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Financial Statements

31. Share capital

	Allotted, called up and fully paid
Ordinary shares	millions	£m
At 1 April 2004	3,088	309
Issued during the year	2	-
At 31 March 2005	3,090	309
Issued during the year	8	1
Effect of share consolidation (i)	(378)	-
At 31 March 2006	2,720	310
Issued during the year	4	-
Effect of share consolidation (ii)	(23)	(2)
At 31 March 2007	2,701	308

(i) On 29 July 2005, the ordinary share capital was consolidated with 43 new ordinary shares of 11 ¹⁷/₄₃ pence each issued for every 49 existing ordinary shares of 10 pence each cancelled.

(ii) From 20 November 2006 to 22 March 2007, the Company repurchased, and subsequently cancelled, under its share buy-back programme 22,388,381 ordinary shares for aggregate consideration of £169m, including transaction costs. The shares repurchased have a nominal value of 11¹⁷/₄₃ pence each and represented 1% of the ordinary shares in issue as at 31 March 2007. The excess of the consideration over the nominal value has been charged against retained earnings.

The total consideration received in respect of ordinary shares issued during the year ended 31 March 2007 was £16m (2006: £28m; 2005: £9m).

In June 2005, we issued a Circular to Shareholders, dated 6 June 2005, outlining a £2bn return of cash to shareholders by way of a B share scheme. Shareholders were issued one B share (a non-cumulative preference share of 10 pence nominal value per share) for every existing ordinary share they held. Shareholders then had choices in respect of the B shares and the return of cash, details of which were set out in the Circular to Shareholders.

At the same time that the B shares were issued, the ordinary shares were consolidated to reflect the return of cash. Shareholders received 43 new ordinary shares (of 11¹⁷/₄₃ pence nominal value per share) for every 49 existing ordinary shares (of 10 pence nominal value per share) held on the record date of 29 July 2005. This resulted in the existing 3,091,247,761 issued ordinary shares of 10 pence each, at 29 July 2005, being replaced by a total of 2,712,727,627 new ordinary shares of 11¹⁷/₄₃ pence each. In addition, 3,091,247,761 B shares of 10 pence each were also issued. To facilitate the above, the authorised share capital of the Company was increased from £500m to £815m by the creation of 3,150m B shares of 10 pence each.

At 31 March 2007 and 31 March 2006, the authorised share capital of the Company was £815m (4,388m ordinary shares of 11¹⁷/₄₃ pence each and 3,150m B shares of 10 pence each). At 31 March 2005, the authorised share capital of the Company was £500m (5,000m ordinary shares of 10 pence each).

Share option and award plans

We operate three principal forms of share option and award plans. They are an employee Sharesave scheme, a Performance Share Plan (PSP) and the Deferred Share Plan.

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

The Sharesave scheme is savings-related where, under normal circumstances, share options are exercisable on completion of a three and/or five year Save-As-You-Earn contract. The exercise price of options granted represents 80% of the market price at the date the option was granted.

Under the PSP, awards have been made to Executive Directors and approximately 350 senior employees. Awards made in 2004 are subject to Total Shareholder Return (TSR) performance based on a comparator group of UK and international utilities over a three year period. For awards made in 2005 and 2006, the criteria was amended so that 50% is based on the Company's TSR performance when compared to the FTSE 100 and 50% is based on the annualised growth of the Company's EPS. Awards are delivered in National Grid plc shares. At 31 March 2007 the number of conditional awards of ordinary share equivalents outstanding under the PSP was 7,979,436 (2006: 9,235,636; 2005: 6,653,420) of which nil (2006: nil; 2005: nil) were available for release. The number of conditional awards during the year ended 31 March 2007 was 2,624,055 (2006: 3,066,047; 2005: 3,635,062) with lapses/forfeits during the year of 3,833,775 (2006: 478,324; 2005: 436,700) and vestings during the year of 50,840 (2006: nil; 2005: 2,997).

Under the Deferred Share Plan, one half of any bonus earned by Executive Directors and a predetermined part of any bonus earned by UK senior employees is automatically deferred into National Grid shares. The shares are held in trust for three years before release. At 31 March 2007 the number of conditional awards of ordinary share equivalents was 395,629 of which 99,140 were available for release. The number of conditional awards during the year ended 31 March 2007 was 409,461 with 13,832 vested during the year.

In addition we have a number of historical plans under which awards are still outstanding but no further awards are being granted. These include the Executive Plan, the Share Matching Plan and the Transitional Share Awards and Special Share Awards.

The Executive Plan applied to senior executives, including Executive Directors. Options granted for the 1999/2000 financial year were subject to the achievement of performance targets related to earnings per share growth over a three year period and have now vested. Options granted for the 2000/01 financial year and thereafter are subject to the achievement of performance targets related to total shareholder return over a three year period. The share options are generally exercisable between the third and tenth anniversaries of the date of grant if the relevant performance target is achieved. The 2000 awards remain unvested.

The Share Matching Plan applied to Executive Directors and other senior employees whereby a predetermined part of each participant's bonus entitlement was automatically deferred into National Grid plc shares (known as qualifying shares) and a matching award may be exercised under the Plan after a three year period provided the Director or senior employee is still employed by the Company or its subsidiary undertakings. At 31 March 2007 the number of options over ordinary shares outstanding under the Share Matching Plan was 383,848 (2006: 435,583; 2005: 341,482) of which 163,616 (2006: 45,384; 2005: 28,534) were exercisable. No options were granted during the year ended 31 March 2007 (2006: 149,232; 2005: 171,460) with lapses during the year of nil (2006: 1,489; 2005: nil) and exercises during the year of 51,735 (2006: 53,642; 2005: 42,163).

The Transitional Share Awards and Special Share Awards were made during the year ended 31 March 2005 to wireless employees and had a vesting period of four and two years respectively, provided the employee was still employed by the Company or its subsidiary undertakings. The number of awards made during the year ended 31 March 2005 were 188,650 and 45,700 respectively. At 31 March 2007 the number of conditional awards of ordinary share equivalents outstanding in relation to the Transitional Share Award and Special Share Awards were 77,293 (2006: 121,170; 2005: 188,650) and nil (2006: 11,000; 2005: 45,700) with lapses during the year of 5,894 (2006: 22,560; 2005: nil) and nil (2006: 16,825; 2005: nil) and vestings during the year of 38,793 (2006: 44,110; 2005: nil) and 11,000 (2006: 17,875; 2005: nil) respectively. Following the sale of the UK wireless infrastructure operations it was agreed that the outstanding share equivalents vested in full on completion of the disposal.

Movement in options to subscribe for ordinary shares under the Company's various options schemes for the three years ended 31 March 2007 is shown below and includes those options related to shares issued to employee benefit trusts:

	Sharesave scheme options		Executive Plan options		Total options
	Weighted average price £	millions	Weighted average price £	millions	millions
At 31 March 2004	3.32	31.7	4.84	12.0	43.7
Granted	3.83	4.8	-	-	4.8
Lapsed – expired	3.36	(1.5)	5.02	(1.1)	(2.6)
Exercised	3.37	(3.8)	3.90	(0.5)	(4.3)
At 31 March 2005	3.35	31.2	4.86	10.4	41.6
Granted	4.34	5.6	-	-	5.6
Lapsed – expired	3.33	(4.1)	4.32	(0.9)	(5.0)
Exercised	3.25	(12.8)	4.04	(2.3)	(15.1)
At 31 March 2006	3.68	19.9	5.01	7.2	27.1
Granted	5.58	4.2	-	-	4.2
Lapsed – expired	3.82	(0.9)	5.48	(1.9)	(2.8)
Exercised	3.43	(1.9)	5.00	(2.1)	(4.0)
At 31 March 2007	4.07	21.3	4.74	3.2	24.5

Included within options outstanding at 31 March 2007, 31 March 2006 and 31 March 2005 were the following options that were exercisable:

At 31 March 2007	3.17	4.1	4.63	2.4	6.5
At 31 March 2006	3.24	0.5	5.03	7.1	7.6
At 31 March 2005	3.25	0.3	4.99	6.3	6.6

The weighted average remaining contractual life of options in the employee Sharesave scheme at 31 March 2007 was 3 years and 1 month. These options have exercise prices between £3.15 and £5.58.

The weighted average share price at the exercise dates was as follows:

	2007 £	2006 £	2005 £
Sharesave scheme options	6.50	5.89	4.49
Executive Plan options	6.68	5.50	4.65

Options outstanding and exercisable and their weighted average exercise prices for the respective ranges of exercise prices and years at 31 March 2007 are as follows:

	Weighted average exercise price of exercisable options £	Number exercisable millions	Weighted average exercise price of outstanding options £	Number outstanding millions	Exercise price per share pence	Normal dates of exercise years
Executive Plan	2.81	0.2	2.81	0.2	258.0 – 280.5	2001 – 2008
	3.82	0.3	3.82	0.3	375.8 – 490.0	2002 – 2009
	5.34	0.4	5.34	0.4	424.0 – 566.5	2003 – 2010
	5.28	0.1	5.31	0.8	526.0 – 623.0	2004 – 2011
	4.71	1.4	4.71	1.4	434.3 – 481.5	2006 – 2013
	4.05	-	4.05	0.1	405.0	2007 – 2014
	4.63	2.4	4.74	3.2

Cash of £16m (2006: £54m; 2005: £13m) was received on exercise of all share options during the year. The tax benefits realised from stock options exercised during the year was £5m (2006: £5m; 2005: £nil).

The aggregate intrinsic value of all options outstanding and exercisable at 31 March 2007 amounted to £115m and £29m respectively.

Share-based payment charges

Under IFRS, a charge is made to the income statement based on the fair value of grants in accordance with IFRS 2 ‘Share-based Payment’. All share awards are equity settled.

The charge to the income statement for the year ended 31 March 2007 was £15m (2006: £17m; 2005: £16m). The related tax (charge)/benefit recognised in the income statement was £(9)m (2006: £2m; 2005: £7m).

Awards under share option plans

The average share prices at the date of options being granted during each of the three financial years ended 31 March were as follows:

	2007	2006	2005
Where the exercise price is less than the market price at the date of grant	746.0p	569.0p	496.0p

The average exercise prices of the options granted during each of the three financial years ended 31 March were as follows:

	2007	2006	2005
Where the exercise price is less than the market price at the date of grant	558.0p	434.0p	383.0p

The average fair values of the options granted during each of the three financial years ended 31 March were estimated as follows:

	2007	2006	2005
Where the exercise price is less than the market price at the date of grant	166.8p	128.0p	90.4p

The fair values of the options granted were estimated using the following principal assumptions:

	2007	2006	2005
Dividend yield (%)	4.5	4.5	5.5-5.8
Volatility (%)	15.6-18.9	15.6-18.9	15.4
Risk-free investment rate (%)	4.2	4.2	4.5
Average life (years)	3.9	4.3	4.0

The fair values of awards under the Sharesave scheme have been calculated using the Black-Scholes European model for awards made prior to 1 April 2006. This is considered appropriate given the short exercise window of sharesave options. The fair value of awards made in 2007 have been calculated by reference to the prior year's Black-Scholes European model calculation.

Volatility has been derived based on the following:

(i)implied volatility in traded options over the Company's shares;

(ii)historical volatility of the Company's shares from October 2002 (the date of the business combination with Lattice Group plc); and

(iii)implied volatility of comparator companies where options in their shares are traded.

Volatility is assumed to revert from its current implied level to its long run mean, based on historical volatility under (ii) above.

Awards under other share scheme plans

The average share prices and fair values at the date share awards were granted during each of the three financial years ended 31 March were as follows:

	2007	2006	2005
Average share price	594.0p	535.6p	431.7p
Average fair value	403.1p	358.0p	210.6p

The fair values of the awards granted were estimated using the following principal assumptions:

	2007	2006	2005
Dividend yield (%)	4.4	4.4	5.3-5.7
Volatility (%)	19.9	19.9	15.4
Risk-free investment rate (%)	4.1	4.1	4.5-5.2

Fair values have been calculated using a Monte Carlo simulation model for awards with total shareholder return performance conditions made prior to 1 April 2006. The fair value of awards made in 2007 has been calculated by reference to the prior year's Monte Carlo simulation model calculation. Fair values of awards with performance conditions based on earnings per share have been calculated using the share price at date of grant less the present value of dividends foregone during the performance period.

For other share scheme awards, where the primary vesting condition is that employees complete a specified number of years service, the fair value has been calculated as the share price at date of grant, adjusted to recognise the extent to which participants do not receive dividends over the vesting period.

Volatility for share awards has been calculated on the same basis as used for share options, as described above.

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