Managing networks around the clock

Annual Report and Accounts 2000 Lattice Group Annual Report and Accounts 2000 IFC

Lattice Group overview

Contents Financial highlights

IFC Financial highlights Holding companies Turnover £3,087m Operating companies 02 Chairman’s statement 04 Chief Executive’s review 06 Business review Total operating profit £1,010m 08 Transco 13 Telecoms 16 Advantica, The Leasing Group Profit for the year £383m 17 Lattice Energy Services, Lattice Property, Eastlands 18 Health, Safety and the Proposed final dividend 3.5p Environment 20 Social initiatives 22 Operating and financial review 30 The Board of Directors 32 Contents to the financial section 33 Regulation 38 Directors’ report

Holding companies

Transco Holdings sub-group Lattice Group Holdings sub-group Turnover £2,975m Turnover £208m Total operating profit £958m Total operating loss £(38)m Employees (average) 14,261 Employees (average) 1,313

The accounts have been prepared on a merger basis, as if the Group had been in existence throughout the period. A reconciliation of the Group results to those above is shown on page 86. Lattice Group plc is divided into the two sub-groups noted above. Transco Holdings owns Transco plc. Lattice Group Holdings owns the Group’s other operating companies.

Operating companies

8

Transco is the owner, operator and 186k is a newly formed Lattice Group A 50:50 joint venture has been formed Advantica is a business which has developer of the majority of Britain's gas company set up to provide fibre-optic with the US-based SpectraSite to create created substantial value providing transportation system. Its network infrastructure and related telecom- a mobile telecommunications towers technology and engineering solutions for supplies almost half the country’s energy munications services. As a first stage, business. This business will be the gas industry in Britain. By blending needs, more in winter. 186k is investing some £450 million in competing to meet the increasing need science, technology and engineering to the construction of a state-of-the-art for infrastructure support for the fast- deliver commercial advantage, the Transco receives gas from seven coastal backbone fibre-optic network connecting growing mobile communications industry company has developed a leading reception terminals around Great Britain, 12 major centres of demand. In addition, as it expands and adopts the third position improving business and and transports it to the meters of more 186k will provide transmission and generation of mobile phones in the UK operating performance for Transco than 20 million industrial, commercial and managed data services as well as IP and Continental Europe. and customers in gas, pipelines and domestic consumers. Its network is made (Internet Protocol) services across Britain. associated industries internationally. up of around 275,000 km of pipeline. The SpectraSite Transco JV will acquire or construct and lease out Transco’s three call centres answered communications towers and rooftop 6.3 million calls last year – 2.9 million to masts and provide expert services in the freephone national gas emergency planning, maintaining and managing service (0800 111 999). The business wireless networks. responded to 1.3 million gas escape reports. 01

Lattice Group is one of the three successor companies to what was formerly British Gas plc. Based on the unrivalled gas network expertise of Transco, our purpose is the safe and reliable provision of infrastructure networks – in gas, telecoms and other utilities. The safety, quality and performance targets of Lattice businesses can only be achieved with the commitment and dedication of our expert workforce. In this Annual Report we feature their work. Managing networks – around the clock.

Eastlands provides a range of Lattice Energy Services provides larger Lattice Property manages the Group's The Leasing Group offers leasing and professional and administrative support energy consumers and developers with extensive occupied estate and surplus vehicle management services to the services to Lattice Group companies, a range of multi-utility infrastructure property portfolio. Its main activities are Lattice Group as well as third party pension scheme trustees and other services. These include new gas, water the reclamation and disposal of former customers. It currently controls a fleet of external customers. Specialist areas of and electricity connections, conversions gas works sites and the provision of more than 23,000 cars and commercial operation are pensions administration, to gas, and installation of combined heat property services to Group companies vehicles with approximately half its payroll bureau services, management and power generation units. Higher to meet their occupational requirements. business being for non-Group accounting and financial accounting. energy prices, increasing environmental customers. Supplementary services offered include pressure (including the Climate Change In addition, Lattice Property is using its database administration and managed Levy) and the liberalisation of Britain’s property management expertise to In November 2000, The Leasing Group mailing services. Eastlands will continue utilities all underpin its growth strategy. procure facilities for Lattice's telecoms signed a major Private Finance Initiative to expand its business as an outsourcing businesses, either from the Group's contract with the London Fire and service provider. existing land portfolio or from the Emergency Planning Authority. Under the external market. 20 year contract, worth over £300 million, The Leasing Group will provide and maintain some 540 Authority vehicles and 20,000 items of operational equipment. Lattice Group Annual Report and Accounts 2000 02 Chairman’s statement

Lattice is a family of businesses – each focused on the challenges and opportunities of its own business environment.

As Chairman of the newly created As regards the future creation of shareholder Lattice Group may I welcome you value, the most significant achievement last to our first Annual Report. Lattice year was our demerger. This will provide Group was formed in October 2000 greater scope for us to develop a portfolio through its demerger from the of profitable growing businesses free of BG Group. It has a portfolio of utility price regulation, both in Great operating companies of which Britain and, over time, overseas. Transco Transco is substantially the largest. will provide the platform for us to do this by maintaining its leading standards of As one of the three successor companies practice, performance and customer service. to the former British Gas plc, we have unrivalled experience and expertise in the This Annual Report provides a picture gas transportation sector. Transco not only of impressive progress and achievement owns and operates one of the largest and underlying the headline numbers which, most complex gas transportation systems at this stage in Transco’s five year cycle of in the world, but also consistently achieves price regulation, are necessarily depressed. high standards of customer service and Importantly, Transco’s underlying cost base reliability. As pioneers in the development in 2000 was held constant. This was in spite of the complex commercial rules and of a 10% growth in the volume of gas information systems needed to open up transported, ongoing measures to prepare the British gas market fully to competition for future performance improvement and and consumer choice, Transco’s expertise a number of other adverse factors. is unique and world-leading. Consistent with the dividend policy Building on this heritage, the Lattice declared at the time of demerger, the Board Group’s core business is the provision, is proposing a final dividend of 3.5p per management and servicing of infrastructure ordinary share, giving a notional total networks – especially those complex dividend for 2000 of 7p per ordinary share. information-based networks which provide the basis for the competitive utility markets Crucially, Transco’s high standards of now formed in the UK, and increasingly in financial performance were matched in other advanced economies. Already we are customer service and supply reliability, applying our network management skills to and in its successful drive to improve the provision of state-of-the-art occupational health and employee safety. infrastructure for the telecoms industry as it We deeply regret that there were two fatal expands to serve the new mass markets for gas explosions during the year. These are broadband and internet-based services. still the subject of enquiries by the investigating authorities. 03

This tragic reminder of the intrinsically performance targets for each business. Last year’s demerger has given us the hazardous nature of gas operations Sharing the same purpose, ours will be a freedom to pursue our own course at underscores our overriding commitment to family of businesses – each focused on the a time of exceptional change and be at the forefront of good practice as challenges and opportunities of its own opportunity. First and foremost, we are regards all aspects of safety – and, business environment; each equipped with concentrating on delivering three prime equally, of occupational health and the resources, capabilities and cultural objectives: sustaining Transco’s drive for environmental improvement. Thus, while qualities to be competitive in its own field; operational and capital efficiency; the full Board is already actively engaged in and each with appropriate reward systems achieving a satisfactory outcome from the governance and strategic direction of based on performance and the creation of Transco’s current regulatory Review; our new Company, safety – and, above all, shareholder value. and establishing a portfolio of successful Transco’s management of public safety – growth businesses based on our leading has commanded particular attention. It is We will still benefit from links between the skills in infrastructure management and for this reason that we have formed a Board businesses, and especially from the sharing technology. Our new telecoms business Safety Committee under the chairmanship of knowledge and expertise in our general should become the forerunner of this of Sir David Davies, one of the country’s field of infrastructure technology, network portfolio of profitable growth businesses foremost engineers and safety experts. The management and related services. Here, free of utility price regulation. Committee will complement and the Corporate Centre will concentrate on strengthen the Board’s uncompromising strategy, helping to make such value- supervision and governance of safety. creating links, fostering innovative business development in and between the Group’s Significantly, we are also leading subsidiaries, and managing the overall the utility sector in including safety portfolio of businesses. performance and customer service standards in the Group’s Short Term The successful creation of the new Lattice Sir John Parker Chairman Incentive Scheme for the directors Group, while preserving the drive for and managers of our businesses. performance improvement and value creation in our established businesses, At this early stage in the development would never have been possible without of the Lattice Group, the Board has also the commitment, professionalism and been giving careful attention to our sheer hard work of people throughout organisational philosophy and principles, the Company. Our new Chief Executive, especially as this affects the relationships Phil Nolan, and his management between the Corporate Centre and the colleagues have led from the front, and individual businesses. the Non-executive members of the Board could not have been more engaged or Our aim is decentralisation within a more generous of their time. On behalf disciplined corporate governance framework of our shareholders, I thank them all of decision-making, accountability and and all of our employees. Lattice Group Annual Report and Accounts 2000 04 Chief Executive’s review

At all levels in the Group, we are deeply committed to performance and delivery and, above all, we want to be judged on our record.

As a leader in the provision and Our first and overriding objective is to A key question is how much flexibility to management of infrastructure preserve our ‘licence to operate’: enhancing plan for as regards the future capacity networks, our unceasing task is our reputation; and being recognised as of the National Transmission System. delivery – delivery to the highest leaders in all aspects of safety, The NTS transports nearly half Britain’s standards of safety, reliability environmental performance, occupational primary energy. As the country’s offshore and customer service. This is health and customer service. gas supplies tighten and we face growing exemplified by Transco with its dependence on imports, flexibility will be world-leading capabilities and Over the last year, our businesses have fully needed to accommodate the uncertainties standards in running Britain’s met this demanding objective. Nothing surrounding future supply patterns. Other gas transportation network. illustrates this better than the leading important policy issues are the performance standards now being achieved implications of the public safety standards Our focus on delivery applies to the huge by Transco’s three Call Centres which set by the Health and Safety Executive for number of operations which go on around provide its National Gas Emergency Transco’s mains replacement policy; and the clock, and are illustrated in this Report. Service. Together, they handled 6.3 million the practical effects of the social and It also applies to our ceaseless drive for calls last year, and despatched four million environmental aspects of regulatory policy performance improvement. In the case of jobs to Transco’s engineers. The average introduced in the 2000 Utilities Act. Transco, this has enabled us to meet time to answer an emergency call was three demands for gas transportation services seconds. Against this background, the regulatory which have grown on average at 8% a year framework needs to be responsive to the over recent years, while reducing unit Transco’s regulatory Review changing priorities of gas consumers – operating costs by 11% a year in real terms. Our second objective is to obtain a to the balancing of lower prices against satisfactory outcome to the current increasing concern for supply reliability, And crucially, our focus on delivery regulatory Review which will set Transco’s safety, and social and environmental applies to the Lattice Group’s prime price control for five years from April improvement. strategic objectives for increasing 2002. Transco is substantially the Group’s shareholder value. At all levels in the largest subsidiary and the Review will have Transco’s drive for capital and Group, we are deeply committed to an important bearing on the prospects of operating efficiency performance and delivery and, above all, the Group as a whole. The basis for Britain’s forward-looking we want to be judged on our record. I will incentive-based (RPI-X) form of utility therefore concentrate on reviewing the From the outset of the Review our aim has price regulation is the achievement of Group’s progress against our objectives. been to achieve alignment wherever outperformance against regulatory targets. possible between the regulatory priorities Until the next five year price control, the Reputation and trust and our business objectives. But this time financial benefits of outperformance are Transco is engaged in an industry where round, the task of defining Transco’s enjoyed by shareholders, and thereafter every operation is inherently dangerous, outputs and service standards for the next transferred to consumers. where our environmental performance is five years is complicated by wider structural under constant scrutiny, and where our and public policy issues. Here, as in other aspects of Transco’s actions affect millions of consumers. performance, our aim is top-quartile 05

performance in relation to comparable to provide state-of-the-art infrastructure to sound basis for the unbundling of regulated infrastructure providers. serve the new mass markets for broadband operational services from regulated Historically, Transco’s performance in this and internet-based services. Transco. In all these cases, our aim is to regard has been exemplary, as shown by create competitive service businesses as a the 36% reduction in the unit cost of Our fibre-optic network provider, 186k, source of future growth in deregulated transporting gas between 1997 and 2000. is on course to complete its national markets. backbone network in the final quarter of But the drive for improvement can never 2001. Complementing this, we have We are also pursuing promising leads for be relaxed. So, over the last two years, recently signed a joint venture agreement deploying our expertise and experience Transco has made substantial progress with Thames Water enabling us quickly outside Great Britain as the basis for in restructuring and in focusing the and efficiently to obtain fibre-optic access growth businesses in overseas markets, management of its operations on to London’s large broadband market especially in Continental Europe and continuing performance improvement. via the sewers. This connectivity will North America. Prime examples of this are the progressive considerably enhance the market reach separation of Transco’s asset management of 186k’s network. Outlook from the operational servicing of the The Lattice Group is only a few months assets; and the successful ‘Performance Our early progress in marketing the old. This year will obviously be a crucial Challenge’ being pursued by individual capacity of 186k’s national network has one for our future prospects: first and Local Distribution Zones. confirmed the attractiveness of its prime foremost for establishing Transco’s new attributes – its state-of-the-art technical regulatory framework and the basis for its The development of growth standards, and the highest levels of system sustained performance drive; and secondly, businesses free of utility price reliability. the development of growth businesses and regulation options. Recognising this, we have set Although Transco provides us with a The SpectraSite Transco joint venture to ourselves demanding objectives, but we platform of world-leading capabilities and provide co-located services on the many have the capabilities and shared experience, it offers limited scope for new telecoms towers needed for the third commitment to achieve them. In doing so, future earnings growth because of the generation of mobile phones is facing a we will lay the foundations for the Lattice progressive tightening of (RPI-X) price ready market for its services, and is already Group’s future success. regulation. Our aim, therefore, is to generating significant revenue. It is focused establish successful growth businesses on delivering ambitious construction and based on our expertise in infrastructure commercial targets. management and technology, and free of utility price regulation. In the course of the current year, we aim to unbundle the Connections business from The prime candidates for such high-growth the regulated business, Transco plc, and be development are the new telecoms well on the way to unbundling the Phil Nolan Chief Executive businesses – 186k and the SpectraSite Metering business. Similarly, we intend to Transco joint venture – established last year have made good progress in establishing a Lattice Group Annual Report and Accounts 2000 06 Business review

The Group operates one of Europe’s Introduction Telecoms: The Group is developing a few gas infrastructures with a truly For administrative and regulatory fibre-optic telecoms business, 186k, based national footprint, we are purposes Lattice is sub-divided into on the existing countrywide coverage of its developing state-of-the-art two subsidiary holding groups: gas transportation network. It has entered telecommunications networks on a Transco Holdings and Lattice Group the market with the start of a construction national scale, and we manage Holdings. programme for a national fibre-optic other enterprises in property and network connecting 12 UK major centres vehicle fleet management and Transco Holdings of demand. The network will be capable scientific research. Transco, Transco Holdings’ principal of handling high-capacity broadband subsidiary, is the owner, operator and transmission and related telecoms services. developer of the substantial majority of Great Britain’s gas transportation system. The Lattice Group has also commenced The Company is required by law to a joint venture with SpectraSite, a US maintain high standards and reliability wireless communications infrastructure across all its operations. Transco also business, to develop a towers business in operates all of the LNG storage facilities in the UK, to meet the growing demand for Great Britain. towers by the mobile communications industry as it moves from second to third The gas transportation business is highly generation (3G) mobile telephone regulated and is subject to price regulation technology. The UK model has the and a price control formula adopted potential to form the basis for further following the MMC report in 1997. The expansion of this business onto the basis of regulation for Transco in the next European stage which is experiencing price control period, which commences on similar levels of growth in demand. 1 April 2002, is currently under review and Transco is actively engaged in those Other activities: Our other businesses discussions with Ofgem – the Regulator. include property management, fleet services, scientific and engineering Lattice Group Holdings consultancy, multi-utility infrastructure Lattice Group Holdings has two main services and the provision of outsourced business areas: Telecoms and Other pensions and payroll administration. These activities. services are provided both to other companies within the Group and to third parties. 07

Continuing operations – consolidated results

Lattice Group plc Transco Holdings Lattice Group Holdings and adjustments Lattice Group 2000 1999 2000 1999 2000 1999 2000 1999 £m £m £m £m £m £m £m £m Turnover 2,975 3,058 208 124 (96) (53) 3,087 3,129 Total operating profit 958 1,160 (38) (7) 90 108 1,010 1,261 Notional adjusted earnings 339 474 (9) (9) 73 76 403 541 Cash inflow from operating activities before exceptionals 1,489 1,039 48 44 5 9 1,542 1,092 Capital expenditure 658 419 142 112 – – 800 531 Net borrowings (6,842) (6,766) 564 146 276 50 (6,002) (6,570) Net assets 5,686 5,619 314 279 267 (225) 6,267 5,673

Demerger 1999 Restructuring and Refinancing and Lattice Group plc On 23 October 2000, the Lattice Group also to the Basis of Preparation on page 49. was demerged from BG Group. Demerger was effected by the transfer of certain The ‘BG’ name and the ‘British Gas’ name companies to Lattice in return for the issue are no longer used in the corporate name of shares by Lattice to existing shareholders Transco Holdings plc Lattice Group of any company that will form part of the Holdings Ltd of BG Group on the basis of one Lattice Transco plc Group. Following the Demerger, the share for each BG Group share. Lattice Telecoms special share in BG Group was redeemed Other operating shares started trading on the London companies and a new special share issued to the Stock Exchange on 23 October 2000. Secretary of State for Trade and Industry by Lattice. The provisions of the new During 1999, while part of the BG Group, The consolidated results of Lattice Group’s special share are substantially the same as the Group’s businesses were restructured continuing operations, including those of the special share in BG Group. to reflect the regulatory ring-fence around acquisitions, and the respective results of Certain special rights set out in the Transco. This was achieved by having the the separate subsidiary groups, Transco Company’s articles of association attach regulatory business held in a separate Holdings and Lattice Group Holdings, are to the new special share. The new special subsidiary group (under Transco set out in the table above. Comparative share carries no right to capital or profits Holdings). information for Lattice is taken primarily beyond its nominal value. from that shown in the listing particulars In addition, to reflect a more efficient issued for Lattice. Comparative Lattice shares are traded on the London and transparent capital structure for the information for Transco Holdings has been Stock Exchange. Transco is a public regulated business, Transco Holdings was taken from its prior year accounts and limited company registered in England refinanced by the issue of bonds with a comparative information for Lattice Group with debt securities traded on the London value of approximately £1.5 billion. Holdings has been extracted from the Stock Exchange and 6.625% Guaranteed underlying accounting records of the Notes due 2018 traded on the New York The Demerger created a new listed companies comprising that group. All Stock Exchange. Transco files a Form 20-F company, Lattice, whose principal three sets of information are presented on with the Securities and Exchange businesses are outlined above. Following a comparable basis in both years. Commission to meet US regulations. the Demerger, the Lattice Group was itself Lattice, as an SEC non-registrant, has been restructured to maintain the ring-fence A further analysis of these results, with exempted from the requirement to around Transco plc which will continue a reconciliation to the results of Lattice produce a Form 20-F. Additional to be held by Transco Holdings. Lattice Group and the adjustments arising on information, prepared in accordance with Group’s other businesses were transferred consolidation, can be found on pages 86 US regulations, can be found in Transco’s to a new intermediate holding company in to 88. The results of the Lattice Group for Form 20-F (included in its Annual Report December 2000 which was established for 2000 and 1999, and comparisons between and Accounts). this purpose. The following chart illustrates the two years, should be considered with the current structure: reference to both the Demerger and the Lattice Group Annual Report and Accounts 2000 08 Transco

Transco aims to maximise performance whilst maintaining the highest standards of safety and reliability and meeting all other service standards.

2000 HIGHLIGHTS Transco e-transactions each day, operating the Transco is responsible for physical and commercial gas transportation Transported 10% more gas than in 1999 developing and maintaining Great regime in the UK. £907 million invested in extending, expanding Britain’s gas pipeline network. Gas and maintaining the system, an increase of £288 million over 1999 is received at seven coastal Gas is transported on behalf of Achieved a 34% reduction in Lost Time Injuries terminals and transported via approximately 60 gas ‘shippers’ from the Ofgem formally initiated its review of Transco’s 275,000 km of pipes to some coastal terminals, nine major storage sites 2002 Periodic Review 20 million consumers and third and three small onshore fields to consumers party pipeline systems. As Britain’s and third party pipeline systems. The NTS is FUTURE PLANS primary gas transporter, our connected to the Bacton terminal, which commitment to the safe and reliable exports and receives gas to and from Our commitment to providing an infrastructure operation of the system underpins Continental Europe via the Interconnector capable of meeting expected gas demand and all our activities. pipeline to Zeebrugge. The interconnector at continually improving safety standards is demonstrated by our continuing programme Moffat, Scotland, transports gas to Dublin of investment in the network: Transco plays a central role in the gas and Belfast. Transco’s transportation services Total demand expected to grow by up industry. We have a near monopoly of gas are predominantly to one customer, British to 17% by 2004 transportation activities in Britain, owning, Gas Trading Limited, a subsidiary of Investment in the range of £3.0 billion to £4.2 billion expected in the next four years operating and developing the substantial Centrica plc, which has a majority share Expenditure on replacement work is expected to majority of the system. The transportation of the domestic market in Great Britain. increase by more than 30% this year system comprises approximately 275,000 km of high pressure National Transmission Transco operates all of the LNG storage System (NTS) and lower pressure (local facilities in Great Britain, located at strategic transmission) and distribution pipelines. positions on the NTS. The major purchasers The physical infrastructure is supported of LNG storage services are customers who by ‘UK Link’ a major part of Transco’s IT ship gas through the NTS, as well as Transco infrastructure which holds 40 terabytes itself in its role as transporter. of data. This system processes one million

1.07am NOTHING IS MORE IMPORTANT THAN SAFETY

At Transco's three call centres up to 930 staff answered 6.3 million calls in 2000 – 95% within 30 seconds. 2.9 million calls were to the free 24-hour-a-day helpline.

If you smell gas call 0800 111 999* * All calls are recorded and may be monitored 09

In accordance with the terms of our Licence, all gas transporters, gas production facilities, pressure ductile iron mains by the end of 2002. we have established the Network Code to gas processing facilities, storage facilities, provide the commercial framework for the interconnectors and others. We are also In accordance with Scottish law, the HSE’s transportation of gas within our network in required to maintain high standards of report on a fatal accident at Larkhall in Great Britain. safety. Under the ‘Gas Safety (Management) December 1999, in which four people died, Regulations’, we have to submit a ‘Safety was passed to the Procurator Fiscal in Our gas transportation business is regulated Case’ to the Health and Safety Executive September 2000. Transco is awaiting the and subject to a price control which will run (HSE), giving details of our arrangements for outcome of his consideration. An inquiry until 31 March 2002. Transco LNG services managing supply security and in responding into a fatal accident in Dundee in October are offered to shippers under an annual to supply emergencies or gas escapes. 2000, in which two people died, is auction and to Transco at administered continuing. It is not yet known when the prices as defined in Transco’s PGT licence. Uncertainty exists over future supply inquiry will be completed. There was a fatal patterns that the NTS will need to accident in Batley, Yorkshire, in November Further information is set out in the accommodate. Also, recent market in which two people died. A coroner’s regulation section on page 33. developments, particularly with respect to inquest has been opened and adjourned oil price volatility, offshore investment and pending the completion of investigations. As well as transporting gas we are gas production, have increased uncertainty. responsible for the safety, development and One of the most significant developments Emergency services maintenance of the transportation system. is the deterioration in the United Kingdom Transco operates a free national gas Continental Shelf (UKCS) annual supply emergency number: 0800 111 999 (all calls System integrity and security outlook compared with the situation as are recorded and may be monitored). During Our Licence requires the system be designed recently as two years ago. 2000, our staff in the three national call to meet a 1 in 20 aggregate peak day centres dealt with 6.3 million telephone calls demand after taking into account certain In 1999 Transco reviewed its policy on from the public and responded to 1.3 million operational factors such as use of storage replacement of some 4,200 km of medium reports of gas escapes and emergencies. and interruptible contracts. This is the level pressure ductile iron distribution mains in the of demand that has a probability of being light of best information on its integrity and 95% of all calls (99% of gas escape calls) exceeded in only one year in 20 years, based performance. As a consequence of this, were answered within 30 seconds against upon historical weather data for at least the Transco agreed with the HSE an accelerated a target of 90%. previous 50 years. In the event of a major programme of replacement. The agreement gas supply emergency Transco is required to was formalised with the issuance of an HSE 98% of responses to uncontrolled escapes act as the Network Emergency Co-ordinator, Improvement Notice. As a result, we aim to were made within an hour against a target responsible for co-ordinating the actions of replace an additional 2,360 km of medium of 97%.

2.30am 6.23am 2.30am Transco responded to some 1.3 million reports of gas escapes and other emergencies during the year.

6.23am Polyethylene pipe for new and replacement pipelaying commissions is distributed throughout the country from the National Distribution Centre, Birmingham. 06:23 08:37

Emergency services

ALL CALLS TO THE CALL CENTRE RESPONSE TO UNCONTROLLED RESPONSE TO CONTROLLED ANSWERED WITHIN 30 SECONDS ESCAPE WITHIN 1 HOUR ESCAPE WITHIN 2 HOURS

Target 90% Target 97% Target 97% Achieved 2000 95% Achieved 2000 98% Achieved 2000 99% Achieved 1999 98% Achieved 1999 98% Achieved 1999 99% Achieved 1998 90% Achieved 1998 97% Achieved 1998 99% Lattice Group Annual Report and Accounts 2000 10

The National Transmission System 99% of responses to controlled escapes Following the introduction of competition (NTS) receives gas from seven were made within two hours against a into the domestic gas market, a growing coastal terminals, nine major storage target of 97%. number of companies is involved in sites and three small onshore fields transportation, supply and ancillary services. before transmission via 6,400 km of Results from an independent customer They rely on Transco to make the high pressure pipeline throughout survey showed that 94% of people reporting competitive market work. During 2000 Great Britain. Regional transmission a gas escape were satisfied or very satisfied Transco extended its secure internet data and distribution is managed by 12 with the outcome of their call to our call access service provided to shippers, allowing Local Distribution Zones (LDZs). centres. information on some 20 million domestic meter points to be viewed. We also operate a free 24-hour helpline for consumers whose appliances or pipework Employees need more extensive repair once they have The number of Transco permanent been made safe by a Transco engineer. In employees at the end of 2000 was 14,263 2000 this helpline gave over 213,000 callers compared with 14,366 in 1999. This follows the details of their local Council for the transfer of 249 employees to Advantica Registered Gas Installers (CORGI) during the year. The number of agency staff engineers. fell by 87 to 2,184.

Customer standards of performance Transco has continued to benefit from the and service wide experience of its staff. During 2000 Transco aims to meet a range of both 1,084 employees submitted ideas to the contractual and statutory standards of Suggestion Scheme and 800 shared a total service. These cover public standards, which of £106,500 in awards payments. These include the important Emergency Standards suggestions resulted in a saving to Transco described in the section on Emergency of £2 million in 2000. Services, together with those on Transportation, Connections, Meterwork Business developments in 2000 and Complaints. Aggregate performance 2000 has seen significant system, regulatory across all these standards was 95%. No and structural developments in Transco. individual standard is targeted below 90%. System developments in 2000 In addition to monitoring and reporting During 2000, the total gas transported was HOW BRITAIN’S GAS PIPELINE SYSTEM WORKS on standards of service, we seek regular 1,101,152 GWh (101,630 million standard National Transmission System (NTS) Reception terminals from offshore gas fields feedback from customer and market surveys. cubic metres assuming a calorific value of NTS compressor stations This in turn drives continuous 39MJ/cuM), an increase of 10%. This was High pressure transmission system improvements in service to both shippers principally due to the high volumes Local Distribution Zones (LDZs) and consumers. transported to the large users connected to Boundaries of LDZs the NTS, most notably exports to Europe.

8.30am 9.53am

8.30am The working day begins at Transco's asset 9.53am Transco monitors both gas flows and quality as it management centre in Sunderland. enters the NTS – 24 hours a day, 365 days a year. Transco continued 11

A total investment of £216 million was As part of our continuous replacement GAS TRANSPORTED mcm completed in the National Transmission programme, we replaced 1,684 km of mains System as part of the continued planned and 154,000 service pipes at a cost of increase in capacity. £249 million.

2000 101,630 New NTS pipelines were commissioned Regulatory developments 1999 92,123 from Bridge Farm to Birch Heath in Ofgem formally initiated its five-yearly Cheshire, Newbold Pacey to Honeybourne review of Transco’s 2002 price control in 1998 81,415 in Warwickshire, Wormington to Tirley in May. As part of the Periodic Review process, 1997 77,169 Gloucestershire and Peterstowe to we made our first major information Llanvetherine in South Wales. On the LDZ submission to Ofgem in December in the CAPITAL AND REPLACEMENT EXPENDITURE transmission system automatic welding was form of a completed Business Planning £m used for the first time on a 48 inch diameter Questionnaire (BPQ). This information is high strength steel pipeline from Drointon an important part of the evidence that has to Sutton on the Derbyshire/Staffordshire been considered by Ofgem in the 2000 907m border. The new pipelines, plus projects in formulation of its initial thoughts for the Kent and Sussex, added about 115 km to the 2002 Review, which was published on 1999 619m high pressure network within the LDZs and 28 February 2001. Ofgem intends to publish 1998 722m will help the system meet increased demand its draft proposal in June 2001, followed by a 1997 654m for gas in the Midlands and South. final proposal in September 2001, effective from April 2002. Major modifications were also undertaken at the Churchover compressor station to Our response to the BPQ made reference to improve efficiency and reduce emissions. the significant uncertainty we face in terms A third compressor unit was commissioned of system investment, increased reliance on at the Aberdeen compressor station to the national system and the potential for increase throughput. new obligations arising from changing public policy objectives in response to an Transco invested £365 million on the emerging ‘new agenda’. medium and low pressure system in connecting an additional 151,915 domestic For the first time we are seeing increasing and 9,738 non-domestic properties to the tightness in long-term supplies with the network. This required the laying of prospect of greater dependence on imports 703 km of new mains. We installed and considerable uncertainty over where gas 1,665,000 new and replacement meters. will be landed. At the same time, there is an Transco also invested £64 million to provide increasing public focus on the importance of additional capacity to meet consumers’ secure energy supplies, particularly in the requests for a gas supply. wake of the fuel crisis last Autumn.

10.33am BALANCING THE SYSTEM

Gas is transported on behalf of over 60 shippers from seven coastal terminals and nine major storage sites to the meters of more than 20 million industrial, commercial and domestic consumers.

System Operation remotely monitors pressures at some 2,000 key points on the transportation system. Lattice Group Annual Report and Accounts 2000 12

While Transco continues to maintain safety Progress was made in the separation of maintains assets on behalf of the owner, levels, there are heightened concerns over Transco’s metering and meter reading established four geographic service groups, public safety generally, increasing the focus activities. With effect from 1 April 2000, which comprise the majority of the on the rate of replacement of metallic mains separate price controls were established for workforce. This change seeks to both that may increase the overall investment these activities. Disaggregated metering enhance current performance and prepare programme. charges were published in August for phased for a progressive move into the competitive implementation from October 2000. An market. Five operating brands have also Our submission emphasised our belief Ofgem document titled ‘Review of Gas been established – Replacement; Repair; that the Periodic Review must give us the Metering Arrangements’, published in Design, Build & Maintain; First Call flexibility to invest appropriately in the August, outlines a joint Ofgem/Transco Emergency; and Meterwork – with the safety and reliability of the network. programme for changing the way that objective of creating a clear focus on each metering and meter reading processes are activity. In addition, as a result of emerging public organised throughout the industry. Part policy objectives, such as the social and of this process will involve the physical The separation of Transco’s Engineering environmental guidelines set out in the separation of our metering and meter Services and Technical Training Unit was Utilities Act 2000, there is a potential for the reading businesses and the establishment completed in April 2000. Following scope of Transco’s obligations to increase. of a metering protocol setting out the rights Ofgem’s consultation with the industry, The developing social and environmental and obligations of all parties within a 249 employees were transferred to Advantica. agenda, which for example includes tackling competitive environment. fuel poverty, connecting ‘non-gas’ areas to For more information regarding regulation the mains network, and reducing The separation of the Connections business of Transco, please see page 33. greenhouse gas emissions, will impact on progressed with the establishment of four Transco’s scope of activities. separate offices to provide quotations and www.transco.uk.com manage associated work. Financial Structural developments separation took place in 2000 with further During 2000 we have continued the IT separation continuing into 2001. programme of restructuring the business to support the separation of those assets and Further progress was made in separating activities that can be deregulated and moved asset management from operational into competitive markets. activities. Operations Management, which

11.15am

11.15am Outside Buckingham Palace. As part of our continuous modernisation programme, 1,684 km of mains and 154,000 service pipes were replaced nationally last year. Transco tries to minimise the disruption to all concerned. 13

Telecoms

Lattice launches its new telecoms network businesses.

2000 HIGHLIGHTS Telecoms We are developing a fixed telecoms In 2000 we launched our new business, initially based on the existing Committed some £450m investment in fixed telecoms network business. 186k, countrywide coverage of our gas telecoms business – 186k a wholly-owned subsidiary, will transportation network. The business has 186k acquired 20% stake in Bulldog Communications Ltd for US$4m develop a new fibre-optic network been named 186k and initial funding was Invested £130m of assets in telecommunications and our joint venture with agreed in July 2000. 186k is entering the towers joint venture with SpectraSite SpectraSite will invest in market by constructing a national fibre- Acquired Aerial Sites plc and AGL Systems telecommunications towers. optic network connecting 12 major centres International Ltd for £65m of demand for high-capacity broadband During 2000, Lattice made a number of transmission and related telecoms services. FUTURE PLANS investments in the fixed telecommuni- cations and mobile infrastructure sectors. In September 2000, we invested Lattice’s commitment to expanding the telecoms business will continue in 2001 with: Entry to these markets has been based on approximately US$4 million for a 20% Planned expansion of towers business into exploitation of existing assets and stake in Bulldog Communications selected European countries capabilities, allied to external expertise and Limited, which is a competitive local Completion of the backbone fibre-optic network in strong partner and supplier relationships. exchange company planning to exploit the the UK The timing of these investments coincides unbundling of BT’s local copper networks Exploration of opportunities to extend the reach of fibre network into regional and metropolitan with a number of key market changes to supply wholesale digital subscriber line area networks including technology convergence around (DSL) products and services. optical and Internet Protocol (IP) networks, strong market growth driven by internet In June 2000, we formed a joint venture usage and the emergence of new with SpectraSite, a US wireless communi- broadband products and services. cations infrastructure company, to develop a telecoms towers business to meet growing European demand from the mobile communications industry as it moves from second to third generation (3G) mobile phone technology. Lattice contributed assets with a fair value of £130 million, valuing the initial business at £260 million. In August 2000, the joint venture acquired Aerial Sites plc and AGL Systems International Limited for approximately £65 million (including goodwill).

1.20pm TELECOMS

SpectraSite Transco plans to be able to offer a nationwide network of over 2,000 telecoms towers to potential customers.

These will be offered on a ‘joint use’ basis so as to minimise the number of extra towers required by mobile phone companies. Lattice Group Annual Report and Accounts 2000 14

186k The network will be approximately Nortel is also delivering the phase 1 We have approved an initial 2,000 km in length, connecting London, operations and systems platforms. £450 million investment programme Birmingham, Manchester, Glasgow, Bristol, A joint venture with Thames Water has to establish a state-of-the-art Newcastle, Edinburgh, Leeds, Nottingham, been agreed to provide fibre national backbone fibre-optic Reading, Leicester and Carlisle. These 12 connectivity in London. network (and associated electronic centres of demand will provide some 20 A headquarters building ‘The Spectrum’ equipment and software) to connect points of connection for third party has been established in Reading that 12 major centres of demand in networks. will also house the Network Operating Great Britain for high-capacity Centre. broadband transmission and Building on Transco’s established expertise Initial marketing initiatives have Internet Protocol based telecoms in land management and pipelaying concentrated on the lease or sale of dark services. It is intended that some techniques and by mainly following the fibre and managed bandwidth services of these services will be available routes of gas trunk lines, 186k plans to lay its to provide early revenues. Target by mid-2001. national fibre-optic network rapidly across customers are other telecoms operators, the country, with minimum disruption to telecoms service providers, internet and road traffic, and in compliance with best application service providers and some environmental practice. selected large customers.

Significant progress has been made in A 20% stake was taken in Bulldog establishing 186k: Communications Limited, a company PTO and Oftel operating licences have established to offer high speed internet, been obtained. broadband and other telecommunications Network construction, electronics and services on a wholesale basis using systems design work has been unbundled local loops supplied by British 1.38pm completed. Telecommunications plc. 186k will seek to A turnkey duct and fibre construction exploit network synergies with its core contract has been let and network build backbone and hopes to utilise Bulldog to is proceeding. deliver broadband DSL services to its Property, to house and power main customers. network node sites, is being provided from within internal property portfolios 186k has also grown rapidly and at and from external sources. 31 December employed 180 people Nortel Networks has been selected as at the headquarters in Reading. our network equipment vendor/partner and is under contract. www.186k.co.uk

1.38pm 186k is entering the fixed telecoms business by constructing a national fibre-optic network connecting 12 major centres of demand for high-capacity broadband transmission and related telecoms services. Telecoms continued 15

SpectraSite Transco We have contributed existing operational In addition, we are actively looking for Our 50:50 joint venture with US- communications structures and rights to opportunities for the development and based SpectraSite provides industrial land suitable for the acquisition of towers in other key infrastructure services to wireless construction of new towers into the joint European markets. communications operators, initially venture, with a fair value of £130 million, in Great Britain, ranging from the in return for a 50% stake. SpectraSite’s The European mobile infrastructure market planning and construction of mobile 50% matching contribution to the joint is expanding rapidly and growth is communications towers through to venture, also valued at £130 million, expected to continue as wireless operators the marketing, leasing, co-location included cash of £108 million, know-how, prepare for the roll-out of 3G mobile and management of site networks. wireless network development skills and its communications in 2002. interests in two UK wireless network development and service companies, The joint venture subsequently acquired Ample and Telink. Aerial Sites plc and AGL Systems International Limited (AGLSIL) for a Some 700 established communications consideration of approximately structures, previously operated by Transco, £65 million. Aerial Sites plc has a portfolio are in the process of being transferred to of over 900 rooftop and other sites for use the joint venture. 270 of the planned 700 as wireless communication sites under structures have already been transferred. contract, with further sites under The joint venture will also have the negotiation. AGLSIL is one of only two opportunity to access our substantial specialist contractors approved by all of the portfolio of industrial and commercial current UK public network operators, in property from which it is planned to the rapidly emerging in-building wireless 2.15pm develop 1,500 new towers. 130 such sites sector. These acquisitions will help the have already been transferred to the joint joint venture to offer coverage for mobile venture. In total, we aim to be able to offer operators across towers, rooftops and a nationwide network of over 2,000 in buildings. telecoms towers to potential customers. The business has grown rapidly and at The initial focus is Great Britain, where 31 December employed 329 people based demand for communications towers is at a head office in Watford and in a being driven by the introduction of 3G number of regional offices including mobile telephony licences. It is expected Coventry, Manchester and Bristol. that 3G mobile telephony licensees planning countrywide coverage will each www.spectrasite-transco.co.uk require access to up to as many as 15,000 communications tower sites compared with about 3,000 for existing second generation mobile networks. Recognising the 2.15pm The European mobile infrastructure market is environmental and planning concerns that expanding rapidly and growth is expected to continue as wireless operators roll out third generation mobile will stem from this expansion, the joint communications in 2002. venture will offer access to its towers on a co-location basis. Lattice Group Annual Report and Accounts 2000 16 Other activities

Advantica The company signed a major contract The Leasing Group Advantica – formerly BG with Invensys Energy Metering jointly to The Leasing Group undertakes Technology – specialises in develop and market a range of new gas leasing and asset management for supplying technology, software, energy meters and also established a a variety of complex vehicle fleets engineering, training and testing business to distribute new microturbine and mobile plant both for Lattice services to customers in gas, technology for energy-saving combined Group and for a growing number pipelines and associated industries heat and power applications in the UK. of external customers, including internationally. We further increased our commitment to the public sector. environmental management by setting The company employs nearly 800 people up a new Energy and the Environment We are currently focusing on supplying in the UK and in North America, bringing business. complete fleet services. Our expertise and together experience in a wide range of experience in fleet maintenance control, technical engineering and commercial Advantica’s reputation for technical which includes the entire Transco disciplines. This experience is supported by excellence and innovation is reflected in commercial fleet, is complemented by specialist test facilities at Spadeadam and the awards won during the year. These engineering, procurement and project Bishop Auckland which provide the included the Queen’s Award for Enterprise management capabilities. In November capacity for large scale hazard testing, high in the category for Innovation – for we were awarded the contract for a major pressure meter calibration, gas processing developments in the area of field service 20 year Private Finance Initiative for the and modelling. and diagnostics; the Institute of Materials’ London Fire and Emergency Planning Prince Philip Award for Polymers in the Authority. The £314 million contract will 2000 has been a year of great change and Service of Mankind; and, for the third cover all of the Authority’s vehicle and growth for Advantica, partly as a result of consecutive year, an Advantica employee operational equipment requirements for the integration of the Engineering Services was presented with the UK Institution of the area within the M25 motorway. and Training Services divisions from Gas Engineers’ Gas Industry Engineer of Transco and also due to the continued the Year award. On Demerger, The Leasing Group’s LNG growth in business with customers outside fuel business was transferred to BG Group. the Lattice Group. We continue to play a www.advanticatech.com We are continuing to develop alternative significant role in technology improvement fuel opportunities with major fleet and for the gas industry – developing a lower public sector customers. cost method of safety testing polyethylene pipes used for gas distribution, and In November 2000, The Leasing Group supporting Transco in the safe and cost- acquired a controlling interest in Bynx, effective replacement of gas mains. a software company specialising in advanced Oracle-based systems for the international leasing and mobile asset management sectors.

www.the-leasing-group.com

3.02pm 3.18pm 3.02pm Advantica's expert staff have created substantial value providing technology and engineering solutions for the gas industry.

3.18pm Lambeth Fire Station. The Leasing Group has been awarded a 20 year Private Finance Initiative contract with the London Fire and Emergency Planning Authority to provide and maintain the Authority's vehicle and operational equipment requirements within the M25. 17

Lattice Energy Services Lattice Property Eastlands Lattice Energy Services provides Lattice Property manages Lattice’s Eastlands (Benefits Administration) large energy consumers and extensive portfolio of land (excluding provides pensions administration, developers with a range of multi- Transco’s operational land) extracting payroll bureau services, accounting, utility infrastructure services such value from surplus land and property database administration and as new gas, water and electricity where appropriate. managed mailing services to Lattice connections, conversions to gas Group companies, pension scheme and installation of combined heat The property portfolio was assembled in trustees and other external and power. January 1994 and consists of land and customers. During 2000 Eastlands buildings occupied for business needs, was incorporated as a wholly owned Lattice Energy Services is not a supplier of properties leased to third parties, surplus subsidiary of the Lattice Group. gas or electricity and so is able to provide properties and land, much of the latter large industrial and commercial energy being contaminated from former gas works Eastlands was established in 1995 as users with an independent service for their use. A provision of £487 million was the Company’s centralised pensions unit. energy infrastructure. established in prior years to deal with the In-house pensions services are now remediation of contaminated sites. At provided on behalf of the Lattice Group 2000 was a year of growth with more than 31 December 2000 a discounted provision trustees for 16,000 current employees, 150 customers, of which 27 industrial of £298 million remained to deal with the 35,000 deferred members and 77,000 customers were converted to natural gas, estimated future costs. pensioners and dependants. saving 65,000 tonnes of carbon dioxide emissions per annum, completion of more Lattice Property continues to reclaim During 2000 Eastlands won additional than 50 energy surveys and the award of brownfield sites throughout the country, payroll contracts and increased its Lattice Energy Services’ first combined working with all interested parties to return portfolio of third party pension heat and power plant construction and land to the beneficial use of the administration clients to seven. maintenance contract. community. A current example of such work is on a former gas works site of 12 www.eastlands.co.uk www.energyhelp.co.uk acres in Cambridge. A planning consent has been received allowing this derelict land to be developed for supermarket and residential use. The holders have been removed and following the resiting of gas equipment the site will be remediated prior to handover to the purchasers later in the year.

www.lattice-property.com

3.37pm 4.02pm 3.37pm Lattice Energy Services working on a valve pit for Centrax at its site in Newton Abbot, Devon.

4.02pm A site on Newmarket Road, Cambridge. Lattice Property is returning many former gas works sites to beneficial use. Historic contamination of the sites requires a variety of soil remediation techniques. Lattice Group Annual Report and Accounts 2000 18 Health, Safety and the Environment

Although Lattice is a new group, the The key aims of the Group’s Health, Safety managers and practitioners from each of core values with respect to health, and Environment (HS&E) policy are: the business units meet regularly to share safety and the environment that To eliminate all injuries and work-related knowledge. have been established over many illness. years remain one of our highest To control the effect of our activities on The Chairman’s Awards encourage the priorities. the environment by reducing emissions, sharing of good HS&E practice. waste and unnecessary use of natural Outstanding HS&E achievements are resources. recognised and celebrated at an annual To promote dialogue and respond ceremony. Entries are encouraged not only positively to the concerns of employees, from Group companies, but also from our customers, shareholders and the public. contractors and partners.

The starting point for achieving these aims Lattice and Transco have played a leading is the establishment and maintenance of role in the establishment of industry-wide effective HS&E management systems, groups to promote gas safety in Great integrated into all business processes and Britain. line management functions. Lattice sets standards for the whole Group, but The Gas Industry Safety Group is now individual companies are responsible for firmly established as the successor to Vigil establishing systems and policies for bringing together all parts of the gas achieving best practice. industry to tackle safety issues collectively. Priorities for the group include restoration Despite the different activities of our of customers’ gas supplies, carbon businesses, HS&E is an area where all parts monoxide awareness and safety research. of the Group can learn and improve from each other’s experience. The leading HS&E The Gas Industry Emergency Committee was established in October, chaired by Lattice Executive Director John Wybrew. Its principal purpose is to ensure that the British gas industry has comprehensive contingency plans and is fully prepared to play its part in tackling the consequences of a large-scale gas supply failure.

4.05pm ENVIRONMENTAL REGENERATION

Dearne Valley, near Rotherham. Transco Green Futures is a training and job creation project supported by the Lattice Foundation under the Government’s New Deal Environmental Task Force option. 19

LOST TIME INJURY TOTALS TOTAL RAISED IN THE SAFETY CHARITY CHALLENGE £000 15 MONTHS TO THE END OF DECEMBER 2000 LDZs Centre sites 4 NTS Total: £752 Total: £210 17 Connections NTS 36.75 Wharf Lane 29.5 Scotland 22 SC 49.5 Shirley 21.0 11 Centre NO 71.5 NDC 17.0 NW 55.5 51 Homer Road 17.0 North 10 YO 87.0 Gloucester 19.0 Yorkshire 15 EM 62.0 Killingworth 27.5 31 N. West E. Midlands 26 WM 54.0 Dorking 15.0 31 W. Midlands WA 75.0 31 Homer Road 19.0 15 Wales E. Anglia 15 EA 68.0 Hinckley 27.0 N. London 36 26 S. West NL 45.5 Lansdowne Gate 18.5 SE 38.5 SE 19 South S.East 29 SO 64.5 SO SW 44.0 SW

We continue to support the Gas Industry By the end of 2000 the Challenge had Improving the provision of management National Training Organisation in raised over £962,000 as a result of information. developing training standards for workers eliminating potential hazards and A comprehensive review of Control of in the gas industry. In December it contributed to the annual reduction in Substances Hazardous to Health announced a £1.5 million training and job LTIs of 34%. The initiative is continuing in (COSHH) assessments. creation package to address the skills 2001. shortage in the UK gas services industry. Environment Transco was issued with four Improvement Lattice businesses continue to be In 2000 Transco continued working to Notices by the HSE. The first required encouraged to seek external certification meet the recommendations arising from replacement of medium pressure ductile of their environmental management the HSE’s major audit the previous year iron mains at Larkhall following an systems. Following successful surveillance which included many positive comments. incident in December 1999. visits, Transco maintained certification of In November, the HSE started a its Environmental Management system to programme of inspections to satisfy itself The second required improvements to ISO14001. Lattice Energy Services that the recommendations had been met. arrangements when working in the vicinity achieved ISO14001 certification in 2000. of third party oil pipelines. Both these Lattice Property is well on the way to Transco uses the CBI Contour Tool, Notices were complied with within the achieving certification in 2001. a bundle of HS&E performance criteria requisite timescale. endorsed in the recent Government There has been an investment programme publication ‘Revitalising Health and The third formalised an agreed approach to to upgrade physical assets to meet new and Safety’, to benchmark HS&E practice and the accelerated replacement programme for developing environmental legislation and performance. 2000 saw improvements in medium pressure ductile iron pipe. By the its associated performance improvements. Transco’s position so that it is now end of 2002 we aim to have replaced an significantly better than the average of additional 2,360 km of ductile iron mains. Lattice produces an Environmental Review other UK utility companies. Transco’s which will be published in the Spring. stated aim is to achieve World Class A fourth Notice required improvements to practice by the end of 2001 as defined procedures for supervising radiography and Business Principles by the Contour Tool. was complied with. As part of the launch of the Group we ensured that all our employees were Improvements to Transco’s Lost Time Health familiar with a unifying set of Business Injury (LTI) rate continued in 2000 (see Throughout 2000 Transco has developed Principles, defining our values and guiding chart above). Transco achieved a 34% a five year Health Strategy designed to our day-to-day operations. We set much reduction in its LTI rate compared to 1999, deliver a pro-active health system into the store by these principles and intend to with 307 lost time injuries to employees, company. The parts of the strategy review them to ensure that they remain compared with 468 in 1999. The most implemented this year include: suited to Lattice. significant improvements occurred in the Reaffirming the responsibilities of more serious ‘over three day injury’ category. managers for the health of their workforce. Transco completed the first year of its Improving health awareness of Safety Charity Challenge in October. This employees, contractors and agency staff. initiative links reductions in injuries Strengthening of health procedures. sustained at work and the identification Developing the provision of and removal of potential hazards with occupational health surveillance for donations to MENCAP/ENABLE, the employees at risk. charity for people with learning difficulties. Lattice Group Annual Report and Accounts 2000 20 Social initiatives

Lattice continues to invest skills, time and money for the well-being of the communities in which we operate.

Lattice is committed to playing a The Group’s social responsibility of local projects to ensure that vital role in the community. programme has three main principles: communities benefit at grass roots level Intelligent corporate citizenship is it is committed to behaving in a socially and that the Group makes a real and the driver behind our commitment responsible manner wherever it operates; lasting difference to local communities. to play a leading and innovative role it believes that sustained commercial And thirdly, we run a ‘matched giving’ in social responsibility activities. success is only possible if the communities scheme, which doubles the funds raised it serves are also thriving; and contributing by our staff. socially benefits the Company’s reputation. The Foundation also focuses support on three areas of activity. We seek to minimise The strategy is based on being forward social deprivation and exclusion and looking, trying to anticipate society’s regenerate local communities. Recognising problems and piloting innovative, practical the Group’s commitment to the natural solutions at a local or grass roots level. environment, we encourage energy efficiency and support projects that aim The Lattice Foundation to save energy and help low-income Through the Lattice Foundation, we aim to groups affected by fuel poverty. And we help find solutions to some of the most help people to engage in continuous pressing social problems faced within the learning and self-development so as to communities where we operate and where realise their full potential in the face of we live. constant change. 4.25pm Our partnership with the Reading Young Offenders Institution helped over 70% of the first intake The Foundation works with local There are many examples of the Lattice find employment on release. communities in Great Britain to support Foundation in action. and develop a wide range of ground- 4.25pm breaking social exclusion and regeneration Most notably in 2000 we set up a pilot projects. This is done in partnership with scheme with Reading Young Offenders both the voluntary and public sectors. Institution to partner and train 50 young offenders in forklift truck driving. Over We provide help in three ways. Each year 70% subsequently found employment, we support a number of new ‘flagship with only three re-offending. The scheme projects’ that attract significant levels of won Business in the Community’s funding, employee skills and time. These Focused Action 2000 Award. projects represent a major commitment to improving the communities we serve. We are providing almost £1 million over Secondly, we support an active programme three years for up to 1,500 unemployed 21

4.45pm 4.45pm Lattice CRED is a workplace based learning programme aimed at 14-16 year olds. “The average attendance of these pupils before Lattice CRED was about 40%. To see this leap to 85% is tangible evidence of the scheme's success." Andrew Daykin, Head of Education, Reading Borough Council.

18-24 year olds on the Government’s averaged 85% compared to an estimated Transco – Affordable Warmth New Deal Environmental Task Force 40% in their previous schools. Transco’s Affordable Warmth programme, programme through our flagship Transco a major initiative to alleviate fuel poverty Green Futures initiative. The young people Lattice is the first UK company to create in Great Britain, gathered pace over the are given paid work and training up to a place of learning of this type and there year. Heat leasing contracts were entered NVQ level 3. This project is a partnership is considerable interest in the progress of into with Local Authorities including with Groundwork, the environmental this visionary project. Lattice CRED is Derbyshire, North Lanarkshire and East regeneration voluntary organisation. likely to be the forerunner of similar Renfrewshire. The first trainees in energy Schemes include general landscaping and schemes throughout the UK. measures and advice and gas heating physical improvement of public areas with installation successfully completed their employees setting up their own contracting www.lattice-foundation.com courses. The Affordable Warmth business on completion and training in programme was featured at all the major home insulation, energy awareness advice political conferences and positive backing and survey techniques. Almost half the was received from key political figures. trainees on the scheme are getting jobs, which is double the national average. Transco is also managing one of the Government’s five pilot ‘Warm Zones’ And in the education field, Lattice in partnership with Stockton-on-Tees Creative Education (CRED) is a ground- Borough Council. breaking initiative based in a Learning Centre built within The Leasing Group www.affordablewarmth.co.uk business in Reading. Aimed at those who find traditional school difficult, we provide an alternative education for up to 50 14-16 year olds from local schools.

The young people follow a work-related curriculum, spending three days a week at the Learning Centre developing literacy and numeracy skills and studying for a Business Studies GNVQ. They spend the remaining two days on work experience placements.

The scheme is now in its second year and in the first year pupils’ attendance figures Lattice Group Annual Report and Accounts 2000 22 Operating and financial review

2000 was another year of change, with the Demerger in October, continuing restructuring in Transco, and new telecommunications ventures.

2000 was yet another year of Introduction unwinding of the pension provision in continuing structural change with This Operating and financial review prior years (£18 million) and the operating Lattice being demerged and its focuses on the continuing operations of costs associated with the start up phase of shares now trading on the London those businesses that were demerged as the new telecommunications ventures Stock Exchange, following the 1999 part of the Lattice Group on 23 October (£22 million in 186k and £4 million in the Restructuring and Refinancing 2000 or which were acquired subsequently. towers joint venture). Lastly, exceptional which separated the non-regulated The Demerger has been accounted for operating costs of £43 million arose in businesses from Transco Holdings under the principles of merger accounting connection with the Demerger. plc and Transco plc. Business which apply in the context of a group development continued with reconstruction such as this. As a result, the Demerger emphasis on continuing current year information, the comparative The Demerger created a new listed restructuring within Transco and information and the four year financial company, Lattice Group plc. Shares in new telecommunications ventures summary of the Group accounts have been the Company were issued to BG Group in fibre optics and mobile prepared on the same modified historical shareholders on a one for one basis in infrastructure. cost basis. The accounts exclude activities return for the businesses transferred to transferred to other BG Group companies Lattice (the original BG Group shares were 2000 was also a year of contrasts in in the Demerger carried out in 2000 and the retained by shareholders). the core Transco business: growth in 1999 Restructuring and Refinancing. The gas volumes shipped for the fourth four year summary also excludes activities Following the Demerger, the businesses year in succession, contrasted with demerged as part of Centrica plc in 1997. within the Group were restructured in falling revenues as price cuts of December 2000 into two sub-groups: 3% and 4% in 1999 had a full year Restructuring of the activities within Transco Holdings, the principal impact. The effect of these cuts Transco continued, with the plans for the subsidiary of which is Transco, a was compounded by an additional unbundling of Connections and Metering business ring-fenced for regulatory price cut of 3% in May 2000. activities proceeding. The Group also purposes, separated from the remainder took the first steps in establishing new of the Lattice Group; and telecommunications ventures in both Lattice Group Holdings, an intermediate fixed fibre optic technology and mobile holding company that owns the new towers infrastructure. telecommunications ventures and the other Group subsidiaries covered on Lower total operating profits of pages 16 and 17. £1,010 million, having fallen by £251 million from £1,261 million year The focus of Transco Holdings is to on year, principally reflect the impact of maximise performance of its regulated a series of regulatory price cuts in the utility business. It is intended that some core Transco business (£147 million). of the existing service activities that are Offsetting this was an increase in volumes presently held within the regulated Transco transported, generating a year on year business will be progressively moved increase in turnover of £64 million. outside the regulatory ring-fence. This gives A one-off increase in operating costs the Group the opportunity to create a arose in respect of a charge for potential substantial utilities services business, both liabilities arising from the Network Code to meet the operational service and other shipper issues (£50 million) and requirements of Transco’s assets and to increased replacement expenditure seek other opportunities in the utilities (£49 million) in Transco. In addition, a sector and also to explore other ways of reduced pension credit in line with the creating shareholder value. 23

The focus of Lattice Group Holdings £624 million. Lattice Group’s earnings per The 2000 results reflect the third full year includes the new businesses set up to realise ordinary share were 11.0 pence compared of the operation of the current five year the opportunities in the telecommuni- to 17.7 pence in 1999. price control period for gas transportation, cations sector in Great Britain (through the implemented with effect from 1 April 1997. complementary use of its gas-related Adjusted earnings per ordinary share 2000 was the first full year of the current infrastructure and expertise) and elsewhere. (before operating exceptional items and LNG Storage price control period, Lattice Property, The Leasing Group, disposals) for continuing operations and implemented with effect from 1 April 1999. Advantica and Lattice Energy Services are acquisitions were 11.6 pence in 2000 also held by Lattice Group Holdings and compared to 17.5 pence in 1999. Adjusting Following initial reductions averaging 13% options for creating value from these 1999 earnings for the full year impact of the in October 1997, the gas transportation subsidiaries are being reviewed. Restructuring and Refinancing would give formula resulted in two further reductions like for like earnings per ordinary share in in charges in 1999, by an average of 3% The regulatory ring-fence 1999 of 15.5 pence. from 1 May and then by an average of 4% The 1999 Restructuring and Refinancing from 1 October. In 2000 transportation involved separating the UK regulated Both basic and adjusted earnings per charges were again reduced by an average of business (Transco) from the other ordinary share in 2000 were reduced by 3% from 1 May. With effect from 1 April businesses in order to provide a ‘ring-fence’ 1.0 pence as a result of a one-off charge of 2000, Transco’s single price control formula around Transco’s regulated operations and £50 million for potential liabilities arising was split into three components, also to give the other businesses more scope from the Network Code and other shipper transportation, metering and meter reading. to pursue growth opportunities. The 1999 issues. The Network Code liabilities were In October 2000 metering charges for the Restructuring and Refinancing was also incurred by Transco as a result of the domestic market were introduced and undertaken in order, amongst other things, application of tolerances in meter readings average gas transportation charges were to reduce the cost of capital of the Transco that were wider than those prescribed. reduced to offset the revenue from these Holdings sub-group. new charges. In 2000 the Group’s total capital The ring-fence around Transco plc is also expenditure was £800 million (1999 Transco is actively engaged in discussions designed to ensure the financial, organis- £531 million), comprising investment in with Ofgem and the wider industry in ational and managerial independence of regulated tangible fixed assets of respect of the Periodic Review that is Transco. As such, it regulates, amongst £658 million (1999 £419 million) and currently under way. The final outcome of other things, relationships and transactions additions to other fixed assets of the Review, which is still uncertain, will between Transco and other companies in £142 million (1999 £112 million) decide the form of regulation Transco will the Group. The 1999 Restructuring and £86 million of which was in respect of The operate under for the five year period from Refinancing has provided increased Leasing Group. Capital expenditure and 1 April 2002. This will also decide the price regulatory clarity to Transco. investment of approximately £1,200 million control mechanism to be applied to is projected for 2001. Transco revenues in that period. The Overall results financial outcome of the Review is A summary of the financial highlights of In addition, total replacement expenditure uncertain and it may or may not have a Lattice as a whole, and the sub-groups within Transco was £249 million (1999 significant impact on the value of the Transco Holdings and Lattice Group £200 million). The increase in replacement business. Further information on the Holdings, is shown on page 7. A more expenditure was caused largely by the regulation of Transco, the existing price detailed analysis of this split, including a implementation of a planned accelerated control formula and the current Periodic reconciliation between Lattice’s results and replacement strategy for medium pressure Review can be found in the Regulation the sub-groups’ results, is shown on pages ductile iron mains that the Company has section on pages 33 to 37. 86 to 88. identified for early replacement. Total expenditure on the accelerated replacement Consolidated profit for the financial year plan of approximately £300 million is in 2000 was £383 million, a decrease of projected (including the expense in 2000). £241 million on the 1999 profit of

TRANSCO OPERATING PROFIT £m TRANSCO £m (unless stated) Operating profit With weather effect 2000 1999 1998 Total throughput (TWh): – At actual temperatures 1,101 998 882 – At SNT 1,131 1,038 918 Operating costs 2,017 1,898 1,838 Replacement expenditure 249 200 165 2000: 1,029 Capital expenditure 658 419 557 1999: 1,262 Direct manpower 1998: 1,327 Year end headcount 14,263 14,366 14,036 Lattice Group Annual Report and Accounts 2000 24

Operating and financial review

Operating results – continuing operations and acquisitions of £202 million. The underlying movements in revenues and operating costs that caused Modified historical cost total operating this decrease are outlined below. Group turnover profit/(loss)

2000 1999 2000 1999 Transco’s turnover was £2,975 million in £m £m £m £m 2000 compared to £3,058 million in 1999. Transco 2,975 3,058 958 1,160 The 2000 decrease of £83 million was due to the cumulative effect of two price cuts Other activities 208 124 (38) (7) averaging approximately 3% and 4% made Pension credit – – 90 108 in 1999 and a further price cut averaging approximately 3% in 2000 (decrease of Less: intra-group sales (96) (53) – – £147 million in total). Offsetting this was Total Group 3,087 3,129 1,010 1,261 an increase of £64 million arising from a 10% increase in volumes due to colder year on year temperatures and underlying New accounting standards The total dividends paid by these entities volume growth, primarily in the export At the end of 2000, the Accounting in 1999 were £296 million of which market. Standards Board published three new £119 million was paid to BG Group, post Financial Reporting Standards (FRSs). the 1999 Restructuring and Refinancing. Operating costs of £2,017 million in 2000 These were FRS 17 ‘Retirement Benefits’, The 3.5 pence per ordinary share shown include £50 million in respect of a one-off FRS 18 ‘Accounting Policies’ and FRS 19 as the interim dividend in 2000 was a charge for potential liabilities arising from ‘Deferred Taxation’. The Company has not contribution to the BG Group 2000 Network Code and other shipper issues, applied them in preparing this year’s interim dividend. £41 million of exceptional Demerger costs Annual Report and Accounts. However, for and additional replacement expenditure of information purposes only, an outline of For the remainder of the current regulatory £49 million. Demerger costs in 2000 the main requirements of those standards period Lattice will, in the absence of include £19 million in respect of employee is shown in note 1 to the accounts, unforeseen circumstances, maintain the level share options crystallising on Demerger page 57. Full application of the Standards is of dividend payments at 7.0 pence per share, and £22 million of other costs relating to compulsory for FRS 18 in 2001, FRS 19 in in real terms. professional fees and relocation of the 2002 and FRS 17 in 2003. head office. Operating costs in 1999 In determining the medium to longer term included charges of £20 million in respect Dividends dividend policy, the Board believes that it of the Restructuring and Refinancing The Board has recommended a final may be appropriate to retain a proportion described above, attributed to Transco. dividend in respect of the year ending of earnings to fund the growth of the 31 December 2000 of 3.5 pence per share unregulated businesses. Excluding all these items, the underlying which, with the contribution to the cost base in 2000 was in line with 1999, BG Group interim dividend as set out in In addition, the outcome of Transco’s next £1,877 million compared to £1,878 million. the announcement of BG Group’s interim Periodic Review is expected to be This was achieved despite a 10% growth in results for the six months ended 30 June announced in September 2001 and will volumes transported, a 34% increase in the 2000, would represent 7.0 pence per share take effect in 2002. The Board recognises cost of gas used in operating the network for the full year, had the Demerger taken that, when the new price control formula in quarter four, costs of the continuing place on 1 January 2000. becomes operative, Lattice’s dividend will restructuring within Transco and other need to be reviewed and that it may general inflationary pressures. The impact Until the Demerger, the entities that form be necessary to reduce the dividend of the increase in gas costs will continue the Lattice Group were part of the significantly from current levels. to be felt in 2001 with further additional BG Group group of companies and costs of approximately £30 million over therefore had no direct dealings with Transco the year. public shareholders. However, intra-group Operating profit in 2000 was £958 million dividends were paid by these entities. compared to £1,160 million in 1999, a fall

TRANSCO OPERATING COSTS (OPEX) £m Base opex Depreciation Replacement expenditure One-off opex

2000: 2,017 1999: 1,898 1998: 1,838 1997: 2,054 Operating and financial review continued 25

Direct manpower at the end of the year regulatory real rate of return for the three During the year, 186k (the Group’s fibre- was 14,263, 103 lower than in 1999. This formula years 1997/98 to 1999/2000 was optic telecommunications network reflects the transfer of 249 staff to 8.5% as compared to the MMC projection subsidiary) was established as a separate Advantica, offset by increased graduate of 7.2%. The MMC’s benchmark for the business and incurred operating expenses recruitment and substitution of agency whole formula period is 7%. of £22 million in the six months to staff by direct employees. 31 December 2000 (1999 £nil). Revenues The results for Transco’s first three are not expected to begin to accrue until In order to measure underlying regulatory years in the current five year completion of the first fibre-optic loop performance, Transco calculates the effect period are set out on page 84. linking London, Reading, Bristol, of the weather on its results as relatively Birmingham and Leicester in 2001. warmer weather leads to decreased sales As at 31 March 2000, Transco’s estimated and, therefore, decreased operating profit. regulatory value was £12,007 million (1999 SpectraSite Transco was also created during The actual temperature is measured against £11,806 million) against the MMC’s the year. The Group’s share of operating seasonally normal temperature (SNT) assumption of £12,588 million (1999 losses was £4 million. The business has which is the average temperature at a £12,229 million). Lower investment in already established revenue streams during particular time of the year over the past ten the three years of the formula period to the period, totalling £10 million in the six years. The reported results are not adjusted 31 March 2000 was the principal reason for months to 31 December 2000. These for SNT, but underlying operating the difference. As at 31 December 2000, represent £25 million of revenues on performance can be tracked by reference the estimated regulatory value was an annualised basis. to such adjusted figures. Relative to SNT, approximately £12,600 million. the weather in 2000 was warm, leading to a The Leasing Group also incurred operating reduction in operating profit of £71 million, Transco’s 2000 capital expenditure was losses of £6 million (1999 £6 million although not as warm as in 1999 when the £658 million compared with £419 million profit), largely as a result of falling residual impact was a reduction of £102 million. in 1999. This increase was mainly the result values in the leased vehicle market. of expenditure on new NTS and other high Transco is subject to a price control formula pressure pipeline projects. The Group has set aside £20 million for agreed with Ofgem after taking into possible future insurance claims, in excess account, amongst other factors, Transco’s In addition to the capital spend above, of existing cover limits, in respect of operating costs, capital expenditure and Transco charged the cost of replacing employer’s liability claims and other replacement expenditure, cost of capital and components of certain categories of uninsured losses. transportation volumes for the period April tangible fixed assets relating to the gas 1997 to March 2002. A Periodic Review to transportation system in Great Britain During 2000 £24 million (1999 £21 million) establish the price control formula for the as an operating cost. In the year ended of the provision for environmental costs five year period commencing 1 April 2002 31 December 2000, this amounted to together with £12 million (1999 £14 million) is currently underway. £249 million compared to £200 million of the property portfolio restructuring costs in 1999. were utilised. At the beginning of 2000, a The formula includes a variable known as provision of £310 million was brought the ‘K-factor’ which is used to adjust Other activities forward to cover the cost of reclamation and allowed revenues for a particular formula Total operating losses in 2000 were regeneration of property sites. After the year (which operates from 1 April each £38 million compared to losses of spend in 2000 and the unwinding of year) for any accumulated under-recovery £7 million in 1999. The principal source discount, the provision carried forward at or over-recovery of formula allowed of the operating loss was the new the end of 2000 was £298 million. revenue from prior years (refer to page 33, telecommunications ventures which are Regulation). The K-factor must be progressing through their start-up phases Pension credit accounted for on a receipts basis and (£22 million in 186k and £4 million in the The Pension credit at Group level arose cannot be accrued. The £77 million K-factor towers joint venture). following a review of the fair pension that was recovered in the year to 31 March charges attributable to the active employees 2000 included the £7 million that was Other activities principally comprise the of each business unit, linked with the under-recovered as at 1 April 1999. This Group’s telecommunications operations actuarial valuation of the Lattice Group created a net over-recovery of £70 million (fixed fibre-optics – ‘186k’ and the mobile Pension Scheme (formerly the BG Group which is currently expected to decrease infrastructure joint venture – ‘SpectraSite Pension Scheme) as at 31 March 1998. It is to £20 million at the end of the 2000/01 Transco’), Lattice Property, The Leasing shown separately in the Segmental analysis year. Group, Advantica, Lattice Insurance, Lattice in note 2 to the accounts, page 58. Energy Services and Eastlands. Following The regulatory real rate of return for the the corporate restructuring late in 2000, Total operating profit from the Pension 1999/2000 formula year to 31 March 2000 these businesses are now held within the credit in 2000 was £90 million compared was 9.9% (1998/99 formula year 9.1%). Lattice Group Holdings sub-group. to £108 million in 1999. Excluding the recovery of the K-factor from Corporate activities of the new Group the previous formula period, the cumulative company also form part of ‘Other activities’. Lattice Group Annual Report and Accounts 2000 26

Profit on disposal of fixed assets Cash flow physical construction of the network Profit on the sale of fixed assets in 2000 at Cash inflow from continuing operations, (£131 million) and for the provision of £15 million was lower than in 1999 which before exceptional items, was technology solutions (£67 million). showed profits of £37 million. Lattice £1,542 million in 2000 compared to Property earned disposal profits of £1,092 million in 1999. The increase in Receipts in respect of the disposal of fixed £68 million, offset by losses on disposal 2000 is primarily due to decreases in assets and investments were £120 million of assets by Transco of £34 million. working capital arising from the one-off in 2000 and £163 million in 1999. Receipts impact in 1999 of a change in Centrica’s in 2000 and 1999 arose mainly from The Group has also earned an unrealised payment policy for gas transportation property disposals. profit of £10 million (reported in the charges (£450 million), offset by lower Statement of total recognised gains and revenues and higher operating costs in Net borrowings losses) by transferring assets into the Transco. Net borrowings for continuing operations SpectraSite Transco joint venture at a fair decreased to £6,002 million at 31 December value in excess of the current book value. Cash outflow relating to operating 2000 from £6,570 million in 1999. The Half of all the gains have been eliminated exceptional items rose to £36 million from 2000 decrease was primarily due to a one- on consolidation of the Group’s share of £35 million in 1999. Exceptional cash off cash outflow in 1999 in respect of a the joint venture’s assets. outflows in 2000 and 1999 included change in the payment policy of British environmental expenditure and property Gas Trading Ltd, a subsidiary of Centrica Interest restructuring costs. plc and Transco’s largest customer Lattice Group’s net interest payable rose to (£450 million) and the settlement of inter- £444 million in 2000 from £357 million in Returns on investments and servicing of company balances with BG Group 1999. This reflects the £1.5 billion bond finance accounted for net cash expenditure companies on Demerger (£505 million). issue in mid-December 1999 as part of the of £444 million in 2000 (1999 £395 million), These reductions were offset by higher Restructuring and Refinancing. This has the increase reflecting the higher interest capital expenditure (£240 million). had a full year impact in 2000 of payments as a result of the full year impact £109 million as opposed to the impact of the increase in net borrowings referred Net borrowings is split between the utility of a half month charge in 1999 of to above. (Transco Holdings sub-group) and the approximately £5 million. This is non-utility group as shown in the table equivalent to a 2.0 pence reduction in Taxation paid of £202 million compared below. earnings per ordinary share. to £162 million in 1999. Lattice Group shareholders’ funds as at The total interest charge includes Payments to acquire subsidiary and 31 December 2000 were £6,267 million £19 million arising from the unwinding of associated undertakings and other fixed compared with £5,673 million at the discounted long-term provisions for assets amounted to £763 million in 2000 beginning of the year, split £5,686 million environmental costs (1999 £19 million). compared to £523 million in 1999. in the utility and £581 million in the There are no cash flows associated with Expenditure in 2000 included £15 million non-utility. As at 31 December 2000 this portion of the interest charge. investment in telecommunications fixed the gearing ratio (net borrowings as a assets and payments to enhance Transco’s percentage of total debt plus equity) was Taxation gas distribution network (£216 million 49% compared with 54% at 31 December Lattice Group’s tax charge for 2000 was on the high pressure network and 1999. £198 million as against £317 million in £365 million on the medium and low 1999, reflecting lower operating profits and pressure system). In addition, The Leasing The increase in gearing levels in 1999 a lower deferred tax element of the charge. Group expenditure was £86 million, the shown in the table below was the result of The historical cost effective tax rate was majority of which was on commercial the 1999 Restructuring and Refinancing. 27.4% for 2000 compared to 28.3% vehicles. This successfully reduced the Group’s cost in 1999. of capital to a more appropriate level for Contracts to the value of £198 million were the nature of the Transco business. also signed in the year by 186k for the

NET BORROWINGS £m GEARING (DEBT/DEBT+EQUITY) %

Transco plc (ring-fenced) (5,331) Transco Holdings plc (1,511) 2000 49 Total utility borrowings (6,842) 1999 54 Non-utility funds 840 1998 33 Net Group borrowings (6,002) 1997 38 Operating and financial review continued 27

As at 31 December 2000, Lattice Group borrowings as at 31 December 2000 are arising on borrowings in any 12 month had unused, uncommitted multi-currency shown in notes 14 to 17 of the accounts, period, and by specifying a minimum borrowing facilities of £1.534 billion. In pages 70-73. average duration for borrowings. This addition, the Group had US$0.896 billion policy restricts the Group from having of short-term (364 day) undrawn Transco’s financial position enables it to an excessively large amount of debt to committed facilities and US$1.046 billion borrow on the wholesale capital and refinance in a given time-frame. During of long-term undrawn committed facilities. money markets and most of its borrowings the year a mixture of short-term debt and are through public bonds and commercial long-term debt was issued. As at 31 December 2000, Lattice Group had paper. The borrowings of Transco/Transco a US$1.25 billion Euro Commercial Paper Holdings contain no restrictive covenants. Interest rate risk management Programme (US$1.1 billion unissued); The interest rate exposure of the Lattice a US Commercial Paper Programme of The Group places surplus funds on the Group arising from its borrowings and US$2.5 billion (US$1.4 billion unissued); money markets usually in the form of deposits is managed by the use of fixed a US$ Extendible Commercial Note short-term fixed deposits which are and floating rate debt, interest rate swaps, Programme of US$0.5 billion (unutilised); invested with approved banks and swaptions and forward rate agreements. and a Euro Medium Term Note Programme counterparties. Details of the Group’s The Group’s interest rate risk management of E5.0 billion (E1.4 billion unissued). short-term investments as at 31 December policy is to seek to minimise total 2000 are shown in note 13 to the accounts, financing costs (i.e. interest costs and Treasury policy page 70. changes in the market value of debt) The Group’s funding programme and debt subject to constraints so that even with management is split between Transco plc There now exist within the Group different large movements in interest rates, neither and Transco Holdings plc which supports credit rated entities. Transco plc has a the interest cost nor the total financing the activities of the regulated utility and credit rating of A2/A. Transco Holdings plc cost can exceed pre-set limits. Lattice Group Holdings Ltd which supports has been separately rated A3/A-. It is a the non-utility businesses of the Group. condition of the regulatory ring-fence Some of the bonds in issue from Transco Lattice’s Treasury department raises all of around Transco plc that it uses reasonable Holdings are index-linked, i.e. their cost is the funding for the Group and manages endeavours to maintain an investment linked to changes in the UK Retail Price interest rate and foreign exchange rate risk. grade credit rating. The outlook on each is Index (RPI). Management believes that stable. Lattice Group Holdings Ltd does these bonds provide a good hedge for Following the Restructuring and not have a rating. Transco Holdings revenues which are also Refinancing in 1999, the Group had RPI linked under the price control formula. already established separate financing The main risks arising from Lattice’s programmes for Transco Holdings which financing activities are set out below. The The performance of the Treasury have been carried forward post-Demerger. Board reviews and agrees policies for department in interest rate risk All funding is approved by the Finance managing each risk and they are management is measured by comparing Committee of the Board, and the use of summarised below. the actual total financing costs of its debt derivative financial instruments is controlled with those of a passively-managed by policy guidelines set by the Board. Refinancing risk management benchmark portfolio. The Board principally controls refinancing Details of the maturity, currency and risk by limiting the amount of financing interest rate profile of the Group’s obligations (both principal and interest)

MATURITY OF 2000 NET BORROWINGS £m A Within 1 year 1,141 B 1 to 2 years 312 C 2 to 3 years 707 D 3 to 4 years 443 E 4 to 5 years 147 F Over 5 years 3,252 Total 6,002

A

B F C D E Lattice Group Annual Report and Accounts 2000 28

Foreign exchange risk management Valuation and sensitivity analysis The amount of commitments and Lattice Group has a policy of hedging Lattice calculates the fair value of debt and contingencies in respect of the Transco certain contractually committed foreign derivative instruments by discounting all business, which is ring-fenced for exchange transactions over a prescribed future cash flows by the market yield curve regulatory purposes, is also disclosed, minimum size. It covers 75% of such at the balance sheet date. In the case of along with details of the cross indemnity transactions expected to occur up to six instruments with optionality, the Black’s between Transco plc and BG Energy months in advance and 50% of variation of the Black-Scholes model is Holdings Limited, a subsidiary of BG transactions in the six to twelve month used to calculate fair value. Group plc (note 22 to the accounts, period in advance. Cover generally takes page 78). the form of forward sale or purchase of For debt and derivative instruments held, foreign currencies and must always relate the Group utilises a sensitivity analysis Litigation to underlying operational cash flows. technique to evaluate the effect that There are a number of historic claims changes in relevant rates or prices will have brought against the former British Gas plc Counterparty risk management on the market value of such instruments. (now Transco) relating to the forced early Counterparty risk arises from the retirement of women at the age of 60 investment of surplus funds and from the As at 31 December 2000, the potential before the Company’s rules changed to use of derivative instruments. The Board change in the fair value of the aggregation equalise retirement ages. There are has agreed a policy for managing such risk, of long-term debt and derivative approximately 35 current cases which which is controlled through credit limits, instruments was £57 million assuming a Transco is challenging on the basis that approvals and monitoring procedures. 10% change in the level of interest rates they have been brought ‘out of time’. (1999 £79 million). Although Transco was successful at first Derivative financial instruments held for instance, the cases are currently being purposes other than trading Commitments and contingencies appealed to the Employment Appeal As part of its business operations, Lattice is Note 22 to the accounts, page 78, details Tribunal. Pursuant to an indemnity exposed to risks arising from fluctuations the Group’s commitments (including those agreement entered into between the new in interest rates and exchange rates. Lattice for capital expenditure) and contingencies. BG Group and Lattice at Demerger, Lattice uses off-balance sheet derivative financial The Group proposes to meet these will take responsibility for such claims. instruments (derivatives) in order to commitments from both the operating cash manage exposures of this type and as such flows of the business and existing lines of Conoco and Chevron (Britannia Field they are a useful tool in reducing risk. credit. partners) issued proceedings against Lattice’s policy is not to use derivatives for BG plc (now known as Transco plc) in the trading purposes. Derivative transactions In the last quarter of the year, two incidents fourth quarter of 1999. The claim is for can, to varying degrees, carry both occurred which caused four fatalities. approximately £17.4 million plus interest counterparty and market risk. These incidents are currently under and costs. Damages for continuing losses, investigation by the Health and Safety which have not yet been quantified, and a Lattice enters into interest rate swaps in Executive (HSE). The HSE report on an declaration that Transco is contractually order to manage the composition of incident in December 1999 has been bound to the claimants, are also sought. floating and fixed rate debt, and so hedge provided to the Scottish Procurator Fiscal The claimants seek to rely on alleged the exposure of borrowings to interest rate who is undertaking further enquiries and a assurances given in 1994 by the then movements. Lattice enters into foreign decision is now awaited on possible Transco director of development regarding currency swaps in order to manage the criminal action which could carry an the provision of capacity for gas flows at currency composition of borrowings and unlimited fine. and away from the St Fergus terminal. The so hedge the exposure to exchange rate claim relates to alleged losses suffered as a movements. Certain agreements are In 1999 Transco reviewed its policy on the result of capacity constraints at the St combined foreign currency and interest replacement of some 4,200 km of medium Fergus terminal after October 1998. rate swap transactions. Such agreements pressure ductile iron distribution mains in Proceedings have been issued, pleadings are known as cross-currency swaps. the light of best information on its exchanged, disclosure partly completed integrity and performance. As a and a timetable set for preparation of Lattice enters into forward rate agreements consequence of this, Transco agreed, with evidence and steps to a trial on liability, in order to hedge interest rate risk on the HSE, an accelerated programme of scheduled for June 2001. short-term debt and money market replacement. The agreement was formalised investments. Forward rate agreements are with the issue of an HSE Improvement Transco has received a notice of arbitration commitments to fix an interest rate that is Notice. As a result, 2,360 km of medium from Vintage Petroleum South America to be paid or received on a notional pressure ductile iron main is required to be Holdings Inc. (Vintage) in connection deposit of specified maturity, commencing replaced by the end of 2002. Transco has with a dispute concerning a sale and at a future specified date. achieved the current year portion of purchase agreement dated 30 June 1995 replacement set out in the Improvement between Vintage and British Gas plc (now Notice. Transco) (the SPA). Under the SPA, Operating and financial review continued 29

Vintage acquired the entire share capital of The Group has received a number of procedures and no latent issues have BG Argentina S.A.. Vintage claims to have claims and anticipates receiving further subsequently manifested. suffered a loss due to breach of warranties claims in respect of employer’s liability under the SPA in relation to the applicable insurance. While the Directors believe that The euro royalty rates under two hydrocarbon no individual claim would be significant, Eleven European countries entered into concessions owned or once owned by BG £20 million has been set aside against the Economic and Monetary Union (EMU) Argentina S.A. and also seeks to rely on likely level of claims in excess of insurance on 1 January 1999 and their ‘legacy indemnities in the SPA in respect of unpaid reserves. The Group is insured for such currencies’ became denominations of the royalties and related costs. Vintage has claims which occurred in the post- euro with fixed exchange rates. This has estimated that its loss is approximately privatisation years and partially insured had minimal impact on the operations of US$10.4 million together with an, as yet, for such pre-privatisation claims. An the Lattice Group. The UK may join EMU unquantified loss in respect of future indemnity agreement entered into at at a later date permitting sterling to convert royalty payments, interest, legal costs and Demerger will apply for the purpose of irrevocably into the euro. The Lattice arbitration costs. These allegations by determining liabilities between Lattice and Group’s assets, revenues, and costs are Vintage have been rejected by Transco and BG Group for such pre-privatisation almost totally denominated in sterling. the allegations will be contested. Pursuant claims. to an indemnity agreement entered into at There have been a number of initiatives Demerger, any liability will be borne by Transco is in dispute with Siemens within the Lattice Group to identify the BG Group. Metering Ltd with regard to Electronic significance of UK conversion into the Token Meters provided by Siemens single European currency. The Lattice There are historic pensions claims Metering Ltd to Transco. At present the Group has undertaken a high level impact originally lodged against British Gas plc parties are seeking to settle the dispute. analysis and identified key impact areas, (now Transco plc) relating to provisions in If these discussions do not reach a namely systems, training and the pension scheme which, until 1990, satisfactory conclusion it is possible that communications. The primary assumptions restricted access to the pension scheme for Transco will issue formal proceedings and trigger points for action have been individuals on the basis of the number of against Siemens Metering Ltd. No defined and a monitoring brief is being hours worked per week. Such provision proceedings have yet been issued. maintained, with regular reporting into the may amount to indirect sex discrimination Following a test of Electronic Token Meters Lattice Group Executive Committee. where women account for a significant in Wales a decision will be taken by majority of those affected. Where such Transco as to whether formal proceedings The Lattice Group will continue to discrimination exists and cannot be should be issued and, if so, as to the value monitor and upgrade the progress already objectively justified, there may be liability. of the claim. made on assessing the implications of There are currently approximately 1,100 EMU for the Lattice Group. such claims with the possibility of more Principal accounting policies claims being lodged by current employees Principal accounting policies are shown who worked on a part time basis between on pages 49-51. 1976 and 1990. The claims are now proceeding through the Employment US GAAP reconciliation Tribunals following the House of Lords’ As a non-registrant with the Securities and ruling confirming that provided that Exchange Commission (SEC), the Group claims are brought within six months of has been exempted from any requirement termination of employment, an employee to prepare information on the basis of US can claim in respect of any losses suffered Generally Accepted Accounting Principles from 1976 onwards. The cases are now (GAAP). However, Transco, the Group’s being reviewed with a view to establishing principal subsidiary, is an SEC registrant those claims that are ‘out of time’, the by virtue of debt securities listed on the potential compensation payable and the New York Stock Exchange and within its prospects of successfully defending the Annual Report and Accounts can be found claims. These claims are subject to an additional information prepared in indemnity given by Centrica plc entered accordance with US GAAP, including into when Centrica plc demerged from significant differences between UK and British Gas plc on 17 February 1997 in US GAAP. respect of those individuals who were Centrica employees. Transco plc has Year 2000 lodged a claims notice with Centrica plc The Group remained vigilant to latent Y2K under this indemnity. issues throughout the period since 1 January 2000. The residual risk has been managed by existing operational Lattice Group Annual Report and Accounts 2000 30

The Board of Directors 31

Sir John Parker FREng (58) Dr Philip Nolan (47) Sir David Davies FRS, FREng (65) Chairman and Non-executive Director Chief Executive Non-executive Director Was appointed to the Lattice Group Board Was appointed to the Lattice Group Board Was appointed to the Lattice Group Board in September 2000. He is also a Non- as Chief Executive in September 2000, in September 2000. He has been President executive Director of GKN plc, P&O having joined British Gas plc in 1996 and of the Royal Academy of Engineering since Princess Cruises plc and Firth Rixson plc. became Managing Director of Transco in June 1996. He was formerly Chief He is a past President of the Royal June 1997. He spent 15 years with BP and Scientific Adviser to the Ministry of Institution of Naval Architects and a in 1995 was seconded to the role of Defence from 1993-1999. He is a former Fellow of the Royal Academy of Managing Director, Interconnector UK, Vice-Chancellor of Loughborough Engineering. He is a Member of the the consortium formed to construct and University of Technology. In October 1999 General Committee of Lloyds Register of operate the pipeline which links the gas he was asked by the Deputy Prime Minister Shipping and Chairman of its Technical network of the UK to that of mainland to produce a report on Automatic Train Committee, and Vice-President of the Europe. As Chief Executive of the Group, Protection Systems for the railway which Engineering Employers Federation. He had he has overall responsibility for operations, was published in February 2000. He is a a long career in the shipbuilding and and specific responsibility for Transco, the director of ERA Technology Ltd and was engineering industries working for British 186k telecommunications business, the made Chairman designate of Railway Shipbuilders Corporation and Harland & Advantica technology business, and the Safety in June 2000. He is Chairman of the Wolff. He was Group Chairman and Chief legal and strategic planning and Safety Committee of the Board. (b)(e)(f) Executive of Babcock International Group development functions. (a)(c)(d) plc and remained Group Chairman until Steve Lucas (46) December 2000. As Chairman he has Kenneth Harvey (60) Executive Director, Finance responsibility for management of the Non-executive Director Was appointed to the Lattice Group Board, Board and oversees the strategic direction Was appointed to the Lattice Group Board as Executive Director, Finance, in of the Group. He is also Chairman of the in September 2000. He is currently September 2000. A Chartered Accountant, Nominations and Finance Committees of Chairman of Pennon Group plc (formerly he worked in private practice in the City of the Board. (b)(c)(d) South West Water). A chartered engineer, London until 1983, specialising in he is a former Chairman of NORWEB plc corporate tax. He then joined Shell Christopher Hampson CBE (69) and of Comax Holdings Ltd. He is also International Petroleum Company, Non-executive Director Non-executive Chairman of both The occupying a number of finance and Was appointed to the Lattice Group Board Intercare Group plc and Beaufort Group treasury roles. Moving to British Gas plc in in September 2000, having joined the BG plc. He is Chairman of the Remuneration 1994, he was appointed Treasurer of BG Board in October 1997. He is also Non- Committee of the Board. (b)(d)(e) Group on 1 December 1998. As Executive executive Chairman of the RMC Group Director, Finance, he has responsibility for plc, and Non-executive Chairman of Baroness Warwick (55) all financial matters, including treasury and British Biotech plc. He is a Non-executive Non-executive Director taxation. He also has specific responsibility Director of the engineering group SNC- Was appointed to the Lattice Group Board for the Leasing and Property businesses Lavalin Group and the electricity company in September 2000. She has been Chief and for the information services function. TransAlta Corp., both in Canada. He is Executive of Universities UK (formerly the (a)(c) Vice-President of the Combined Heat and Committee of Vice-Chancellors and Power Association. (b)(e) Principals) since 1995. She was previously John Wybrew (59) Chief Executive of the Westminster Executive Director George Rose (48) Foundation for Democracy, and is a Was appointed to the Lattice Group Board Non-executive Director former General Secretary of the as Executive Director in September 2000, Was appointed to the Lattice Group Board Association of University Teachers and a having joined British Gas plc in April in September 2000. He was appointed member of the TUC General Council. 1996. He had a career with the Royal finance director of BAE Systems plc – the (b)(d)(e) Dutch/Shell Group spanning more than former British Aerospace plc – in April 30 years and was Corporate Affairs 1998. He joined the company in 1992. He Director for Shell UK Ltd before joining is also currently a Non-executive Director British Gas. As Executive Director he has of SAAB AB, a Member of the Financial responsibility for corporate affairs, human Reporting Review Panel and a former Non- resources, regulation, the health, safety, executive Director of Orange plc. He is security and environment forum, Chairman of the Audit Committee of the knowledge sharing and the development Board. (b)(e) of the Company’s intranet. He also has specific responsibility for the Energy Services business. (a)(f)

Membership of Committees (a) Group Executive (b) Audit (c) Finance (d) Nominations (e) Remuneration (f) Safety Lattice Group Annual Report and Accounts 2000 32

Contents to the financial section 33 Regulation 38 Directors’ report 43 Remuneration report 48 Auditors’ report 49 Principal accounting policies 52 Accounts 89 Shareholder information 90 Financial calendar 91 Index 92 Definitions 33 Regulation

Our core Transco business is subject to government regulation.

Gas and Electricity Markets Authority The supply, transportation and shipping of gas in Great Britain are the subject of the licensing and regulatory regime of the Gas Act 1986, as amended (the Gas Act) and the Utilities Act 2000 (the Utilities Act). The Regulator of the gas supply, transportation and shipping businesses in Great Britain is the Gas and Electricity Markets Authority (the Authority). The Authority has been created by the Utilities Act and replaces the former Director General of Gas Supply (the Director) and the Director General of Electricity Supply. In addition, the HSE regulates safety matters relating to the operation of the gas transportation system and the LNG storage business (see Other Regulatory Developments below).

The Utilities Act also creates a new principal objective for the Secretary of State for Trade and Industry and the Authority to carry out their respective functions in the manner best calculated to protect the interests of consumers in relation to gas conveyed through pipes, wherever appropriate by promoting effective competition between persons engaged in, or in commercial activities in connection with, the shipping, transportation or supply of gas so conveyed.

The Secretary of State and the Authority are required to carry out those functions in the manner so as to further the principal objective, having regard to (a) the need to secure that, so far as it is economical to meet them, all reasonable demands in Great Britain for gas conveyed through pipes are met; and (b) the need to secure that licence holders are able to finance the activities which are the subject of the obligations imposed by the Gas Act or the Utilities Act. Furthermore the Secretary of State and the Authority are required to have regard to the interests of (i) individuals who are disabled or chronically sick; (ii) individuals of pensionable age; (iii) individuals with low income; and (iv) individuals residing in rural areas. In addition, there is an obligation on the Authority to have regard to guidelines on social and environmental matters issued by the Secretary of State.

In enforcing the conditions of the Licence and other obligations imposed by the Gas Act, the Authority can make legally enforceable orders, which may include monetary penalties. The Utilities Act enables the Authority to levy financial penalties on licensees for contravening any licence condition or relevant requirement of the Gas Act or Utilities Act or for failure to meet guaranteed standards of service. The Authority has recently consulted on its guidelines for the assessment of the level of such penalties.

The Gas Act and the Licence Pursuant to the Gas Act, Transco is obliged to develop and maintain an efficient and economical pipeline system, for the conveyance of gas in its authorised area (see below) and to comply, so far as it is economical to do so, with reasonable requests to connect to the system and convey gas by means of that system to any premises. The Gas Act and Licence also place duties on Transco to avoid undue discrimination or undue preference in the connection of premises or other pipelines or in the terms on which it undertakes the conveyance of gas.

At present, the Licence authorises Transco to act as a public gas transporter for the whole of Great Britain except for certain areas in respect of which other public gas transporters have been licensed. These arrangements will change with the implementation of the Utilities Act (see Other Regulatory Developments below). The Licence provides, among other things, for the operation of a price control formula, which establishes maximum average prices for gas transportation services. The formula is incentive-based and includes a ‘K-factor’ which is used to adjust allowed revenues for a particular formula year (which operates for 12 months from 1 April each year) to provide for any accumulated under- or over-recovery of allowed formula revenue from prior formula years. The formula is modified periodically by the Authority in consultation with Transco.

When requested, Transco must connect to its gas transportation system premises situated within 23 metres of a relevant main, the supply of gas to which is not expected to exceed 2,196,000 KWh (75,000 therms) in any year and to supply and lay any pipe necessary for that purpose if requested to do so by the owner of the premises. Transco must also connect any premises, the supply of gas to which is not expected to exceed 2,196,000 KWh (75,000 therms) in any year to a relevant main where the connecting pipe is supplied and laid by the owner or occupier of the premises in question where it is fit for purpose. Transco is required to maintain such connections and to Lattice Group Annual Report and Accounts 2000 34

maintain, repair and renew any service pipe by which gas is conveyed to premises. Under the terms of the Licence, Transco must conduct the transportation business in a manner best calculated to secure that neither it nor any related person nor any gas shipper or supplier obtains any unfair commercial advantage.

The current Licence consists of standard, amended standard and special conditions. The conditions can only be changed in accordance with the mechanisms set out in the Gas Act. The conditions of the Licence may be amended without Transco’s consent in order to remedy or prevent any effects adverse to the public interest identified by the Competition Commission in an investigation under the Gas Act or the Fair Trading Act 1973. The Authority has power to make such references; the Secretary of State may also make references under the Fair Trading Act 1973.

Transco may not dispose of the right to operate any transportation or LNG storage asset without the consent of the Authority if to do so would materially affect its ability to carry on its activities or discharge its duties. Any disposal of such rights to operate a significant part of the gas conveyance system also requires the consent of the Secretary of State.

Under the Licence, Transco is subject to further obligations in relation to its activities as a public gas transporter. These include (i) obligations relating to the conveyance of gas to communities remote from the main transportation system in Great Britain; (ii) obligations requiring the production of regulatory accounts for the Transco business; (iii) obligations to enter into agreements with other public gas transporters relating to the provision of emergency services to them or on their behalf where a major loss of supply has occurred; and (iv) an obligation to produce guidelines in relation to the operation of the transportation system.

The Licence is terminable on ten years’ notice by the Secretary of State taking effect no earlier than 22 August 2011. It is also revocable by the Authority if (i) Transco so agrees; (ii) Transco fails to pay Licence fees; (iii) Transco fails to comply with a notice to remedy a breach of an enforcement order or with an order made under competition legislation; (iv) Transco ceases to carry on its business as a public gas transporter; or (v) in the event of certain circumstances of financial default or if Transco enters into certain restructurings not approved by the Authority.

Transco’s Licence also contains special conditions known as ‘the ring-fence conditions’. They were introduced into Transco’s Licence with its consent in December 1999. The principal ring-fence conditions are: a requirement on Transco, subject to a small business exception only to carry on the transportation and LNG storage businesses; a requirement to ensure that it has sufficient management and financial resources to carry out its business. It must issue an annual certificate to the Authority to that effect; to use reasonable endeavours to maintain an investment grade credit rating as the issuer of corporate debt; a requirement to deal on an arm’s length basis and on normal commercial terms with other companies in the Lattice Group and not to enter into new guarantees or other forms of security for them; a requirement to obtain undertakings from Lattice Group plc on behalf of the Lattice Group (i) to supply to Transco such information as it may be required to supply to the Authority and (ii) to refrain from doing anything that could cause Transco to breach its statutory or licence duties.

If Transco is in material default of any of the ring-fence conditions it can be prohibited from declaring and paying a dividend.

On 26 January 2001, the Authority introduced, with Transco’s consent, new special licence conditions to create separate price controls for Transco’s transportation business and its metering and meter reading business. The new conditions did not seek to revise the overall revenues Transco would receive but allocated the revenues between the businesses with effect from April 2000.

Price control Transco is subject to a price control agreed with Ofgem after taking into account, among other factors, an assessment of Transco’s operating costs, capital expenditure, cost of capital and transportation volumes. The current price control, which came into effect retrospectively from 1 April 1997, was based upon the recommendations of the 1997 MMC Report.

Current price control The current formula is expected to operate until 31 March 2002. It may be modified earlier if either the Authority proposes, to which Transco agrees, or if Transco requests that the price control formula be terminated. If Transco does not agree to any proposed modification by the Authority, the matter may be referred by the Authority to the Competition Commission, formerly the MMC. Any request for termination by Transco must be made with not less than 18 months prior notice of the date termination is requested to become effective. Upon such a request, the Authority can agree to the termination of the price control formula and propose a new formula or refer the matter to the Competition Commission.

The MMC recommended, in broad terms, that 50% of Transco’s gas transportation revenues be fixed with the remaining 50% variable according to the volume transported. The price control is principally an RPI-X control which includes an annual adjustment of inflation Regulation continued 35

less 2%. The MMC also recommended that the revenues resulting from its assumed volume levels should allow Transco to earn, over the five year formula period, a 7% real return on a pre-tax basis on its regulatory value. The regulatory value used by the Director in establishing the price control is based upon the methodology set out in the 1997 MMC Report. This involved establishing an initial regulatory value as at 1 April 1997 by valuing the pre-1992 investment through the application of British Gas plc’s market to asset ratio (taken as 60% which was its approximate value as at 31 December 1991) to Transco’s pre-1992 current cost book values, and then by adding the post-1991 investment at its then current cost book value. Transco was part of British Gas plc as at 1 April 1997. The resulting amount was to be reduced by deferred customer capital contributions which were also subject to a market to asset ratio adjustment for pre-1992 contributions. The MMC also established that the regulatory value should be revalued each year by reference to movement in the RPI and should be adjusted each year by the addition of net investment less an annual depreciation charge.

One significant departure by the Director from the MMC recommendations was in the introduction of a volume ‘deadband’ to reduce the benefit to Transco of achieving volume growth above that assumed by the MMC. Although revenues rise with increased volumes up to the volume levels assumed by the MMC, there is no increase in revenues for increased volumes up to the top of the deadband which is set approximately 3% above the volume level assumed by the MMC. Above the deadband, Transco’s allowed revenues once again increase with increased volumes.

Capital investment In December Transco submitted its first report to Ofgem on the capital investment programmes under the current price control, analysing the results achieved in relation to the targets set. Over the three years from 1997 to 1999, Transco met 13 and exceeded five of the 19 agreed targets. This has been achieved at less than the anticipated cost primarily through procurement savings and effective project and contract management.

The next Periodic Review The current price control was not varied as a result of the 1999 Restructuring and Refinancing. The Director approved the 1999 Restructuring and Refinancing on the basis that his discretion at the next Periodic Review would be unfettered by that approval.

The Authority has indicated that its Periodic Review is due for completion in September 2001 and implementation in April 2002. It is likely to result in revised limits on prices and revenues. To that end, the Director followed up an initial consultation document in May 2000 with a further consultation in November 2000. As well as responding to both these documents, Transco made its major information submission to the Director in December 2000 in the form of a completed Business Planning Questionnaire. The Authority published its Initial Thoughts document on the Review of Transco’s price control on 28 February 2001. Associated with this are three further consultations, one relating to the New Gas Trading Arrangements, which was also published on 28 February 2001. The other two documents, the Review of Exit, Interruption and LNG, and Long Term Investment Initial Proposals, are awaited. Transco will be responding to these documents in due course.

The Authority has indicated that after taking account of the responses to the Initial Thoughts document it intends to publish draft proposals for the new Transco price controls in June 2001 with its final proposals being published in September 2001.

In line with normal regulatory practice, it is expected that the Authority’s next Review will take account of Transco’s: cost of capital; regulatory value; capital and replacement investment in the present regulatory period; and requirements for operating expenditure, capital investment and replacement expenditure in the next regulatory period.

The Authority has indicated that it will wish to consider the appropriate regulatory value of the regulated business. At the last Review, the Director considered the basis on which Transco’s regulatory value is established and rolled forward. One issue that it has indicated it wants to consider again is the treatment of the difference between the market value of British Gas plc as a whole as at 31 December 1991 and the then current cost book value of assets and whether this should be applied in a ‘focused’ or ‘unfocused’ manner. With the unfocused approach, the difference is applied evenly across the book values of all of the assets of the British Gas plc businesses, both regulated and unregulated. The alternative involves making specific valuations of the non-price regulated parts of the former British Gas plc with the residue of the market value being assigned to the regulated activities in Transco. This in effect ‘focuses’ the difference on a business specific basis. A focused approach may result in a reduction in regulatory value with a consequential reduction of the basis on which Transco makes a return. The latter approach was rejected by the MMC in the last and previous Reviews.

In his November 2000 consultation, the Director confirmed his intention to consider all relevant evidence before reaching a conclusion on the regulatory value of Transco’s pre-1992 assets. He proposed to estimate the impact on Transco’s regulatory value of using the two approaches and to publish the results in the February 2001 Initial Thoughts consultation document, inviting consultees to comment on the appropriate methodology for the calculation of Transco’s initial regulatory value. Lattice Group Annual Report and Accounts 2000 36

In the November consultation, the Director considered the responses to his initial May 2000 consultation document and proposed that the following further level of disaggregation is appropriate for Transco’s next price control period from 1 April 2002: separation of the price controls between the NTS and the LDZs. This may include either a single price control for all LDZs, or separate controls for each; and within the NTS, further separation of the roles of Asset Owner and System Operator.

Broadly, the Asset Owner owns and maintains the network, while the System Operator is responsible for the short-term operation of the system including energy and system balancing functions.

The outcome of the Periodic Review will determine Transco’s allowed revenues and is therefore expected to be the major factor affecting the Lattice Group’s future operating results and financial position. However, in determining the outcome of the Periodic Review the Authority must have regard to Transco’s ability to finance its functions efficiently in fulfilling its obligations under the terms of the Licence.

As agreed following the 1997 MMC Report, Transco and the Director jointly developed a framework for monitoring Transco’s capital and replacement investments. Transco submitted to the Director a report detailing its costs and output deliveries for the period 1997 to 1999. Auditors acting on behalf of the Director, have examined the report and the Authority has indicated its intention to publish Transco’s report and its auditor’s findings during the first quarter of 2001.

If Transco incurs lower investment expenditure than the allowance recommended by the 1997 MMC Report, Ofgem may, in certain circumstances, wish to claw back a proportion of the underspend by making an adjustment to the revenues allowed in the next price control period. The Director issued a consultation document on this subject in December 1999.

Other Regulatory Developments Regulation in respect of LNG Following the Demerger the ownership of all of the LNG storage facilities were retained within Transco. In April 2000, the Director completed the first stage of his review of LNG. Some of the capacity of LNG facilities substitutes for pipeline capacity by providing gas in suitable locations at times of high demand; the Director recognised this role by accepting Transco’s proposal for increased payments, based on the capacity required in any year. It was also agreed that Transco would purchase its own requirements for LNG services at the previous fixed regulated prices but that, for the remaining capacity, Transco could deviate from the fixed prices. Transco therefore sold its LNG capacity for the storage year commencing 1 May 2000 on the basis of a pay-as-bid auction. LNG has been granted exemptions under the regulations implemented by the UK Government to give effect to the European Gas Directive. These exemptions are subject to Transco’s LNG arrangements remaining within its Network Code. The exemptions are revocable on four months notice.

Utilities Act The Utilities Act received Royal Assent on 28 July 2000. The parts relating to the implementation of the new electricity trading arrangements, the formation of the Gas and Electricity Markets Authority and the Council of the Gas and Electricity Consumer Councils (now called energywatch) are in force. The remainder of the Utilities Act will be implemented in stages. The Utilities Act seeks to give effect to the proposals previously announced by the UK Government during its review of utility regulation, with greater emphasis placed on the primacy of the consumer and the need to make energy utility regulation more transparent, consistent and predictable. The Utilities Act will significantly affect the environment in which Transco does business and will provide the framework to align the gas and electricity regulatory regimes. Other measures set out in the Utilities Act include: the extension of the Authority’s powers to allow it to set individual and overall (i.e. aggregate) performance standards for gas transporters and electricity suppliers and distributors, to impose financial penalties (these are limited to 10% of turnover to be determined in accordance with an order issued by the Secretary of State for Trade and Industry and must be (a) reasonable in all the circumstances of the case; and (b) in accordance with the procedural requirements laid out in the Utilities Act) on licence holders for past and current contraventions of their licence conditions, of specified statutory requirements and of individual performance standards. These powers are in addition to the licence enforcement powers held by the Authority under the Utilities Act, but the power to attach a financial penalty to an enforcement order will be substituted by these new financial penalties provisions. These new powers under the Utilities Act are also in addition to the powers of the Authority under the Competition Act 1998 (in anticipation of the new powers, the Director recently consulted on the nature and form of guaranteed and overall standards of performance); the Secretary of State for Trade and Industry is to be given powers to make orders imposing requirements on gas and electricity suppliers, gas transporters and electricity distributors, to carry out activities aimed at promoting the efficient use of gas and electricity by consumers; companies which provide any price regulated services will be required to disclose whether or not they link the remuneration of the directors of their price regulated businesses to standards of services set for or agreed by the company and the disclosure has to describe those arrangements and that remuneration; the introduction of a new duty on gas transporters to facilitate competition in the supply of gas; the geographic exclusivity of public gas transporters’ licences is to be removed; Regulation continued 37

in circumstances when pipes laid by the owner of the premises (‘self-lay’ pipes) vest in a gas transporter, the responsibility for maintaining the reinstatement of the ground containing the pipe, and any other liabilities, also vests in the gas transporter. The gas transporter has the right to require self-layers to accept terms and indemnify it in respect of such liabilities in connection with the laying of the pipe; the Secretary of State for Trade and Industry may, by order, provide that specified activities are to become licensable activities or that specified activities are to cease to be licensable activities; new procedures and thresholds for the amendment of standard licence conditions where a proportion of the relevant licence holders do not actively object (and notwithstanding objections of the minority); a provision which specifies that conditions may be included in a licence which require the licence holder to enter into arrangements with other persons for the use of any pipeline system of the licence holder (wherever situated and whether or not used for the purpose of carrying on the activities authorised by the licence) for such purposes as may be specified in the conditions and may include provision for the terms on which such arrangements are to be entered into; licences shall be capable of being transferred with the consent of the Authority and subject to any term of the licence relating to its transfer; the Secretary of State for Trade and Industry may make an order containing a scheme for the adjustment of gas charges if he considers that disadvantaged groups of customers are being treated less favourably than other customers; the Authority may make regulations prescribing standards of pressure and purity which must be complied with by gas transporters in conveying gas to premises or to pipeline systems operated by other gas transporters; and the establishment of an independent Gas and Electricity Consumer Council, known as energywatch, with the job of seeking to resolve complaints, providing information of use to consumers, and advocating the interests of all consumers to the Authority, government and other bodies with an influence on regulation.

Gas Transporters’ Licence As part of the consultation and preparation for the Utilities Act process, the Director, on behalf of the Secretary of State for Trade and Industry, published initial proposals in early February 2000 on draft standard licence conditions in gas and electricity which are intended to give effect to the provisions of the Utilities Act and to achieve greater alignment between the two regimes. Following initial consultation a further set of draft licences were issued in October 2000 for further consultation. Transco provided a detailed response to both consultations and is working closely with the Authority and other interested parties in the development of the new licence. These standard licence conditions, when approved by the Secretary of State for Trade and Industry, will be introduced by order, rather than through the collective licence amendment process. It is likely that the new standard licence conditions will be issued in early 2001 to come into effect at the end of the first quarter 2001.

The new standard conditions have been restructured so that certain sections are applicable to all transporters and certain others can be brought in at the direction of the Authority at different times and applied to transporters or classes of transporters. The principal changes anticipated are: the removal of the licence fee cap and changes to the methods of allocating costs of the Authority and energywatch to licence holders; the introduction of a Registrar of Pipes who will hold details of pipelines laid by each gas transporter; enhanced emergency service information and enquiry provision; an obligation to co-operate in modifying industry documents, including Network Code and associated documents to give effect to the Utilities Act; written codes of practice for complaint handling and access to premises which have to be approved by the Authority and the reporting of performance against such codes to the Authority and energywatch; stricter requirements for the provision of information to the Authority; stricter requirements, subject to derogations, for the disposal of the rights to operate transportation assets; enhanced provisions relating to the production and content of regulatory accounts; the requirement to make available data to customers about their supply points to facilitate competition in gas supply; and the introduction of enhanced standard ‘ring-fence’ conditions modelled on Transco’s existing ring-fence conditions.

It is not presently expected that Transco’s existing Special Conditions will be affected when the new Standard Conditions are introduced.

Ofgem Plan and Budget Ofgem published a consultation document in December on its Corporate Plan and Budget for April 2001 to March 2002. The document sets out six main priorities: social and environmental action; regulation of monopoly businesses; efficient trading in the wholesale gas and electricity markets; managing the move to competitive supply markets; work on industrial structure and competitiveness; work to develop Ofgem as an efficient regulator. Lattice Group Annual Report and Accounts 2000 38 Directors’ report

The Directors present their report and the audited accounts for the financial year ended 31 December 2000.

Principal activities Transco Transco is the owner, operator and developer of the substantial majority of Great Britain’s gas transportation system. Transco’s system has some 275,000 kilometres of national and local transmission and distribution pipelines and is required by law to maintain high standards and reliability across all its operations. Transco also operates all of the LNG storage facilities in Great Britain and these are located at strategic positions on the National Transmission System.

The gas transportation business is highly regulated and is subject to price regulation and a price control formula. The current control period expires in April 2002 and consultations on the appropriate controls for the next five year period are continuing (see Regulation section, page 33).

In accordance with the terms of the Licence, Transco has established the Network Code. One of the key elements of the Network Code includes commercial incentives for shippers to balance their inputs to, and outputs from, the gas transportation system on a daily basis.

Businesses to be transferred from within the regulatory ring-fence Transco has already separated the responsibility for managing its network activities into two parts – asset management and operations management. It is planned that the operations management business will undertake further work in preparation for a progressive transfer of operational services into the competitive market outside the regulatory ring-fence. The Lattice Group will also pursue the transfer of its connections, metering and metering services businesses outside the regulatory ring-fence.

Telecoms The Lattice Group has entered into a joint venture with SpectraSite, a US wireless communications infrastructure business, to develop a towers business to support the growing European demand for towers by the mobile communications industry as it moves from second to third generation mobile telephone technology.

The Lattice Group is also developing a telecoms business based on the existing countrywide coverage of its gas transportation network. It will enter the market by constructing a national fibre-optic network connecting 12 major centres of demand for high-capacity broadband transmission and related telecoms services. In recognition of the potential growth in the market, the Lattice Group is considering options for deepening its network and expanding its services offerings. Future decisions to pursue these options will be made on a case by case basis.

Other activities The Lattice Group also includes Lattice Property, The Leasing Group, Advantica, Lattice Insurance, Lattice Energy Services and Eastlands.

The Business review and Operating and financial review can be found on pages 6 and 22 respectively.

Results and dividend The modified historical cost profit on ordinary activities before taxation was £581 million compared with £941 million in 1999. A final dividend of 3.5 pence per ordinary share is proposed which, with the contribution to the BG Group interim dividend, as set out in BG Group’s interim results for the six months ended 30 June 2000, represents 7.0 pence per share for the full year. £137 million (1999 £624 million) has been transferred to reserves from the modified historical cost profit and loss account. The results are dealt with fully in the following sections: Principal accounting policies, Accounts, Notes to the accounts and Operating and financial review.

Substantial shareholders As at 27 February 2001 notification had been received by the Company of a shareholding of 3% or more of the share capital of the Company, by the following: Name Lattice Shares Percentage holding of issued share capital CGNU plc 142,815,584 4.05

Share capital On the latest practicable date prior to the publication of this document, the authorised and issued share capital of Lattice was as follows: Authorised Issued Number Amount Number Amount 5,000,000,000 £500,000,000 Ordinary Shares 3,528,147,798 £352,814,779.80 1 £0.10 Special Share 1 £0.10 39

Directors The names of the present Directors and biographical details are given in the Board of Directors section on pages 30 and 31. At every Annual General Meeting, Directors who were elected or last re-elected three years previously (Article 90) must retire and may be re-appointed. Details of those Directors standing for re-election are given in the Notice of Annual General Meeting. As this is the first Annual General Meeting of Lattice Group plc, all Directors will be standing for re-election. Details of the Directors’ contracts, emoluments and share interests can be found in the Remuneration report on page 43. From 10 May 2000 to 1 September 2000 JWA Cann and GW Lewin Smith, were Directors but received no emoluments from Lattice in respect of services performed as Directors.

Employees The total number of Group employees at 31 December 2000 was 15,741. The workforce is supplemented by outside contractors (the equivalent of 9,549 full-time employees for the year ended 31 December 2000). Each part of the business has processes in place to communicate matters of importance to its employees, including the use of electronic mail and in-house publications, as well as videos and briefing meetings.

Terms and conditions of employment, including rates of pay, are determined by individual businesses for levels below top management. The businesses determine arrangements consistent with the market in which they operate.

The majority of employees are members of trade unions and both formal and informal mechanisms operate for collective consultation. The primary trade unions representing employees are Unison, the GMB Union and the Transport and General Workers Union. There have been no work stoppages of any significance in the businesses in the last five years.

Lattice remains committed to fair treatment of people with disabilities in relation to job applications, training, promotion and career development. Every effort is made to find appropriate alternative jobs for those who are unable to continue in their existing job due to disability.

Lattice takes a positive approach to equality and diversity. We promote equality in the application of reward policies, employment and development opportunities, and aim to support employees in balancing work and personal lifestyles.

Employees are encouraged to become shareholders in the Company. The majority hold ordinary shares under the BG Group Employee Profit Sharing Schemes and/or will be contributing to the Lattice Group Sharesave Scheme in 2001. Further details of the employee share schemes are given in the Remuneration report and in note 4 of the Notes to the accounts.

Community involvement Lattice Group acknowledges its responsibilities to play a part in the communities in which it operates. To this end it has formed the Lattice Foundation. During 2000 the Group made charitable donations of £2 million. No donations were made in the UK for political purposes.

Research and Development The Company continues to play a significant role in technology improvement for the gas industry. See ‘Other activities – Advantica’ on page 16.

Suppliers Lattice Group aims to pay all of its creditors promptly. It is the Company’s policy to agree the terms of the payment at the start of business with each supplier, ensure that suppliers are aware of the terms of payment, and to pay in accordance with contractual and other legal obligations.

The Company had 31 days’ purchases outstanding at 31 December 2000 based on the average daily amount invoiced by suppliers during the year.

The Company’s relationship with its shareholders and Annual General Meeting The Company recognises the importance of maintaining a purposeful relationship with its shareholders. The Company uses the Annual General Meeting as an opportunity to communicate with its shareholders.

The Annual General Meeting will be held at 10.30 a.m. on Monday 23 April 2001 at the Hilton Birmingham Metropole Hotel, National Exhibition Centre, Birmingham B40 1PP. For shareholders a separate Notice of Annual General Meeting, which includes an explanation of the proposed resolutions, is enclosed with this document. In addition to the ordinary business of the Meeting, shareholder consent will be sought for the Company to purchase its own ordinary shares.

A résumé of the business carried out at the Annual General Meeting will be available on request from the Registrars after the Meeting has been held, and will be posted on the Company’s website, where a copy of this Annual Report and Accounts can also be viewed. Lattice Group Annual Report and Accounts 2000 40

Lattice has an annual Investor Relations Programme and maintains a dialogue with its institutional shareholders in this country and overseas based on the mutual understanding of objectives. In order to facilitate this, regular meetings are held with institutional shareholders following the announcement of results.

Recent legislative changes have authorised the use of electronic communication with shareholders, with the consent of the individual shareholder, and such consent can be given by going to www.shareview.co.uk. This is an optional facility for shareholders. Auditors PricewaterhouseCoopers have expressed their willingness to be re-appointed as Auditors of the Company. Going concern The accounts have been prepared on the going concern basis since the Directors are satisfied that the Group’s and Company’s activities are sustainable for the foreseeable future. Statement of Directors’ responsibilities for preparing the financial statements The Directors are required by the Companies Act 1985 to prepare financial statements 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 financial statements detailed in the following sections, 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: Principal accounting policies, Accounts, Notes to the accounts and Operating and financial review.

The Company has complied with UK disclosure requirements in this report in order to present a consistent picture to all shareholders.

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 financial statements 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 financial statements, 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. Statement of Business Principles Lattice is a major UK-based company operating in a mature market. Our reputation for high standards in all that we do is crucial to our business success. Accordingly, the Board has agreed a Statement of Business Principles setting out fundamental values to guide our actions, decisions and standards, throughout the Group. Corporate governance – Statement of compliance with the provisions of the Combined Code Lattice is committed to achieving high standards of corporate governance throughout the Group and to integrity and high ethical standards in all our business dealings. The Board considers that it has complied throughout the financial period with the Code provisions set out in Section 1 of the Combined Code.

The statement below reports on how the Company has applied the principles in Section 1A and B (Directors and Directors’ Remuneration). Section 1C (Relations with Shareholders) is covered in The Company’s relationship with its shareholders and Annual General Meeting section above, and Section 1D (Accountability and Audit) is covered in the Auditors section above and in the Auditors’ report to the members of Lattice Group plc. Internal Control The Company as required by the UK Listing Authority has complied with the Combined Code provisions on internal control having established the procedures necessary to implement the guidance issued in September 1999 (the Turnbull committee report) and by reporting in accordance with that guidance.

The Board has overall responsibility for the Company’s system of internal control and for reviewing its effectiveness whilst the role of management is to implement Board policies on risk and control. The system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve business objectives. In pursuing these objectives, internal controls can only provide reasonable and not absolute assurance against material misstatement or loss. Directors’ report continued 41

There is a continuous process for identifying, evaluating and managing the significant risks faced by the Lattice Group which has been in place for the year under review and up to the date of approval of the Annual Report and Accounts. This process is regularly reviewed by the Board.

The processes used by the Board to review the effectiveness of the system of internal control include the following:

During the year the Audit Committee of the Board: reviews the external and internal audit work plans; receives and reviews at each meeting a Register of the Group’s key risk areas; considers reports from management, internal and external audit on the system of internal control and any material control weaknesses; and discusses with management the actions taken on problem areas identified by Board members or in the internal/external audit reports.

The Audit Committee also reviews the effectiveness of the risk management process and significant risk issues are referred to the Board for consideration.

The Chairman of the Audit Committee reports the outcome of the Audit Committee meetings to the Board and the Board receives the minutes of all Audit Committee meetings.

The Finance Committee considers financing and investment decisions concerning the Group, including the giving of guarantees and indemnities, and monitors policy and control mechanisms for managing Treasury risk. The Board receives the minutes of all Finance Committee meetings.

The Board reviews the role of insurance in managing risks across the Group.

The Group’s management operates a risk management process which identifies the key risks facing each business and reports to the Audit Committee on how those risks are being managed. This is based on each department and major project producing a register which identifies their key risks, the probability of those risks occurring, their impact if they do occur and the actions being taken to manage those risks to the desired level. This information is passed up on a filter basis culminating in the production of business unit risk registers and, finally, a Register of the Group’s key risk areas. This identifies the key risks facing Lattice across all the businesses under a number of generic risk areas. These risks are discussed at the Group Executive on a regular basis and regular monitoring reports are received to update them on progress.

At the year-end, before producing the statement in the Annual Report and Accounts, the Board, through the Audit Committee, reviews the following: each Executive Director is asked to complete a Letter of Assurance confirming compliance throughout the year with the Group’s policies, procedures, risk management processes etc. These letters are based on a ‘due diligence’ process throughout the Group. The outcome of these letters is reported to the Audit Committee; Lattice has adopted a control framework model for application across the Group and an annual report on compliance with that model and with the Group risk management process, is produced; and the Board reviews the Group and business unit risk registers and receives regular reports on any major problems that have occurred during the year and how the risks have changed over the period under review. The Board of Directors The Board leads and maintains effective control over Lattice’s activities. With regard to joint ventures and associated undertakings the level of control exercised necessarily reflects the governance framework of each entity. The Directors’ biographies appear in the Board of Directors section, and these demonstrate that the Board has within it the necessary range of backgrounds, qualities and experience to lead the Company. Lattice has separate posts of Chairman and Chief Executive to differentiate the running of the Board from the executive responsibility for the running of the Company’s businesses. In addition to the Non-executive Chairman and the Chief Executive, the Board consists of two other Executive Directors and five Non-executive Directors. All Directors are subject to election by shareholders at the first opportunity after their appointment by the Board and to re-election at general meetings at least every three years. Attendance is expected at all Board meetings by all Directors except in special circumstances. The Board is supplied with appropriate information to enable it to discharge its duties.

Members of the Board meet at least 10 times a year. The Board has a schedule of matters specifically reserved to it for decision, including strategy and financial policy, and major acquisitions and disposals. In addition, the Board focuses each year on Group strategy at a Planning Conference. There is a clear division of roles and responsibilities between the Chairman and Chief Executive. The Board considers that the Non-executive Directors as a group are of a sufficient calibre and number to bring strength of independence to the Board, and has nominated Kenneth Harvey, Chairman of the Remuneration Committee, and George Rose, Chairman of the Audit Committee, to be senior independent Directors, to whom concerns can be conveyed by shareholders. The Board considers that this is in compliance with the Combined Code. Lattice Group Annual Report and Accounts 2000 42

Directors have access to the advice and services of the Company Secretary, and the Board has, by means of the Audit Committee, established a procedure for any Director, if necessary, to take independent professional advice at the Group’s expense. The Company Secretary ensures that Board procedures are followed and that applicable rules and regulations are complied with. The Company Secretary may only be removed with the approval of the Board as a whole.

Appropriate training and briefing is available to all Directors on appointment to the Board, taking into account their individual qualifications and experience, and training is also available on an ongoing basis to meet their individual needs. All Directors receive a monthly business review giving the latest position on the Group’s businesses. All Executive Directors are members of the Group Executive Committee, which meets monthly, and is properly briefed on the Group’s activities. The minutes of these meetings are circulated to all Directors.

The Board considers that all Directors bring an independent judgement to the Board’s deliberations in respect of strategy, performance, resources, key appointments and standards of conduct. All Non-executive Directors are considered by the Board to be free from any business or other relationship which could be seen as interfering with the exercise of their independent judgement. Non-executive Directors joining the Board are appointed for a period of three years, subject to subsequent review and to re-appointment at the Company’s Annual General Meeting. The Non-executive Directors, other than the Chairman, receive fees of £25,000 per annum and the reimbursement of reasonable expenses incurred in attending meetings. Chairmen of Committees of the Board receive an additional £5,000 per annum. Non-executive Directors are not eligible for any of the Company’s share schemes, incentive schemes or pension schemes.

The Board has delegated authority to the following Committees of the Board on other specific matters. All of the Committees have written constitutions and terms of reference. The members of each of the Committees are shown in the Board of Directors Section.

Group Executive Committee Chairman: Dr Philip Nolan The Board delegates authority for the day-to-day management of the Company’s business to the Group Executive Committee, which meets monthly. The Committee comprises the Executive Directors, together with Stephen Ainger, the Strategy and Development Director, Chris Bolt, Transco’s Regulation and Corporate Affairs Director, Lawrie Haynes, the 186k Chief Executive Officer, and Nick Woollacott, the Transco Chief Operating Officer.

Audit Committee Chairman: George Rose Comprising all the Non-executive Directors, the Audit Committee examines and reviews internal controls, compliance, financial and accounting policies and practices, the form and content of financial reports and statements and general matters which may be brought to the attention of the Company by its Auditors. In addition, the Committee reviews the scope and results of the audit and its cost- effectiveness, as well as the performance of the Auditors and non-audit services to the Company. The Committee meets at least three times a year.

Finance Committee Chairman: Sir John Parker The Finance Committee oversees the financial management of the Group, including the giving of guarantees and indemnities and recommends to the Board certain financial policies. The Committee normally meets four times a year.

Nominations Committee Chairman: Sir John Parker The Nominations Committee recommends to the Board appointments for the roles of Chairman, Chief Executive, Executive and Non-executive Directors and Company Secretary. The procedure for the appointment of new Directors to the Board is overseen by the Nominations Committee and is set out in its terms of reference. The Committee meets as required.

Remuneration Committee Chairman: Kenneth Harvey The Remuneration Committee is made up entirely of independent Non-executive Directors. It has responsibility for recommending to the Board, Group policy on the remuneration of Executive Directors and other designated senior employees of the Group. The Committee operates within agreed terms of reference and meets as required. No Director is involved in deciding his or her own remuneration.

The members of the Remuneration Committee are Kenneth Harvey (Chairman), Sir David Davies, Christopher Hampson, George Rose and Baroness Diana Warwick. The Committee consults with the Chairman and the Chief Executive, where appropriate, with regard to the remuneration of other Executive Directors, and designated senior employees, and has access to professional advice both inside and outside the Company. The Chief Executive keeps the Committee informed of matters relating to the terms and conditions of other senior executives in the Group.

Safety Committee Chairman: Sir David Davies The members of the Safety Committee are Sir David Davies (Chairman), John Wybrew, Executive Director, and Stuart Anderson, Transco Director, Licence to Operate. The Committee examines important aspects of safety policy, legislation/regulation issues, practice and performance, and reports back its conclusions and recommendations to the Board. 43 Remuneration report

Remuneration policy The Company’s remuneration policy for Executive Directors is intended to secure and retain the skills and experience needed to meet the challenges of the future and to align the interests of Directors and shareholders. The current elements of remuneration for Executive Directors link rewards to corporate and individual performance and comprise salary, taxable benefits, the Long Term and Short Term Incentive Schemes, notional share units (cash-based) for 186k, participation in all-employee share schemes and pension entitlements. Pay and employment conditions elsewhere in the Group are taken into account in determining the remuneration packages for Executive Directors, and the provisions of Schedule A to the Combined Code have been considered. Full details of the Directors’ remuneration are given below. The Directors confirm that this report has been drawn up in accordance with Schedule B of the Combined Code. The reward package for Executive Directors is unchanged from that notified to shareholders at Demerger.

Remuneration review The Remuneration Committee reviews, each year, the level of compensation for Executive Directors and other designated senior employees of the Group. The Remuneration Committee compares executive salaries with that of executives in other FTSE 100 companies, taking into account relative performance of the individual. The comparisons rely on independent external market data. The reviews are made in the context of the Company’s needs as well as individual performance and responsibilities.

Salaries as at 31 December 2000 are given in the Directors’ service contracts section. Salaries are reviewed annually and, with effect from 2001, reviews will take place in April, rather than January, each year.

Annual bonus Executive Directors have not received any payments under an annual bonus scheme in 2000. Executive Directors are eligible to participate in a share-based annual incentive scheme (the Lattice Group Short Term Incentive Scheme) which was introduced in January 2001, with the first awards to be made in 2002. The scheme focuses on the delivery of short term, key performance targets such as achievement of profit and cash flow and control of operating expenditure, which contribute to shareholder value. The maximum award for Executive Directors will not exceed 50% of actual base pay over the performance period. Failure to meet service standards and health and safety targets will result in a reduced level of bonus payments. The notional value will then be converted into a number of Lattice Group plc ordinary shares based on the average mid-market closing share prices over the three trading days immediately following the announcement of annual results, and the number of shares transferred will be reduced to take account of income tax and any national insurance charges.

Telecoms (186k Limited) Incentive Scheme Executive Directors may participate in the 186k Limited Incentive Scheme which provides cash benefits dependent upon the growth in value of 186k Limited. Units are awarded with a fixed base price, usually equal to the most recent fair value of 186k Limited.

On 3 November 2000, Phil Nolan, Steve Lucas and John Wybrew were awarded 197,500, 140,000 and 167,500 units respectively with a base price of £1.00. This base price is subject to an increase on each anniversary of the award date by a rate equivalent to 10% per annum compound. Units may normally be redeemed between the 5th and 10th anniversaries of the award date for a cash payment based on the difference between the base price and the most recent fair value at the date of redemption.

Long Term Incentive Scheme Lattice Group introduced a Long Term Incentive Scheme following Demerger. It links the award of shares to Executive Directors and employees to total shareholder return. Independent advice was taken to set the performance criteria, which govern the Scheme, and these are set out in the Rules of the Scheme.

Under the terms of the Scheme, notional awards of shares may be made annually. Performance will be measured over a period of three years, and the retention period will be a further one year. In this way, executives and other employees have a long-term interest in the Company’s performance. The number of shares eventually released to the participant depends upon the performance of the Company’s total shareholder return compared with that of other regulated and utility companies, the list of which is available for inspection at the Company’s registered office address. No awards for performance will be made if the total shareholder return, when compared with that of other companies in the comparator group over the performance period, falls below 50th percentile. The Remuneration Committee will only decide that shares should be released if the Company’s total shareholder return reflects sound underlying financial performance.

In November 2000, awards were made to the Executive Directors and other employees under the Scheme. The number of shares shown in the Directors’ remuneration table below is the total maximum number which could be released to individual Executive Directors under the terms of the Scheme if the performance criteria were met in full. The Chairman and other Non-executive Directors do not participate in the Scheme. Lattice Group Annual Report and Accounts 2000 44

Employee share schemes Executive Directors may participate in the Sharesave Scheme on the same basis as other employees.

Prior to the Demerger the participants of the BG Sharesave Schemes were given the opportunity to be granted a replacement Sharesave option over an identical number of BG Group shares as held under their existing options. The replacement options were exercised prior to the Demerger, to the extent of the participant’s savings and interest at the date of exercise, so that participants received Lattice Group shares at Demerger. For every one BG Group share held at the Demerger record time, the employee received one Lattice Group share. The Group paid income tax and national insurance charges which arose from the exercise by employees (other than Directors) of replacement options. Executive Directors who held options prior to Demerger chose to exercise their options early.

As an alternative to the exercise of options prior to Demerger, participants could continue to save until the end of their savings contracts at which time they could exercise their options to buy BG Group shares or withdraw their savings and bonus in the normal way. The Inland Revenue confirmed the tax approved status of the existing options would be retained.

Details of individual Executive Directors’ interests in options granted under the Lattice Group Sharesave Scheme in December 2000 are shown in the table below entitled Directors’ interests in options over ordinary shares.

The BG Group Employee Profit Sharing Schemes provided for the distribution to all eligible employees of a proportion of BG Group’s profit, in the form of shares. Executive Directors are eligible to receive shares under the Schemes and a distribution was made under the BG Group Employee Profit Sharing Scheme in May 2000 in respect of the year 1999. For every one BG Group share held at the Demerger record time, the employee received one Lattice Group share.

BG Group expects to make a distribution of shares to eligible employees under the BG Group Employee Profit Sharing Scheme in April 2001 in respect of the year 2000. Lattice Group employees, including the Executive Directors, will receive a pro-rated allocation of BG Group shares to reflect the nine months prior to Demerger and will also receive, for the remaining three months of the year, an equivalent cash payment to the value of the allocation when placed in trust. This will be grossed up for tax and national insurance charges (other than Directors).

Executive Directors and all eligible employees will be able to participate in the Lattice Group All Employee Share Ownership Plan, under which the Company has chosen to award free and partnership shares. The Plan was launched at the beginning of 2001.

The remuneration shown in the tables below represents remuneration from 23 October 2000, the effective date of the Demerger, to the year end. The Directors received no emoluments from Lattice Group in respect of services performed from the date of appointment on 1 September 2000 to Demerger on 23 October 2000. Remuneration for Sir John Parker, Phil Nolan, John Wybrew and Christopher Hampson for the period to Demerger can be found in the BG Group plc Annual Report and Accounts, available from Investor Relations, BG Group plc, 100 Thames Valley Park Drive, Reading, Berkshire RG6 1PT.

Directors’ remuneration a) Total remuneration for the period to 31 December 2000 £ Fees to Non-executive Directors 25,768 Salaries (a) 235,713 Benefits 9,821 Employee Profit Sharing Scheme (b) 4,875 a) Includes salary for Non-executive Chairman. b) Represents cash payment to be made in 2001. Directors’ remuneration report continued 45

b) Individual remuneration for the period to 31 December Taxable total Salary/fees benefits (a) Total 2000 2000 2000 £ £ £ Sir John Parker (b) 42,944 192 43,136 Phil Nolan 75,390 4,413 79,803 Steve Lucas 53,441 2,279 55,720 John Wybrew 63,938 2,937 66,875 Sir David Davies (b) 4,772 – 4,772 Christopher Hampson (b) 4,772 – 4,772 Kenneth Harvey (b) 5,726 – 5,726 George Rose (b) 5,726 – 5,726 Baroness Diana Warwick (b) 4,772 – 4,772 a) Taxable benefits include such items as company car, fuel, chauffeur, financial advice and medical insurance. b) Sir John Parker and other Non-executive Directors do not participate in any of the Company’s share schemes, incentive plans or pension schemes.

Chairman Sir John Parker has no fixed term contract as Chairman and is entitled to one month’s notice of termination of his office as Chairman. His salary is £225,000 per annum.

Directors’ service contracts Executive Directors Lattice’s Executive Directors all entered into new service contracts with Lattice with effect from Demerger. Each of the Directors named below (the ‘Executive Directors’) has entered into an employment contract with Lattice, particulars of which are as follows: Name of director Date of contract Annual salary from Demerger Steve Lucas 14 September 2000 £280,000 Phil Nolan 14 September 2000 £395,000 John Wybrew 14 September 2000 £335,000

Each Lattice Executive Director is entitled to the benefit of a company car for business and personal use, a driver for business use, 28 days’ annual holiday, financial advice, reimbursement of business expenses, personal accident insurance, family private medical insurance, sick pay and long term disability insurance.

Each Executive Director’s employment contract provides for a notice period of one year.

Each of the Executive Directors has a provision in his employment contract entitling him to an amount by way of liquidated damages equal to one year’s current annual gross salary, and credit of one year’s additional pensionable service, if his employment contract is terminated by Lattice within 12 months of a change in control of Lattice. For the purposes of this provision a change in control is deemed to occur if Lattice becomes a subsidiary of another company; or 50% or more of the voting rights of Lattice, or the right to appoint or remove the majority of the Board, become vested in an individual, body or group of individuals or bodies acting in concert; or all or substantially all of the business, assets and undertakings of Lattice becomes owned by any person, firm or company (other than a subsidiary or associated company). The Executive Directors’ employment contracts provide that any such payments will be less any deductions the employer is required to make, and shall be in full and final settlement of any claims the Executive Director may have against the employer or a subsidiary or associated company arising out of the termination of employment, save for any personal injury claim or any accrued pension rights or statutory employment protection claim.

Non-executive Directors Sir John Parker will receive £225,000 per annum in respect of his Chairmanship of Lattice (inclusive of all fees and other remuneration to which he may become entitled as a Director of Lattice or any of its subsidiaries or associated companies). For the duration of his Chairmanship, he will be entitled to one month’s notice, the use of a car, a driver, secretarial services and to personal accident insurance, family private medical insurance and life insurance on terms agreed by the Board. He will not be entitled to a pension or to participate in any bonus, share option or incentive plan arrangements.

Other than the Chairman, each Non-executive Director will be paid a fee of £25,000 per annum, and any Non-executive Directors who chair a Committee of the Board will be paid an additional £5,000 per annum in respect of each Committee. Lattice Group Annual Report and Accounts 2000 46

The date of appointment for each of the Non-executive Directors and their fees are as follows:

Name of Non-executive Director Date of appointment Total fees and other benefits payable Sir John Parker, Chairman (a) 1 September 2000 See above Sir David Davies (b) 1 September 2000 £30,000 Christopher Hampson (c) 1 September 2000 £25,000 Kenneth Harvey (d) 1 September 2000 £30,000 George Rose (c) 1 September 2000 £30,000 Baroness Diana Warwick (d) 1 September 2000 £25,000 a) Member of the Audit, Nomination and Finance Committees. b) Member of the Remuneration, Audit and Safety Committees. Sir David Davies was appointed Chairman of the Safety Committee with effect from 1 January 2001. c) Members of the Remuneration and Audit Committees. d) Members of the Remuneration, Audit and Nomination Committees.

Each Non-executive Director has been appointed for an initial three year period.

Directors’ interests in options over ordinary shares The interests of the Directors in share options held under the Lattice Group Sharesave Scheme were as follows:

Options Options Options Market price Options Options Earliest as at 23 Oct granted during exercised at date lapsed during as at 31 Dec Exercise normal 2000 (a) the year during the year of exercise the year 2000 (b) price (£) exercise date Expiry date Steve Lucas – – – – – – – – – Phil Nolan – 8,209 – – – 8,209 1.18 01/03/04 31/08/04 John Wybrew – 8,209 – – – 8,209 1.18 01/03/04 31/08/04 a) As at Demerger. As at their date of appointment, 1 September 2000, the Directors held no options over Lattice Group shares. b) The closing price of a Lattice Group plc ordinary share on the last day of trading of 2000 (29 December) was 151 pence. The range during the period from Demerger to the year end for Lattice Group plc ordinary shares was 156 pence (high) and 140 pence (low).

Directors’ interests in shares The Directors’ interests in ordinary shares of the Company and in bonds of Transco Holdings plc were as follows:

Beneficial interests Beneficial interests Long Term Incentive Scheme ordinary shares (a) bond packages (b) notional allocation of shares As at As at As at As at As at Allocated As at 23 October 31 December 23 October 31 December 23 October during 31 December 2000 2000 2000 2000 2000 (c) 2000 (d) 2000 Sir John Parker 1,960 11,960 – – – – – Steve Lucas 60,866 60,866 – – 83,300 213,073 296,373 Phil Nolan 103,092 103,092 1 1 286,850 300,585 587,435 John Wybrew 244,788 219,788 – – 305,015 254,927 559,942 Sir David Davies – 11,000 – – – – – Christopher Hampson 5,331 10,331 – – – – – Kenneth Harvey 2,000 2,000 – – – – – George Rose – – – – – – – Baroness Diana Warwick – 1,333 – – – – – a) Interests shown are beneficial interests in the ordinary shares of Lattice Group plc. Ordinary shares in Lattice Group plc were acquired on 23 October 2000 as a result of the Demerger on the basis of one Lattice Group plc share for each BG Group plc share. Beneficial interest includes shares acquired pursuant to the BG Group Employee Profit Sharing Schemes at Demerger, on the basis of one Lattice Group plc share for each BG Group plc share, which will be held for eligible Directors under the terms of the Scheme and released at the same time as the BG Group plc shares three years from the date of allocation. As at their date of appointment, 1 September 2000, the Directors did not have any beneficial interests in Lattice Group plc shares. b) Bond package is as defined in the Scheme of Arrangement as set out in the circular to BG plc shareholders dated 8 October 1999. As at 29 December 2000, the closing price of a bond package was 105.46% of its nominal value of £3,000. c) A notional allocation of BG ordinary shares was made in October 1999. At Demerger, the allocations were reconstituted into replacement allocations over Lattice Group shares in such a way that their value was retained. The base price was £1.3073 and these awards are subject to the Rules of the Lattice Group Long Term Incentive Scheme and would normally be released at the discretion of the trustees, subject to underlying financial performance, in October 2003. d) A notional allocation of Lattice Group shares was made on 3 November 2000 under the Lattice Group Long Term Incentive Scheme at a base price of £1.3141. Figures for (c) and (d) represent the maximum award possible if performance criteria are met at the end of the performance period (three years) and which would not vest until the expiry of the retention period (one further year). Directors’ remuneration report continued 47

Other interests There were no changes in the interests of the Directors in the share capital or debentures of the Company or any of its subsidiary undertakings between 1 January 2001 and 27 February 2001.

There were no contracts of significance subsisting during or at the end of the financial year to which the Company or any of its subsidiary undertakings is a party and in which any Director or any other executive officer is or was materially interested. Since 1 January 2001 the Company has not been, and is not now, a party to any material transaction or proposed transaction in which any Director or any other executive officer, any spouse or relative of any of the foregoing or any relative of such spouse has or was to have a direct or indirect material interest.

Pensions All the Executive Directors are subject to the earnings cap which is a restriction on the amount of pay which can be used to calculate pensions due from a tax approved pension scheme. They are all members of the Lattice Group Pension Scheme (which prior to the Demerger was known as the BG Group Pension Scheme). Lattice Group has agreed to increase their retirement benefits (including contingent death benefits) by means of unapproved arrangements, under the Lattice Group Supplementary Benefits Scheme, to at least the level which would otherwise have been provided in the Lattice Group Pension Scheme had they not been subject to the earnings cap. Provision has been made in the accounts in respect of the additional obligations for post-retirement benefits.

Directors’ pension provisions were as follows: Directors’ Years of Increase Total accrued contributions pensionable in pension annual for part year to Age as at service at for part year to pension at 31 December 31 December 31 December 31 December 31 December Retirement 2000 (a) 2000 2000 (b) 2000 (a) 2000 age £000 £000 £000 p.a.

Steve Lucas (b) 1.6 46 13 9/12 12.7 51.5 65 Phil Nolan (b)(c) 2.3 47 7 11/12 19.8 78.0 60 John Wybrew 1.9 59 4 9/12 28.5 66.7 65 a) The increase in accrued pension is measured from 23 October 2000. The contributions shown are also for the part year. b) Includes pensionable service transferred from previous employments. c) The figures for Phil Nolan include an accrued pension amount of £21,687 per annum in respect of a recent transfer into the Pension Scheme.

From 23 October 2000 the provisions for all the Executive Directors are designed to give a pension equivalent to two-thirds of salary (averaged over three years) at retirement age, inclusive of any pension rights earned in previous employment. Prior to that, John Wybrew’s pension accrued at the rate of one fortieth of salary (averaged over 12 months) at retirement for each year and completed day of service to achieve a target pension of £40,000 p.a. at age 60 and Steve Lucas’s pension accrued at the rate of one sixtieth of salary (averaged over 12 months) at retirement for each year and completed day of service. Phil Nolan’s retirement age is now 60 (65 prior to 23 October 2000) and John Wybrew’s retirement age is now 65 (60 prior to 23 October 2000).

No actuarial reduction is applied to pensions payable from the age of 55, provided ten years’ service has been completed with Lattice Group (which includes any pensionable service transferred from previous employment). Pensions in payment are increased in line with inflation. An adult dependant’s pension is payable on the death of a Director, equal to two-thirds of that payable to the Director based on potential service to retirement age.

External appointments To broaden the experience of Executive Directors, it is normal Company policy, subject to individual approval by the Remuneration Committee, to allow each Director to accept a maximum of one external appointment as a Non-executive Director of another company, fees for which are retained by the individual Director.

By order of the Board Registered office: John Patience 130 Jermyn Street Company Secretary London SW1Y 4UR

27 February 2001 Registered in England No. 3900804 Lattice Group Annual Report and Accounts 2000 48 Auditors’ report to the members of Lattice Group plc

Independent Auditors’ report to the members of Lattice Group plc We have audited the financial statements which comprise the profit and loss account, the balance sheet, the cash flow statement, the statement of total recognised gains and losses and the related notes which have been prepared under the historical cost convention (as modified by the revaluation of certain fixed assets) and the accounting policies set out under ‘Principal accounting policies’.

Respective responsibilities of Directors and Auditors The Directors’ responsibilities for preparing the Annual Report and the financial statements in accordance with applicable United Kingdom law and accounting standards are set out in the Statement of Directors’ responsibilities.

Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory requirements, United Kingdom Auditing Standards issued by the Auditing Practices Board and the Listing Rules of the Financial Services Authority.

We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the United Kingdom Companies Act 1985. We also report to you if, in our opinion, the Directors’ report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding Directors’ remuneration and transactions is not disclosed.

We read the other information contained in the Annual Report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements.

We review whether the corporate governance statement reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the Company’s or Group’s corporate governance procedures or its risk and control procedures.

Basis of audit opinion We conducted our audit in accordance with auditing standards issued by the United Kingdom Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

Opinion In our opinion the financial statements give a true and fair view of the state of affairs of the Company and the Group at 31 December 2000 and the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with the United Kingdom Companies Act 1985.

PricewaterhouseCoopers 27 February 2001 Chartered Accountants and Registered Auditors 1 Embankment Place London WC2N 6RH 49 Principal accounting policies

Basis of preparation and accounting principles The financial information shown in this report presents the consolidated financial statements for the two years ended 31 December 2000 of the Company and those businesses which are held within the Lattice Group as at 31 December 2000, or since the date of acquisition if subsequent to the Demerger from BG Group which took place on 23 October 2000. The principal entities included within the financial statements are shown in note 26. The following summarises the accounting and other principles that have been applied in preparing the financial information on a merger basis: comparatives for the Lattice Group have been prepared as if the continuing operations of the Lattice Group were in existence for the whole of 1999 and 2000. No comparatives are reported for the Company as the Company accounts relate to the period from incorporation on 29 December 1999 to 31 December 2000; as well as costs borne directly by the Lattice Group, the results within the financial information include a share of corporate head office costs which have historically been recharged by BG Group to its underlying business segments. These principally comprise costs of the following head office departments: Finance, Secretariat and Legal, Human Resources and Corporate Affairs as well as other corporate recharges such as pension and share scheme costs. The level of charges may not be representative of costs that will be incurred following the Demerger; net interest includes net interest payable on the net debt of the BG Group and its subsidiary undertakings which has been attributed to the Lattice Group. Interest charges presented may not be representative of costs that will be incurred following the Demerger; exchange differences on foreign currency debt included in shareholders’ funds in 1999 were offset against those arising on overseas assets of BG Group and its subsidiary undertakings. The Lattice Group, which does not have any foreign currency assets, swapped all foreign currency borrowings into sterling obligations following the 1999 Restructuring and Refinancing; the tax charge for the Lattice Group is based on certain assumptions that have been applied to provide a reasonable estimate of the tax charge that would have existed had this been a separate business. Historical tax charges presented may not be representative of tax charges that would have been incurred had the Lattice businesses not formed part of the BG Group and its subsidiary undertakings or that will be incurred following the Demerger; and all capital and reserves movements, excepting movements to the revaluation reserve, have been stated on a pro forma basis as shown in note 21. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make judgements and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported revenues during the reporting period. Actual results could differ from these estimates. These accounts have been prepared in accordance with applicable accounting standards, under modified historical cost principles. Under these principles, Lattice Group values Transco’s regulatory assets at depreciated replacement cost (see Tangible fixed assets below) or, where lower, the estimated value in use (see Impairment of fixed assets below). Transco’s regulatory assets are those assets which are subject to a regulatory regime in Great Britain. Revalued assets include operational land and buildings, mains and services, gas storage, plant and machinery and meters in Great Britain. Differences between modified historical cost profit and historical cost profit comprise: i) depreciation in excess of historical cost depreciation adjustment – the additional depreciation necessary to bring historical cost depreciation up to a full modified historical cost depreciation charge, which is based on the modified historical cost of fixed assets; and ii) disposal of tangible fixed assets adjustment – the difference between the modified historical cost and historical cost profit or loss on disposal. Financial Reporting Standard (FRS) 18, ‘Accounting Policies’, which was issued on 7 December 2000, has not been adopted. This Standard comes into effect in 2001. Basis of consolidation In accordance with the principles of merger accounting, as set out in FRS 6 ‘Acquisitions and Mergers’, the accounts have been prepared as if the Lattice Group had been in existence throughout 1999 and 2000. Information in respect of the transactions made in connection with the Demerger is shown in note 1 to the accounts. Only the continuing operations of the Lattice Group that were demerged on 23 October 2000 are consolidated in the financial statements. The results of undertakings acquired post Demerger are consolidated from the date when control passes to the Company. The results of undertakings disposed of post Demerger are consolidated to the date when control passes from the Company. The accounts comprise a consolidation of the accounts of the Company and its subsidiary undertakings and incorporate the results of its share of joint ventures and associated undertakings on an equity basis. The Group’s principal subsidiary undertaking, Transco plc, which operates the substantial majority of the gas distribution network in Great Britain, has been ring-fenced for regulatory purposes. The ring-fence requires Transco to meet a number of regulatory conditions (set out in detail on page 34) which include restrictions on business activities, fund raising, granting of guarantees and dividend payments. These restrictions are not sufficiently onerous to prevent Group management from exercising control of the business or rights over the subsidiary undertaking’s assets and management and hence Transco’s results have been consolidated. Transco plc is registered with the SEC in the US in respect of listed debt securities. Transco plc therefore publishes additional information based on US accounting principles in the 20-F Statement that is included within that company’s Annual Report and Accounts. Goodwill On the acquisition of a subsidiary undertaking, joint venture or associated undertaking, fair values are attributed to the net assets acquired and the consideration paid. Goodwill, which represents the difference between the fair value of the purchase consideration and the fair value of the net assets acquired, is capitalised. Goodwill which has a limited useful economic life is amortised on a straight-line basis. Lattice Group Annual Report and Accounts 2000 50

Tangible fixed assets Transco’s regulatory tangible fixed assets are included in the balance sheet at depreciated replacement cost or, where lower, the estimated value in use (see Impairment of fixed assets below). Investment properties are carried at valuation. All other categories of tangible fixed assets are carried at depreciated historical cost. a) Modified historical cost i) land and buildings – Transco’s regulatory assets – based upon periodic valuation undertaken on a rolling basis by independent external chartered surveyors, determined on the basis of open market value for existing use; land and buildings – investment properties – based upon periodic valuation on a rolling basis by independent external chartered surveyors, determined on the basis of open market value. Valuations take into account estimated non-statutory decontamination costs; land and buildings – other – based upon historical cost; ii) mains and services, gas storage, plant and machinery and meters – Transco’s regulatory assets – a rolling five year valuation, with interim valuations either quarterly or annually. Valuation is undertaken internally by qualified staff with full valuations reviewed externally. The valuation is based upon the application of calculated average unit replacement costs to the physical lengths or quantities used except some plant and machinery where valuation is based on the application of appropriate indices to their historical cost; iii) other tangible fixed assets – Transco’s regulatory assets – based upon historical cost; other tangible fixed assets – other – based upon historical cost. Additions represent extensions to, or significant increases in, the capacity of tangible fixed assets and are stated at actual cost. Expenditure on the replacement of certain statutory categories of Transco’s tangible fixed assets (mains and services) is charged as a trading cost. Major assets in the course of construction are included in tangible fixed assets, in the categories to which they relate, on the basis of costs incurred at the balance sheet date. In the case of assets constructed by the company and its subsidiary undertakings, this includes all relevant directly attributable costs and commissioning costs. Interest costs incurred during construction that are directly attributable to the construction of a significant tangible fixed asset, are capitalised as part of the cost of the asset concerned at a rate based on the Group’s average cost of debt. Contributions received towards the cost of tangible fixed assets are included in creditors as deferred income and credited to the profit and loss account over the life of the assets. b) Depreciation Freehold land and investment properties are not depreciated as expected residual values are not materially different from their carrying values. Other tangible fixed assets are depreciated on a straight-line basis at rates sufficient to write off the modified historical cost or historical cost of individual assets over their estimated useful economic lives. The depreciation periods for the principal categories of assets are as follows:

Freehold and leasehold buildings – Transco’s regulatory assets up to 50 years – other up to 50 years Mains and services – Transco’s regulatory assets 55 to 65 years Gas storage – Transco’s regulatory assets 40 years Plant and machinery – Transco’s regulatory assets 10 to 50 years – other 3 to 25 years Meters – Transco’s regulatory assets 10 to 20 years Motor vehicles and office equipment – Transco’s regulatory assets 3 to 10 years – other 1 to 10 years

Asset lives are kept under review and complete asset life reviews are regularly carried out. Assets held under finance leases are depreciated over the shorter of the lease term or their useful economic life. Assets in the course of construction are not depreciated until they enter service. c) Impairment of fixed assets The impairment is calculated as the difference between the carrying values of income generating units and the estimated value in use at the date the impairment loss is recognised. Transco’s asset base as a whole is treated as one income generating unit. Value in use represents the present value of expected future cash flows discounted on a pre-tax basis. The regulatory environment is a significant factor in determining the value in use of transportation assets. Therefore, future cash flows in respect of Transco’s transportation assets comprise a five year business plan plus a projection in perpetuity, on the assumption that the price control formula for future regulatory periods will be similar in form to the price control formula for the regulatory period commencing 1 April 1997. Impairment of regulatory assets is recognised in the statement of total modified historical cost recognised gains and losses until the carrying amount of the asset is reduced to depreciated historical cost; thereafter impairment is recognised in the profit and loss account. Changes in value in use are reported in the statement of total modified historical cost recognised gains and losses as unrealised surplus or loss on revaluation of tangible fixed assets. Stocks Stocks are stated at weighted average historical cost less provision for deterioration and obsolescence. Principal accounting policies continued 51

Environmental costs Provision is made, on a discounted basis, for statutory decontamination costs of old gas manufacturing sites, retained in the Lattice Group. The unwinding of the discount is included in the profit and loss account as a financial item and is added to the net interest charge. Deferred tax Deferred tax, in respect of accelerated capital allowances and other timing differences, is provided only to the extent that it is probable that a liability or asset will crystallise. FRS 19, ‘Deferred Taxation’, which was issued on 7 December 2000, has not been adopted. This Standard comes into effect in 2002. Leases Assets for use in the Group’s businesses which are held under finance leases are capitalised, included in tangible fixed assets at historical cost and depreciated accordingly. The obligations related to finance leases, net of finance charges in respect of future periods, are included within borrowings. The interest element of the rental obligation is allocated to accounting periods during the lease term, to reflect the constant rate of interest on the remaining balance of the obligation for each accounting period. Rentals under operating leases are charged to the profit and loss account as incurred, except that a provision has been made in respect of rents payable on vacant leasehold property. Assets acquired for letting under finance leases are included in debtors (due within or after one year). Income from finance leases is calculated by apportioning the total gross earnings to give a constant periodic rate of return to the net cash investment of the leases in each period. Assets held by the company for letting under operating leases are shown under fixed assets. Income from operating leases is recognised on a straight-line basis over the life of the lease. Financial instruments Derivative instruments utilised by the Group are interest rate swaps, foreign currency swaps, forward rate agreements, interest rate swaptions and forward exchange contracts. A derivative instrument is considered to be used for hedging purposes when it alters the risk profile of an existing underlying exposure of the Group in line with its risk management policies. Derivatives used for hedging are accounted for on an accruals basis. During the year there were no derivatives used for trading purposes. 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. Interest differentials on derivative instruments are recognised by adjusting the net interest charge. Premiums or discounts on derivative instruments are amortised over the shorter of the life of the instrument or the underlying exposure. Currency swap agreements and forward exchange contracts are retranslated at the rates ruling in the agreements and contracts. Resulting gains or losses are offset against foreign exchange gains or losses on the related borrowings or, where the instrument is used to hedge a committed future transaction, are deferred until the transaction occurs. Turnover Group turnover, which excludes value added tax and other sales taxes, comprises the value of goods and services provided by Group undertakings, excluding those between them. Total turnover is Group turnover together with the Group’s share of its joint ventures’ turnover. Turnover generated under contracts pertaining to a period of time is recognised on a proportional basis to match the timing of the associated costs. Turnover within Transco in respect of sales of regulated transportation services, the Group’s principal source of revenue, includes an assessment of transportation services supplied to customers between the date of the last meter reading and the year end. Provision is not made for any future price reductions where revenues exceed the regulated maximum allowable amount. Interest Interest payable, except that related to financing the construction of significant tangible fixed assets, is written off as incurred. Discounts or premiums and expenses on the issue of debt securities and premiums payable on early redemption of debt securities, in lieu of future interest costs, are amortised over the term of the related security and included within interest payable. Pensions SSAP 24, ‘Accounting for Pension Costs’, requires that the cost of providing retirement pensions and related benefits be charged to the profit and loss account over the periods benefiting from the employees’ services. The regular pension cost, variations from the regular pension cost and interest are all charged within employee costs. The difference between the charge or credit to the profit and loss account and the contributions paid to the Lattice Scheme is shown as an increase or decrease in the provision. Deferred tax and interest on this provision is accounted for in full. FRS 17, ‘Retirement Benefits’ which was issued on 30 November 2000, has not been adopted. This Standard comes into effect on a progressive basis commencing in 2001 with full implementation by 2003. Research and development All research and development expenditure is written off when incurred except for laboratory buildings and equipment used for research and development which are capitalised and depreciated in accordance with the depreciation policy set out above. Advertising expenditure Advertising expenditure is written off as incurred. Lattice Group Annual Report and Accounts 2000 52 Financial statements

Consolidated modified historical cost profit and loss account for the year ended 31 December 2000 1999 Notes £m £m Turnover – Group and share of joint ventures 3,092 3,129 Less: share of joint ventures’ turnover (5) –

Group turnover 2 3,087 3,129 Operating costs 3 (2,030) (1,848) Demerger costs (1999 Restructuring and Refinancing costs) 3 (43) (20) Group operating profit 1,014 1,261 Share of operating losses in joint ventures (4) –

Total operating profit 2 1,010 1,261 Profit on disposal of fixed assets 15 37

Profit on ordinary activities 2 1,025 1,298 Net interest 5 (444) (357) Profit on ordinary activities before taxation 581 941 Tax on profit on ordinary activities 6 (198) (317) Profit on ordinary activities after taxation and for the financial year 383 624

Dividends 7 (246) –

Transfer to reserves 21 137 624

Earnings per ordinary share – basic 8 11.0p 17.7p Earnings per ordinary share – adjusted 8 11.6p 17.5p Earnings per ordinary share – notional adjusted 8 11.6p 15.5p Earnings per ordinary share – diluted 8 11.0p – Earnings per ordinary share – diluted adjusted 8 11.5p –

All of the above relate to continuing operations. Consolidated statement of total modified historical cost recognised gains and losses for the year ended 31 December 2000 1999 £m £m Profit on ordinary activities after taxation and for the financial year 383 624 Other recognised gains and losses: Unrealised surplus on revaluation of tangible fixed assets (see note 9, page 65) 376 16 Unrealised gain on transfer of fixed assets to a joint venture (see note 10, page 68) 10 – 386 16 Total recognised gains and losses for the financial year 769 640

Reconciliation of consolidated modified historical cost and historical cost profit on ordinary activities before taxation for the year ended 31 December 2000 1999 £m £m Modified historical cost profit on ordinary activities before taxation 581 941 Modified historical cost adjustments: Depreciation in excess of historical cost depreciation (a) 125 140 Disposal of tangible fixed assets adjustment (b) 17 39 142 179 Historical cost profit on ordinary activities before taxation 723 1,120

In 2000 the historical cost transfer to reserves was £279m (1999 £803m). a) Represents the additional depreciation necessary to bring historical cost depreciation up to a full modified historical cost depreciation charge, which is based on the modified historical cost of fixed assets. b) Represents the difference between the modified historical cost and historical cost profit or loss on disposal.

The accounting policies on pages 49 to 51, together with the notes on pages 57 to 83, form part of these financial statements. 53

Modified historical cost balance sheets The The Group Company as at 31 December 2000 1999 2000 (a) Notes £m £m £m Fixed assets Tangible assets 9 14,057 13,536 – Investments in subsidiary undertakings 10 – – 566 Investments in joint ventures: Share of gross assets 10 73 – – Share of gross liabilities 10 (11) – – 62 – – Other investments 10 10 7 – 14,129 13,543 566 Current assets Stocks 11 41 46 – Debtors: amounts falling due within one year 12 638 745 328 Debtors: amounts falling due after more than one year 12 54 294 86 692 1,039 414 Investments 13 223 422 230 Cash at bank and in hand 7 13 – 963 1,520 644 Creditors: amounts falling due within one year Borrowings 14 to 17 (1,371) (1,823) – Other creditors 18 (1,027) (757) (128) (2,398) (2,580) (128) Net current (liabilities)/assets (1,435) (1,060) 516 Total assets less current liabilities 12,694 12,483 1,082 Creditors: amounts falling due after more than one year Borrowings 14 to 17 (4,861) (5,182) – Other creditors 18 (874) (825) – (5,735) (6,007) – Provisions for liabilities and charges 19 (692) (803) (288) 6,267 5,673 794 Capital and reserves (b) Called up equity share capital 20, 21 353 353 353 Other reserves 21 (5,731) (5,771) – Revaluation reserve 21 6,659 6,429 – Profit and loss account 21 4,992 4,665 441 Joint ventures and associated undertakings 21 (6) (3) – Lattice Group shareholders’ funds 6,267 5,673 794

Commitments and contingencies are shown in note 22, page 78. a) No comparative figures are reported for the Company as the accounts relate to the period from incorporation on 29 December 1999 to 31 December 2000. b) Capital and reserves for 1999 have been stated on a pro forma basis (see note 21, page 77). The financial statements on pages 49 to 83 were approved by the Board on 27 February 2001 and were signed on its behalf by:

Sir John Parker, Chairman

Steve Lucas, Executive Director, Finance

The accounting policies on pages 49 to 51, together with the notes on pages 57 to 83, form part of these financial statements. Lattice Group Annual Report and Accounts 2000 54

Movements in modified historical cost Lattice Group shareholders’ funds The The Group Company (a) for the year ended 31 December 2000 1999 2000 £m £m £m Profit for the financial year 383 624 564 Dividends (246) – (123) 137 624 441 Issue of bonds on Restructuring and Refinancing – (1,509) – Other recognised gains and losses for the financial year (b) 386 16 – Contribution to sharesave trust (c) 45 – – Issue of shares – – 353 Currency translation adjustments (d) – (9) – Funding movement with BG 26 (1,052) – Net movement in shareholders’ funds for the financial year 594 (1,930) 794 Lattice Group shareholders’ funds as at 1 January 5,673 7,603 – Lattice Group shareholders’ funds as at 31 December 6,267 5,673 794 a) No comparative figures are reported for the Company as the accounts relate to the period from incorporation on 29 December 1999 to 31 December 2000. b) An analysis of Lattice Group’s other recognised gains and losses for the financial year is shown on page 52. c) Represents contributions by BG Group to the Transco plc sharesave trust as part of the Demerger arrangements. d) Currency translation adjustments in 1999 arising on foreign currency net debt are offset against those arising on overseas assets of BG Group prior to Demerger. The Lattice Group swapped all foreign currency borrowings into sterling obligations following the 1999 Restructuring and Refinancing.

Reconciliation of modified historical cost and historical cost net assets/(liabilities) The The Group Company (a) as at 31 December 2000 1999 2000 £m £m £m Modified historical cost net assets 6,267 5,673 794 Revaluation surplus (b) (6,659) (6,429) – Historical cost net (liabilities)/assets (392) (756) 794 a) No comparative figures are reported for the Company as the accounts relate to the period from incorporation on 29 December 1999 to 31 December 2000. b) Represents revaluation of Transco’s regulatory assets of £6,609m (1999 £6,372m) and investment properties of £50m (1999 £57m).

The accounting policies on pages 49 to 51, together with the notes on pages 57 to 83, form part of these financial statements. Financial statements continued 55

Consolidated cash flow statement for the year ended 31 December 2000 1999 Notes £m £m Operating activities: Cash inflow from operating activities 25(a) 1,542 1,092 Net expenditure relating to exceptional items 25(a) (36) (35)

Net cash inflow from operating activities 25(a) 1,506 1,057

Net cash outflow from returns on investments and servicing of finance 25(b) (444) (395) Net cash outflow from taxation (202) (162) Net cash outflow from capital expenditure and financial investment 25(c) (628) (344) Net cash outflow from acquisitions and disposals 25(d) (10) (7) Equity dividends paid (a) (123) – Net cash inflow from the management of liquid resources 25(e) 198 7 Net cash inflow before financing activities 297 156 Net cash outflow from financing activities 25(f) (297) (153) Net increase in cash in the year – 3 a) Represents a dividend paid to BG Group plc in respect of the Lattice Group contribution to the BG Group plc 2000 interim dividend.

Reconciliation of net borrowings 2000 1999 Notes £m £m Net borrowings as at 1 January (6,570) (3,785) Net increase in cash in the year – 3 Cash inflow from the management of liquid resources 25(e) (198) (7) Cash outflow/(inflow) from change in borrowings and lease financing 25(f) 802 (1,262) Issue of bonds on Restructuring and Refinancing – (1,509) Other movements: Accretion of interest (34) (10) Debt issue expenses (1) 9 Other adjustments (1) (9) (36) (10) Net borrowings as at 31 December (6,002) (6,570) Represented by: Cash at bank and in hand 7 13 Current asset investments 13 223 422 Gross borrowings: Short-term borrowings 14 (1,371) (1,823) Long-term borrowings 14 (4,861) (5,182) (6,232) (7,005) (6,002) (6,570)

The accounting policies on pages 49 to 51, together with the notes on pages 57 to 83, form part of these financial statements. Lattice Group Annual Report and Accounts 2000 56

Analysis of changes in financing during the year

2000 1999 Share capital (a) Notes £m £m

Opening balance 21 353 353 Net cash inflow from financing activities – – Closing balance 353 353 a) Capital and reserves for 1999 have been stated on a pro forma basis (see note 21, page 77). 2000 1999 Gross borrowings (a) Notes £m £m Opening balance (7,005) (4,221) Decrease/(increase) in bank overdraft 6 (6) Net cash outflow/(inflow) from change in borrowings and lease financing 25(f) 802 (1,262) Issue of bonds on 1999 Restructuring and Refinancing – (1,509) Other movements: Accretion of interest (34) (10) Debt issue expenses (1) 9 Other adjustments – (6) (35) (7)

Closing balance 14 (6,232) (7,005) a) Gross borrowings exclude cash at bank and in hand and current asset investments.

Analysis of cash movement 2000 1999 £m £m Opening balance (1) (6) Net increase in cash in the year – 3 Exchange adjustments – 2 Closing balance (1) (1)

Cash represents cash at bank and in hand of £7m (1999 £13m) offset by bank overdrafts of £8m (1999 £14m).

The accounting policies on pages 49 to 51, together with the notes on pages 57 to 83, form part of these financial statements. 57 Notes to the accounts

1 Merger accounting and new accounting standards Merger accounting On 23 October 2000, BG Group plc demerged certain businesses (grouped together under BG Transco Holdings plc) to Lattice Group plc (the ‘Demerger’). As explained on page 49, ‘Basis of preparation and accounting principles’, these consolidated financial statements have been prepared as if the Lattice Group had been in existence for the whole of 1999 and 2000 and only the continuing operations of those businesses have been consolidated. The profit on ordinary activities after taxation of the demerged businesses included within these financial statements from 1 January to 23 October 2000 is £233m. Upon Demerger, BG Transco Holdings plc was renamed Transco Holdings plc and the share capital of Transco Holdings was transferred to Lattice Group plc, who recorded its investment in Transco Holdings at the nominal value of shares issued to BG Group plc shareholders. In accordance with Sections 131 and 133 of the Companies Act 1985, no premium was recorded on the shares issued. On consolidation, the difference between the nominal value of the Company’s shares issued and the amount of share capital of Transco Holdings at the date of Demerger, was debited to opening other reserves. Lattice Group plc was incorporated as a private company limited by shares on 29 December 1999 as Shelba Marketing Limited. On incorporation, it had authorised share capital of £1,000 divided into 1,000 ordinary shares of £1 each, of which two ordinary shares were allotted and fully paid. On 29 August 2000, its name was changed to Lattice Group plc and it was re-registered as a public company on 30 August 2000. By a written resolution of the shareholders dated 29 August 2000, the 1,000 ordinary shares were sub-divided into 10,000 ordinary shares of 10 pence each and the authorised share capital of Lattice Group plc was increased to £500,000,000.10 by the creation of 4,999,490,000 further ordinary shares of 10 pence each, one special share (the New Special Share) of 10 pence and one redeemable preference share of £50,000. The redeemable preference share was allotted and paid up in full on 29 August 2000. On 4 December 2000, in accordance with Article 3.5.1, the redeemable preference share of £50,000 was redeemed, at which point it was sub-divided and redesignated as 500,000 ordinary shares of 10 pence each. As part of a restructuring prior to the Demerger, Lattice Property, The Leasing Group, Lattice Insurance, Advantica and a number of other interests were transferred from BG Group to Transco Holdings on 16 July 2000. On 23 October 2000, the Demerger date, Lattice issued share capital to BG Group plc shareholders, totalling 3,528,147,798 ordinary shares of 10 pence each, on the basis of one Lattice Group plc share for each BG Group plc share, in consideration for the investment in Transco Holdings. Transco Holdings’ principal assets were its investments in Transco plc and the entities noted above. As set out on page 22, subsequent to the Demerger, Lattice Group was itself restructured in December 2000 into two subsidiary groups, Transco Holdings and Lattice Group Holdings, to maintain the capital efficiency and transparency created for the utility by the 1999 Restructuring and Refinancing. Shares in Lattice Group plc were officially admitted to the Official List of the London Stock Exchange and dealings commenced on 23 October 2000. New accounting standards During the year, Lattice has implemented Financial Reporting Standard (FRS) 16 ‘Current Tax’ which was published in December 1999. In addition, the following Standards, which are not required to be implemented in the current year, were issued by the Accounting Standards Board: FRS 17 ‘Retirement Benefits’; FRS 18 ‘Accounting Policies’ and FRS 19 ‘Deferred Tax’. The impact of FRS 16 on these financial statements and, in order to assist users of the accounts, some commentary on FRS 17-19, is shown below. FRS 16 Current Tax FRS 16 was issued on 16 December 1999 and has been adopted by the Group in the current year. FRS 16 requires that current tax should be accounted for in the profit and loss account unless it relates to an item accounted for in the statement of total recognised gains and losses, in which case the tax should also be accounted for therein. It also requires a number of disclosure changes in terms of the content of the notes to the accounts. This Standard has had no impact on the financial results or position of the Group, as the specific changes in accounting treatment are not relevant to the Group. The Standard only impacts the Group in terms of the content of disclosures which, in some cases, were already given in prior years as additional voluntary disclosures. FRS 17 Retirement Benefits FRS 17 was issued on 30 November 2000. It requires certain disclosures to be made in 2001 and 2002 and full implementation in 2003 and will require a prior year adjustment. FRS 17 requires that current and past pension service costs should be reported in operating costs and that the expected return on scheme assets less interest on scheme liabilities should be reported adjacent to interest on the face of the profit and loss account. Actuarial gains and losses should be reported in the statement of total recognised gains and losses. The recoverable surplus in the scheme should be reported separately as a pension asset in the balance sheet. This Standard will have a significant impact on the Group’s financial results and position, as indicated in note 24, page 81, notably by increasing the volatility of these results in line with changes in actuarial assumptions and short-term fluctuations in market values of fund assets. Lattice Group Annual Report and Accounts 2000 58

1 Merger accounting and new accounting standards continued FRS 18 Accounting Policies FRS 18 was issued on 7 December 2000. It requires full implementation in 2001. FRS 18 requires companies to set out the principles to be followed in selecting accounting policies and the disclosures needed to help users understand the accounting policies adopted and how they have been applied. The Standard should have no impact on the Group’s financial results or position. FRS 19 Deferred Tax FRS 19 was issued on 7 December 2000. It requires full implementation in 2002 and will require a prior year adjustment. FRS 19 introduces a form of ‘full’ provision method of accounting for deferred tax which will replace the ‘partial’ provision method adopted by the Group as set out in Statement of Standard Accounting Practice (SSAP) 15 ‘Accounting for deferred tax’. Under this new approach, deferred taxes are deemed to represent the right to pay less tax or an obligation to pay more tax in the future as a result of transactions or events that have occurred by the balance sheet date. The deferred tax for a period and any adjustments in respect of previous periods will be recognised in the profit and loss account. Tax arising on gains and losses that have been recognised in the statement of total recognised gains and losses will be recognised in that statement. Reporting entities are permitted but not required to discount deferred tax assets and liabilities to reflect the time value of money. Movements in the discount should be included as part of the tax charge/(credit) in the profit and loss account. This Standard will have a significant impact on the Group’s financial results and position as indicated in note 19, page 75. 2 Segmental analysis Lattice’s operations comprise the Transco business segment, Other activities and a Pension credit (see note 24, page 81). Transco is Great Britain’s primary gas transporter and is responsible for developing and maintaining a gas pipeline network. Other activities principally comprise Telecoms, Lattice Property, The Leasing Group, Advantica, Lattice Insurance and Lattice Energy Services. Turnover and operating profit derive principally from the same geographical source and destination, being Great Britain. Group turnover and total operating profit/(loss) – analysed by business segment Total operating Group turnover profit/(loss) for the year ended 31 December 2000 1999 2000 1999 £m £m £m £m Modified historical cost Transco 2,975 3,058 958 1,160 Other activities 208 124 (38) (7) Pension credit – – 90 108 3,183 3,182 1,010 1,261 Less: intra-group sales (96) (53) – – 3,087 3,129 1,010 1,261

Historical cost total operating profit differs from modified historical cost total operating profit for Transco. The historical cost total operating profit for Transco is £1,083m (1999 £1,300m). Operating exceptional charges in 2000 amounted to £43m (1999 £20m) and represented costs arising in connection with the Demerger (1999 Restructuring and Refinancing) and have been included within Transco £41m (1999 £20m) and Other activities £2m (1999 £nil). Profit on ordinary activities – analysed by business segment for the year ended 31 December 2000 1999 £m £m Modified historical cost Transco 924 1,143 Other activities 25 47 Pension credit 90 108 Less: intra-group items (14) – 1,025 1,298

Historical cost profit on ordinary activities for the year ended 31 December 2000 was £1,167m (1999 £1,477m), comprising Transco £1,068m (1999 £1,302m); Other activities £32m (1999 £67m); Pension credit £90m (1999 £108m) and intra-group items £(23)m (1999 £nil). Notes to the accounts continued 59

2 Segmental analysis continued Net assets and gross assets – analysed by business segment Net assets/(liabilities) Gross assets as at 31 December 2000 1999 2000 1999 £m £m £m £m Transco 12,772 12,292 14,199 13,780 Net borrowings, net interest, tax, dividends and intra-group balances (7,086) (6,673) 98 491 5,686 5,619 14,297 14,271 Other activities (69) (118) 550 523 Net borrowings, net interest, tax, dividends and intra-group balances 938 539 245 269 869 421 795 792 Pension credit (288) (367) – – 6,267 5,673 15,092 15,063

Historical cost net and gross assets differ from modified historical cost net and gross assets for Transco and for Other activities. Historical cost net assets/(liabilities) of Transco are £(923)m (1999 £(753)m) and for Other activities are £819m (1999 £364m). Historical cost gross assets of Transco are £7,688m (1999 £7,899m) and for Other activities are £745m (1999 £735m). Modified historical cost depreciation and capital expenditure – analysed by business segment Modified historical Capital cost depreciation expenditure for the year ended 31 December 2000 1999 2000 1999 £m £m £m £m Transco 332 330 658 419 Other activities 47 29 142 112 379 359 800 531 Transco only: Depreciation in excess of historical cost depreciation 125 140 Modified historical cost depreciation 504 499 Lattice Group Annual Report and Accounts 2000 60

3 Operating costs The Group’s operating costs charged to the profit and loss account included: 2000 1999 £m £m Change in stock of finished goods and work in progress (1) – Raw materials and consumables 177 145 Employee costs (see note 4(b), page 61) 473 402 Less: Own work capitalised (43) (35) Employee costs included within replacement and research and development expenditure below (18) (39) Sharesave Scheme costs included in Demerger costs below (20) – 392 328 Amounts written off tangible fixed assets: Modified historical cost depreciation (see note 9, page 65): Historical cost depreciation 369 351 Depreciation on assets held under finance leases 10 8 Depreciation in excess of historical cost depreciation (a) 125 140 504 499 Other operating charges: Replacement expenditure 249 200 Lease rentals: Plant, machinery and equipment – 1 Other assets 15 16 Research and development 19 40 Demerger costs (b) 43 – Restructuring and Refinancing costs – 20

a) Represents the additional depreciation necessary to bring historical cost depreciation up to a modified historical cost depreciation charge, which is based on the modified historical cost of fixed assets. b) These charges arose during the year as a direct result of the Demerger. They include the costs of income tax and national insurance contributions which Lattice has agreed to pay on behalf of employees (but not Directors) on the restructuring of the BG Sharesave Scheme (£20m), £14m related to the costs of establishing a new corporate centre and £9m of other costs. The remuneration of the Group’s Auditors comprises: The The Group Company 2000 1999 2000 £m £m £m Audit of Group accounts 1.3 1.4 0.4 Other statutory and regulatory services 0.3 0.2 – Other services 0.9 3.4 – 2.5 5.0 0.4 Notes to the accounts continued 61

4 Directors and employees a) Directors’ remuneration Lattice Group plc was incorporated on 29 December 1999. The Directors of Lattice Group plc, from incorporation to the date of Demerger, received no emoluments in respect of their services to Lattice Group plc. Directors’ remuneration in respect of their services to Lattice Group plc after Demerger and interests in Group securities are given in the Directors’ report on page 44. The remuneration for the period to Demerger of those Directors who were Directors of BG Group plc prior to Demerger (Sir John Parker, Phil Nolan, John Wybrew and Christopher Hampson) can be found in the Annual Report and Accounts of BG Group plc. The aggregate amount of emoluments paid to Directors in respect of qualifying services since the Demerger was £276,177 (1999 £nil). As at 31 December, retirement benefits were accruing to three Directors under a defined benefit scheme. b) Employee costs 2000 1999 £m £m Wages and salaries 440 413 Social security costs 39 36 Pension costs 23 23 Pension credit (90) (108) Long Term Incentive Scheme (see note 4(d) below) 6 9 Sharesave Scheme (see notes 3 and 4(f) below) 20 – Employee Profit Sharing Scheme (see note 4(g) below) 35 29 473 402

In 2000, employee costs of £430m (1999 £367m) were charged to the profit and loss account and £43m (1999 £35m) were capitalised. c) Average number of employees during the year 2000 1999 Number Number Transco 14,261 14,264 Other activities 1,318 942 15,579 15,206

Average employee numbers are based on an average monthly headcount. All employees are employed in the UK except for three employed in North America, included in Other activities. Information on share schemes set out under sections (d) to (k) below is in respect of shares in BG Group plc up to the date of the Demerger and shares in Lattice Group plc after that date. Figures are in respect of Lattice Group participants in the schemes unless stated otherwise. d) Long Term Incentive Scheme Details of the Lattice Group Long Term Incentive Scheme are given on page 43. Details of reconstituted notional allocations (1999 Scheme) and notional allocations (2000 Scheme) to Directors under the Lattice Group Long Term Incentive Scheme are given on page 46. Costs of the Scheme are charged to the profit and loss account over the life of the allocation, based upon the likelihood of allocations under the Scheme. Charges up to the date of the Demerger are in respect of the BG Group Scheme. A sum of £6m was charged in 2000 (1999 £9m). e) Lattice Group Short Term Incentive Scheme Details of the Lattice Group Short Term Incentive Scheme, which has been introduced with effect from the 2001 financial year, are given on page 43. The first awards of shares under this Scheme will not be made until Spring 2002. f) Sharesave Scheme Under the Lattice Group Sharesave Scheme, options over 71 million shares were granted on 20 December 2000. In the context of Demerger, participants in the BG Sharesave Scheme were given the opportunity to be granted an unapproved restructured sharesave option, exercisable over BG Group shares prior to Demerger. The employee PAYE and national insurance costs of participants employed by Lattice Group, who exercised their options prior to Demerger, have been paid by Lattice Group (£20m). Shares held by the BG Qualifying Employee Share Ownership Trust (QUEST), which was established in 1997 by BG to satisfy exercises of options under the BG Sharesave Scheme, were transferred for a total of £2.00 to the trustee of the Lattice Group All Employee Share Ownership Plan (Lattice Group AESOP) and the trustee of the BG Group All Employee Share Ownership Plan (BG Group AESOP), immediately prior to Demerger, in direct proportion to the number of employees in each group. Accordingly, 29m BG Group plc ordinary shares were transferred to the Lattice Group AESOP and 2.5m BG Group plc ordinary shares were transferred to the BG Group AESOP. On Demerger, each AESOP received a Lattice Group plc ordinary share for every BG Group plc ordinary share received under these transfers. Lattice Group Annual Report and Accounts 2000 62

4 Directors and employees continued As at 31 December 2000, the Lattice Group AESOP continued to hold 29m ordinary shares in Lattice Group plc and 29m ordinary shares in BG Group plc. It is expected that the trustee will resolve to sell the BG Group plc shares in 2001. Invitations to subscribe to the Lattice Group AESOP were issued to employees in January 2001. No awards were made under this plan in 2000. g) Employee Profit Sharing Scheme A total amount of £35m was charged to the profit and loss account for employee profit sharing as explained below. Under the BG Group Employee Profit Sharing Scheme £23m (1999 £29m) was set aside as a share of Lattice Group profits up to the date of Demerger in order to make an allocation of ordinary shares of BG Group plc in April 2001 on behalf of eligible Lattice Group employees. The share allocation to Lattice Group employees will represent the number of completed months’ service with BG Group in 2000 before the Demerger (nine months). For the remaining three months of the year, Lattice Group employees will receive an equivalent cash payment, grossed up for income tax and any national insurance charges (other than for Directors), and an amount of £12m has been set aside for that purpose. h) Summary of movements in share options Lattice Group BG Sharesave Sharesave Scheme Scheme options options m m 1999 Outstanding as at 1 January 1999 – 46 Granted – 9 Exercised – (1) Lapsed – (2) Outstanding as at 31 December 1999 – 52 Exercisable as at 31 December 1999 – 1 Option price range as at 31 December 1999 (£) – 1.36–2.85 Option price range for exercised options (£) – 1.36–2.85 2000 Outstanding as at 1 January 2000 – 52 Granted 71 – Exercised – (32) Lapsed – (19) Outstanding as at 31 December 2000 71 1 Exercisable as at 31 December 2000 – – Option price range as at 31 December 2000 (£) 1.18 1.36–2.85 Option price range for exercised options (£) – 1.36–2.85

i) Weighted average exercise price of share options Lattice Group BG Sharesave Sharesave Scheme Scheme options options £ £ Outstanding as at 1 January 2000 – 1.86 Granted 1.18 – Exercised – 1.71 Lapsed – 2.07 Outstanding as at 31 December 2000 1.18 2.25

j) Long Term Incentive Scheme allocations Notional allocations made in 2000 were 7m shares (1999 7m shares as reconstituted). A proportion of the allocation will be transferred to the ownership of the participants following a three year performance period and a further year in trust. k) Analysis of share options as at 31 December 2000 Weighted Weighted Number of average Normal average Date of shares option price exercisable remaining grant m £ date contractual life Sharesave Scheme options 2000 71 1.18 2004/6 4yrs 3mths Notes to the accounts continued 63

5 Net interest 2000 1999 £m £m Interest payable: On loans wholly repayable within five years 215 247 On loans any part repayable after five years 226 92 Interest payable on transportation prepayment 11 24 Finance lease (income)/charges (2) 1 Interest receivable (24) (26) 426 338 Add: unwinding of discount on environmental costs provision (see note 19, page 75) 19 19 Net interest payable/(receivable) – Group 445 357 – Joint ventures (1) – 444 357

6 Taxation 2000 1999 £m £m Current tax UK – current corporation tax at 30% (1999 30.25%) 176 220 Deferred tax Origination and reversal of timing differences 22 97 Tax on profit on ordinary activities 198 317

Based upon the historical cost results, the effective tax rate for the year ended 31 December 2000 was 27.4% (1999 28.3%). The tax charge reconciles with the charge calculated using the standard rate of UK corporation tax as follows: 2000 1999 £m £m Modified historical cost profit on ordinary activities before taxation 581 941 Modified historical cost adjustments 142 179 Historical cost profit on ordinary activities before taxation 723 1,120 Corporation tax at UK statutory rates on historical cost profit 217 337 Effect on tax charge of: Depreciation and other timing differences (30) (20) Permanent differences 11 – Tax charge 198 317

The following table reconciles the UK corporation tax rate and the historical cost effective tax rate computed by taking the various elements of the tax reconciliation as a percentage of historical cost profit before taxation: 2000 1999 % % UK corporation tax rate 30.0 30.3 Depreciation and other timing differences (4.1) (2.0) Permanent differences 1.5 – Historical cost effective tax rate 27.4 28.3

FRS 19, Deferred Taxation, which has not been adopted in the current year, introduced the requirement to effectively adopt a full provision basis for deferred taxation. If FRS 19 had been adopted, the provision required at 31 December 2000 in respect of the Group would be approximately £1,200m on an undiscounted basis and approximately £650m on a discounted basis. No provision has been made for any tax liability that would arise if fixed assets were disposed of at their revalued amount, because no significant disposals which might give rise to a taxable gain are contemplated. Lattice Group Annual Report and Accounts 2000 64

7 Dividends 2000 1999 2000 1999 Pence per Pence per ordinary share ordinary share £m £m Ordinary shares: Interim dividend 3.5 – 123 – Proposed final dividend 3.5 – 123 – 7.0 – 246 –

The proposed final dividend in 2000 is in respect of Lattice Group plc shares. The interim dividend in 2000 represents the Lattice Group’s contribution to the BG Group 2000 interim dividend. In 1999, the Group’s subsidiaries, while part of the BG Group of companies, made dividend payments amounting to £177m for the 1999 interim dividend and £119m for the 1999 final dividend. The Group’s dividend policy is set out on page 24. Restrictions on the payment of dividends by Transco are set out on page 77.

8 Modified historical cost earnings per ordinary share Modified historical cost earnings per ordinary share for 2000 and 1999 have been calculated by dividing the modified historical cost earnings (defined as profit for the financial year) for the Group of £383m (1999 £624m), by 3,470m, being the weighted average number of ordinary shares in issue, and eligible for dividends, post Demerger (1999 3,529m, being the expected maximum number of shares in issue upon Demerger, as estimated in the Listing Particulars). Adjusted earnings per ordinary share has been calculated in order to reflect the underlying performance of the Group. 2000 1999 Pence per Pence per ordinary ordinary £m share £m share The Group Earnings – basic 383 11.0 624 17.7 Profit on disposal of fixed assets (15) (0.4) (37) (1.0) Demerger costs and 1999 Restructuring and Refinancing costs 43 1.2 20 0.6 Tax impact of profit on disposal of fixed assets and Demerger costs (8) (0.2) 7 0.2 Total adjustments 20 0.6 (10) (0.2) Earnings – adjusted 403 11.6 614 17.5 Adjustment in respect of the 1999 Restructuring and Refinancing Interest on bonds issued by Transco Holdings – – (104) (2.9) Tax impact of interest on bonds issued by Transco Holdings – – 31 0.9 Earnings – notional adjusted (a) 403 11.6 541 15.5

a) Modified historical cost earnings per ordinary share in 1999 was calculated on the maximum number of shares expected to be in issue at the time of Demerger. This figure was after an 8 for 9 share capital reduction on the issue of bonds as part of the 1999 Restructuring and Refinancing. However, earnings for 1999 do not include the full annual cost of the debt element of that refinancing, being interest on the £1.5bn bonds. Adjustment for this would lower 1999 basic and adjusted modified historical cost earnings per ordinary share by 2 pence. This 1999 notional modified historical cost earnings per ordinary share is more comparable with 2000. The earnings used to calculate diluted earnings per ordinary share are the same as those for the modified historical cost earnings per ordinary share, divided by 3,485m being the weighted average number of ordinary shares in issue during the year as adjusted for share options. No comparatives have been presented as there were no dilutive potential ordinary shares in 1999 (see note 1, page 57). A reconciliation of the weighted average number of ordinary shares used as the denominator in calculating the basic and diluted earnings per ordinary share is given below: 2000 Shares m The Group Basic 3,470 Dilutive potential ordinary shares in respect of outstanding options 15 Diluted basis 3,485 Notes to the accounts continued 65

9 Tangible fixed assets The Group Modified historical cost As at Disposals As at 1 Jan and 31 Dec 2000 Additions transfers Revaluations (a) 2000 (b),(c) £m £m £m £m £m Land and buildings – Transco’s regulatory assets 365 9 (9) 26 391 – investment properties 89 – (14) – 75 – other 349 23 (82) – 290 Mains and services – Transco’s regulatory assets 23,732 348 (25) 1,686 25,741 Gas storage – Transco’s regulatory assets 744 1 (10) 45 780 Plant and machinery – Transco’s regulatory assets 2,240 83 (48) (24) 2,251 – other – 22 – – 22 Meters – Transco’s regulatory assets 1,747 126 (58) (345) 1,470 Motor vehicles and office equipment – Transco’s regulatory assets 669 91 (102) – 658 – other 155 97 (67) – 185 Gross modified historical cost 30,090 800 (415) 1,388 31,863

Analysis of total: – Transco’s regulatory assets 29,497 658 (252) 1,388 31,291 – investment properties 89 – (14) – 75 – other 504 142 (149) – 497 30,090 800 (415) 1,388 31,863

Net modified Depreciation historical cost As at Provision Disposals As at As at As at 1 Jan for the and 31 Dec 31 Dec 31 Dec 2000 year transfers Revaluations (a) 2000 (b),(c) 2000 1999 £m £m £m £m £m £m £m Land and buildings – Transco’s regulatory assets 32 2 (4) 7 37 354 (d) 333 (d) – investment properties – – – – – 75 (d) 89 (d) – other 204 4 (18) – 190 100 (d) 145 (d) Mains and services – Transco’s regulatory assets 13,222 229 (25) 1,050 14,476 11,265 10,510 Gas storage – Transco’s regulatory assets 662 6 (10) 41 699 81 82 Plant and machinery – Transco’s regulatory assets 1,425 41 (50) 18 1,434 817 815 – other – – – – – 22 – Meters – Transco’s regulatory assets 552 89 (38) (104) 499 971 1,195 Motor vehicles and office equipment – Transco’s regulatory assets 414 90 (88) – 416 242 255 – other 43 43 (31) – 55 130 112 16,554 504 (264) 1,012 17,806 14,057 13,536 Analysis of total: – Transco’s regulatory assets 16,307 457 (215) 1,012 17,561 13,730 13,190 – investment properties – – – – – 75 89 – other 247 47 (49) – 245 252 257 16,554 504 (264) 1,012 17,806 14,057 13,536 Lattice Group Annual Report and Accounts 2000 66

9 Tangible fixed assets continued Transco operates under a regulatory regime and its assets are valued at the lower of depreciated replacement cost or estimated value in use (see Principal accounting policies, page 49). Valuations of Transco’s regulatory assets have been undertaken on a rolling basis by both external and internal qualified staff. The external valuers and year of valuation are Faithfull and Gould, Project Managers and Cost Engineers (1999) and FPD Savilles, International Property Consultants (1997). Lattice Group’s headquarters are located at 130 Jermyn Street, London SW1Y 4UR, where it occupies rented office space with a gross internal area of approximately 2,400 square metres. Other fixed assets and investment properties within the above categories constitute assets not attributable to Transco and therefore not subject to regulatory control within Great Britain. Valuations of investment properties are based upon an annual valuation by independent external chartered surveyors, determined on the basis of open market value. Valuations take into account estimated non-statutory decontamination costs. The regulatory formula applies to the Transco asset base as a whole since it generates a single revenue stream and therefore impairment and value in use adjustments cannot be specifically or accurately attributed to individual classes of assets. However, FRS 15 requires that the impairment (£4,919m with effect from 1 April 1997) and subsequent value in use adjustments be apportioned to asset classes rather than as a deduction from total replacement cost. In this situation, the impairment and subsequent value in use adjustments have been set principally against mains and services. Although this does not affect the total net modified historical cost carrying value of tangible fixed assets, carrying values for each individual class of asset are therefore stated on a best endeavours basis. a) Modified historical cost revaluation of £1,388m and depreciation revaluation of £1,012m, totalling £376m is as reported within the Consolidated statement of total modified historical cost recognised gains and losses (see page 52). Transco’s fixed assets are shown on a statutory basis, whereas the value in use valuation is based on Transco’s assets as a whole. As a result, modified historical cost may be less than historical cost for a statutory asset category without causing a charge to the profit and loss account. b) The modified historical cost of assets held under finance leases included above as at 31 December 2000 was £51m (1999 £51m). The related accumulated depreciation was £34m (1999 £24m). c) The modified historical cost of assets held in the Group’s capacity as a lessor as at 31 December 2000 was £163m (1999 £138m). The related accumulated depreciation was £42m (1999 £27m). d) The net modified historical cost of the Lattice Group’s land and buildings can be analysed as follows: Long Short Net Freehold leasehold leasehold book value £m £m £m £m 31 December 2000 523 3 3 529 31 December 1999 560 3 4 567

The following table reconciles the net historical cost of tangible fixed assets to their net modified historical cost. Net book cost As at Disposals As at 1 Jan Provision and 31 Dec 2000 Additions for year transfers Revaluations 2000 £m £m £m £m £m £m Net historical cost 7,107 800 (379) (130) – 7,398 Revaluation surplus: – Transco’s regulatory assets Revaluation to net replacement cost 10,579 – (125) (14) 742 11,182 Impairment (a) (4,919) – – – – (4,919) Value in use adjustment (b) 712 – – – (366) 346 6,372 – (125) (14) 376 6,609 – Investment properties 57 – – (7) – 50 6,429 – (125) (21) 376 6,659 Net modified historical cost 13,536 800 (504) (151) 376 14,057

a) Following publication of the MMC report, Transco’s regulatory tangible fixed assets were impaired by £4,919m with effect from 1 April 1997 to reflect their estimated value in use at that date. b) The modified historical cost of Transco’s regulatory assets is calculated based on the value in use of the Transco business in which the fixed assets are used. Pre-tax real discount rates applied in calculating value in use are approximately 7%. Notes to the accounts continued 67

9 Tangible fixed assets continued Net historical cost of fixed assets The Group Historical cost Depreciation Net historical cost as at 31 December 2000 1999 2000 1999 2000 1999 £m £m £m £m £m £m Land and buildings – Transco’s regulatory assets 64 57 13 11 51 46 – investment properties 25 32 – – 25 32 – other 290 349 190 204 100 145 Mains and services – Transco’s regulatory assets 6,388 6,040 1,536 1,431 4,852 4,609 Gas storage – Transco’s regulatory assets 131 135 69 71 62 64 Plant and machinery – Transco’s regulatory assets 1,443 1,378 602 575 841 803 – other 22 – – – 22 – Meters – Transco’s regulatory assets 1,414 1,611 341 570 1,073 1,041 Motor vehicles and office equipment – Transco’s regulatory assets 658 669 416 414 242 255 – other 185 155 55 43 130 112 Total 10,620 10,426 3,222 3,319 7,398 7,107 Lattice Group Annual Report and Accounts 2000 68

10 Fixed asset investments Fixed asset investments represent long-term investments. The Group Associated Joint ventures undertakings Share of Share of Other net assets net assets investments Total £m £m £m £m As at 1 January 2000 – 3 7 10 Investments 65 – 5 70 Disposals and other adjustments – – (2) (2) As at 31 December 2000 65 3 10 78 Retained profits less losses as at 1 January 2000 – (3) – (3) Share of profits less losses during the year (3) – – (3) As at 31 December 2000 (3) (3) – (6) Carrying value as at 31 December 2000 62 – 10 72 Carrying value as at 31 December 1999 – – 7 7

During the year, the Group and its joint venture partner, SpectraSite, agreed each to contribute assets with fair values of £130m to the newly formed joint venture, SpectraSite Transco Communications Ltd, a company formed to explore opportunities in the telecommunications towers business. The Group intends to contribute fixed assets (sites) with an historical cost value of £nil in return for its 50% interest. As at 31 December 2000, the Group had transferred assets with a fair value of £36m and an historical cost value of £nil. The acquisition of the Group’s 50% interest in SpectraSite Transco Communications Ltd comprised:

for the year ended 31 December 2000 £m Fair value of total assets to be contributed 130 Modified historical cost book value of assets contributed to date (10) Fair value of assets still to be contributed (a) (94) Unrealised gain on the contribution 26 Group share (50%) 13 Transaction costs (3) Group’s unrealised gain on assets contributed to date 10

a) The Group has to transfer fixed assets to the joint venture to satisfy the outstanding obligation. These assets have an historical cost net book value of £nil. If the obligation is not settled with fixed assets, cash will be payable (see note 22, page 78). An analysis of Lattice Group’s share of turnover and net assets in joint ventures is shown below: for the year ended 31 December 2000 £m Share of turnover 5

as at 31 December 2000 £m Share of assets – intangible fixed assets (goodwill) (a) 45 – tangible fixed assets 3 – current assets 25 73 Share of liabilities – amounts falling due within one year (11) – amounts falling due after more than one year – (11) Share of net assets 62

a) The goodwill arose on acquisitions made by the joint venture during the year. Notes to the accounts continued 69

10 Fixed asset investments continued The Company Subsidiary undertakings Shares £m As at 1 January 2000 – Investments 566 Carrying value as at 31 December 2000 566

Investments as at 31 December 2000 comprise Lattice Group Holdings Limited of £213m and Transco Holdings plc of £353m. Investments in the year comprise transactions undertaken in connection with the Demerger (see note 1, page 57). Further information on principal subsidiary undertakings, joint ventures and associated undertakings is given in note 26, page 83.

11 Stocks The Group 2000 1999 £m £m Raw materials and consumables 40 44 Finished goods and goods for resale 1 2 41 46

Stocks are stated at cost less provision for deterioration and obsolescence of £1m (1999 £1m).

12 Debtors The The Group Company amounts falling due within one year 2000 1999 2000 £m £m £m Trade debtors 414 403 – Amounts owed by BG Group undertakings – 110 – Amounts owed by subsidiary undertakings – – 328 Other debtors (a) 88 126 – Own shares (a) 16 – – Prepayments and accrued income – other 120 106 – 638 745 328

The The Group Company amounts falling due after more than one year 2000 1999 2000 £m £m £m Other debtors 10 228 – Deferred corporation tax (b) 44 66 86 54 294 86 Total debtors 692 1,039 414

Debtors are stated net of provisions for doubtful debts of £12m (1999 £13m). Amounts credited against profit for doubtful debts were £1m (1999 £3m). Other debtors include amounts in respect of loans granted to employees of £nil (1999 £1m). a) As at 31 December 2000, the Group held shares with a book value of £45m (1999 £nil), representing shares that were held originally by a Qualifying Employee Share Ownership Trust (QUEST) set up by Transco plc in 1997, and transferred to an All Employee Share Ownership Plan (AESOP) prior to Demerger. The AESOP then received a Lattice Group plc share for every BG Group plc share held. It is expected that the Lattice Group AESOP will sell its BG Group plc shares over a period of time. The shares held by the AESOP will be used for future employee share schemes which are dependent on performance targets. The cost of awards to employees will be recognised in the profit and loss account over the period to which the employee’s performance relates, based on the fair value of the shares at the date the award is made. As at 31 December 2000, the Lattice Group AESOP held 29m Lattice Group plc shares with a book value of £16m (included in Own shares), and a market value of £43m. The AESOP also held 29m BG Group plc shares with a book value of £29m (included in Other debtors) and a market value of £76m. The AESOP has waived its rights to receive dividends on the Lattice Group plc shares. b) The Group’s net deferred corporation tax balance of £44m (1999 £66m) consists of a deferred tax asset of £86m (1999 £110m) which relates to the pension cost provision and a deferred tax liability of £42m (1999 £44m) relating to other timing differences. For details regarding the potential deferred tax liability not provided (see note 19, page 75). Lattice Group Annual Report and Accounts 2000 70

13 Current asset investments The The Group Company (a) 2000 1999 2000 £m £m £m Money market investments 223 344 – Other investments – 78 230 223 422 230

a) Current asset investments in the Company represent funds lent from the Group parent company to its subsidiary undertaking, Transco Holdings plc. Money market investments include £164m (1999 £153m) held by Lattice’s insurance subsidiary undertaking. The effective interest rates of the Group’s investments at 31 December 2000 were between 0.9% and 9.0% (1999 1.9% and 7.5%). The currency and interest rate composition of the Group’s current asset investment portfolio, after taking account of currency and interest rate swaps, is: Fixed rate Fixed rate weighted weighted average Fixed Floating 2000 average Fixed Floating 1999 interest rate investments investments Total interest rate investments investments Total % £m £m £m % £m £m £m Currency: Sterling 4.8 219 – 219 5.0 410 4 414 US dollars 6.4 4 – 4 6.4 7 1 8 223 – 223 417 5 422

All the current asset investments have a maturity within twelve months.

14 Borrowings The Group’s treasury policy and other borrowings information disclosed on page 26, as part of the Operating and financial review, form part of this note. The Group amounts falling due within one year 2000 1999 £m £m Bank loans and overdrafts 8 14 Bills of exchange payable 40 396 Other loans – commercial paper 824 1,041 Other loans – bonds 490 362 Obligations under finance leases 9 10 Total borrowings due within one year 1,371 1,823

The Group amounts falling due after more than one year 2000 1999 £m £m Other loans – bonds (a) 4,860 5,172 Obligations under finance leases 1 10 Total borrowings due after more than one year 4,861 5,182 Gross borrowings 6,232 7,005

a) Bonds falling due after more than one year include the bond package issued on the 1999 Restructuring and Refinancing. On issue the package included three types of bonds: £503m 7.0% fixed rate, due 2024; £503m floating rate due 2009; £503m of 4.1875% index-linked due 2022. Interest of £15m (1999 £nil) has accreted on index-linked bonds during the year and has also been included in bonds falling due after more than one year. Bonds also include the amount of £50m (1999 £44m), including accretion of interest to 31 December 2000, in respect of a zero coupon bond, due 2021, that will amount to £680m (1999 £680m) on maturity. This represents the after swap sterling liability of a face value US$1,500m (1999 US$1,500m) bond. Notes to the accounts continued 71

14 Borrowings continued As noted in the Basis of consolidation on page 49, the Group’s subsidiary undertaking Transco is ring-fenced for regulatory purposes. This includes a significant proportion of the Group’s net debt. The table below analyses the Group’s gross borrowings/(resources) between those inside the ring-fence and those outside the ring-fence. The Group 2000 1999 £m £m Transco (ring-fenced) 5,390 5,534 Transco Holdings 1,511 1,500 Lattice Group Holdings 10 21 Less: intra-group items (a) (679) (50) Gross borrowings 6,232 7,005

a) Represents intra-group funding to Transco and Transco Holdings from other Lattice Group companies eliminated on consolidation. Undrawn committed borrowing facilities are as follows: 2000 1999 £m £m Within one year 656 782 Between one and two years 23 204 Between two and three years 24 204 Between three and four years – 210 Between four and five years 600 – 1,303 1,400

Maturity profile of the Group’s total financial liabilities The following table analyses the Group’s total financial liabilities, comprising gross borrowings after taking account of currency and interest rate swaps. These are repayable as follows: Gross borrowings Net borrowings 2000 1999 2000 1999 £m £m £m £m Within one year 1,371 1,823 1,141 1,388 Between one and two years 312 553 312 553 Between two and three years 707 304 707 304 Between three and four years 443 744 443 744 Between four and five years 147 462 147 462 After five years 3,252 3,119 3,252 3,119 6,232 7,005 6,002 6,570

Further information on total financial liabilities is given in note 15, page 72. Net borrowings comprise gross borrowings less current asset investments and cash at bank and in hand. Obligations under finance leases included above are repayable as follows: The Group 2000 1999 £m £m Within one year 9 10 Between one and two years 1 10 10 20 Lattice Group Annual Report and Accounts 2000 72

15 Currency and interest rate composition of the Group’s financial liabilities and borrowings The following tables analyse the currency and interest rate composition of the Group’s gross borrowings of £6,232m (1999 £7,005m) and net borrowings of £6,002m (1999 £6,570m) before and after taking swaps into account. Currency composition of the Group’s borrowings Gross borrowings Net borrowings % after taking swaps % before taking swaps % after taking swaps % before taking swaps into account into account into account into account 2000 1999 2000 1999 2000 1999 2000 1999 Currency: Sterling 100 100 50 55 100 100 51 54 US dollars – – 35 32 – – 35 33 Other – – 15 13 – – 14 13

The Lattice Group has sold an option to a counterparty which gives that party the right, but not an obligation, to receive an amount of yen from the Lattice Group in December 2002 in return for paying Lattice Group an amount in US dollars, Swiss francs or euros. The option was put in place to hedge a ´55,000m (£263m) denominated bond issued by the Lattice Group under which the Lattice Group has the right to re-denominate the principal in US dollars, Swiss francs or euros. There is, therefore, no underlying foreign currency exposure on this transaction. This is excluded from the above table as a result of the option to re-denominate in the currencies stated. Interest rate composition of the Group’s borrowings Gross borrowings Net borrowings % after taking swaps % before taking swaps % after taking swaps % before taking swaps into account into account into account into account 2000 1999 2000 1999 2000 1999 2000 1999 Basis: Fixed rate 47 47 78 79 45 43 78 77 Floating rate 53 53 22 21 55 57 22 23

The effective interest rates during the year were between 4.5% and 11.0% (1999 4.5% and 10.9%). The interest rates on those Group borrowings which are at floating rates are determined by the prevailing LIBOR (London Interbank Offered Rate) for the relevant currency and maturity at the time of determination plus or minus an agreed margin. Currency and interest rate composition of financial liabilities of the Group The following table analyses the currency and interest rate composition of the Group’s financial liabilities, comprising gross borrowings, after taking account of currency and interest rate swaps: Fixed rate Fixed rate weighted weighted average average Fixed Floating period interest rate borrowings borrowings Total as at 31 December 2000 years % £m £m £m Currency: Sterling 7 6.99 2,919 3,313 6,232

Fixed rate Fixed rate weighted weighted average average Fixed Floating period interest rate borrowings borrowings Total as at 31 December 1999 years % £m £m £m Currency: Sterling 6.8 6.2 3,302 3,703 7,005

For the purposes of the above tables, debt with a maturity within one year, such as commercial paper, bills of exchange and other money market borrowings, has been treated as fixed. Index-linked bonds have been treated as floating. Borrowings falling due after more than one year of £4,861m (1999 £5,182m) can be analysed, after currency and interest rate swaps, as fixed interest rate 38% (1999 31%) and floating interest rate 62% (1999 69%). Notes to the accounts continued 73

16 Currency analysis of the Group’s net assets There are no material net assets before gross borrowings or gross borrowings after swaps denominated in a currency other than the operating (or ‘functional’) currency of the operating unit involved. Currency exposure of the Group’s net monetary assets/(liabilities) There are no material net monetary assets or liabilities of the Group which are denominated in a currency other than the operating (or ‘functional’) currency of the operating unit involved.

17 Financial instruments Derivatives For an explanation of policy on derivatives, see the Operating and financial review on page 28. The notional principal amounts of derivatives are: 2000 1999 £m £m Foreign currency swap agreements and foreign exchange contracts 3,879 3,818 Interest rate swap agreements 2,535 2,358

The notional amounts included above do not necessarily represent the amounts to be exchanged by the parties and therefore are not a measure of the exposure of the Group through the use of derivatives. The amounts exchanged are based upon the notional amounts and the other terms of the derivatives, including interest rates and exchange rates. The value of the derivatives is based upon these underlying parameters and changes in the relevant rates or prices. Counterparty risk The Group’s counterparty exposure under foreign currency swaps and foreign exchange contracts was £165m (1999 £11m) and interest rate swaps £51m (1999 £12m). The Group has no significant exposure to either individual counterparties or geographical groups of counterparties. Fair values of financial instruments 2000 1999 Book value Fair value Book value Fair value £m £m £m £m Primary financial instruments held or issued to finance the Group’s operations: Short-term borrowings (1,371) (1,371) (1,823) (1,823) Long-term borrowings (4,861) (5,198) (5,182) (5,216) Current asset investments 223 223 422 422 Cash at bank and in hand 7 7 13 13 Derivative financial instruments held to manage the interest rate and currency profile: Interest rate-related derivatives – 43 – (33) Currency rate-related derivatives – 132 – (122) Unrecognised total net gains/(losses) (see Gains and losses on hedges below) – 175 – (155)

For the purpose of the above table, the fair value of short-term borrowings, related derivative instruments, current asset investments and cash at bank and in hand approximate to book value due to the short maturity of these instruments. Short-term debtors and creditors have been excluded from the disclosures in the table above. Lattice Group Annual Report and Accounts 2000 74

17 Financial instruments continued Gains and losses on hedges The table below shows the extent to which the Group has off-balance sheet (unrecognised) and on-balance sheet (deferred) gains and losses in respect of hedges at the beginning and end of the year.

Unrecognised Deferred Net Net Gains Losses total Gains Losses total £m £m £m £m £m £m Gains/(losses) on hedges at 1 January 2000 132 (287) (155) 31 (74) (43) Transfer from gains to losses (5) 5 – – – – Transfer from losses to gains (43) 43 – – – – Losses/(gains) arising in previous years that were recognised in 2000 – 21 21 7 (15) (8) Gains/(losses) not recognised in 2000 Arising before 1 January 2000 84 (218) (134) 38 (89) (51) Arising in 2000 284 25 309 (11) 4 (7) Gains/(losses) on hedges as at 31 December 2000 368 (193) 175 27 (85) (58) Of which: Gains/(losses) expected to be included in 2001 income 8 (7) 1 6 (12) (6) Gains/(losses) expected to be included in 2002 income or later 360 (186) 174 21 (73) (52)

£132m (1999 £(122)m), of the unrecognised total net gains/(losses) above of £175m (1999 £(155)m), are offset by foreign exchange losses/gains on the related foreign currency denominated borrowings. Hedges of future transactions As at 31 December 2000 the value of future transactions hedged was £25m (1999 £nil).

18 Other creditors The The Group Company amounts falling due within one year 2000 1999 2000 £m £m £m Trade creditors 297 401 – Interest payable 92 130 – Taxation and social security (a) 68 37 5 Other creditors 194 80 – Accruals and deferred income 253 109 – Proposed dividend 123 – 123 1,027 757 128

The The Group Company amounts falling due after more than one year 2000 1999 2000 £m £m £m Accruals and deferred income (b) 874 825 – Total other creditors 1,901 1,582 128

a) 2000 balance includes £45m corporation tax payable. b) Accruals and deferred income for amounts falling due after more than one year relate principally to contributions to capital projects. Notes to the accounts continued 75

19 Provisions for liabilities and charges As at Profit Unwinding Transfers As at 1 Jan and loss of and other 31 Dec 2000 credit discount Paid adjustments 2000 The Group £m £m £m £m £m £m Pension costs 367 (67) – (12) – 288 Environmental costs 310 – 19 (24) (7) 298 Property restructuring costs 69 – – (12) – 57 Other 57 – – (8) – 49 803 (67) 19 (56) (7) 692

The Company Pension costs – (43) – – 331 (a) 288

a) Represents pension costs provision balance on transfer of the pension scheme from BG Group plc to Lattice Group plc.

A brief description of each provision, together with estimates of the timing of expenditure, is given below: Pension costs These represent the difference between the net charge or net credit to the profit and loss account in respect of pension costs and the contributions to the pension scheme (see Principal accounting policies, page 49 and note 24, page 81). Environmental costs The undiscounted provision of £364m as at 31 December 2000 for statutory decontamination costs of old gas manufacturing sites is determined by periodic assessments undertaken by environmental specialists. The provision has been discounted at 6%, a discount rate which reflects the specific risks associated with environmental property issues. The expected payment dates for statutory decontamination remain uncertain. Non-statutory decontamination costs are included within the valuation of land and buildings (see Principal accounting policies, page 49). Property restructuring costs These consist primarily of provisions for disposal of surplus leasehold interests and rent and rates payable on surplus properties. The expected payment dates for property restructuring costs remain uncertain, but it is expected that most expenditure will take place between 2001 and 2005. Other This comprises estimates of liabilities in respect of past events incurred by the Company’s insurance subsidiary undertaking. This includes provision for employer liability claims. In accordance with insurance industry practice, these estimates are based on experience from previous years and there is, therefore, no identifiable payment date. Deferred corporation tax The following potential deferred tax liabilities have not been provided for, on the basis that the differences will not reverse in the foreseeable future: As at As at 31 Dec 31 Dec 2000 1999 £m £m UK corporation tax at 30%, (1999 30%) Accelerated capital allowances 1,275 1,325 Other timing differences (5) (11) Unprovided potential deferred tax liabilities 1,270 1,314

If full provision were made on an undiscounted basis for deferred taxation, the total provision required at 31 December 2000 in respect of the Group would be approximately £1,200m (on a discounted basis, approximately £650m). The adoption of FRS 19 will effectively lead to a full provision basis for deferred taxation with the option of deferred tax balances being discounted. The impact on the Group, on a full or a discounted basis, would be broadly in line with these amounts. No provision has been made for any tax liability that would arise if fixed assets were disposed of at their revalued amount because no significant disposals which might give rise to a taxable gain are contemplated. Lattice Group Annual Report and Accounts 2000 76

20 Share capital Pro forma (a) Pro forma (a) Number of number of shares shares 2000 1999 2000 1999 Authorised m m £m £m Equity Ordinary shares of 10 pence each 5,000 5,000 500 500 Non-equity Special rights share of 10 pence – – – –

Pro forma (a) Pro forma (a) Number of number of shares shares 2000 1999 2000 1999 Allotted and fully paid m m £m £m Equity Ordinary shares of 10 pence each 3,528 3,528 353 353 Non-equity Special rights share of 10 pence – – – –

a) Pro forma ordinary shares allotted and called up at 31 December 1999 represent the nominal values of shares authorised and in issue by Lattice Group plc as at 31 December 2000 (see note 1, page 57). On Demerger the Company issued 3,528 million ordinary shares of 10 pence each to shareholders in BG Group plc in consideration for 100% of the share capital of BG Transco Holdings plc on the basis of one Lattice Group plc share for each BG Group plc share held. Certain special rights, set out in the Company’s Articles of Association, attach to the Special rights share issued to HM Government. This share carries no rights to capital or profits beyond its nominal value. This share was issued on Demerger. It replaces the special share in BG Group plc, that was redeemed on that date. For further information on share capital see note 1, page 57 on merger accounting. Notes to the accounts continued 77

21 Capital and reserves The Group Profit Joint Called up and loss ventures and share Other Revaluation account associated capital reserve reserve (a) reserve undertakings Total £m £m £m £m £m £m As at 1 January 2000 353 (5,771) 6,429 4,665 (3) 5,673 Funding movements with BG Group plc (b) – 26 – – – 26 Opening capital and reserves adjusted for funding movements 353 (5,745) 6,429 4,665 (3) 5,699 Transfer from profit and loss account – – – 140 (3) 137 Unrealised gain on revaluation of tangible fixed assets – – 376 – – 376 Contribution to sharesave trust (c) – – – 45 – 45 Unrealised gain on transfer of fixed assets to a joint venture – 10 – – – 10 Movement between reserves (d) – 4 (146) 142 – –

As at 31 December 2000 353 (5,731) (e) 6,659 4,992 (6) 6,267

The Company Profit Called up and loss share account capital reserve Total £m £m £m As at 1 January 2000 – – – Transfer from profit and loss account – 441 441 Issue of shares 353 – 353 As at 31 December 2000 353 441 794

As set out in the Basis of preparation and accounting principles, the financial statements have been prepared on a merger basis and therefore all capital and reserves opening balances and movements, excepting movements to the revaluation reserve, have been stated on a pro forma basis. The Group profit and loss account reserve includes £1,078m in respect of Transco plc. If provision was made for deferred taxation, in accordance with the requirements of FRS 19, almost all of the estimated provision and associated charge to reserves shown in note 19, page 75, would be made in the accounts of Transco plc. Transco plc is prohibited from declaring a dividend or other distribution unless it has certified that it is in compliance in all material respects with certain regulatory obligations, including a requirement to ensure it has sufficient financial resources and facilities to enable it to carry on its business and a requirement to use all reasonable endeavours to maintain an investment grade credit rating (see Transco’s regulatory financial information, page 84). Distribution of the profit and loss account reserve of the Group’s other subsidiary undertakings is not materially restricted. The modified historical cost profit for the financial year, dealt with in the accounts of the Company, was £564m. As permitted by section 230(3) of the Companies Act 1985, no profit and loss account is presented for the Company. a) £6,609m (1999 £6,372m) of the revaluation reserve relates to Transco’s regulatory assets and £50m (1999 £57m) relates to investment properties. b) Funding movements in other reserves represent cash contribution by BG Group plc to Lattice Group on Demerger. c) Represents contribution by BG Group to the Transco plc Employee Sharesave Trust as part of the Demerger arrangements. d) The movement between reserves represents modified historical cost adjustments (see Reconciliation of consolidated modified historical cost and historical cost profit on ordinary activities before taxation, page 52) and the transfer of assets to a joint venture (see note 10, page 68). e) Primarily represents the difference between the carrying value of subsidiary undertakings investments and their respective capital structures following the Demerger and the 1999 Restructuring and Refinancing. Also included are unrealised gains on transfer of fixed assets to a joint venture. Lattice Group Annual Report and Accounts 2000 78

22 Commitments and contingencies Following the demerger from British Gas plc of Centrica in 1997, the Restructuring and Refinancing of BG Group plc in 1999 and the Demerger of Lattice Group in 2000, the Group has been left with a number of indemnities and guarantees. A significant proportion of these indemnities and guarantees are on behalf of third parties and do not relate to the ongoing businesses of the Group, as shown in the table below: 2000 1999 £m £m In respect of Group activities (a) 3,546 3,229 On behalf of third parties (b) 1,166 1,247 Total commitments and guarantees 4,712 4,476

a) Commitments in respect of Group activities Loan guarantees on behalf of subsidiaries (i) 2,773 2,605 Committed contracts for capital expenditure (ii) 399 142 Operating leases (iii) 204 330 Warrants (iv) – 62 Other (v) 170 90 Total commitments for Group activities 3,546 3,229

i) Loan guarantees on behalf of subsidiaries Transco, a subsidiary undertaking of Lattice, has guaranteed the repayment of the principal sums, any associated premium and interest on loans due from its financial subsidiary undertakings. As at 31 December 2000, the sterling equivalent amounted to £2,773m, (1999 £2,605m). ii) Committed contracts for capital expenditure As at 31 December 2000, the Lattice Group had placed contracts for capital expenditure (tangible fixed assets and investments) amounting to £399m (1999 £142m). The Company has not placed any contracts for capital expenditure. iii) Operating leases The Lattice Group had commitments for the following year under operating leases expiring as follows: Land and buildings 2000 1999 £m £m Expiring: Within one year – 4 Between one and five years 1 1 Thereafter 11 16 12 21

Commitments under operating leases for Lattice Group were payable as follows: Land and buildings 2000 1999 £m £m Amounts due within: One year 12 21 Two years 14 17 Three years 14 17 Four years 14 16 Five years 13 16 Thereafter 137 243 As at end of period 204 330

The Lattice Group had no operating lease commitments other than land and buildings at 31 December 2000 (1999 £nil). The Lattice Group’s commitments under finance leases entered into before, but which commence after, 31 December 2000 were £nil (1999 £nil). The Company had no operating lease commitments as at 31 December 2000. iv) Warrants In previous years, Transco had issued warrants entitling the holders to subscribe at any time between November 1994 and November 2000 for up to US$100m of 30 year bonds. As at 31 December 2000 all of the warrants had lapsed without being exercised. The sterling equivalent value of the bonds was £nil (1999 £62m). Notes to the accounts continued 79

22 Commitments and contingencies continued v) Other The value of other commitments and contingencies (including the asset transfer below) as at 31 December 2000, amounted to £170m (1999 £90m). In return for its 50% share of the joint venture company, SpectraSite Transco Communications Ltd, the Group has undertaken to transfer a number of sites to the joint venture company. If the sites are not transferred to the joint venture, according to an agreed timetable, ranging from December 2001 to December 2003, alternative cash payments are required. It is not anticipated that any material cash payments will be made. The maximum exposure based on the current number of asset transfers is £90m (1999 £nil). vi) Legal proceedings Various group undertakings are parties to legal actions and claims which arise in the ordinary course of business. While the outcome of some of these matters cannot readily be foreseen, the Directors believe that they will be disposed of without significant effect on the net asset position as shown in these financial statements. b) Commitments on behalf of third parties 2000 1999 £m £m BG Energy Holdings – Karachaganak (i) 883 536 BG Energy Holdings – Other (ii) 188 609 Loan guarantees to BG Energy Holdings’ joint ventures and associates (iii) 95 102 Total BG Energy Holdings (part of BG Group plc) 1,166 1,247

i) BG Energy Holdings (BGEH) – Karachaganak Transco, pursuant to a Mutual Assurances Agreement dated 18 November 1997 (the MAA), is the guarantor of BG International Limited’s contractual obligations to the Republic of Kazakhstan and the Closed Joint Stock Company National Oil and Gas Company Kazakhoil under the Final Production Sharing Agreement dated 18 November 1997 (the FPSA) and related contractual documents for the Karachaganak field in which BG International has a 32.5% interest. BG International is a subsidiary of BGEH. The contingent liabilities for which Transco could be liable under this guarantee are estimated to be £883m (1999 £536m). This relates to the proportion of BG International Limited’s interest, although each party to the FPSA could be liable for the other parties’ share of any liability. In this event, BG International Limited would have a right to recover from the other parties payments made in excess of its share and, if that other party defaults, BG International Limited would be entitled to that party’s share in the project. However, the liability of BG International Limited under the FPSA and related contractual documents and, therefore of Transco under the MAA, is uncapped. If and when the field and related infrastructure are developed further, BG International Limited’s commitments, and, if consent to the replacement of the guarantee has not been received, Transco’s contingent liabilities, may increase significantly. In the event that Transco is required to meet any liability under the MAA, it will be entitled to be indemnified by Transco Holdings which, in turn, will be entitled to be indemnified by BGEH pursuant to deeds of indemnity entered into at Demerger. ii) BG Energy Holdings – Other The value of other commitments and contingencies (mainly the provision of guarantees and indemnities to third parties in respect of cross-default obligations which relate to BGEH’s businesses) was £188m (1999 £609m). iii) Loan guarantees to BG Energy Holdings’ joint ventures and associates Transco has also guaranteed its share of the repayment of principal, any associated premium and interest on loans due by joint ventures and associated undertakings which were transferred to BGEH as part of the Restructuring and Refinancing. As at 31 December 2000 the sterling equivalent amounted to £95m (1999 £102m). iv) Centrica In 1997 Transco, as part of the arrangements for the Centrica demerger, gave financial guarantees to particular industrial and commercial customers (principally UK power generators) of Centrica as to the performance by Centrica of certain long term interruptible gas supply contracts over periods of up to 15 years. As at 31 December 2000, the aggregate minimum volume of gas that customers are obliged to take under their contracts, during their remaining supply periods, was approximately 7bn therms (1999 approximately 16bn therms). Centrica and its subsidiary undertaking, British Gas Trading Limited, have agreed to indemnify Transco against any liabilities incurred by it under such guarantees and, in certain circumstances, to provide Transco with secured cash collateral, such obligations being guaranteed by further subsidiary undertakings of Centrica. Lattice Group Annual Report and Accounts 2000 80

22 Commitments and contingencies continued c) Cross indemnity and cross guarantees A significant proportion of the Group’s total indemnities and guarantees are backed by further cross guarantees from third parties as shown below. Following the 1999 Restructuring and Refinancing, Transco, a subsidiary undertaking of Transco Holdings, procured an indemnity from BG Energy Holdings Limited dated 10 March 2000 (the ‘BGEH Indemnity’) which operates to indemnify it in respect of its liabilities and potential liabilities under certain obligations which fall within the definition of cross-default obligations. These obligations include financial or performance guarantees given by Transco in respect of BG Energy Holdings Limited which amount (see (b) above) to approximately £1,166m (1999 £1,247m) of Lattice’s total commitments and contingencies of £4,712m (1999 £4,476m). BG International Limited has been working with Transco since early 1999 to remove all of the relevant guarantees or to replace Transco with an alternative guarantor which is not part of the Lattice Group. This process continues following the Demerger. However, for any guarantees (including in relation to Karachaganak) which remain outstanding at 1 January 2001, Transco will continue to provide such guarantees on an arm’s length basis until they are removed or replaced. In the event that there is a change of control of BG Group, BG Group will be obliged to procure a back-up guarantee to Transco Holdings from the acquiring company. As at 31 December 2000, excluding the amounts in relation to the Karachaganak guarantee, the contingent liabilities of Transco under the majority of these guarantees are not significant on an individual basis although Transco’s aggregate liability under these guarantees could be significant. In relation to the Karachaganak guarantee, the details of which are described above, the relevant parties have been approached to consent to the replacement of the guarantee with a guarantee from BG Group and discussions with those parties are ongoing. Upon Demerger, due to the requirement in the Licence that a ‘related person’ indemnifies Transco, the BGEH Indemnity was replaced by an indemnity from Transco Holdings to Transco (the ‘BGTH Indemnity’). Upon Demerger, BG Energy Holdings Limited indemnified Transco Holdings in relation to cross-default obligations which relate to its businesses. The amounts shown above in b (i) to b (iv) include those sums covered by cross-indemnities.

23 Related party transactions BG Group plc On 23 October 2000 the Lattice Group was demerged from BG Group plc. Prior to that date, BG Group plc exercised control over all of the businesses within the Lattice Group and provided a number of services to those businesses, including corporate centre services, and, in some cases, also received services from them, including vehicle and property leasing and research and development. All transactions between the groups since 23 October 2000 have been on an arm’s length basis on normal commercial terms. As described in note 24, on Demerger the BG Group Pension Scheme transferred to the Lattice Group, reflecting the fact that the majority of the contributing members are associated with the Lattice businesses. The scheme has been renamed the Lattice Group Pension Scheme. Employees of BG Group will continue their membership of the Lattice Group Pension Scheme for a period anticipated to be less than one year from Demerger. BG Group employees will then be eligible to join a new BG Group Scheme. A share of the assets of the Lattice Group Scheme will be transferred to the corresponding new BG Group Scheme reflecting the share of the total accrued Lattice Scheme’s liabilities at Demerger that are attributable to BG Group employees, or former employees, electing to transfer. This transfer of assets and liabilities is expected to be in the region of £240m, approximately 2% of the Scheme valuation. Details of related party transactions are set out below: 2000 1999 £m £m Income receivable from BG Group companies 54 37 Charges payable to BG Group companies (97) (129)

Balance owed by/(to) BG Group companies 10 110

A number of Lattice subsidiaries have on-going, arm’s length, commercial trading arrangements for the provision of services to BG Group companies. As explained in note 22(c), Transco has provided financial and performance guarantees to BG Group companies on an arm’s length basis. Prior to Demerger, Lattice received a net funding amount of £505m from BG Group plc (note 25(f), page 83) and paid an interim dividend of £123m to BG Group plc. During the year there were a number of transactions between the Company and its subsidiary undertakings, joint ventures and associated undertakings. These transactions have not been disclosed as they are either eliminated on consolidation and therefore exempt from disclosure or are considered to be insignificant except for the transfer of sites to the newly formed joint venture, SpectraSite Transco Communications Ltd, (see note 10, page 68). Notes to the accounts continued 81

24 Pensions and post-retirement benefits Pension scheme Substantially all of the Group’s employees are members of the Lattice Group Pension Scheme (the Scheme), formerly the BG Group Pension Scheme. It was originally formed from the merger of the BG Staff Pension Scheme and the BG Corporation Pension Scheme with effect from 1 April 2000. On Demerger, Lattice Group became Principal Employer of the Scheme. On the merger of the schemes, certain benefit improvements were made and employee contributions to the Scheme were reduced from 4% of pensionable pay to 3% of pensionable pay. The minimum employer’s contribution was also reduced from 4% to 3% of pensionable pay. The Scheme is of the defined benefit final salary type. The Scheme is self-administered and funded to cover future pension liabilities in respect of service up to the balance sheet date. It is subject to independent valuations at least every three years, on the basis of which the qualified actuary certifies the rate of employer’s 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. An independent actuarial valuation of the BG pension schemes was last undertaken as at 31 March 1998. The long-term assumptions used in the actuarial valuation were as follows: 31 Mar 31 Mar 1998 1996 valuation valuation % % Rate of price inflation and pensions increases 3.0 5.0 Annual rate of return on investments 7.0 9.0 Future increases in earnings 5.0 7.0 Dividend growth 3.5 4.5

The independent actuarial valuations as at 31 March 1998 showed that the aggregate market value of the BG pension schemes’ assets was £11,820m (31 March 1996 £9,731m). The respective actuarial values of those assets were 109% (31 March 1996 111%) of the benefits due to members calculated on the basis of pensionable earnings and service as at 31 March 1998 on an ongoing basis (using the projected unit method) and allowing for projected increases in earnings and pensions, discounting the accrued liabilities at a market- related real discount rate of 2.6% per annum. The independent valuations as at 31 March 1998 showed that the liability profiles of the schemes had changed significantly since the previous valuations at 31 March 1996 as most pensioners and deferred pensioner entitlements remained with the BG pension schemes on the Centrica demerger. This necessitated a review of the fair pension charges attributable to each business unit. The difference between these fair charges and the Group credit amounted to £90m (1999 £108m) and is reported in the segmental analysis as Pension credit (see note 2, page 58). Following Demerger, employees of companies in the Lattice Group have continuing scheme membership. Employees of BG Group will continue to participate in the Scheme for up to approximately one year after the Demerger. BG Group plc will then set up a new pension scheme and a share of the assets and liabilities of the Lattice Group Pension Scheme will be transferred to that scheme, reflecting the share of the total accrued liabilities that are attributable to BG Group employees, or former employees, electing to transfer to the new BG Group pension scheme. This transfer of assets and liabilities is expected to be in the region of £240m, approximately 2% of the Scheme. The next independent actuarial valuation of the Lattice Group Pension Scheme will be as at 31 March 2001. The costs of the Scheme and unfunded pensions, assessed in accordance with actuarial advice, and the reconciliation to the balance sheet provision were as follows: 2000 1999 £m £m Regular pension cost 66 59 Amortisation of surplus (154) (173) (88) (114) Interest on balance sheet provision 21 29 Net pension credit (see note 4(b), page 61) (67) (85) Contributions paid (12) (14) Movement in provision (79) (99) Balance sheet provision as at 1 January 367 466 Balance sheet provision as at 31 December 288 367

The regular pension cost has been based on the 31 March 1998 actuarial valuation, with an adjustment to allow for the effect, as calculated by the actuary, of the benefit improvements granted on the merger of the two schemes on 1 April 2000. Post-retirement benefits The Group has no material post-retirement benefits other than pensions. Lattice Group Annual Report and Accounts 2000 82

24 Pensions and post-retirement benefits continued FRS 17 – Retirement Benefits FRS 17 was issued on 30 November 2000 and has not been adopted. Some preliminary work has been done to estimate the financial impact of this Standard. It is estimated that the surplus of the Scheme, using a corporate bond discount rate of 5.4%, would be in the range of £1.2bn to £1.4bn. FRS 17 leads to a large and potentially volatile fair value asset being disclosed on the balance sheet. This surplus is recognised as an asset to the extent that it is recoverable through refunds of surplus or contribution reductions. Discussions continue with professional advisers to ascertain more accurately this surplus amount and to consider how much of it to reflect in the balance sheet. On adoption of this Standard, the net of the SSAP24 provision (£288m at 31 December 2000, see note 19, page 75) and the related deferred tax asset (£86m at 31 December 2000, see note 12, page 69) would be credited to the profit and loss reserve by means of a prior year adjustment.

25 Notes to the consolidated cash flow statement a) Cash flow from operating activities for the year ended 31 December 2000 1999 £m £m Modified historical cost Group operating profit 1,014 1,261 Modified historical cost depreciation 504 499 Provisions for liabilities and charges (85) (85) Movements in working capital: Stocks – decrease 5 6 Trade and sundry debtors – decrease/(increase) 46 (267) Trade and sundry creditors – increase/(decrease) 9 (388) Long-term creditors – increase 49 66 109 (583) Cash inflow from operating activities 1,542 1,092 Expenditure relating to exceptional items: Restructuring costs (see note 19, page 75) (12) (14) Environmental costs (see note 19, page 75) (24) (21) (36) (35) Net cash inflow from operating activities 1,506 1,057

b) Returns on investments and servicing of finance for the year ended 31 December 2000 1999 £m £m Interest received 16 38 Interest paid (462) (434) Interest element of finance lease rentals 2 1 Net cash outflow from returns on investments and servicing of finance (444) (395)

c) Capital expenditure and financial investment for the year ended 31 December 2000 1999 £m £m Payments to acquire tangible fixed assets (753) (516) Net investment in finance leases 5 9 Receipts from disposal of tangible fixed assets 120 163 Net cash outflow from capital expenditure and financial investment (628) (344)

d) Acquisitions and disposals for the year ended 31 December 2000 1999 £m £m Purchases of subsidiary undertakings and fixed asset investments (10) (7) Net cash outflow from acquisitions and disposals (10) (7)

e) Management of liquid resources (a) for the year ended 31 December 2000 1999 £m £m Payments to acquire investments with an original maturity date of less than one year (5,490) (7,603) Receipts from disposal of investments with an original maturity date of less than one year 5,688 7,610 Net cash inflow from the management of liquid resources 198 7

a) Includes money market, listed and unlisted investments. Notes to the accounts continued 83

25 Notes to the consolidated cash flow statement continued f) Financing activities for the year ended 31 December 2000 1999 £m £m Cash (outflow)/inflow from change in borrowings (793) 1,272 Capital element of finance lease rentals (9) (10) (802) 1,262 Funding movement on Demerger and Restructuring and Refinancing 505 (1,415) Net cash outflow from financing activities (297) (153)

g) Significant non-cash transaction The only significant non-cash transaction during 2000 was the transfer of fixed assets to the newly formed joint venture, SpectraSite Transco Communications Ltd, in return for a 50% interest (see note 10, page 68). In 1999, there were no significant non-cash transactions.

26 Principal subsidiary undertakings and joint ventures Principal subsidiary undertakings Group Group share of Country of holding net assets as at 31 December 2000 incorporation and operation Activity % (a) % (b) Transco plc England Gas transportation 100 100 Transco Holdings plc England Group holding company 100 100 British Transco International Finance B.V. The Netherlands Financing 100 100 British Transco Finance Inc. USA Financing 100 100 British Transco Capital Inc. USA Financing 100 100 British Transco Finance (No. 1) Ltd Cayman Islands Financing 100 100 British Transco Finance (No. 2) Ltd Cayman Islands Financing 100 100 Lattice Group Holdings Limited England Group holding company 100 100 Lattice Energy Services Ltd England Energy services 100 100 Lattice Insurance Company Limited Isle of Man Insurance 100 100 Lattice Property Portfolio Ltd England Property 100 100 The Leasing Group plc England Leasing 100 100 Advantica Technologies Ltd England Technology 100 100 Advantica Technologies Inc. USA Technology 100 100 186k Ltd England Telecommunications 100 100 Eastlands (Benefits Administration) Ltd England Pensions Administration 100 100

a) Ordinary shares. b) Net assets attributable to equity shareholders. Principal joint ventures Issued Group Country of share holding as at 31 December 2000 incorporation and operation Activity capital % SpectraSite Transco Communications Ltd England Telecommunications £286m (a) 50.00

a) Comprises 130m A ordinary shares, 130m B ordinary shares and 26m C ordinary shares. The Group holding is 130m B ordinary shares. The companies listed are those which principally affect the profits and assets of Lattice. A full list of subsidiary undertakings, joint ventures and associated undertakings will be included in the next Annual Return filed with the Registrar of Companies. Lattice Group Annual Report and Accounts 2000 84

Transco regulatory financial information (unaudited) Under the terms of amended standard condition 2 of Transco’s Public Gas Transporters’ Licence, Transco has a requirement to produce regulatory accounting statements reflecting the format and content of Transco’s statutory accounts. A small number of differences exists between the segmental results shown in this report and the results shown in the regulatory accounting statements. These are set out below along with Transco’s third year regulatory results to 31 March 2000. Reconciliation of modified historical cost operating profit to Transco’s regulatory accounting statements 2000 1999 £m £m Modified historical cost operating profit as per segmental analysis (a) 958 1,160 Add: discontinued operations (b) – (5) Modified historical cost operating profit as per Transco’s regulatory accounting statements 958 1,155 a) See note 2, page 58. b) Discontinued operations comprise those storage activities of BG Group plc which ceased to be regulated from 1 April 1999. Those activities, managed by BG Storage, were subsequently transferred as part of the 1999 Restructuring and Refinancing. Reconciliation of modified historical cost net assets to Transco’s regulatory accounting statements 2000 1999 £m £m Total modified historical cost net assets as per segmental analysis (a) 5,686 5,619 Borrowings by Transco Holdings not included in regulatory accounting statements 1,511 1,500 Intra-group balance between Transco and Transco Holdings 1,986 1,761 Other adjustments, principally intra-group balances and other creditors 79 (2) Modified historical cost net assets as per Transco’s regulatory accounting statements 9,262 8,878 a) See note 2, page 58. Transco’s 2000 regulatory accounts are available from Brian Tenner, Group Head of Investor Relations, Lattice Group, 130 Jermyn Street, London SW1Y 4UR or on Lattice Group’s website at www.lattice-group.com. Results for the Regulatory Third Year ended 31 March 2000 (based on Transco’s interpretation of the methodology applied by the MMC in 1997) Transco is subject to a price control formula, which was set by Ofgem after taking into account, amongst other factors, operating costs, capital expenditure, cost of capital and transportation volumes, for the formula period April 1997 to March 2002 (including the deadbands for which the formula allows no additional revenue). In the business and domestic market, actual volumes of gas transported were within the deadband. Volumes at seasonally normal temperatures were approximately 4% above the top of the deadband. In the large user market, volumes were approximately 30% above the top of the deadband. By the end of March 2000, the accumulated under-recovered formula revenue (K-factor) from the previous formula period to March 1997 had been fully recovered and approximately £70m K-factor in respect of the current formula period had been over-recovered. This over- recovery is expected to be largely refunded to customers by March 2001 as a result of reductions in charges already announced. Transco’s regulatory operating costs, excluding non-daily meter reading cost pass-through, were £1,227m against our interpretation of the MMC’s projected level of £1,377m. Transco’s overall regulatory cash flow was £1,157m, £429m above our interpretation of the MMC’s projected level of £728m. Much of the additional cash flow was generated by Transco’s continuing drive to improve efficiency savings in regulatory operating costs and net investment. Transco’s regulatory value was £12,007m at the end of March 2000 against our interpretation of the MMC’s assumption of £12,588m, with lower investment in the formula period to date being the principal reason for the difference. Excluding the recovery during the formula year of £7m K-factor revenue from the previous formula period, Transco’s regulatory real rate of return in 1999/2000 was 9.9%. Excluding recovery of K-factor from the previous formula period, the cumulative return for the three formula years to date was 8.5% against an MMC projection of 7.2%. Actual MMC Actual MMC Cumulative (a) Cumulative (a) 1999/2000 1999/2000 Volumes: Business and domestic TWh 1,925 1,922 649 646 Large user TWh 820 676 363 273 Regulatory operating costs (b) £m 3,945 4,235 1,227 1,377 Regulatory cash flow £m 3,149 1,934 1,157 728 Regulatory value at 31 March 2000 £m 12,007 12,588 12,007 12,588 Regulatory return excluding K from previous formula period % 8.5 7.2 9.9 7.1 a) 1997/98, 1998/99 and 1999/2000 prices (i.e. money of the day). b) Excludes non-daily meter reading cost pass-through. 85

Financial summary of continuing activities (unaudited) Modified historical cost profit and loss account for the year ended 31 December 2000 1999 1998 1997 £m £m £m £m Group turnover 3,087 3,129 3,148 3,210 Operating costs (2,030) (1,848) (1,807) (2,169) Demerger costs (1999 Restructuring and Refinancing costs) (43) (20) – – Group operating profit 1,014 1,261 1,341 1,041 Share of operating losses in joint ventures (4) – – – Total operating profit 1,010 1,261 1,341 1,041 Profit/(loss) on disposal of fixed assets 15 37 (6) 3 Profit on ordinary activities 1,025 1,298 1,335 1,044 Net interest (444) (357) (361) (320) Profit on ordinary activities before taxation 581 941 974 724 Tax on profit on ordinary activities (198) (317) (255) (199) Windfall tax charge – – – (514) Profit on ordinary activities after taxation for the financial year 383 624 719 11

Modified historical cost statement of net assets as at 31 December 2000 1999 1998 1997 £m £m £m £m Fixed assets 14,129 13,543 13,649 12,984 Current assets 963 1,520 1,057 1,328 Creditors: amounts falling due within one year (2,398) (2,580) (2,484) (4,029) Net current liabilities (1,435) (1,060) (1,427) (2,701) Total assets less current liabilities 12,694 12,483 12,222 10,283 Creditors: amounts falling due after more than one year (5,735) (6,007) (3,714) (2,724) Provisions for liabilities and charges (692) (803) (905) (1,026) Net assets 6,267 5,673 7,603 6,533

Cash flow statement for the year ended 31 December 2000 1999 1998 1997 £m £m £m £m Cash inflow from operating activities 1,542 1,092 1,871 2,626 Net expenditure relating to exceptional items (36) (35) (67) (187) Net cash inflow from operating activities 1,506 1,057 1,804 2,439 Net cash outflow from returns on investments and servicing of finance (444) (395) (371) (335) Net cash outflow from taxation (202) (162) (356) (375) Net cash outflow from capital expenditure and financial investment (628) (344) (562) (446) Net cash outflow from acquisitions and disposals (10) (7) – – Equity dividends paid (123) – – – Net cash inflow/(outflow) from the management of liquid resources 198 7 92 (249) Net cash inflow before financing activities 297 156 607 1,034 Net cash outflow from financing activities (297) (153) (611) (1,021) Net increase/(decrease) in cash in the year – 3 (4) 13

No information has been presented in respect of 1996 as it would not be practical to obtain it. The Listing Particulars, issued on 15 September 2000, contain further details on financial information for the full years 1997 and 1998. Lattice Group Annual Report and Accounts 2000 86

Analysis of Lattice Group consolidated modified historical cost profit and loss account (unaudited) The profit and loss accounts presented below represent the split of the consolidated results between the Transco Holdings sub-group, the Lattice Group Holdings sub-group and the parent company, Lattice Group plc, including consolidation adjustments, and have been prepared on the basis that the new group structure was in place throughout the financial period. Reference should also be made to the Basis of consolidation on page 49. Lattice Group Lattice plc and Transco Group consolidation Lattice Group for the year ended 31 December 2000 Holdings Holdings adjustments consolidated £m £m £m £m Turnover – Group and share of joint ventures 2,975 213 (96) 3,092 Less: share of joint ventures’ turnover – (5) – (5) Group turnover 2,975 208 (96) 3,087 Operating costs (1,976) (240) 186 (2,030) Demerger costs (41) (2) – (43) Group operating profit/(loss) 958 (34) 90 1,014 Share of operating losses in joint ventures – (4) – (4) Total operating profit 958 (38) 90 1,010 Profit/(loss) on disposal of fixed assets (34) 63 (14) 15 Profit on ordinary activities 924 25 76 1,025 Net interest (454) 10 – (444) Profit on ordinary activities before taxation 470 35 76 581 Tax on profit on ordinary activities (169) (2) (27) (198) Profit on ordinary activities after taxation for the financial year 301 33 49 383 Adjusted earnings 368 (28) 63 403 Notional adjusted earnings (a) 339 (9) 73 403

Lattice Group plc and consolidation adjustments principally comprise the Pension credit less deferred tax and inter-company elimination adjustments. For the purpose of the Segmental analysis (see note 2, page 58) Transco Holdings is included within the Transco business segment and Lattice Group Holdings is included within Other activities segment. Lattice Group plc and consolidation adjustments above includes both the Pension credit segment and intra-group eliminations. a) Transco Holdings sub-group currently borrows funds from both Lattice Group Holdings sub-group and Lattice Group plc. Had this arrangement been in place throughout the financial period and been on an arm’s-length commercial basis it would have had the following impact on the results of each sub-group. This notional adjustment is shown for information purposes only and does not form part of the statutory results of the sub-groups.

Lattice Group Lattice plc and Transco Group consolidation Lattice Group for the year ended 31 December 2000 Holdings Holdings adjustments consolidated £m £m £m £m Adjusted earnings 368 (28) 63 403 Notional net interest (payable)/receivable (41) 27 14 – Notional tax impact of interest adjustment 12 (8) (4) – Notional adjusted earnings 339 (9) 73 403 87

Analysis of Lattice Group consolidated modified historical cost net assets (unaudited) The information presented below represents the split of the consolidated financial position between Transco Holdings sub-group, Lattice Group Holdings sub-group and the parent company, Lattice Group plc, including consolidation adjustments. Lattice Group Lattice plc and Transco Group consolidation Lattice Group as at 31 December 2000 Holdings Holdings adjustments consolidated £m £m £m £m Fixed assets Tangible assets 13,730 327 – 14,057 Investment in joint ventures: Share of gross assets – 103 (30) 73 Share of gross liabilities – (11) – (11) – 92 (30) 62 Other investments 1 9 – 10 13,731 428 (30) 14,129

Current assets Stocks 38 3 – 41 Debtors: amounts falling due within one year 517 205 (84) 638 Debtors: amounts falling due after more than one year (48) 43 59 54 469 248 (25) 692 Investments 58 568 (403) 223 Cash at bank and in hand 1 6 – 7 566 825 (428) 963 Creditors: amounts falling due within one year Borrowings (2,014) (10) 653 (1,371) Other creditors (737) (623) 333 (1,027) (2,751) (633) 986 (2,398) Net current (liabilities)/assets (2,185) 192 558 (1,435) Total assets less current liabilities 11,546 620 528 12,694

Creditors: amounts falling due after more than one year Borrowings (4,887) – 26 (4,861) Other creditors (870) (5) 1 (874) (5,757) (5) 27 (5,735) Provisions for liabilities and charges (103) (301) (288) (692) Net assets 5,686 314 267 6,267

Net (borrowings)/resources £m (6,842) 564 276 (a) (6,002) Modified historical cost gearing ratio % 55 – (b) – (b) 49 Modified historical cost debt/equity ratio % 120 – (b) – (b) 96 Modified historical cost capital employed £m 12,458 (66) (136) 12,256 Capital expenditure including investments £m 658 151 – 809 Employee numbers (average headcount) 14,261 1,313 5 15,579 a) Represents intra-group finance leases held by Transco Holdings, eliminated at Group level, £46m and a loan to Transco Holdings of £230m. b) Sub-group holds net resources and, therefore, gearing ratio and debt/equity ratio are nil. For the purposes of the Segmental analysis (see note 2, page 58), Transco Holdings is included in the Transco business segment. Lattice Group Holdings comprises the Other activities segment. Lattice Group plc and consolidation adjustments principally comprise the Pension credit less deferred tax and dividends. Lattice Group Annual Report and Accounts 2000 88

Analysis of Lattice Group consolidated cash flow statement (unaudited) The cash flow statements presented below represent the split of the consolidated results between the Transco Holdings sub-group, the Lattice Group Holdings sub-group and the parent company, Lattice Group plc, including consolidation adjustments, and have been prepared on the basis that the new group structure was in place throughout the financial period.

Lattice Group Lattice plc and Transco Group consolidation Lattice Group for the year ended 31 December 2000 Holdings Holdings adjustments consolidated £m £m £m £m Cash inflow from operating activities 1,489 48 5 1,542 Net expenditure relating to exceptional items (4) (32) – (36) Net cash inflow from operating activities 1,485 16 5 1,506 Net cash (outflow)/inflow from returns on investments and servicing of finance (464) 18 2 (444) Net cash outflow from taxation (191) (11) – (202) Net cash (outflow)/inflow from capital expenditure and financial investment (606) 15 (37) (628) Net cash inflow/(outflow) from acquisitions and disposals 7 (9) (8) (10) Equity dividends (paid)/received (379) – 256 (123) Net cash inflow/(outflow) from the management of liquid resources 210 (415) 403 198 Net cash inflow/(outflow) before financing activities 62 (386) 621 297 Net cash (outflow)/inflow from financing activities (54) 378 (621) (297) Net increase/(decrease) in cash in the year 8 (8) – – 89

Shareholder information Analyses of shareholdings as at 31 December 2000 Distribution of ordinary shares by type of shareholder Number of Shares holdings m Nominees 11,782 2,823 Other limited companies 1,149 78 Banks 58 15 Insurance companies 20 72 Pension funds 51 7 Other corporate bodies 704 34 Individuals 1,042,555 499 1,056,319 3,528

Range analysis of register Number of Shares holdings m

1 – 500 780,105 195 501 – 1,000 178,522 119 1,001 – 5,000 89,314 152 5,001 – 10,000 5,184 35 10,001 – 50,000 1,664 33 50,001 – 100,000 341 24 100,001 – 1,000,000 837 300 1,000,001 and above 352 2,670 1,056,319 3,528

Major shareholdings as at 31 December 2000 % of Shares issued m shares Chase Nominees Limited 192 5.45 Nutraco Nominees Limited 120 3.41 Prudential Client HSBC 90 2.55 Vidacos Nominees Limited 77 2.17 RBSTB Nominees Limited 76 2.16 Stanlife Nominees Limited 72 2.05

Lattice Group plc Headquarters and Registered Office address: 130 Jermyn Street, London SW1Y 4UR Web address: www.lattice-group.com Registrars and transfer office: Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DA Telephone: 0870 241 3937 Low cost share dealing services Information on a range of low cost share dealing services is available from the Registrars on 0870 241 3937. Capital gains tax information On 23 October 2000 when the Demerger became effective the base cost of BG Group plc shares was apportioned on the following basis: 65.6212% to BG Group plc shares and 34.3788% to Lattice Group plc shares. Information on gifting your shares To transfer your shares to another member of your family as a gift, please ask the Registrars for a gift transfer form. The completed transfer form and relevant share certificate(s) should be completed and returned to our Registrars to record the change in ownership. If you have a small number of shares and would like to donate them to charity, please ask our Registrars for a ShareGift (charity donation scheme) transfer form. Dividend re-investment plan The Company is actively considering the introduction of a dividend re-investment plan to enable shareholders to convert their dividend payment directly into shares. Further information on this proposal is expected to be available during 2001. www.shareview.co.uk Our Registrars, Lloyds TSB Registrars, have introduced a service to provide shareholders with on-line internet access to details of their shareholdings. The service is free, secure and easy to use. To register for the service, go to www.shareview.co.uk. You will need your shareholder reference (which can be found in the top left hand corner of the enclosed proxy form). Lattice Group Annual Report and Accounts 2000 90

Consolidated tax vouchers From June 2001, shareholders who receive their dividend direct to their bank or building society will receive a consolidated tax voucher once every year rather than a voucher for each dividend payment. The consolidated tax voucher will show all dividend payments made in the tax year and will be sent to shareholders with their Annual Report and Accounts or Summary Financial Statement, just prior to them receiving any tax return from the Inland Revenue.

Financial calendar 2001 Annual General Meeting 23 April Ex-dividend date for 2000 final dividend 25 April Record date for 2000 final dividend 27 April Payment of 2000 final dividend 5 June Announcement of 2001 interim results 13 September Financial year end 31 December 91

Index Item page Item page Item page

Accounting policies 49-51 Depreciation 49, 50, 52, 59, 60, 65-67, 82 Operating costs 52, 60, 85, 86 Analysis of the Lattice Group 86-88 Derivatives 73 Operating profit/(loss) 52, 85, 86 Annual General Meeting 39-40 Directors 30-31, 39, 61 Pensions and post-retirement Assets 53, 59, 65 Directors’ remuneration report 43-47 benefits 51, 75, 81-82 Gross 59, 65 Disposals 52, 82, 85, 86 Principal accounting policies 49-51 Net 53, 54, 59, 85, 87 Dividends 24, 52, 54, 55, 64, 74, 88 Principal activities 38 Auditors’ remuneration 60 Policy 24, 77 Profit and loss account 52 Auditors’ report 48 Earnings per ordinary share 23, 52, 64 Analysis of Lattice Group 86 Balance sheets 53 Employees 10, 39, 61-62 Four year financial summary 85 Analysis of Lattice Group 87 Environmental costs 75, 82 Four year financial summary 85 Provisions for liabilities and charges 75 Euro 29 Basis of consolidation 49 Reconciliation of consolidated modified Exceptional items 55, 82, 88 historical cost and historical cost profit Basis of preparation 49 Financial calendar 90 on ordinary activities before taxation 52 Bonds 54, 55, 56, 70 Financial instruments 51, 73-74 Reconciliation of modified historical cost Borrowings 26-27, 53, 55, 70-74 Financial Reporting Standards 57-58 and historical cost net assets/(liabilities) 54 Analysis of Lattice Group 87 Fixed assets 50, 53, 85, 87 Reconciliation of net borrowings 55 Business review 6-21 Tangible 65-67 Regulation 33-37, 84 Capital and reserves 53, 77 Foreign currencies 72-73 Capital expenditure 59, 82 Related party transactions 80 Four year financial summary 85 Cash flow 26, 55, 82-83 Research and development 51 Going concern 40 Analysis of Lattice Group 88 Risk management 27-28 Four year financial summary 85 Goodwill 49 Segmental analysis 58-59 Guarantees and warrants 78-80 Chairman’s statement 2-3 Share capital 53, 76, 77 Health, Safety and the Environment 18-19 Changes in financing during the year 56 Shareholders’ funds 53, 54, 77 Charitable donations 39 Impairment 50, 66 Shareholder information 89-90 Chief Executive’s review 4-5 Interest 26, 52, 63, 72 Statement of Business Principles 19, 40 Commitments and contingencies 78-80 Investments 53, 68-70 Statement of total modified historical cost Community 20-21, 39 Current asset 53, 70 recognised gains and losses 52 Creditors 53, 74 Fixed asset 53, 68-69 Stocks 53, 69 Analysis of Lattice Group 87 Joint ventures 6, 13, 15, 83 Subsidiary undertakings 83 Four year financial summary 85 Lattice Foundation 20-21, 39 Substantial shareholdings 89 Debt/equity ratio 26, 87 Leases 51, 60, 78 Suppliers 39 Debtors 53, 69, 87 Litigation 28-29, 79 Taxation 26, 52, 63, 75 Deferred taxation 63, 75 Movements in modified historical Definitions 92 cost Lattice Group shareholders’ funds 54 Transco regulatory financial information 84 Demerger 7, 22-23, 24, 57 Operating and financial review 22-29 Treasury policy 27-28 Lattice Group Annual Report and Accounts 2000 92

Definitions

For the purposes of this document the following definitions apply: ‘bcf’ Billion cubic feet. ‘BG’ BG Group plc and its subsidiary undertakings consolidated with its share of joint ventures and associated undertakings. ‘BG Energy Holdings’ BG Energy Holdings Limited and its subsidiary undertakings consolidated with its share of joint ventures and associated undertakings. ‘BG Group plc’ or ‘BG Group’ The ultimate parent company of BG Energy Holdings Limited. Former ultimate parent company of Transco Holdings plc. ‘Company’ or ‘Lattice’ Lattice Group plc. ‘Controlled escape’ A gas escape which has been stopped by turning off the emergency control (meter control valve). ‘Demerger’ The demerger of Lattice Group plc from BG Group plc which became effective on 23 October 2000. ‘Group’ The Company and its subsidiary undertakings. ‘GWh’ Gigawatt hours. ‘KWh’ Kilowatt hours. ‘Lattice Group’ Lattice Group plc and its subsidiary undertakings consolidated with its share of joint ventures and associated undertakings. ‘Lattice Group Holdings’ Lattice Group Holdings Limited and its subsidiary undertakings consolidated with its share of joint ventures and associated undertakings. ‘Licence’ The public gas transporter licence treated as granted under section 7 of the Gas Act 1986, as amended, to Transco by which Transco is authorised to transport gas. ‘LNG’ Liquefied natural gas. ‘mcm’ Million cubic metres. ‘MMC’ Monopolies and Mergers Commission (now known as the Competition Commission). ‘MMC report’ The report of the MMC entitled ‘BG Group plc. A report under the Gas Act 1986 on the restriction of prices for gas transportation and storage services’ published in June 1997. ‘MJ/cuM’ Mega joules per cubic metre. ‘MW’ Megawatt. ‘Ofgem’ The Office of Gas and Electricity Markets which as of 16 June 1999 is the new name for the combined Office of Electricity Regulation and Office of Gas Supply. ‘Restructuring and Refinancing’ The corporate restructuring and refinancing of BG plc which became effective on 13 December 1999. ‘SpectraSite’ The Group’s joint venture partner in the mobile telecommunications infrastructure business. ‘Telecoms’ The Group’s combined subsidiary interests in fixed fibre-optic telecommunications and joint venture interest in mobile telephone infrastructure. ‘TWh’ Terawatt hours. ‘Transco’ Transco plc and its subsidiary undertakings consolidated with its share of joint ventures and associated undertakings (formerly known as BG Transco plc). ‘Transco Holdings’ Transco Holdings plc and its subsidiary undertakings consolidated with its share of joint ventures and associated undertakings (formerly known as BG Transco Holdings plc). ‘186k’ The Group’s fibre-optic telecommunications subsidiary. Designed and produced by Fishburn Hedges Typeset by Burrups Ltd, St Ives plc Printed by Polestar Group 130 Jermyn Street London SW1Y 4UR Telephone 020 7389 3200 www.lattice-group.com Registered in England No. 3900804