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Director's Reports

Directors' Report for the year ended 31 March 2007

Directors

The biographies of the persons serving as Directors as at the date of this report are set out under Board of Directors. The names of all persons serving as Directors during the financial year are included in Remuneration outcomes during the year ended 31 March 2007, detailed in the table setting out Directors' beneficial interests.

Directors' and Officers' liability insurance cover is arranged and qualifying third party indemnities, in accordance with sections 309A-B of the Companies Act 1985, are in place for each Director.

The Directors' interests in shares and in options to receive shares are set out in the Directors' Remuneration Report.

Code of Ethics

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

Principal activities, business review and future developments

National Grid plc is the ultimate holding company of a group of companies involved principally in the transmission and distribution of electricity and gas in the UK and northeastern US.

The Directors consider that the requirement to produce a business review is fulfilled by the inclusion in this Annual Report and Accounts of an Operating and Financial Review and the Corporate Governance section.

Dividends

The Directors are recommending a final dividend of 17.8 pence per ordinary share ($1.7638 per American Depositary Share) be paid on 22 August 2007 to shareholders on the register at 8 June 2007. Further details in respect of dividend payments can be found under Returns to shareholders.

Political donations and expenditure

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

National Grid USA and certain subsidiaries made political donations of $100,000 (£52,289) during the year. National Grid USA's political action committees, funded partly by voluntary employee contributions, gave $149,709 (£78,282) to political and campaign committees in 2006/07.

Charitable donations

During 2006/07, some £9 million (2005/06: £7.7 million) was invested in support of community initiatives and relationships. The London Benchmarking Group model was used to assess this overall community investment. Direct donations to charitable organisations amounted to £2.9 million (2005/06: £2.7 million).

In addition to our charitable donations, substantial support was provided for our Affordable Warmth Programme, education programme, university research and our Young Offenders Into Work Programme.

Financial instruments

Details on the use of financial instruments and financial risk management are included under Liquidity and treasury management.

Post balance sheet events

On 3 April 2007, we completed the sale of our UK wireless infrastructure business for cash proceeds of £2.5 billion.

Also in April, we agreed to the sale of our US wireless infrastructure operations for proceeds of approximately $290 million (£147 million). Completion is expected in the autumn of 2007.

Research and development

Expenditure on research and development during the year was £6 million, compared with £7 million in 2005/06.

Share purchases

At the Company's Annual General Meeting in 2006, shareholder authority was given to purchase up to 10% of our ordinary shares.

As part of our interim results for the six months to 30 September 2006, a share buy-back programme was announced to return around $1.9 billion (£1 billion) to shareholders. This return is based on cash flows from stranded assets under our US rate plans.

This ordinary share buy-back commenced on 20 November 2006 and, as at the date of this report, 22,388,381 ordinary shares of 11¹⁷/₄₃ pence had been repurchased for an aggregate consideration of £168,983,332.59 (representing approximately 1% of our issued share capital). All of these shares were cancelled. The repurchases leave the Company with authority to buy back a further 250 million ordinary shares.

The Directors intend to seek shareholder approval to renew this authority at this year's Annual General Meeting.

Companies are permitted to hold repurchased shares as treasury shares rather than cancelling them. The Directors have no current intention to hold repurchased shares as treasury shares, other than as may be required for employee share schemes.

Return of cash: B shares

Under the return of cash, approved by shareholders on 25 July 2005, holders of B shares could elect to retain them for future repurchases. A further repurchase offer was made on 8 August 2006 and an additional 39,521,422 B shares were repurchased at 65 pence per share. Following this repurchase 45,815,437 B shares remained in issue.

Employees

Over the past year, National Grid has continued to demonstrate how it values its employees. The company-wide publication National Grid World is now issued twice a year in line with the interim and end of year financial results. In 2006/07 it has provided employees with an overview of performance, updates on the acquisition of Rhode Island gas distribution operations and KeySpan, alongside material setting out our changing strategy and new operating model. Feedback from employees has been largely positive. This publication is only one example of the multiple communication channels we have established and continue to develop to ensure the timely cascade of critical information to employees. A number of these channels have been established to support dialogue between employees and management.

In July 2006, we conducted a company-wide employee opinion survey. Over 11,000 employees (58%) took part in the process, a 9% increase on the response rate when the survey was conducted in 2004. The survey demonstrated that employees better understand the Company's strategy and the need for change. They believe that the business is heading in the right direction and are willing to do their jobs differently to help us improve. Safety continues to be recognised as one of National Grid's key strengths.

Areas that the survey highlighted as needing improvement included general management behaviours around communication with employees and performance management. Action plans have now been developed by each of the businesses to address their key priorities for improvement.

National Grid's core values are integrity, ownership and respect. Responses to the 2006 employee opinion survey demonstrated that respect and integrity are becoming embedded in the culture of the organisation. Our inclusion and diversity vision is to develop and operate our business in a way that results in a more inclusive and diverse culture. This supports the attraction and retention of the best people, improves effectiveness, delivers superior performance and enhances the success of the Company. Employees are provided with the opportunity to develop to their full potential regardless of race, gender, nationality, age, disability, sexual orientation, religion and background. We support a number of employee interest groups including groups for women and new starters. These receive Executive Director sponsorship. Over the past year, additional networks have been launched to support disabled employees and those from an ethnic minority background.

Employee share ownership of the Company is facilitated among UK employees by the operation of both the Sharesave scheme and share incentive plans. In the US, employees are able to invest in the Company through employee incentive thrift plans.

In the UK, approximately 72% of employees participate in sharesave schemes. There are also about 7,600 participants in the share incentive plans. Of current US employees participating in the National Grid USA Incentive Thrift Plans I and II, approximately 74% and 79% respectively hold ADSs.

Policy and practice on payment of creditors

It is National Grid's policy to include in contracts, or other agreements, terms of payment with suppliers. Once agreed, we aim to abide by these payment terms.

The average creditor payment period at 31 March 2007 for National Grid's principal operations in the UK was 19 days (20 days at 31 March 2006).

Audit information

Having made the requisite enquiries, so far as the Directors in office at the date of the signing of this report are aware, taking into account their periods of office, there is no relevant audit information (as defined by Section 234ZA of the Companies Act 1985) of which the Company's auditors are unaware, and the Directors have taken all the steps they ought to have taken to make themselves aware of any relevant audit information and to establish that the Company's auditors are aware of that information.

Material interests in shares

As at the date of this report, National Grid had been notified of the following beneficial interests in 3% or more of its issued share capital:

	% of issued share capital
Legal and General Investment Management Ltd	4.12
Fidelity International Limited	3.06

No further notifications have been received.

Annual General Meeting

National Grid's 2007 Annual General Meeting will be held on Monday 30 July 2007 at The ICC in Birmingham. Details are set out in the separate Notice of Annual General Meeting.

On behalf of the Board

Helen Mahy
Company Secretary and General Counsel
16 May 2007

National Grid plc, 1-3 Strand, London WC2N 5EH
Registered in England and Wales No. 4031152

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