31. Share capital

	Allotted, called up and fully paid
	millions	£m
At 31 March 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

1. 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.

The total consideration received by the Group and Company in respect of ordinary shares issued during the year ended 31 March 2006 was £28m (2005: £9m).

In June 2005, National Grid issued a Circular to Shareholders, dated 6 June 2005, outlining its £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 11 ¹⁷/₄₃ 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 11 ¹⁷/₄₃ 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 2006, the authorised share capital of the Group was £815m (4,388m ordinary shares of 11 ¹⁷/₄₃ pence each and 3,150m B shares of 10 pence each).

At 31 March 2005, the authorised share capital of the Group was £500m (5,000m ordinary shares of 10 pence each).

At 31 March 2004, the authorised share capital of the Group was £500m (5,000m ordinary shares of 10 pence each and one £1 special rights non-voting redeemable preference share). During the year ended 31 March 2005 the one £1 special rights non-voting redeemable preference share was removed from the authorised share capital of the Group.

The special rights non-voting redeemable preference share of £1 in National Grid plc (‘the Special Share’), held on behalf of the Crown, was issued by National Grid to the Secretary of State for Trade and Industry on 31 January 2002 as part of a scheme of arrangement. It was redeemed at par on 5 May 2004 and on 26 July 2004 an ordinary resolution was passed cancelling this share from inclusion in the authorised share capital of the Company. The Special Share did not carry any rights to vote at general meetings but entitled the holder to receive notice of and to attend and speak at such meetings. Certain matters, in particular the alteration of certain articles of association of the Company, required the prior written consent of the holder of the Special Share. The Special Share conferred no right to participate in the capital or profits of the Company, except that on a winding-up the holder of the Special Share was entitled to repayment of £1 in priority to other shareholders. Prior to 31 January 2002, the Secretary of State for Trade and Industry held a Special Share with equivalent rights in National Grid Holdings One plc. A similar Special Share in Lattice Group plc was held at 31 March 2002 by the Crown. This share was redeemed on 21 October 2002 as part of the Merger arrangements.

Share option and award schemes

The Group operates two principal forms of share option scheme. They are an employee Sharesave scheme and an Executive Share Option Plan (the ‘Executive Plan’). The details given below relate to the schemes operated by the Group and the Sharesave scheme formerly operated by Lattice. Following the Merger, most Lattice scheme options were converted into 0.375 National Grid plc options. The remaining Lattice scheme options lapsed on 29 April 2003.

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

The Sharesave scheme is savings-related where, under normal circumstances, share options are exercisable on completion of a three- or five-year save-as-you-earn contract. The exercise price of options granted represents 80% of the market price at the date the option was granted.

The Executive Plan applies to senior executives, including Executive Directors. Options granted for the 1999/2000 financial year 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 returns over a three-year period. The share options are generally exercisable between the third and tenth anniversaries of the date of grant if the relevant performance target is achieved.

The Company also operates a number of share award schemes including a Performance Share Plan (PSP), a Share Matching Plan and a Transitional Share Award and Special Share Award in relation to former Crown Castle UK employees.

Under the PSP, awards have been made to Executive Directors and approximately 350 senior employees who have significant influence over the Group’s ability to meet its strategic objectives. Under the PSP, awards are conditional on the Group’s Total Shareholder Return over a three-year period. Awards are delivered in National Grid plc shares. At 31 March 2006 the number of conditional awards of ordinary share equivalents outstanding under the PSP was 7,736,972 (2005: 5,864,904) of which nil (2005: nil) were exercisable. The number of conditional awards during the year ended 31 March 2006 was 2,320,464 (2005: 2,846,546) with lapses/forfeits during the year of 448,396 (2005: 436,700) and exercises of nil (2005: 2,997).

The Share Matching Plan applies to Executive Directors whereby a predetermined part of each Director’s bonus entitlement is automatically deferred into National Grid plc shares and a matching award may be made under the Plan after a three-year period provided the Director is still employed by the Group. At 31 March 2006 the number of conditional awards of ordinary share equivalents outstanding under the Share Matching Plan was 435,583 (2005: 341,482) of which 45,384 (2005: 28,534) were exercisable. The number of conditional awards during the year ended 31 March 2006 was 149,232 (2005: 171,460) with lapses during the year of 1,489 (2005: nil) and exercises during the year of 53,642 (2005: 42,163).

The Transitional Share Awards and Special Share Awards were made during the year ended 31 March 2005 to former Crown Castle UK employees and have a vesting period of four and two years respectively, provided the employee is still employed by the Group. The number of awards made during the year ended 31 March 2005 were 188,650 and 45,700 respectively. At 31 March 2006 the number of conditional awards of ordinary share equivalents outstanding were 121,170 (2005: 188,650) and 11,000 (2005: 45,700) with lapses during the year of 22,560 (2005: nil) and 16,825 (2005: nil) and exercises during the year of 44,110 (2005: nil) and 17,875 (2005: nil) respectively.

Movement in options to subscribe for ordinary shares under the Group’s various options schemes for the two years ended 31 March 2006 are shown below and include 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

 

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

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 2006 was 2 years and 6 months. These options have exercise prices between £3.15 and £4.57.

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

	2006	2005
Sharesave scheme options	5.89	4.49
Executive Plan options	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 2006 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
	3.81	0.3	3.81	0.3	375.8 – 490.0	2002 – 2009
	5.50	1.2	5.50	1.2	424.0 – 566.5	2003 – 2010
	5.28	0.9	5.28	0.9	526.0 – 623.0	2004 – 2011
	5.48	1.9	5.48	1.9	479.5 – 563.0	2005 – 2012
	4.72	2.6	4.72	2.6	434.3 – 481.5	2006 – 2013
	4.05	-	4.05	0.1	405.0	2007 – 2014
	5.03	7.1	5.01	7.2

 

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 2006 was £17m (2005: £16m).

Awards under share option plans

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

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

 

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

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

 

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

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

 

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

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

 

The fair values of awards under the Sharesave scheme have been calculated using the Black-Scholes model. This is considered appropriate given the short exercise window of sharesave options.

Volatility has been derived based on the following:

1. implied volatility in traded options over the Group’s shares;
2. historical volatility of the Group’s shares from October 2002 (the date of the merger of National Grid Group plc and Lattice Group plc); and
3. 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 two financial years ended 31 March were as follows:

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

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

	2006	2005
Dividend yield (%)	4.4	5.3-5.7
Volatility (%)	19.9	15.4
Risk-free investment rate (%)	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. 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.