on the electricity transmitted across our network, and to provide this essential service we need public acceptance of that network. We value very highly our strong relationships with landowners, local communities and environmental groups. Managingour impact

18 Environment Community

We are committed to identifying and managing the key We consider our impact on the community as a whole. We pride environmental impacts arising from our network. Our annual ourselves on the culture of learning and support which we are environmental performance report (available on the website) building within the Company and encouraging outside through explains how we’re doing, and how we are improving our projects we undertake in the communities in which we operate. performance. What examples are there of what you do to manage Is your environmental management recognised? your impact on the community as a whole?

We are well advanced towards implementing the ISO 14001 National Grid works closely with businesses and voluntary Environmental Management System Standard by the end of groups throughout the country, supporting many community- the year. based projects. These important projects enable us to forge and strengthen links with farmers, environmentalists and the What is your current position on EMFs? general public to create greater awareness of our operations There have been no developments since last year. Despite and a better understanding of local issues. enormous effort to investigate a possible connection, no With our transmission equipment sited in the countryside, research programme in the world has established a proven we are aware of the potential impact of our activities. We work causal link between electric and magnetic fields (EMFs) and ill closely with our 20,000-plus grantors – landowners and health. Nevertheless, we recognise the public concern about occupiers who have National Grid equipment on their EMFs. We support the activities of the UK Co-ordinating property – to protect land and wildlife from damage during Committee on Cancer Research and the EMF Biological essential maintenance work. Research Trust and design and operate our network in accordance with the guidance on exposure to EMFs issued by We have an open approach with planning authorities and, to the National Radiological Protection Board. help in this, we have developed a new computer-aided design package. We can now use the latest virtual reality techniques Do you manage your waste? to show the impact of planned extensions to the network, We have produced a Company-wide waste management which allows them to make more realistic judgements of the strategy and have rationalised our practices for dealing with impact, both positive and negative, of any scheme. waste. We have appointed a single waste management Are you taking part in the Government’s “New Deal”? contractor who can ensure that all our waste is disposed of correctly and cost effectively. We are also considering Yes – we support the scheme and have New Deal recruits other options including recycling, re-use schemes and working in a range of activities. The scheme offers a real job reducing waste. with prospects to 18–24 year olds who have usually been out of work for six months or more, enabling them to come off benefit and into work.

left Margaret Stewart We value our hard-earned Two of our staff, Deena Wood and Director of reputation for achieving effective Vicci Page, with their students on Corporate Affairs partnerships with the many the Mentoring Project. The mentor organisations and individuals and student who are assigned to ‘‘ involved with our work. one another are able to discuss We also recognise that we cannot a whole range of issues covering afford to stand still, and must education, training and career continuously keep under review advice, and even more specific and strive to improve our impacts problems – say with exams. The on the environment, and our scheme aims to provide a positive relationships with the communities role model and build links between in which we operate. local businesses and schools. 19’’ The Board of Directors

David Jefferies James Ross David Jones Stephen Box Wob Gerretsen CBE, FEng Non-executive Director, Group Chief Executive and a Finance Director Business Development Director Chairman and a member of the Chairman-designate and a member of the Nominations Appointed as a Director of NGG Appointed as a Director of Nominations Committee member of the Nominations Committee and of The National Grid NGG and of The National Grid Committee Appointed as a Director and Appointed as a Director of NGG Company plc in August 1997. Company plc in 1995. Formerly Chairman of NGG in 1995, Appointed as a Director of NGG in 1995, David Jones has been Formerly with Coopers & with the Costain Group, where David Jefferies was Chairman on 1 March 1999, James Ross a Director of The National Grid Lybrand, where he was a he was a Director and Chairman of The National Grid Company is the Chairman of The Company plc since 1994, partner specialising in corporate of Costain Engineering and plc from its inception until Littlewoods Organisation plc, becoming its Chief Executive in finance. He is a Director of Construction Limited. Prior 30 March 1996. He was also having been Chief Executive of April 1994 and its Chairman in Energis and Chairman of the to this, he held a number Chairman of Viridian plc and Cable and Wireless plc from March 1996. He has been a Group Trustees of the Electricity of posts within the Costain Chairman of Electricity Pensions 1992 to 1995. Prior to this, he Director of Energis since 1994 Supply Pension Scheme – Group. Aged 57. Trustee Limited. David Jefferies was a Managing Director of the and is also a Non-executive National Grid Group. Aged 48. was previously Chairman of the British Petroleum Company plc Director of Bull Worldwide London Electricity Board and and Chairman and Chief Information Systems. He was Deputy Chairman of the Executive Officer of BP America. formerly Group Chief Executive Electricity Council. He is a He is a Non-executive Director of South Wales Electricity, Fellow of the Royal Academy of McGraw Hill and of Datacard, having previously held senior of Engineering and is a past both of which are based in the engineering, commercial and President of the Institution United States, and of Schneider management posts with the of Electrical Engineers. based in France. James Ross is South Western and Midlands David Jefferies will retire also a trustee of the Cleveland Electricity Boards. Aged 57. as Chairman of NGG at the Orchestra and a Board member Company’s Annual General of the Regional Development Meeting in July this year. Agency for the North West. Aged 65. Aged 60.

20 Roger Urwin Bob Faircloth John Grant Richard Reynolds Malcolm Williamson

Managing Director, Non-executive Director, Non-executive Director, Non-executive Director and Non-executive Director and a Transmission Chairman of the Remuneration Chairman of the Audit a member of the Audit member of the Remuneration Committee and a member of Committee and a member of Committee Committee Appointed as a Director of NGG the Audit and Nominations the Remuneration Committee and of The National Grid Appointed as a Director of NGG Appointed as a Director Committees Company plc in 1995, Roger Appointed as a Director of NGG in 1998, Richard Reynolds was of NGG in 1995, Malcolm Urwin was previously Chief Appointed as a Director of in 1995, John Grant is Chief a Director of GEC during the Williamson is President and Executive of London Electricity NGG in 1995, Bob Faircloth Executive of Ascot Plc. He was period from 1986 to 1995. Chief Executive Officer of Visa plc. Prior to this, he held a was Chief Operating Officer and Finance Director of Lucas He was Managing Director of International. He was previously number of appointments within an Executive Director of BTR Industries plc (subsequently GEC Telecommunications and Group Chief Executive of the Central Electricity Generating until 1995 and a Non-executive LucasVarity plc) from 1992 to became Managing Director Standard Chartered PLC, Board before joining Midlands Director until May 1998. 1996, and previously held a of GPT on the merger of Managing Director of Girobank Electricity Board as Director of Before joining BTR in 1980, number of senior executive the GEC and Plessey plc and Chief Executive of the Engineering. He is a Non- Bob Faircloth held a number positions during 25 years with telecommunications Post Office’s banking executive Director of Foreign of technical and management the Ford Motor Company, companies. He was also operations. He is a member of and Colonial Special Utilities posts, mainly in the including Vice President, Chairman of GPT and is the Council of the Industrial Investment Trust plc and petrochemicals and paper Ford of Europe, Director of currently Chairman of the Society, a Director of British Total Oil Marine plc and a industries in Canada and Corporate Strategy, Ford US Eastern European Trade Invisibles and UK Chairman of Fellow of the Royal Academy Europe. He is also engaged and Executive Deputy Council. He is also a the British Thai Business Group. of Engineering. Aged 53. in international management Chairman, Jaguar Cars. He is Non-executive Director of Malcolm Williamson will retire consulting with involvement also a Non-executive Director Photobition and of Phonelink as a Director of NGG at the with international banks, of Torotrak plc. Aged 53. plc. Aged 60. Annual General Meeting in July. industrial companies and Aged 60. government agencies and is a Director of the Economic Development Authority, Savannah, Georgia. Aged 62.

21 Corporate governance

Introduction NGG’s independent Non-executive Directors are selected and Corporate governance is the system by which companies appointed for their individual business experience and their are directed and controlled, focusing particularly on the ability to bring a broad perspective to their contributions to responsibilities of Directors for setting strategic aims, the strategic direction of the Group in the interests of the establishing financial and other policies and overseeing their Company and its shareholders; as such, they represent a implementation, and for accounting to shareholders for the strong and independent element on the Board. performance and activities of the company. Board balance The NGG Board currently comprises four Directors Executive Directors (including the Group Chief Executive, The Board NGG is led and controlled by its Board of David Jones) and six Non-executive Directors (including Directors, which meets at least eight times a year. the Chairman, David Jefferies). With the exception of David Jefferies, all the Non-executive Directors are To ensure that the direction and control of the Company are wholly independent. firmly in its own hands and that it is fully informed on key issues, the Board has reserved certain matters for its Supply of information Both regular and ad hoc reports and collective decision and/or monitoring. presentations are made to the Board to ensure that it is supplied in a timely manner with information of the quality Board approval is required for significant new business and detail that it requires. proposals, including the establishment, acquisition and disposal of subsidiaries, and for major capital projects and Appointments to the Board The NGG Board has delegated transactions involving the acquisition or disposal of assets, to the Nominations Committee responsibility for considering including interests in the voting share capital of any company. the reappointment of existing Directors, for identifying and The Board must approve any transaction likely to require selecting potential new Directors and for proposing to the listing particulars or a shareholder circular to be filed with the Board the appointment of new Directors. The Nominations London Stock Exchange. Also reserved to the Board are Committee has written terms of reference and meets as matters relating to health and safety and policy issues required on the expiry of the term of appointment of any affecting the external standing of NGG. Director and on the declaration of any vacancy for a Director. The members of the Nominations Committee are identified All Directors have access to the advice and services of the on pages 20 and 21. Company Secretary and General Counsel and may take independent professional advice, at the Company’s expense, Non-executive Directors are appointed by the Board and have in the furtherance of their duties. letters of engagement for periods of up to three years.

All Directors bring an independent judgement to bear on Reappointment of Directors Every Director, without issues of strategy, performance, resources, including key exception, is required by NGG’s Articles of Association to appointments, and standards of conduct. retire by rotation at intervals of not less than three years and to seek reappointment by the shareholders at the Annual All Directors receive full and appropriate briefing on first General Meeting. In addition, any new Director who has been appointment, with subsequent updating as necessary. appointed by the Board is required by the Articles to retire at The Chairman and the Group Chief Executive There is a the next Annual General Meeting and to seek reappointment clear division of responsibilities between the Chairman, David by the shareholders. Jefferies, and the Group Chief Executive, David Jones. This division of responsibilities will be maintained following the retirement in July 1999 of David Jefferies, who will be succeeded as Chairman by James Ross.

22 Directors’ remuneration Accountability and audit The Remuneration Committee of independent Non-executive Financial reporting We are mindful of our responsibility for Directors has responsibility for determining, in accordance presenting a balanced and understandable assessment of with current best practice, all aspects of the remuneration and National Grid’s financial position and prospects in all reports, terms and conditions of service of the Executive Directors. both to our own investors and to regulatory bodies. The Remuneration Committee also maintains an overview of Internal control In common with all other listed companies, policy in relation to the remuneration and conditions of service we are awaiting the finalisation by the Institute of Chartered of other senior managers and determines policy and practice Accountants of England and Wales of guidance on how we in relation to equity participation schemes. should meet the new requirement of the Combined Code to The members of the Remuneration Committee, which has review the Group’s system of internal control, including written terms of reference, are identified on pages 20 and 21. financial, operational and compliance controls and risk The NGG Chairman and the Group Chief Executive may management. Pending finalisation of this guidance, the London attend meetings of the Remuneration Committee at the Stock Exchange has confirmed that companies are able to invitation of the Committee, but are not permitted to be satisfy the provision of the Combined Code in respect of present during discussions on their respective remuneration. internal control by reporting on their internal financial control in Details of the remuneration of each Director are given on accordance with the recommendations of the Cadbury Code. page 24. Accordingly, the NGG Board has reviewed the effectiveness Relations with shareholders of the Group’s system of internal financial control, recognising We value the constructive relations we have developed that any system of internal financial control can provide only with our investors and work hard to keep all shareholders, reasonable, and not absolute, assurance against material irrespective of size, informed about the Company’s policies misstatement or loss. and progress. The Board approves the Group’s annual budget and business Dialogue with institutional shareholders Regular dialogue plan, the components of which form the financial objectives is maintained with institutional investors, fund managers against which individual operating units are monitored. The and analysts, with the aim of fostering mutual understanding Board exercises control over NGG’s business through the of objectives. Executive Committee chaired by David Jones. The Executive Committee meets monthly and has full delegated authority to The Annual General Meeting We welcome the active carry out necessary actions in key areas between meetings involvement of private investors at the Annual General of the full NGG Board. There is a clear direct-line reporting Meeting, the Notice of which is posted at least 20 working structure to individual Directors. days in advance. At each Meeting, the Chairman makes a presentation on the year’s financial results and business Material risks faced by the Group have been identified and activities and encourages open and lively discussion between are kept under review by Directors. As part of the business shareholders and Directors. Shareholders are invited to vote planning process, operating units are required to review separately on each resolution, including the Annual Report relevant risks and to identify and implement measures to and Accounts, and the number of proxy votes lodged for and control them. against each resolution is made available at the Meeting. All parts of the business are subject to review by the Group’s A summary of the business carried out at the Annual General internal audit function, which provides independent appraisal Meeting is made available to shareholders on request. of systems of control and the quality and performance of those controls. We are also very proud of our innovative and highly successful Networking programme, which is designed to give individual shareholders the opportunity to meet Directors and staff and to experience our operations at first hand. 23 Corporate governance continued

Audit Committee and auditors The NGG Board has The Audit Committee has specific responsibility for making delegated to the Audit Committee of independent Non- recommendations to the Board on the appointment and executive Directors authorities and duties in respect of the remuneration of external auditors and for keeping under Group’s annual accounts and other financial reports, its review the nature and extent of non-audit services provided system of internal control and risk management system, the by the external auditors. In keeping with this responsibility, the scope and extent of internal audit and the activities of the Audit Committee receives regular reports on all expenditure, external auditors. The Audit Committee, the members of with the external auditors and with the other major which are identified on pages 20 and 21, has written terms accountancy firms, in order to satisfy itself that value for of reference and meets at least four times a year, with at least money is obtained and that the objectivity of the statutory one private meeting with the external auditors. The external audit is not impaired. auditors may request additional private meetings with the Audit Committee if they consider this necessary.

Directors’ remuneration The remuneration of individual Directors for the year ended 31 March 1999 is set out below:

Total emoluments (excluding pensions)

Base salary Annual and fees bonus Benefits 1998/99 1997/98 £000 £000 £000 £000 £000

Chairman David Jefferies (Non-executive Director) 150 – 9 159 149

Executive Directors David Jones 300 108 8 416 355 Stephen Box 200 70 661 336 1722 Wob Gerretsen 183 63 11 257 227 Roger Urwin 205 71 14 290 264 John Uttley3 ––––45

Non-executive Directors Bob Faircloth 27 – – 27 22 John Grant 30 – – 30 25 Richard Reynolds4 31 – – 31 2 Trevor Robinson5 ––––8 James Ross6 4––4– Malcolm Williamson 30 – – 30 25

1,160 312 108 1,580 1,294

1 Benefits include relocation expenses of £51,526

2 Appointed 4 August 1997

3 Resigned 30 June 1997. In addition to the above emoluments, John Uttley received compensation in 1997/98 for the termination of his service agreement equivalent to one year’s pay and benefits totalling £228,000 which was paid as a further contribution to the pension scheme.

4 Appointed 20 February 1998

5 Resigned 31 July 1997

6 Appointed 1 March 1999

Benefits are accruing to four Directors under a defined-benefit pension scheme (the same number as in 1997/98). 24 Financial review

Turnover Taxation Group turnover from continuing operations fell marginally The tax charge totalled £283.1 million and included £162.8 from £1,519.3 million to £1,514.2 million. million relating to the net exceptional gain. The effective tax rate for the year, excluding the impact of exceptional items, Operating profit was 27.0 per cent, compared with 28.7 per cent last year. Total operating profit increased by £42.0 million to £583.3 million. This reflects a £20.9 million reduction in our share Capital expenditure of Energis’ operating loss, higher profit contributions from Capital expenditure increased to £309.6 million, compared other activities (up by £16.8 million), joint ventures (up by with £233.0 million in 1997/98 (excluding £86.7 million of £6.9 million) and interconnectors (up by £3.3 million), and expenditure by Energis up to December 1997, when it a £5.9 million reduction in transmission profit, which fell to ceased to be a Group undertaking). The higher level of £513.8 million. The increase in other activities profit relates capital expenditure reflects an increase of £68.5 million primarily to the release to the profit and loss account of in transmission spend. £15.2 million of provisions following the implementation Earnings per share of FRS 12, a new accounting standard which has resulted Basic earnings per share, excluding exceptional items, in a change in the method of accounting for provisions. increased by 12.7 per cent to 22.2 pence. The weighted Exceptional items average number of shares in issue fell from 1,688.3 million The results for the year include two exceptional items: in 1997/98 to 1,466.6 million as a result of the share consolidation carried out in February 1998, reflecting the • a pre-tax profit of £891.8 million (£712.7 million after tax) on return to shareholders of £768.6 million of excess capital the sale of 60 million ordinary shares in Energis; and by means of a special dividend of 44.7 pence net per • a pre-tax charge of £52.6 million (£36.3 million after tax), ordinary share. being the cost of closing out £415 million of interest rate Ordinary dividends swaps. The Directors are recommending a final dividend of The close-out of the swaps, which were entered into in 1995, 7.82 pence per ordinary share. This will bring the total will have a beneficial impact on future years’ interest charges. ordinary dividend for the year to 13.07 pence, an increase of 8.3 per cent over last year. The total dividend is covered The exceptional gain of £107.1 million reported in 1997/98 1.7 times (1997/98: 1.6 times) by earnings per share related to the reduction of the Group’s interest in Energis as excluding exceptional items and will cost £192.0 million. a consequence of the issue by Energis to other investors of 75 million of its shares in December 1997. Share price and market capitalisation At 31 March 1999, NGG’s share price was 451.75 pence, Interest compared with 353 pence on 31 March 1998, an increase The net interest charge increased from £75.8 million to of 28.0 per cent. Between 1 April 1998 and 31 March 1999, £137.9 million. This increase reflects: daily closing prices for the shares were within the range • a full-year charge relating to the financing cost of the 359.0 pence to 552.75 pence. The market capitalisation £768.6 million special dividend paid in February 1998; and of the Company at year end was £6.7 billion.

• the inclusion within the net interest charge of bank facility fees and interest rate option costs totalling £14.1 million relating to the proposed acquisition of NEES and costs of £7.6 million relating to the issue in February 1999 of Equity Plus Income Convertible securities (EPICs) exchangeable into Energis shares.

25 Financial review continued

Cash flow Year 2000 Net cash inflow from continuing operations fell marginally from National Grid has in place a group-wide project to review its £615.2 million to £605.9 million. business-critical information systems and to plan and implement changes as necessary to accommodate the Cash flow benefited significantly from the following two uncertainties arising from the Year 2000 date change. transactions carried out in February 1999, both relating to The project commenced in 1996, when a Year 2000 project the Group’s shareholding in Energis: co-ordination team was established with responsibility for • the sale of 60 million shares in Energis, which produced net developing an overall plan to achieve Year 2000 readiness, proceeds of £959.3 million; and including the monitoring of Year 2000-related activities within operating units. Detailed progress reports are made to the • the issue of EPICs in the principal amount of $401.2 million, Executive Committee on a regular basis and the Board is kept the proceeds of which were £242.6 million. fully informed of progress. By June 1999, National Grid Payments to the providers of finance, in the form of dividends expects that 98 per cent of all computer-dependent systems, and interest, totalled £302.8 million net, compared with applications and equipment will be Year 2000-ready. £997.6 million net in 1997/98 which included the special All systems which are critical to the secure operation and dividend of £768.6 million. control of the transmission system were declared Year 2000- ready in April 1999. Cash absorbed as a result of net purchases of tangible fixed assets increased from £286.4 million in 1997/98 to £312.5 National Grid estimates that the total cost of modifying or million, while £25.2 million (compared with £45.3 million in replacing systems to achieve Year 2000 readiness will be 1997/98) was spent to acquire fixed asset investments. approximately £16 million, of which approximately £12 million has been spent to date. Shareholders’ funds Shareholders’ funds increased from £929.4 million to Monitoring of Year 2000 preparations in the electricity industry £1,744.0 million. This increase comprised £809.5 million of as a whole is being carried out by independent assessors on retained profit, £5.9 million from the exercise of employee behalf of the industry’s regulator, OFFER. OFFER has reported share options and an exchange adjustment of £(0.8) million. that the electricity industry’s preparations for the Year 2000 date change are well advanced and that, in its view, the date Net debt change will not pose a risk to electricity supplies. Net debt fell from £1,465.3 million to £703.4 million, while gearing (net debt as a percentage of shareholders’ funds) fell from 158 per cent to 40 per cent. Interest cover (the number of times the net interest charge is covered by total operating profit) for the year was 4.2 times (1997/98: 7.1 times).

The improvements in shareholders’ funds, net debt and gearing result primarily from the exceptional gain and the proceeds generated by the sale of 60 million Energis shares in February 1999.

In addition to the debt of £242.6 million raised through the issue of the Energis EPICs described above, The National Grid Company plc issued a 25 year bond, the net proceeds of which were £443.0 million.

26 Summary financial statement

As required by the Companies (Summary Financial Statement) Auditors’ statement to the members of Regulations 1995, the summary financial statement on pages The National Grid Group plc 27 to 29 is a summary of the information contained in the We have examined the summary financial statement on pages Directors’ report and accounts of The National Grid Group plc 27 to 29. for the financial year ended 31 March 1999 and should be Respective responsibilities of the Directors read in conjunction with the joint statement by the Chairman and auditors and the Group Chief Executive on pages 2 to 4, the review of The summary financial statement is the responsibility of the activities on pages 5 to 19, the Board of Directors on pages Directors. Our responsibility is to report to you our opinion as 20 and 21 and the financial review on pages 25 and 26. to whether the summary financial statement is consistent with The Annual Review and the summary financial statement the annual accounts and the Directors’ report. do not contain sufficient information to allow as full an understanding of the results of the Group and state of affairs Basis of opinion of the Company or of the Group as would be provided by We conducted our examination in accordance with Auditing the full Report and Accounts. Standards issued by the Auditing Practices Board. The audit of a summary financial statement comprises an assessment of Copies of the full Report and Accounts are available, whether the statement contains all information necessary to free of charge, from the Shareholder Enquiry Unit, ensure consistency with the annual accounts and the National Grid House, Kirby Corner Road, Coventry CV4 8JY Directors’ report and of whether the detailed information (telephone 01203 423940). required by law has been properly extracted from those documents and included in the summary statement. Our report on the Group’s annual accounts includes information on the responsibilities of Directors and auditors relating to the preparation and audit of accounts and on the basis of our opinion on the accounts.

Opinion In our opinion, the summary financial statement is consistent with the annual accounts and the Directors’ report of The National Grid Group plc for the year ended 31 March 1999 and complies with the requirements of Section 251 of the Companies Act 1985 and the regulations made thereunder.

PricewaterhouseCoopers Chartered Accountants and Registered Auditors London 24 May 1999

Report of the auditors The auditors’ opinion on the full annual accounts of the Group for the year ended 31 March 1999 is unqualified and does not contain any statement concerning accounting records or failure to obtain necessary information and explanations.

27 Summary financial statement continued

Summary Group profit and loss account

for the year ended 31 March 1999 1999 1998 (restated) £m £m

Turnover, including share of joint ventures 1,568.3 1,625.5 Less: share of joint ventures’ turnover (54.1) (16.1)

Group turnover – Continuing operations 1,514.2 1,519.3 – Discontinued operations – 90.1 1,514.2 1,609.4 Operating costs (931.6) (1,069.4)

Operating profit/(loss) – Continuing operations 582.6 568.4 – Discontinued operations – (28.4) Operating profit of Group undertakings 582.6 540.0 Share of joint ventures’ and associate’s operating profit 0.7 1.3

Total operating profit 583.3 541.3 Exceptional profit relating to Energis 891.8 107.1 Net interest (137.9) (75.8) Exceptional cost of closing out interest rate swaps (52.6) –

Profit on ordinary activities before taxation 1,284.6 572.6 Taxation – Excluding exceptional items (120.3) (133.5) – Exceptional items (162.8) – (283.1) (133.5)

Profit on ordinary activities after taxation 1,001.5 439.1 Dividends – Ordinary (192.0) (189.2) – Special – (768.6) (192.0) (957.8)

Retained profit/(loss) 809.5 (518.7)

Earnings per ordinary share – Basic, including exceptional items 68.3p 26.0p – Basic, excluding exceptional items 22.2p 19.7p – Diluted, including exceptional items 64.3p 25.8p – Diluted, excluding exceptional items 21.7p 19.5p

Dividends per ordinary share – Ordinary 13.07p 12.07p – Special – 44.70p

The emoluments of the Directors, excluding pension contributions, were £1.580m (1998: £1.294m) – see page 24.

28 Summary Group balance sheet at 31 March 1999 1999 1998 (restated) £m £m

Fixed assets Intangible assets – goodwill 15.1 – Tangible assets 2,890.9 2,711.4 Investments 233.1 326.9

3,139.1 3,038.3

Current assets 1,746.3 384.0 Creditors (amounts falling due within one year) (1,414.9) (1,097.2)

Net current assets/(liabilities) 331.4 (713.2)

Total assets less current liabilities 3,470.5 2,325.1 Creditors (amounts falling due after more than one year) (1,680.9) (1,320.5) Provisions for liabilities and charges (45.6) (75.2)

Net assets employed 1,744.0 929.4

Capital and reserves Called up share capital 173.9 173.5 Share premium account 246.5 232.7 Profit and loss account 1,323.6 523.2

Shareholders’ funds 1,744.0 929.4

The summary financial statement on pages 27 to 29 was approved by the Board of Directors on 24 May 1999 and was signed on its behalf by:

D G Jefferies CBE, FEng Chairman

S J Box FCA Finance Director

Note relating to the summary financial statement

Reconciliation of movement in shareholders’ funds 1999 1998 (restated) £m £m

Profit on ordinary activities after taxation 1,001.5 439.1 Dividends – Ordinary (192.0) (189.2) – Special – (768.6) (192.0) (957.8)

809.5 (518.7) Issue of ordinary shares 5.9 16.2 Exchange adjustments (0.8) –

Net increase/(decrease) in shareholders’ funds 814.6 (502.5) Shareholders’ funds at start of year 929.4* 1,431.9

Shareholders’ funds at end of year 1,744.0 929.4

*Originally £888.6m before adding prior year adjustment of £40.8m. 29 Five-year financial summary

Group profit and loss account

1999 1998 1997 1996 1995 (restated) £m £m £m £m £m

Group turnover – Continuing operations 1,514.2 1,519.3 1,369.5 1,381.8 1,304.4 – Discontinued operations – 90.1 88.0 105.2 123.9 1,514.2 1,609.4 1,457.5 1,487.0 1,428.3 Operating costs (931.6) (1,069.4) (795.6) (805.3) (750.0)

Operating profit/(loss) – Continuing operations 582.6 568.4 716.1 729.1 656.5 – Discontinued operations – (28.4) (54.2) (47.4) 21.8 Operating profit of Group undertakings 582.6 540.0 661.9 681.7 678.3 Share of joint ventures’ and associate’s operating profit 0.7 1.3 – – –

Total operating profit 583.3 541.3 661.9 681.7 678.3 Exceptional items 839.2 107.1 – (24.6) (33.3) Net interest (137.9) (75.8) (70.5) (40.6) (34.4)

Profit before taxation 1,284.6 572.6 591.4 616.5 610.6 Taxation (283.1) (133.5) (176.2) (194.2) (175.8)

Profit after taxation 1,001.5 439.1 415.2 422.3 434.8 Dividends – Ordinary (192.0) (189.2) (190.7) (175.0) (162.0) – Other – (768.6) – (1,560.8) – (192.0) (957.8) (190.7) (1,735.8) (162.0)

Retained profit/(loss) 809.5 (518.7) 224.5 (1,313.5) 272.8

Earnings per ordinary share – Basic, including exceptional items 68.3p 26.0p 24.3p 25.0p 25.8p – Basic, excluding exceptional items 22.2p 19.7p 24.3p 26.4p 27.7p – Diluted, including exceptional items 64.3p 25.8p 24.2p 24.7p 25.4p – Diluted, excluding exceptional items 21.7p 19.5p 24.2p 26.2p 27.3p Ordinary dividends per share 13.07p 12.07p 11.13p 10.27p 9.60p Dividend cover* – Ordinary dividends (times) 1.7 1.6 2.2 2.6 2.9 Interest cover (times) 4.2 7.1 9.4 16.8 19.7

*Excluding exceptional items.

The figures for 1995 to 1997 inclusive have not been restated to reflect the impact of FRS 12.

30 Summary Group balance sheet

1999 1998 1997 1996 1995 (restated) £m £m £m £m £m

Fixed assets 3,139.1 3,038.3 2,979.1 2,809.1 2,882.0 Net current assets/(liabilities) 331.4 (713.2) (605.5) (425.2) (378.5) Long term creditors and provisions (1,726.5) (1,395.7) (984.7) (1,281.7) (531.3)

Shareholders’ funds 1,744.0 929.4 1,388.9 1,102.2 1,972.2

Net debt 703.4 1,465.3 847.0 1,254.5 199.1 Gearing 40% 158% 61% 114% 10%

The figures for 1995 to 1997 inclusive have not been restated to reflect the impact of FRS 12.

Other key data

1999 1998 1997 1996 1995 £m £m £m £m £m

Net cash inflow from operating activities 605.9 627.2 846.6 897.2 902.1 Capital expenditure 309.6 319.7 279.8 253.5 366.6

Number Number Number Number Number

Average number of persons employed by the Group – Continuing operations 3,628 3,689 3,837 3,950 4,302 – Discontinued operations – 529 577 615 569

31 Shareholder information

Analyses of shareholdings as at 24 May 1999 Distribution of shares by type of shareholder

Number of % of issued shareholders Shares share capital

Banks 174 476,651 0.03 Nominee companies1 12,344 1,112,728,450 76.22 Insurance companies 39 145,009,762 9.81 Pension funds 46 4,859,643 0.33 Other corporate bodies 562 11,585,712 0.78 Electricity companies2 8 977,090 0.07 Other limited and public companies 920 20,822,268 1.41 Individuals 794,740 181,576,589 11.35

808,833 1,478,036,165 100.00

Distribution of shares by size of holding

Number of % of issued shareholders Shares share capital

1 – 99 497,548 34,745,164 2.35 100 – 499 239,002 50,044,307 3.39 500 – 999 37,226 25,396,198 1.72 1,000 – 4,999 30,184 60,051,226 4.06 5,000 – 9,999 2,355 15,836,789 1.08 10,000 – 49,999 1,422 28,361,134 1.92 50,000 – 99,999 317 22,773,371 1.54 100,000 – 499,999 438 100,707,211 6.81 500,000 – 999,999 139 97,463,941 6.59 1,000,000 and above 202 1,042,656,824 70.54

808,833 1,478,036,165 100.00

1 Nominee companies typically hold shares on behalf of banks, insurance companies, investment trusts, pension funds and PEP and ISA investors 2 In accordance with NGG’s Articles of Association, no holder of a licence under the Electricity Act 1989 or Pool member, no affiliate of either, and no group of companies of which a regional electricity company is a member, has an interest of 1 per cent or more in the voting share capital of NGG.

Financial calendar 25 May 1999 1998/99 preliminary results and recommended final dividend announced 1 June 1999 NGG shares go ex-dividend 7 June 1999 Record date for NGG final dividend 22 July 1999 Annual General Meeting 16 August 1999 1998/99 final dividend paid to qualifying shareholders 30 November 1999 1999/2000 interim results and interim dividend announced 6 December 1999 NGG shares go ex-dividend 10 December 1999 Record date for 1999/2000 interim dividend 17 January 2000 1999/2000 interim dividend paid to qualifying shareholders 32 Individual Savings Accounts (ISAs) Summary of business of Annual General Meeting Individual Savings Accounts (ISAs) for NGG shares are The Annual General Meeting will be held on Thursday 22 July available. Further information may be obtained from 1999 in the Salamander Suite at the National Exhibition The Account Manager Centre, Birmingham. If you would like to receive a summary Stocktrade of the business transacted at the Annual General Meeting, PO Box 1076 please contact the Shareholder Enquiry Unit (see “Enquiries” 10 George Street below). Edinburgh EH2 2PZ Networking 1999 (telephone “Grid Line”, 0131 529 0443). To obtain an application form to take part in the 1999 Regulatory accounts Networking programme, please write to: NGG’s subsidiary company The National Grid Company plc is Networking 1999 the holder of the electricity transmission licence for England National Grid House and Wales. NGC is required by the transmission licence to Kirby Corner Road provide to the Director General of Electricity Supply Coventry CV4 8JY. accounting statements in respect of each of its licensed Requests for application forms must be received by businesses. Copies of these statements for the year ended 27 August 1999. 31 March 1999 may be obtained, free of charge, from the Enquiries Shareholder Enquiry Unit (see “Enquiries” below). Enquiries about individual shareholder matters (including Unsolicited mail changes of address, lost share certificates etc) should be We are obliged by law to make our share register available to addressed to: other organisations and some shareholders may therefore Lloyds TSB Registrars receive unsolicited mail. Any shareholder who wishes to limit National Grid Team receipt of such mail should contact: 54 Pershore Road South The Mailing Preference Service Birmingham B22 1AD Freepost 22 (telephone 0121 433 8000). London W1E 7EZ. Lloyds TSB Registrars’ website can be accessed on The Mailing Preference Service is free to the public and will www.lloydstsb–registrars.co.uk notify those organisations which support its aims that unsolicited mail should not be sent to individuals who have Enquiries relating to National Grid’s activities should be registered a preference not to receive it. addressed to: The Shareholder Enquiry Unit Audio tape version of Annual Review National Grid House For the assistance of visually-impaired shareholders, an audio Kirby Corner Road tape version of the Annual Review has been prepared and Coventry CV4 8JY may be obtained, free of charge, from the Shareholder (telephone 01203 423940). Enquiry Unit (see “Enquiries” right). Information about National Grid is also available via the Internet on www.nationalgrid.co.uk

The National Grid Group plc Designed and produced by Timothy Guy Design Photography by David Partner and Larry Bray News cuttings © Evening Standard, 1999 The Financial Times Limited, 1999, Utility Week, 1999 Printed by St Ives (Plymouth) Limited Typeset by Real Time Studio The paper used in this report is produced from sustainably managed forests and is elemental chlorine free (ECF) The National Grid Group plc National Grid House Kirby Corner Road Coventry CV4 8JY