20-F 1 d406115d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   For the fiscal year ended 31 March 2017
OR
   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   Date of event requiring this shell company report                    
   For the transition period from                  to                 

Commission file number: 001-14958

NATIONAL GRID PLC

(Exact name of Registrant as specified in its charter)

England and Wales

(Jurisdiction of incorporation or organization)

1-3 Strand, London WC2N 5EH, England

(Address of principal executive offices)

Alison Kay

011 44 20 7004 3000

Facsimile No. 011 44 20 7004 3004

Group General Counsel and Company Secretary

National Grid plc

1-3 Strand London WC2N 5EH, England

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each class

  

Name of each exchange on which registered

Ordinary Shares of 12 204/473 pence each    The New York Stock Exchange*
American Depositary Shares, each representing five    The New York Stock Exchange
Ordinary Shares of 12 204/473 pence each   
6.625% Guaranteed Notes due 2018    The New York Stock Exchange
Preferred Stock ($100 par value-cumulative):   
3.90% Series    The New York Stock Exchange
3.60% Series    The New York Stock Exchange

 

 

  * Not for trading, but only in connection with the registration of American Depositary Shares representing Ordinary Shares pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: None.

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Securities Exchange Act of 1934: None.

The number of outstanding shares of each of the issuer’s classes of capital or common stock as of 31 March 2017 was

Ordinary Shares of 11 17/43 pence each   3,942,983,447

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ☑  No ☐

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ☐  No ☑

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☑  No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): Yes ☐  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑     Accelerated filer ☐
Non-accelerated filer ☐     Emerging growth company ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP ☐    International Financial Reporting Standards as issued  by the International Accounting Standards Board ☑     Other ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.  Item 17 ☐    Item 18 ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☑

This constitutes the annual report on Form 20-F of National Grid plc (the “Company”) in accordance with the requirements of the US Securities and Exchange Commission (the “SEC”) for the year ended 31 March 2017 and is dated 6 June 2017. Details of events occurring subsequent to the approval of the annual report on 17 May 2017 are summarised in section “Further Information” which forms a part of this Form 20-F. The content of the Group’s website (www.nationalgrid.com/uk) should not be considered to form part of this annual report on Form 20-F.

 

 

 


Table of Contents

Form 20-F Cross Reference Table

 

Item    Form 20-F caption    Location in the document      Page(s)  

1

  

 

Identity of directors, senior management and advisors

  

 

Not applicable

     –      

2

  

 

Offer statistics and expected timetable

  

 

Not applicable

     –      

3

  

 

Key Information

     
  

3A Selected financial data

  

“Additional Information—Summary consolidated financial information”

     200-201  
     

“Strategic Report—Financial review”

     20-23  
     

“Financial Statements—Consolidated statement of financial position”

     88  
     

“Financial Statements Consolidated statement of financial position—Unaudited commentary on consolidated statement of financial position—Net debt”

     89  
     

“Financial Statements—Consolidated cash flow statement—Unaudited commentary on the consolidated cash flow statement—reconciliation of cash flow to net debt”

     91  
     

“Additional Information—Other unaudited financial information—Alternative performance measures”

     193-195  
     

“Additional Information—Shareholder information—Exchange rates”

     186  
     

“Exchange Rates”

     “Further Information”  
  

3B Capitalization and indebtedness

  

Not applicable

     –      
  

3C Reasons for the offer and use of proceeds

  

Not applicable

     –      
    

3D Risk Factors

  

“Additional Information—Internal control and risk factors—Risk factors”

     180-183  

4

  

 

Information on the company

     
  

4A History and development of the company

  

“Want more information or help?”

    

207

Back cover

 

 

     

“Additional Information—The business in detail—Key milestones”

     172  
     

“Strategic Report—At a glance”

     2-3  
     

“Strategic Report—Chairman’s Statement”

     4-5  
     

“Strategic Report—Chief Executive’s review”

     6-7  
     

“Strategic Report—Our purpose, vision, strategy and values”

     8  
     

“Strategic Report—Our operating environment”

     9  
     

“Strategic Report—Other performance measures—Capital Expenditure”

     22  
     

“Additional Information—Shareholder information—Articles of Association”

     184-185  
     

“Financial Statements—Consolidated statement of financial position—Unaudited commentary on consolidated statement of financial position—Property, plant and equipment”

     89  
     

“Financial Statements—Consolidated cash flow statement—Unaudited commentary on the consolidated cash flow statement—Net capital expenditure”

     91  
     

“Financial Statements—Notes to the consolidated financial statements—2. Segmental analysis—(c) Capital expenditure”

     96  
     

“Financial Statements—Notes to the consolidated financial statements—9. Discontinued operations”

     112-115  
     

“Additional Information—The business in detail—UK Regulation”; “US Regulation” and

     174-179  

 

i


Table of Contents
Item    Form 20-F caption    Location in the document      Page(s)  
     

“—Summary of US price controls and rate plans”

  
  

4B Business overview

  

“Additional Information—The business in detail—Where we operate”

     173  
     

“Strategic Report—At a glance”

     2-3  
     

“Strategic Report—Our purpose, vision and strategy”

     8  
     

“Strategic Report—Our operating environment”

     9  
     

“Strategic Report—Progress against our current strategy”

     10-13  
     

“Strategic Report—Our Business model”

     14  
     

“Strategic Report – Financial Review—Additional commentary on financial KPIs”

     20-21  
     

“Strategic Report—Regulatory financial performance”

     23  
     

“Strategic Report—Principal operations—UK”; “—US”; and “—other activities”

     24-29  
     

“Financial Statements—Notes to the consolidated financial statements—2. Segmental analysis” and “—unaudited commentary on the results of our principal operations by segment”

     95-98  
     

“Financial Statements—Notes to the consolidated financial statements—30. Financial risk management—(e) Commodity risk”

     150  
     

“Additional Information—The business in detail—UK Regulation”; “—US Regulation”; and “—Summary of US price controls and rate plans”

     174-179  
  

4C Organizational structure

  

“Financial Statements—Notes to the consolidated financial statements—32. Subsidiary undertakings, joint ventures and associates—Principal subsidiary undertakings”

     154-156  
  

4D Property, plants and equipment

  

“Strategic Report—Financial Review—Additional commentary on financial KPIs—Regulated asset base growth”

     21  
     

“Additional Information—The business in detail—Where we operate” and

— “Other disclosures—Property, plant and equipment”

    

173

191

 

 

     

“Strategic Report—Other performance measures—Capital Expenditure”

     22  
     

“Financial Statements—Consolidated statement of financial position—Unaudited commentary on consolidated statement of financial position—Property, plant and equipment”

     89  
     

“Additional Information—Other disclosures—Property, plant and equipment”

     191  
     

“Financial Statements—Notes to the consolidated financial statements—12. Property, plant and equipment”

     118-119  
     

“Financial Statements—Notes to the consolidated financial statements—20. Borrowings”

     127-128  
     

“Additional Information—Other unaudited financial information—Capital investment”

     195  

4A

  

 

Unresolved staff comments

  

 

“Additional Information—Other disclosures—Unresolved SEC staff comments”

     192  

5

  

 

Operating and financial review and prospects

             

 

ii


Table of Contents
Item    Form 20-F caption    Location in the document      Page(s)  
  

5A Operating results

  

“Strategic Report—Financial review”

     20-23  
     

“Strategic Report—Our operating environment”

     9  
     

“Additional Information—The business in detail—UK regulation”; “—US regulation”; and “—Summary of US price controls and rate plans”

     174-179  
     

“Strategic Report—Principal operations—UK”; “—US”; and “—other activities”

     24-29  
     

“Financial Statements—Consolidated income statement—Unaudited commentary on the consolidated income statement”

     85  
     

“Financial Statements—Notes to the consolidated financial statements—2. Segmental analysis—Unaudited commentary on the results of our principal operations by segment”

     97-98  
     

“Additional Information—Commentary on consolidated financial statements”

     198-199  
     

“Financial Statements—Notes to the consolidated financial statements—30. Financial risk management—(d) Currency risk”

     149  
     

“Additional Information—Internal control and risk factors—Risk factors—Law and regulation”

     181  
  

5B Liquidity and capital resources

  

“Strategic Report—Financial review”

     20-23  
     

“Financial Statements—Notes to the consolidated financial statements—1.A Going concern”

     92  
     

“Financial Statements—Consolidated cash flow statement and “—Unaudited commentary on the consolidated cash flow statement”

     90-91  
     

“Additional Information—Internal control and risk factors—Risk factors—Financing and liquidity—An inability to access capital markets at commercially acceptable interest rates could affect how we maintain and grow our businesses”

     183  
     

“Financial Statements—Notes to the consolidated financial statements—2. Segmental analysis—Unaudited commentary on the results of our principal operations by segment”

     97-98  
     

“Financial Statements—Notes to the consolidated financial statements—16. Derivative financial instruments”

     123-125  
     

“Financial Statements—Notes to the consolidated financial statements—19. Cash and cash equivalents”

     127  
     

“Financial Statements—Notes to the consolidated financial statements—20. Borrowings”

     127-128  
     

“Financial Statements—Notes to the consolidated financial statements—27. Net debt”

     142-143  
     

“Financial Statements—Notes to the consolidated financial statements—28. Commitments and contingencies”

     144  
     

“Financial Statements—Notes to the consolidated financial statements—30. Financial risk management—(b) Liquidity risk”

     148  
     

“Financial Statements—Notes to the consolidated financial statements—30.

     149  

 

iii


Table of Contents
Item    Form 20-F caption    Location in the document      Page(s)  
     

Financial risk management—(d) Currency risk”

  
     

“Financial Statements—Notes to the consolidated financial statements—. Financial risk management—(f) Capital risk management”

     151  
     

“Financial Statements—Notes to the consolidated financial statements—31. Borrowing facilities”

     153  
     

“Material Interests in Shares” and “Material interest in American Depositary Shares”

     “Further Information”  
  

5C Research and development, patents and licenses, etc.

  

“Additional Information—Other disclosures—Research and development”

     191-192  
  

5D Trend information

  

“Strategic Report—Financial review”

     20-23  
     

“Strategic Report—Principal operations—UK”; “—US”; and “—other activities”

     24-29  
     

“Strategic Report—Our operating environment”

     9  
  

5E Off-balance sheet arrangements

  

“Financial Statements—Unaudited commentary on consolidated statement of financial condition—Off balance sheet items”

     89  
  

5F Tabular disclosure of contractual obligations

  

“Financial Statements—Notes to the consolidated financial statements—28. Commitments and contingencies”

     144  
  

5G Safe Harbor

  

“Important notice”

     1  
     

“Want more information or help?—Cautionary statement”

     207-208  

6

  

Directors, senior management and employees

             
  

6A Directors and senior management

  

“Corporate Governance—Our Board”

     34-35  
  

6B Compensation

  

“Corporate Governance—Annual statement from the Remuneration Committee chairman” and “Corporate Governance—Annual report on Remuneration”

     54-71  
     

“Financial Statements—Notes to the consolidated financial statements—3. Operating costs—(c) Key management compensation”

     100  
     

“Financial Statements—Notes to the consolidated financial statements—23. Pensions and other post-retirement benefits”

     129-137  
  

6C Board practices

  

“Corporate Governance—Our Board”

     34-35  
     

“Additional Information—Other disclosures” “—Conflict of interest”; and —Director’s indemnity”

     190-191  
     

“Corporate Governance—“Board Composition, Our Board and its committees and Board and committee interactions”; “—Audit Committee”; “—Finance Committee”; “—Safety, Environment and Health Committee”; “—Nominations Committee”; “—Executive Committee”; “—Management committees” and “—Statement of compliance with the UK Corporate Governance Code”

     36-52  
     

“Corporate Governance—Annual statement from the Remuneration Committee chairman”

     54-55  
     

“Corporate Governance— At a glance” and

—“Directors’ Remuneration Policy— Future policy table – Executive Directors”

     56-59  
     

“Corporate Governance— Directors’ Remuneration Policy—Approved policy table – Non-executive Directors (NEDs)”

     60  
     

“Corporate Governance— Directors’ Remuneration Policy—Service contracts and

     61-62  

 

iv


Table of Contents
Item    Form 20-F caption    Location in the document      Page(s)  
     

policy on payment for loss of office” and “—Policy on Recruitment remuneration”

  
     

“Additional Information—Shareholder Information—Articles of Association—Directors”

     184  
  

6D Employees

  

“Financial Statements—Notes to the consolidated financial statements—3. Operating costs—(b) Number of employees”

     99  
     

“Additional Information—Other disclosures—Employees”

     191  
  

6E Share ownership

  

“Corporate Governance— Annual report on Remuneration —Statement of Directors’ shareholdings and share interests (audited information)”

     68  
     

“Corporate Governance— Directors’ Remuneration Report—Annual report on remuneration”

     63-71  
     

“Additional Information—Shareholder information—Material interests in shares”

     186  
     

“Additional Information—Other disclosures—All-employee share plans”

     190  
     

“Share ownership”

     “Further Information”  

7

  

 

Major shareholders and related party transactions

             
  

7A Major shareholders

  

“Additional Information—Shareholder information—Material interests in shares”

     186  
     

“Material interests in shares” and “Material interest in American Depositary Shares”

     “Further Information”  
  

7B Related party transactions

  

“Financial Statements—Notes to the consolidated financial statements—29. Related party transactions”

     145  
     

“Material interests in shares”

     “Further Information”  
     

“Financial Statements—Notes to the consolidated financial statements—28 Commitment and Contingencies.

     144  
  

7C Interests of experts and counsel

  

Not applicable

     –      

8

  

 

Financial information

             
  

8A Consolidated statements and other financial information

     
     

“Financial Statements—Report of Independent Registered Public Accounting Firm—Audit opinion for Form 20-F”

     83  
     

“Financial Statements—Notes to the consolidated financial statements—1. Basis of preparation and recent accounting developments”

     92-94  
     

“Financial Statements—Consolidated income statement”; “—Consolidated statement of comprehensive income”; “—Consolidated statement of changes in equity”; “—Consolidated statement of financial position”; and “—Consolidated cash flow statement”

     84-91  
     

“Financial Statements—Notes to the consolidated financial statements—analysis of items in the primary statements”

     92-143  
     

“Financial Statements—Notes to the consolidated financial statements—supplementary information”

     144-165  
     

“Strategic Report—Chairman’s statement”

     4-5  
     

“Strategic Report—Financial Review—Other

     22  

 

v


Table of Contents
Item    Form 20-F caption    Location in the document      Page(s)  
     

performance measures—Divided growth”

  
    

8B Significant changes

  

“Subsequent Events”

     “Further Information”  

9

  

 

The offer and listing

     
  

9A Offer and listing details

  

“Additional Information—Shareholder information—“Exchange Rates”, “—Share price”, and “— Price History”

    

186-187

“Further Information”

 

 

  

9B Plan of distribution

  

Not applicable

  
  

9C Markets

  

“Additional Information—Shareholder information—Share price”

     187  
  

9D Selling shareholders

  

Not applicable

     –      
  

9E Dilution

  

Not applicable

     –      
    

9F Expenses of the issue

  

Not applicable

     –      

10

  

 

Additional information

     
  

10A Share capital

  

Not applicable

     –      
  

10B Memorandum and articles of association

  

“Additional Information—Shareholder Information—Articles of Association”

     184-185  
     

“Additional Information—Other disclosures—Corporate governance practices: differences from New York Stock Exchange (NYSE) listing standards”

     190  
     

“Additional Information—Shareholder information—Share capital”

     186-187  
  

10C Material contracts

  

“Additional Information—Other disclosures—Material contracts”

     191  
  

10D Exchange controls

  

“Additional Information—Shareholder information—Exchange controls”

     185  
  

10E Taxation

  

“Additional Information—Shareholder information—Taxation”

     187-189  
  

10F Dividends and paying agents

  

Not applicable

     –      
  

10G Statement by experts

  

Not applicable

     –      
  

10H Documents on display

  

“Additional Information—Shareholder information—Documents on display”

     185  
    

10I Subsidiary information

  

Not applicable

     –      

11

  

 

Quantitative and qualitative disclosures about market risk

     
  

11A Quantitative information about market risk

  

“Financial Statements—Notes to the consolidated financial statements—16. Derivative financial instruments”

     123-125  
     

“Financial Statements—Notes to the consolidated financial statements—33. Sensitivities on areas of estimation and uncertainty”

     157-158  
     

“Financial Statements—Notes to the consolidated financial statements—30. Financial risk management—(a) Credit risk”; “—(b) Liquidity risk”; “—(c) Interest rate risk”; “—(d) Currency risk”; “—(e) Commodity risk”; “—(f) Capital risk management”; and “—(g) Fair value analysis”

     145-152  
     

“Strategic Report—Financial review”

     20-23  
  

11B Qualitative information about market risk

  

“Financial Statements—Notes to the consolidated financial statements—16. Derivative financial instruments”

     123-125  
     

“Financial Statements—Notes to the consolidated financial statements—30. Financial risk management—(a) Credit risk”; “—(b) Liquidity risk”; “—(c) Interest rate risk”; “—(d) Currency risk”; “—(e) Commodity risk”; “—(f) Capital risk management”; and “—(g) Fair value analysis”

     145-152  
     

“Strategic Report—Financial review”

     20-23  

 

vi


Table of Contents
Item    Form 20-F caption    Location in the document      Page(s)  
         

“Additional Information—Internal Control and Risk factors—Risk Factors”

     180-183  

12

  

 

Description of securities other than equity securities

     
  

12A Debt securities

  

Not applicable

     –      
  

12B Warrants and rights

  

Not applicable

     –      
  

12C Other securities

  

Not applicable

     –      
  

12D American depositary shares

  

“Additional Information—Shareholder information—Description of securities other than equity securities: depositary fees and charges”

     185  
     

“Additional Information—Shareholder information—Depositary payments to the Company”

     185  
         

“Additional Information—Definitions and glossary of terms”

     203-206  

13

  

 

Defaults, dividend arrearages and delinquencies

  

Not applicable

     –      

14

  

 

Material modifications to the rights of security holders and use of proceeds

  

Not applicable

     –      

15

  

 

Controls and procedures

  

“Additional Information—Internal control and risk factors—Disclosure controls” and “—Internal control over financial reporting”

     180  
     

“Corporate Governance—Audit Committee”

     40-44  
         

“Financial Statements—Report of Independent Registered Public Accounting Firm—Audit opinion for Form 20-F”

     83  

16

  

 

16A Audit committee financial expert

  

“Corporate Governance—Board and Committee Membership and Attendance”

     37  
  

16B Code of ethics

  

“Additional Information—Other disclosures—Code of Ethics”

     190  
  

16C Principal accountant fees and services

  

“Corporate Governance—Audit Committee—External audit”

     43-44  
     

“Financial Statements—Notes to the consolidated financial statements—3. Operating costs—(e) Auditors’ remuneration”

     100  
  

16D Exemptions from the listing standards for audit committees

  

Not applicable

     –      
  

16E Purchases of equity securities by the issuer and affiliated purchasers

  

“Additional Information—Shareholder information—Authority to purchase shares”

     186  
  

16F Change in registrant’s certifying accountant

        –      
  

16G Corporate governance

  

“Additional Information—Other disclosures—Corporate governance practices: differences from New York Stock Exchange (NYSE) listing standards”

     190  
    

16H Mine safety disclosure

  

Not applicable

     –      

17

  

 

Financial statements

  

Not applicable

     –      

18

  

 

Financial statements

  

“Financial Statements—Company accounting policies”

     166-167  
     

“Financial Statements—Notes to the consolidated financial statements—1. Basis of preparation and recent accounting developments”

     92-94  
     

“Financial Statements—Consolidated income statement”; “—Consolidated statement of comprehensive income”; “—Consolidated statement of changes in equity”; “—Consolidated statement of financial position”; and “—Consolidated cash flow statement”

     84-91  
     

“Financial Statements—Notes to the consolidated financial statements—analysis of

     92-143  

 

vii


Table of Contents
Item    Form 20-F caption    Location in the document      Page(s)  
     

items in the primary statements”

  
     

“Financial Statements—Notes to the consolidated financial statements– supplementary information”

     144-165  
         

“Financial Statements—Report of Independent Registered Public Accounting Firm—Audit opinion for Form 20-F”

     83  

19

  

 

Exhibits

  

Filed with the SEC

     –      

 

viii


Table of Contents
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               Annual Report   
               and Accounts 2016/17

 

 

  

Bring Energy to Life

              
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Table of Contents

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Table of Contents
 

 

 

 

 

 

 

    

 
 

 

Information about our reporting

Our financial results are reported in sterling. We convert our US business results at the weighted average exchange rate during the year, which for 2016/17 was $1.28 to £1 (2015/16 $1.47 to £1).

 

We use adjusted profit measures which exclude the impact of exceptional items and remeasurements. These are used by management to assess the underlying performance of the business. Reconciliations to statutory financial information are shown on page 193.

 

 
 

 

Online report

The PDF of our Annual Report and Accounts 2016/17 includes a full search facility. You can find the document by visiting the investor relations section at www.nationalgrid.com and using a word search.

 

 
 

 

Further information

Throughout this report you can find links to further detail within this document or online. Please look out for the following icon:

 

 
 

LOGO

 

 
 

 

LOGO

 

 
 

 

Our people on the front cover (clockwise)

Thomas Drumm, Supervisor, Rhode Island, and Don Wolanski, First Class Lineman, Rhode Island. Sue Foster, Customer Service Advisor – Domestic Customer Operations, Solihull.

Nasima Khanom, Team Coordinator – Business Development, Blyth, and Amanda Nock, Governance and Compliance Officer, Solihull. Mary Grace Welch, Lead Economic Development Representative, New York. Steven Abatiello, Web Operations Manager, New York.

 

 
 

 

 

 

 

    

 

 

Contents

National Grid Annual Report and Accounts 2016/17

 

 

 

 

 Strategic Report              

 

The Strategic Report includes an overview of our strategy and business model, the principal risks we face and information about our performance. In addition to the financial review included within this section, we provide additional analysis and commentary, including the performance of our operating segments, within the unaudited commentary sections of the Financial Statements. This additional analysis forms part of our Strategic Report.

     At a glance    02
     Chairman’s statement    04
     Chief Executive’s review    06
     Our purpose, vision, strategy and values    08
    

Our operating environment

   09
    

Progress against our current strategy

  

10

    

Our business model

  

14

    

Internal control and risk management

  

15

    

Viability statement

  

19

    

Financial review

  

20

    

Principal operations

  

24

    

Our people

  

30

       
       
 Corporate Governance              

 

The Corporate Governance Report, introduced by our Chairman, contains details about the activities of the Board and its committees during the year. We include reports from the Audit, Nominations, Remuneration, Finance, and Safety, Environment and Health Committees. We also include details of our shareholder engagement activities.

 

     Corporate Governance contents and statement of compliance with the UK Corporate Governance Code    32
     Directors’ Report and other disclosures    53
     Directors’ Remuneration Report    54
       
       
       
       
       
       
 Financial Statements              

 

Our Financial Statements include: the independent auditors’ reports; consolidated financial statements prepared in accordance with IFRS as adopted by the EU; related commentary and notes to the consolidated financial statements; and the Company’s financial statements prepared in accordance with FRS 101.

 

     Financial Statements contents    72
     Introduction to the Financial Statements    73
     Statement of Directors’ responsibilities    74
     Independent auditors’ report    75
     Report of Independent Registered Public Accounting Firm    83
       
       
 Additional Information              

 

This section includes additional disclosures and information, definitions and a glossary of terms, summary consolidated financial information, and other useful information for shareholders, including contact details for more information or help.

     Additional Information contents    172
     Definitions and glossary of terms    202
     Want more information or help?    207
     Cautionary statement    208
       
       
       
     We use a number of technical terms and abbreviations within this document. For brevity, we do not define terms or provide explanations every time they are used; please refer to the glossary on pages 202–206 for this information as well as an important notice in relation to forward-looking statements with our cautionary statement.
       
 

 

  National Grid Annual Report and Accounts 2016/17   Contents   1


Table of Contents

    

 

 

Total adjusted operating profit (%)

    At a glance     

 

LOGO

   

 

We are one of the world’s largest investor-owned utilities focused on transmission and distribution activities in electricity and gas in the UK and the US. We play a vital role in connecting millions of people to the energy they use, safely, reliably and efficiently. We are organised into operating segments, which we describe below.

 

 

 

  
        

 

You can find more information about what we do on our website

www.nationalgrid.com

 

For information about our approach to paying our taxes, please see Note 6 in the Financial Statements, on page 104.

   

UK Electricity Transmission

We own and operate the electricity transmission network in England and Wales, with day-to-day responsibility for balancing supply and demand. We operate but do not own the Scottish networks. Our networks comprise approximately 7,200 kilometres (4,474 miles) of overhead line, 1,500 kilometres (932 miles) of underground cable and 342 substations.

 

 

 

UK Gas Transmission

We own and operate the gas National Transmission System (NTS) in Great Britain, with day-to-day responsibility for balancing supply and demand. Our network comprises approximately 7,660 kilometres (4,760 miles) of high-pressure pipe and 618 above-ground installations.

  

 

Group total adjusted operating profit*

 

 

Adjusted operating profit

 

 

Adjusted operating profit

 
£4,667m     £1,372m   £511m  

2015/16: £4,096m

 

    2015/16: £1,173m   2015/16: £486m  

 

Group total statutory operating profit*

 

 

Statutory operating profit

 

 

Statutory operating profit

 

£4,102m

2015/16: £4,085m

 

   

£1,361m

2015/16: £1,173m

 

£507m

2015/16: £486m

 
       

 

Group total capital investment

 

 

Capital investment

 

 

Capital investment

 
£4,450m     £1,027m   £214m  

2015/16: £3,946m

 

    2015/16: £1,084m   2015/16: £186m  

 

 

 

 

 

 

 

*  From continuing and discontinued operations

  Includes investments in joint ventures and associates

 

 

Our role as system operator

As Great Britain’s System Operator (SO) we make sure Great Britain’s gas and electricity is transported safely and efficiently from where it is produced to where it is consumed. We seek to ensure that supply and demand are balanced in real-time and we facilitate the connection of assets to the transmission system. In the US, similar services are provided by independent system operators.

 

 

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   Strategic Report

 

 

 

  US Regulated    Other Activities    Discontinued operations
 

Electricity: We both own and operate transmission facilities across upstate New York, Massachusetts, New Hampshire, Rhode Island and Vermont. We own and operate electricity distribution networks in upstate New York, Massachusetts and Rhode Island, serving approximately 3.4 million customers. The assets we operate include 14,219 kilometres (8,835 miles) of overhead line, 377 transmission substations and 763 distribution substations.

 

Gas: We own and operate gas distribution networks across the northeastern US, located in upstate New York, New York City, Long Island, Massachusetts and Rhode Island. Our networks deliver gas to approximately 3.6 million customers.

  

Our other activities mainly relate to non-regulated businesses and other commercial operations not included within the business segments including: interconnectors; UK-based gas metering activities; UK property management; a UK liquefied natural gas (LNG) importation terminal; US LNG operations; US unregulated transmission pipelines; and corporate activities.

 

In 2016/17, we announced plans to create National Grid Ventures. With effect from April 2017, we have brought together key assets outside our core regulated businesses into this new unit. See page 28 for further details.

  

Until 31 March 2017, we owned and operated four gas distribution networks comprising approximately 131,000 kilometres (81,400 miles) of pipeline, transporting gas from the NTS to around 10.9 million consumers on behalf of 41 gas shippers. As announced on 31 March 2017, a 61% interest in this business was sold to a consortium of investors. The Consortium comprises Macquarie Infrastructure and Real Assets, Allianz Capital Partners, Hermes Investment Management, CIC Capital Corporation, Qatar Investment Authority, Dalmore Capital and Amber Infrastructure Limited/International Public Partnerships. National Grid has retained a 39% interest in the business. The figures below reflect performance of the business on a 100% basis for the entire year and include the results of Xoserve Limited (previously reported within other activities).

 

 

 

Adjusted operating profit

  

 

Adjusted operating profit

  

 

Adjusted operating profit

  £1,713m    £177m    £894m
 

2015/16: £1,185m

 

   2015/16: £370m    2015/16: £882m
 

 

Statutory operating profit

  

 

Statutory operating profit

  

 

Statutory operating profit

  £1,278m    £62m    £894m
 

2015/16: £1,196m

 

   2015/16: £370m    2015/16: £860m
 

 

Capital investment

  

 

Capital investment

  

 

Capital investment

  £2,247m    £374m    £588m
 

2015/16: £1,856m

 

   2015/16: £254m    2015/16: £566m

 

  

 

  

 

 

 

US regulated RoE %

 

LOGO

  

 

UK regulated RoE %

 

LOGO

  

Gain on sale

£5,321m

Cash receipts of £5.5bn

 

  National Grid Annual Report and Accounts 2016/17   At a glance   3


Table of Contents

    

 

Chairman’s statement

National Grid is responding positively to wide-reaching

developments in our operating environment and taking

steps to build a stronger foundation for the future.

 

 

LOGO   

 

“We have a

role to play

in helping communities

have fair and

equal access to opportunities

to be successful.”

 

In focus

Full-year dividend of

44.27p/share

Final dividend of 29.10 p/share

expected to be paid on

16 August 2017*

 

 

Special dividend for payment

on 2 June 2017

 

84.375p

 

LOGO

 

 

Responsible business

www.nationalgrid.com/responsibility

 

Our KPIs

 

pages 10–13

 

*Subject to shareholder approval of the proposed share consolidation, the final dividend will be paid on post consolidation shareholdings.

Over the past year, we have seen significant developments both in our external environment and within the Company.

In the summer of 2016, the UK voted to leave the European Union (EU), leading to a change in government leadership. More recently, a General Election was announced for 8 June 2017. We have also seen a new administration in the US following the Presidential election. We await developments in its policy positions.

Amid these developments, public trust in big business and political institutions remains low. The cost of energy and the impact of investment in new technology on bills remains a matter of concern for politicians, regulators and consumers. The energy industry needs to work hard to demonstrate affordability and build trust with consumers and communities who feel disconnected from the opportunities that technological and market changes can bring.

In early 2017, the UK Government presented proposals for a UK industrial strategy, including recommendations for developing energy infrastructure, skills and investment in technology and innovation.

The commitment of governments across the world to support the agreement on climate change made at the Paris Conference of the Parties sent a strong signal that we have to tackle the threat of rising temperatures. You can read more about these changes and our responses on page 9.

In light of these changing external circumstances, together with the ongoing evolution of the energy industry and growth in distributed generation, Chief Executive John Pettigrew, together with the Executive team,

has led a review of our business. This has resulted in a clear articulation of our purpose and the evolution of our vision, values and the strategic priorities that guide our business. You can read more about these on page 8.

I am pleased that John has delivered a very strong performance in his first year as Chief Executive. Together with his team, he has made significant progress on our commitments and towards evolving the direction for National Grid.

Nicola Shaw joined the Board on 1 July 2016 as Executive Director, UK, and I am pleased that she has also made a very good start.

Gas Distribution

This year we concluded the sale of a majority interest in our UK Gas Distribution business to a consortium of investors. This has created value for our shareholders through a significant gain on the disposal.

We announced a one-off return of £4 billion of net proceeds to shareholders through a combination of a special dividend and share buy-backs. I am also pleased that we voluntarily set aside £150 million of the sale proceeds that will be used to benefit consumers.

On 19 April 2017, following Board approval, we announced the special dividend of 84.375 pence per share ($5.4224 per American Depositary Shares) which will be paid to ordinary shareholders on 2 June 2017. To ensure, as far as possible, that the share price is not affected by the special dividend, shareholder approval is sought for a share consolidation on an 11 for 12 basis, which means that for every 12 shares you had, you will have 11 if approved. This and other related resolutions will also be considered at a General Meeting on 19 May 2017. Notice of this meeting was sent to all shareholders.

 

 

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   Strategic Report

 

 

 

 

Results

As a consequence of the sale of a 61% interest in the UK Gas Distribution business, this year’s accounts are more complex than in previous years. In particular, we report our earnings for the Group excluding UK Gas Distribution (the ‘continuing Group’) separately from the results of that business, which we report within ‘discontinued operations’. You can find out more about the main aspects of this on pages 112–115.

Standing back from the detail of these accounts, I would like to highlight two aspects. Firstly, the strength of the balance sheet and our key credit metric of retained cash flow divided by adjusted net debt. Secondly, the cash flows in the business, which have enabled us to grow the full-year dividend in line with our policy, and continue to grow the capital investment in the business to help meet our growth aims.

Dividend policy

Our dividend policy aims to grow the ordinary dividend per share at least in line with the rate of UK RPI growth each year for the forseeable future. Accordingly, the Board has recommended an increase in the final dividend to 29.10 pence per ordinary share ($1.8924 per American Depositary Share)*. If approved, this will bring the full-year dividend to 44.27 pence per share ($2.8351 per American Depositary Share), an increase of 2.1% over the 43.34 pence per ordinary share in respect of the financial year ended 31 March 2016.

Responsible business

It is a fundamental fact of our business that the work we do carries risks for our employees, customers and the general public. Operating a safe working environment is the primary responsibility of the Board and our Executive leadership team. It is a responsibility we take very seriously, and when we fall short of expected levels of safety, we make sure lessons are learnt and shared, as well as making sure we take any necessary remedial actions as soon as is practicable.

We also have a responsibility to contribute towards the economic, social and environmental well-being of the communities where we operate. In early 2016, the UN presented their 17 Sustainable Development Goals. At National Grid we are focusing on five of these goals where we can help to make a difference. These include affordable and clean energy, as well as climate action.

For example, we have made significant progress in our search for low-carbon alternatives to SF6, an electrical insulator that has a global warming impact 23,900 times that of CO2. We are trialling an alternative (Green Gas for Grid, or g3) that delivers the same technical benefits at less than 2% of the global warming impact of SF6. I am pleased to say g3 has now been certified for use on part of our network and the equipment insulated with this gas is now energised.

National Grid recognises the wider role we can play in helping communities have fair and equal access to opportunities to be successful. We work with community groups, charities and educational institutions to help address some of the challenges felt by the most disadvantaged in our society who can struggle to access decent and sustainable education and employment.

For example, working with Teach First in the UK, our employees coach new teachers as they start their careers in some of the most challenging schools in the country. We share Teach First’s aim to end educational inequality, which is one of the main barriers to social mobility.

In the US, we are supporting United Way of Rhode Island’s Housing for All Fund. The fund helps people who are making tough choices around which basic needs they can afford. Through this support, we are playing our part in building a stronger community by helping people access more affordable housing. It helps to retain and attract people to the area, supporting the wider economic recovery of the region.

How we manage our operational sites can have a major impact on the environmental well-being of communities. For example, I was pleased to see a project in the UK where our newest graduate recruits worked with site managers and the Yorkshire Wildlife Trust to enhance the environment at our site in Kirkstall, Leeds. The land around our site has been subject to anti-social behaviour and fly-tipping. Our project will see graduate volunteers addressing these issues, building a sensory garden and improving the woodland and ponds so that the local community can access and use the site safely.

Corporate governance

After nearly six years’ tenure as a Non-executive Director, Ruth Kelly has decided that due to personal circumstances and time commitments she will not be seeking re-election by shareholders at the next Annual General Meeting. Ruth has made a significant contribution throughout her time with the Company and we are sorry to see her go.

I was pleased to welcome Pierre Dufour to our Board in February 2017. Pierre’s wealth of experience will bring great value to our Board and to the Remuneration and Nominations Committees. Additionally, his strong track record in safety and industrial risk management, and the supervision of complex multinational engineering projects, makes him ideally placed to strengthen the expertise on our Safety, Environment and Health Committee.

The topic of corporate governance has been the subject of considerable political and media attention in the UK during 2016/17. The Financial Reporting Council (FRC) is now undertaking a fundamental review of the UK Corporate Governance Code and we shall be an active participant in its consultation process.

Your Board continues to be very mindful of the need to create value for our shareholders within a framework of high standards of corporate governance, recognition of our responsibilities to the wider group of the Company’s stakeholders and setting the right tone from the top.

Looking ahead

We will work closely with our customers and stakeholders to understand the impact of the UK exit from the EU as Brexit negotiations develop.

We believe it is in the interests of consumers to make sure the UK has continued barrier-free access to neighbouring energy markets and to the benefits realised through harmonised trading arrangements with the EU.

Our US business will continue to work with all levels of government to find efficient energy solutions for the communities we work in, and to solve issues facing the energy sector. We remain committed to ensuring a sustainable and clean energy future for all our customers.

The increasing threat from cyber attacks mean we must remain vigilant to the very real risks posed to our critical national infrastructure. We continue to focus on the strategies needed to protect our business, our customers and the communities that rely on our services.

I would like to extend my deepest appreciation to all our employees and the management team for their hard work, dedication and commitment to your Company’s success.

 

LOGO

Sir Peter Gershon
Chairman
 

 

  National Grid Annual Report and Accounts 2016/17   Chairman’s statement   5


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Chief Executive’s review

The past year was an important period for National Grid.

We completed the sale of a majority interest in our UK Gas

Distribution business, made progress with our new rates

in the US, and developed our thinking on National Grid’s

purpose, vision and strategic direction.

 

 

LOGO   

 

“Our purpose,

which sets out

why National

Grid exists, is

simple – we

bring energy

to life.”

 

A period of change

 

The energy sector is undergoing transformation. It faces greater change and uncertainty than ever before, which brings fresh challenge and new opportunities. As a result, we have spent considerable time over the past year re-evaluating how we will respond to these new challenges. The result is an articulation of our purpose, and evolution of our vision and strategy, which guide everything we do.

 

Find out more

For more information on the challenges we face see page 9

 

You can read more about our purpose and how we have evolved our vision and strategy on page 8

I am proud of what we have achieved during 2016/17. We have continued being innovative and efficient to deliver savings for customers, while taking steps across the Group to evolve by investing in newer technologies. These developments come at a time when there have been considerable changes in our operating environment, as described on page 9.

This is why our leadership team has conducted a strategic review of our business to articulate our purpose and evolve our vision and strategy. I am excited by the evolution of our strategy, which we are setting out in this report.

Our performance in 2016/17

In terms of safety, our overall lost time injury frequency rate for the Group was 0.08, which is considered to be world class. This figure, which includes our contractors and excludes the UK Gas Distribution business, is slightly different to our KPI for the Group’s employee injury frequency rate. You can read about this on page 10.

However, we were all reminded of the importance of safety this year, following a tragic incident in which one of our UK employees lost his life. We take safety very seriously at National Grid – it remains a fundamental priority – and we will do everything we can to learn from incidents, so we can continually improve our performance.

Both our UK and US businesses remain committed to achieving the highest possible standards for safe working.

We invested £4.5 billion of capital this year in our businesses, a record level for the Group, driving growth of 5% in our total asset base.

In both the UK and US, we continued to achieve close to 100% reliability across our networks.

At National Grid, we are very aware of the need to put our customers at the heart of how we run our business. In all of our business areas, both in the UK and in the US, we have exceeded our customer satisfaction targets, which I believe is testament to the continuous efforts we have made on improving the services we provide.

Finally, through the strong operational performance and growth in our assets, we support our growing dividend. We measure our performance through our Group Return on Equity (RoE), which remained strong at 11.7% this year and Value Added, which increased to £1.9 billion this year, equivalent to 51.6 pence/share.

Developments in our business

In 2016/17, we have made progress in our business in a number of important areas.

The sale of a majority interest in our UK Gas Distribution business marks an important milestone for National Grid. We worked closely with the purchasing Consortium to ensure a smooth transition for our customers and employees so that services continue to be delivered safely and efficiently. The sale puts our portfolio in a strong position to support higher growth and to continue delivering an attractive dividend while maintaining a healthy balance sheet.

We have retained a 39% interest in the new Gas Distribution business, and have entered into an option agreement with the Consortium

 

 

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for the potential future sale and purchase of an additional 14% interest. This would be on broadly similar terms to the sale of the 61% equity interest.

During 2016/17, we made progress with our rate cases in the US, securing agreements in Massachusetts, New York City and Long Island. The New York agreements include provision to phase the impact on consumer bills over time to help manage the increase in costs.

Our ability to make new investments in our US networks means we can continue our work to ensure a clean, sustainable energy supply for our customers. In December, we began the transmission of electricity to Rhode Island from the Block Island wind farm, the first offshore wind generation in the US. You can read more about our US investments on pages 26–27.

In the UK, Ofgem concluded its mid-period review of the RIIO price control for Gas and Electricity Transmission, giving us certainty over our core revenues for the remaining RIIO period.

Also this year, we issued a joint statement with BEIS and Ofgem about the enhanced role and greater separation of the Electricity System Operator (ESO) function. While the proposals are subject to consultation, we support the principle of greater separation of the ESO role within National Grid. We believe it is the most effective way to balance the interests of consumers with the need to maintain security of supply in a fair and competitive energy market. We look forward to working with the regulator and our stakeholders to deliver the best possible outcome for UK consumers.

The outcome of the UK referendum on EU membership has challenged all businesses to consider the impact Brexit will have on their operations. We continue to work positively with both UK and EU legislators to maintain access to cross-border services so we are able to ensure the UK’s security of supply and the interests of energy consumers.

We welcome the opportunity the UK Government’s Green Paper ‘Building our Industrial Strategy’ provides to contribute to the industrial development of the UK. We believe secure, low-carbon and affordable energy underpins the success of all the UK’s industries. We welcome the commitment to investing in the skills and education needed to encourage future innovation in energy systems.

We have brought together our Other Activities, which mainly comprise businesses that are adjacent to our core regulated operations, to create a new division with its own leadership. It will be called National Grid Ventures and its objectives are to focus on the development of new growth opportunities and strengthening

our commercial and partnership capabilities for the future. A recent example of this is our partnership with US solar supplier Sunrun, which we announced in January. I would like to welcome Badar Khan to my leadership team as Group Director, Corporate Development and National Grid Ventures.

You can read more about the developments in our UK, US and other businesses on pages 24–29.

Our purpose, vision and strategy

Throughout this year’s Annual Report and Accounts, we describe our performance for 2016/17 against our current strategy. However, as Sir Peter has described, there is much change taking place in our operating environment.

The shift to a low-carbon economy is gathering pace in both the UK and US. Globally, investment in coal-powered generation is falling and renewables have now overtaken coal as the world’s largest source of installed power capacity. This year, for the first time, we saw periods where no coal-fired power stations generated electricity in the UK. In the US, investment in solar, battery storage and energy efficiency continues apace.

With such change happening all around us, we cannot stand still. That’s why we have developed our thinking on National Grid’s purpose, vision and strategic direction.

Our purpose, which sets out why we exist, and what we bring to our customers and wider society, is simple: we bring energy to life. This means getting the heat, light and power that customers rely on to their homes and businesses; and supporting the communities that we are a part of.

Our vision is to exceed the expectations of our customers, shareholders and communities today and make possible the energy systems of tomorrow. How we perform individually, and as an organisation, is guided by this single ambition.

So, what does this all mean for our strategy? Our strategic focus is predicated on our customers. As a responsible, purpose-led organisation, we must put into sharper focus the customers to whom we deliver – their needs and priorities must come first. And by making decisions that consider our customers’ interests, we will be able to deliver sustainable performance over the long term. Therefore, we are focused on three specific areas.

Firstly, we are finding new ways of optimising our operational performance, so we can maximise value from our businesses. And as we improve performance, it increases our efficiency and ultimately benefits the customer by improving affordability.

Secondly, we are seeking opportunities to drive asset growth by investing in our core regulated assets where we see strong potential. This investment is needed to deliver asset health, network expansion and modernisation. We expect the current levels of spend to continue over the medium term.

And thirdly, we are making further changes to make sure National Grid is better equipped for the future. As I described earlier, we have created National Grid Ventures, which will focus on developing new growth opportunities and strengthening our commercial and partnership capabilities for the future.

You can read more about our purpose, vision and strategy on page 8.

Our people

Our performance is dependent on the commitment and achievements of our people. As Chief Executive, it’s been a privilege to meet many of our employees across the organisation and see how they deliver for their customers, their communities and each other.

That’s why I am pleased to report that our annual employee engagement score has risen to 77% from 73%.

If we are to achieve the strategic objectives I have described, it’s important that we continue to make sure our employees have the right skills and capabilities to lead us through this period of change.

Over the past year, we’ve delivered an average of 6.5 days of technical, safety, leadership or professional effectiveness training per employee in the UK and US. You can read more about this on pages 30 – 31.

Looking ahead

Our focus will remain on driving the performance of the business to deliver strong Group returns and increasing Value Added.

To achieve this, our UK and US regulated businesses will continue looking for ways to optimise performance. In 2017/18, we will look to achieve good outcomes for our US rate filings. In the UK, we’ll begin the process of preparing for RIIO-T2. The performance of our regulated businesses will be underpinned by continued investment, so we can make sure we deliver a safe, reliable and affordable service for our customers. Our newly formed National Grid Ventures will look for opportunities adjacent to our core business to support its growth.

 

LOGO

John Pettigrew
Chief Executive.
 

 

  National Grid Annual Report and Accounts 2016/17 7   Chief Executive’s review   7


Table of Contents

    

 

Our purpose, vision, strategy and values

 

We describe on page 9 how the operating environment for our industry is changing. To make sure National Grid is well positioned to respond to these changes, we have evolved our purpose, vision, strategy and values.   

 

LOGO

Our vision

“We will exceed

the expectations

of our customers,

shareholders and

communities

today and make

possible the

energy systems

of tomorrow.”

Our purpose

Having a clear sense of what we stand for as a company and what it is that binds us all together is vitally important. This is what we call our purpose. In simple terms it’s what drives our desire to serve our customers and it’s that thing that makes us proud about the work we do.

Our purpose is to bring energy to life.

In its simplest form ‘bring energy to life’ means getting the heat, light and power that customers rely on to their homes and businesses. But ‘life’ also means supporting the communities that we are a part of and live amongst to support the economic growth and sustainability of wider society.

Our vision

Our vision describes how we create value – not just today, but in the future too.

Our vision is: “We will exceed the expectations of our customers, shareholders and communities today and make possible the energy systems of tomorrow.”

The needs of our customers, shareholders and communities are at the heart of everything we do. So, our vision statement clearly describes the ambitious challenge we have set ourselves – to make sure we deliver value for them every day.

Our vision also looks to the future, reminding us of the critical role we will play for future generations. We are already seeing changes in our energy system as more renewable and decentralised generation is introduced. To be relevant in this future, we have to play an active role in helping shape the energy landscape, and benefiting from what it provides.

Our strategy

We have three strategic priorities for our business that will help us achieve our vision.

1) Find new ways of optimising our operational performance

Our customers want and need us to be more efficient, so we must find ways to improve how we run our business. We have looked at enhancing our productivity and customer experience through more efficient and customer-focused processes. Given the scale of our core business in the UK and US, even small improvements will have a huge impact on our overall performance. Finding new ways of optimising our operational performance will be an important factor in our ability to compete and grow. It creates the financial capacity and the capability for us to future-proof our business.

2) Look for opportunities to grow our core business

Delivering strong operational performance provides us with a foundation to pursue other opportunities. We will continue to pursue business development opportunities that are close to our core business. In the US, we will build on our successful efforts over the past two years to pursue opportunities in electricity and gas transmission. In the UK, interconnectors and competitive onshore transmission projects will be our focus over the next decade.

3) Make sure National Grid is better equipped for the future

We need to future-proof our business against the effects of a changing energy landscape. The operation of our networks is already affected by changes to the generation mix, while the needs and expectations of our customers are evolving.

Our preparations for the future have already begun in the UK and US with the establishment of National Grid Ventures, which brings together our non-network businesses to focus on targeted investment in the energy sector outside of our core business. We are also looking to develop new capabilities that are essential for long-term success.

For example, our partnership with Sunrun, the largest dedicated residential solar company in the US, allows us to increase our capability in the distributed energy space, and enhance our ability to meet the changing energy needs of our customers and communities.

Our values

We know that how we deliver is as important as what we deliver. If our purpose is the ‘why’, our values are the ‘how’. They help shape our spirit, attitude and what guides us. We have to adapt and develop our values to align with the expectations of our customers and communities, without losing sight of the things that make us strong today.

Our values build on and protect our strong foundations while looking to the future. They are aligned to our purpose and help our people understand how we expect to achieve our purpose and vision for our customers and each other.

Every day we do the right thing and find a better way.

‘Do the right thing’ pulls together our foundational values – keeping each other and the public safe; complying with all the relevant rules, regulations and policies; respecting our colleagues, customers and communities; and saying what we think and challenging constructively. ‘Find a better way’ challenges us to focus on performance and continuous improvement for our customers, our shareholders and communities.

 

 

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Our operating environment

 

Our operating environment is shaped by the regulatory choices governments make to respond to the changing needs of energy consumers. In meeting these demands, regulators seek to balance often conflicting objectives. In the last year we have seen a shift in focus to affordability and moving to a low carbon economy.  

 

    

 

LOGO

       

 

LOGO

      

 

LOGO

    

Affordability

 

        Security of supply        Sustainability

 

Commentary

  

 

The cost of the energy is an issue for consumers, industry, energy providers, regulators and governments. Consumers expect a reliable energy system that delivers gas and electricity when and where it is needed. They pay for the cost of this infrastructure and improvements to it through the network costs part of their energy bills. The costs are subject to regulatory approval.

       

 

The energy system is in a phase of transition from high to low carbon. Coal plants are closing down and being replaced with nuclear, renewables and gas, as well as emerging battery storage. During the transition, electricity margins need to be monitored and actively managed as we move to a generation mix with greater volumes of intermittent generation.

      

 

Our world is changing as a result of human activity and its impact on the environment. The Paris Agreement sends a clear signal that the shift to a low-carbon economy is inevitable, and it is now accepted that sustainable business is good business – delivering value for people, the environment and business. This includes reducing greenhouse gas emissions, managing non-renewable resources, and preserving and protecting habitats and ecosystems.

 

 

Developments

  

 

In the UK, the Government set out proposals for an industrial strategy that confirms the high priority placed on affordability of energy. Ofgem proposed a number of adjustments to allowances for UK Gas and Electricity Transmission following its mid-period review of the RIIO-T1 price control.

 

In the US, the cost of energy remains a concern for consumers and regulators who expect affordable, reliable and cleaner energy while keeping costs low. As new technologies, such as solar, are adopted, there are fears that low-income customers may not have access to cheaper, cleaner sources of energy.

       

 

Energy security remains a priority for the UK Government, and a number of balancing tools are available to manage capacity. BEIS introduced amendments to the UK capacity market to improve long-term planning of capacity and reduce costs to consumers.

 

The UK Government has also committed to proceed with the Hinkley Point C nuclear power station.

 

In the US, the reliability of energy infrastructure remains a concern for consumers, regulators and policy makers. Regulators are seeking investment to improve the security and resilience of energy networks.

      

 

In December 2015, the Paris Agreement entered into force, and as at 17 May 2017 has been ratified by 146 national governments. The Agreement requires signatories to commit to reducing global greenhouse gas emissions with the aim of limiting increases in global average temperature.

 

Investment in solar generation has continued in both the UK and US. The first offshore wind project in the US went operational off the coast of Rhode Island. This year, for the first time, we saw periods where no coal-fired power stations generated electricity in the UK.

 

The UK BEIS green paper on industrial strategy included a focus on developing education and skills for energy innovation. In the US, state regulators continue to support energy innovation projects through programmes such as New York State’s ‘Reforming the Energy Vision’.

 

 

Our response

  

 

Our US and UK regulated businesses continue to strive for greater efficiency to help offset the impact of costs for energy and capital investment programmes. We continue to find innovative ways to reduce both the time and cost to repair or replace assets, minimising the costs to consumers.

 

In the US, the rate case outcomes for New York included plans to phase increases over three years to mitigate the impact on consumer bills. We also provide low-income assistance to more than 118,000 households in upstate New York annually, with programmes and experts dedicated to delivering solutions for those struggling to pay their energy bills.

 

In the UK, we have been able to generate £460 million of savings for consumers in the first four years of the RIIO arrangements and additionally we voluntarily set aside £150 million of the proceeds from the sale of a majority interest in our UK Gas Distribution business that will be used to benefit consumers. We are expecting around £200 million of cost savings for consumers resulting from awarding Enhanced Frequency Response contracts for more than 200 MW of battery storage in July 2016.

     

 

We continue to support BEIS and Ofgem on capacity market policy development and applicant readiness. We also continue to work with our delivery partners to achieve operational milestones. National Grid was asked to play an important role in Electricity Market Reform and act as the Delivery Body administering new market arrangements – the Capacity Mechanism and Contracts for Difference – which provide incentives for the investment required in our energy infrastructure.

 

In the US, recent rate case decisions in New York State and Massachusetts have approved increased capital investment programmes to improve electricity and gas infrastructure. We have also extended our grid modernisation pilot in Worcester.

    

 

Reducing greenhouse gas emissions forms part of the Company’s KPIs (see page 12).

 

In the UK, we are working with customers and stakeholders to gather insights on the future role of gas in managing the transition to a low-carbon future. We continue to work with BEIS and Ofgem on the development of future energy systems as we respond to the shift to low-carbon energy in the UK.

 

In the US, we support the Clean Power Plan. We continue to invest in new gas and electricity infrastructure that will further decarbonise generation, removing the use of coal and oil while increasing the use of renewables. We own 21 MW of solar generation and plan to add 14 MW more.

 

In January 2017, we formed a partnership with Sunrun, the largest dedicated provider of residential solar systems in the US. The partnership includes a residential solar co-marketing pilot already in progress in our service area on Staten Island, targeting roughly 100,000 homeowners.

 

  National Grid Annual Report and Accounts 2016/17   Our operating environment   9


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Progress against our current strategy

 

We first set out our current strategy in our 2012/13 Annual Report and have continued to report on our progress against it since then. As we describe on page 9, there is an extraordinary amount of change facing our industry, so we have articulated our purpose, and evolved our vision and strategy (see page 8).   

 

          LOGO      

Our strategic objectives

 

We aim to be a recognised leader in the development and operation of safe, reliable and sustainable energy infrastructure, to meet the needs of our customers and communities and to generate value for our investors. We measure our progress in creating value for our investors.

 

All data in this section includes UK Gas Distribution unless otherwise stated.

   

Our strategic objectives

 

LOGO

 

Deliver operational excellence

 

Achieve world-class levels of safety, reliability, security and customer service.

 

LOGO

 

Engage our people

 

Create an inclusive, high-performance culture by developing all our employees.

 

LOGO

 

Stimulate innovation

 

Promote new ideas to work more efficiently and effectively.

 

LOGO

 

Engage externally

 

Work with external stakeholders to shape UK, EU and US energy policy.

 

LOGO

 

Embed sustainability

 

Integrate sustainability into our decision-making to create value, help preserve natural resources and respect the interests of our communities.

 

LOGO

 

Drive growth

 

Grow our core businesses and develop future new business opportunities.

     

Deliver operational excellence

 

Achieve world-class levels of safety, reliability, security and customer service.

 

Our customers, communities and other stakeholders demand safe, secure and reliable supply of their energy. This is reflected in our regulatory contracts where we are measured and rewarded on the basis of meeting our commitments to customers and other stakeholders.

 

How we assess progress:

Employee lost time injury frequency rate

This is the number of employee lost time injuries per 100,000 hours worked in a 12-month period (including fatalities). Our ambition is to achieve a world-class safety performance of below 0.1.

 

Employee lost time injury frequency rate

per 100,000 hours worked

 

 

LOGO

 

 

Our overall lost time injury frequency rate for the Company has remained at 0.10 which is an historic low level for the Company.

 

Customer satisfaction

The table below summarises how we measure customer satisfaction and also shows our targets for each business area.

 

           

Methodology

   

Measure

         

 

         

UK

 

RIIO-related metrics

agreed with Ofgem

    Score from surveys
         

 

         

US

 

Customer Trust

Advice metric

    Score from survey
         

 

             

 

16/17 

  15/16    Target 
         

 

         

UK Electricity

     
         

Transmission

  7.4    7.5    6.91 
         

 

         

UK Gas

     
         

Transmission

  8.0    7.6    6.91 
         

 

         

UK Gas

     
         

Distribution

  _2    8.4    8.31 
         

 

         

US – Residential3

  60.7%    56.5%    57.4% 
     

 

         

 

1. Figures represent our baseline targets set by Ofgem for reward or penalty under RIIO. The maximum score we can receive is 10.

 

2. Our customer satisfaction results are reported on an annual basis with the results being published later this year.

3. Our customer satisfaction methodology has changed from using the JD Power survey measure to the Customer Trust Advice survey metric. The new survey specifically focuses on the services we provide for our customers and better represents their views of us.

         

 

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   Strategic Report

 

 

 

 

Our customer satisfaction KPI comprises four components: Ofgem’s UK electricity and gas transmission and distribution customer satisfaction scores, and the US residential Customer Trust Advice survey metric. The US metric has been in place for two years and measures customers’ sentiment and overall satisfaction with National Grid by asking their level of trust in our advice to make good energy decisions.

In all of our key business areas, both in the US and in the UK, we have exceeded our customer satisfaction targets. You can find out more about our work on behalf of customers on pages 24–27.

Network reliability

Network reliability is measured separately for each of our business areas. The table below provides a simple visual representation of our performance across all of our networks. Our targets are set out in the table for our UK networks, and are set individually for each of our US jurisdictions.

 

 

Network reliability

 

         

Target  
or base  

%  

  16/17    

Performance  
against  

target  

UK Electricity        
Transmission     99.9999     99.999964     exceeded  
UK Gas        
Transmission     100     99.97500     not achieved  
UK Gas        
Distribution     99.999     99.998     not achieved  
US Electricity        
Transmission     99.9     99.97     no target  
US Electricity        
Distribution     99.9     99.994     no target  

Key:

T – Target

B – No target set or set individually by each jurisdiction. Accordingly, we set a base and report performance above the base.

We aim to deliver reliability by planning our capital investments to meet challenging demand and supply patterns, designing and building robust networks, having risk-based maintenance and replacement programmes, and detailed and tested incident response plans. We have not met our targets for UK Gas Transmission and Distribution. UK Gas Transmission missed its target as there was cessation to the flow at two supply points on the NTS on a small number of occasions. UK Gas Distribution had two incidents in the East of England network. One of these affected around 6,000 customers and was caused by third-party damage to our assets. The other affected around 2,500 customers.

You can find more information about our UK principal operations on pages 24–25, and our US principal operations on pages 26–27.

Group return on equity (RoE)

We measure our performance in generating value for our shareholders by dividing our annual return by our equity base. This calculation provides a measure of the performance of the whole Group compared with the amounts invested by the Group in assets attributable to equity shareholders.

 

 

Group RoE %

 

LOGO

Group RoE has decreased during the year to 11.7%, from 12.3% in 2015/16. During the year, the UK regulated businesses (including UK Gas Distribution) delivered a solid operational return of 13.1% in aggregate (2015/16: 13.3%), including an assumption of 3% long run average RPI inflation. The US operational return of 8.2% (fiscal year) was up on last year’s 8.0% (calculated on a calendar year basis), reflecting increased revenues from new rate plans in MECO, KEDNY and KEDLI.

A target for Group RoE is included in the incentive mechanisms for executive remuneration within both the Annual Performance Plan (APP) and the Long Term Performance Plan (LTPP). You can find more information about our Directors’ remuneration on pages 54-71.

LOGO

Engage our people

Create an inclusive, high-performance culture by developing all our employees.

It is through the hard work of our employees that we will achieve our vision, respond to the needs of our stakeholders and create a competitive advantage. Encouraging engaged and talented teams that are in step with our strategic objectives is vital to our success.

How we assess progress:

Employee engagement index

This is a measure of how engaged our employees feel, based on the percentage of favourable responses to certain indicator questions repeated annually in our employee engagement survey. Our target is to increase engagement compared with the previous year.

 

 

Employee engagement index %

 

LOGO

We measure employee engagement through our employee engagement survey. The results of our 2016/17 survey, which was completed by 90% of our employees, have helped us identify specific areas where we are performing well and those areas we need to improve. Our engagement index has risen 4 points to 77% favourable.

The above engagement data for 2015/16 and 2016/17 excludes our UK Gas Distribution employees because they did not take part in the 2016/17 survey due to the sales process.

The employee engagement figures including UK Gas Distribution for 2012 to 2015 were as follows: 63% for 2012/13, 71% for 2013/14, and 75% for 2014/15.

 

 

  National Grid Annual Report and Accounts 2016/17   Progress against our current strategy   11


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Progress against our current strategy continued

 

 

 

Workforce diversity

We measure the percentage of women and ethnic minorities in our workforce. While we have no specific target we aim to develop and operate a business that has an inclusive and diverse culture.

 

 

Workforce diversity %

 

LOGO

We continue to closely track the demographics of our employee population in terms of gender and ethnicity. You can find out more about how we promote an inclusive and diverse workforce on page 30. The above data includes UK Gas Distribution employees. If they were excluded, the figures for 2016/17 would be 24.1% and 17.3% for women and ethnic minorities respectively.

 

LOGO

Stimulate innovation

Promote new ideas to work more efficiently and effectively.

Our commitment to innovation allows us to run our networks more efficiently and effectively and achieve our regulatory incentives. Across our business, we explore new ways of thinking and working to benefit every aspect of what we do.

You can read more about how we have innovated during 2016/17 in our principal operations sections on pages 24–29.

LOGO

Engage externally

Work with external stakeholders to shape UK, EU and US energy policy.

Policy decisions by regulators, governments and others directly affect our business. We engage widely in the energy policy debate, so our position and perspective can influence future policy direction. We also engage with our regulators to help them provide the right mechanisms so we can deliver infrastructure that meets the changing needs of our customers and stakeholders.

Community engagement and investment in education

Working with our communities is important in creating shared value for us as a business and the people we serve. We use the London Benchmarking Group measurement framework to provide an overall community investment figure which includes education (but excludes investment in university research projects). While we have no specific target, our overall aim is to make sure we are creating shared value for the communities that we serve and work in.

 

 

Community engagement and investment in education £

 

LOGO

In the UK, our community engagement and investment in education is £5,850,965 for 2016/17. In the US it is £6,513,926. This is a financial measurement of a number of activities, including the time our employees give through volunteering, the money our employees raise through fundraising and also the support we give to our charity partners. Overall our Company-wide investment is £12,364,891.

Skills and capabilities

We support developing the skills and capabilities of young people through skills-sharing employee volunteering, especially in the science, technology, engineering and mathematics (STEM) subjects, because it supports our future talent recruitment and our desire to see young people gain meaningful employment. While we have no specific target, our aim is to encourage young people to get involved in STEM subjects.

 

Skills and capabilities

Interactions

 

LOGO

We measure quality (>1 hour) interactions with young people on STEM subjects. In the UK, in 2016/17, we have had 6,596 interactions with young people on STEM subjects, and 22,995 interactions in the US. Overall we have seen an increase of 11,183 interactions with young people on STEM.

 

LOGO

Embed sustainability

Integrate sustainability into our decision-making to create value, help preserve natural resources and respect the interests of our communities.

Our long-term sustainability strategy sets our ambition to deliver these aims and to embed a culture of sustainability within our organisation.

Climate change

A measure of our reduction of Scope 1 and Scope 2 greenhouse gas emissions of the six primary Kyoto greenhouse gases (excluding electricity transmission and distribution line losses). Our target is to reduce our greenhouse gas emissions by 45% by 2020 and 80% by 2050, compared with our 1990 emissions of 19.6 million tonnes.

 

 

Greenhouse gas emissions

Million tonnes carbon dioxide equivalent

 

LOGO

Our Scope 1 greenhouse gas emissions for 2016/17 equate to 6.9 million tonnes of carbon dioxide equivalent (2015/16: 7 million tonnes) and our Scope 2 emissions (excluding electricity line losses) equate to 0.3 million tonnes (2015/16: 0.3 million tonnes); combined this is a 63% reduction against our 1990 baseline. These are equivalent to an intensity of around 424 tonnes per £million of revenue (2015/16: 496). Our Scope 2 emissions from electricity line losses equate to 3.1 million tonnes (2015/16: 3.4 million tonnes).

 

 

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   Strategic Report

 

 

 

 

Our Scope 3 emissions for 2016/17 were 34 million tonnes (2015/16: 35.6 million tonnes). We measure and report in accordance with the World Resources Institute and World Business Council on Sustainable Development Greenhouse Gas Protocol. 100% of our Scope 1 and 2 emissions and 92% of our Scope 3 emissions are independently assured against ISO 14064-3 Greenhouse Gas assurance protocol. This statement, along with more information about our wider sustainability activities and performance can be found in the ‘responsible business’ section of our website www.nationalgrid.com.

 

LOGO

Drive growth

Grow our core businesses and develop future new business options.

We continue to maximise value from our existing portfolio, while exploring and evaluating opportunities for growth. Making sure our portfolio of businesses maintains the appropriate mix of growth and cash generation is necessary to meet the expectations of our shareholders.

Value Added

Reflects value to shareholders of dividend and growth in National Grid’s assets, net of the growth in overall debt.

 

 

Value Added £bn

 

LOGO

While we have no specific target, our overall aim is to grow Value Added sustainably over the long term while maintaining performance of our other financial KPIs.

Value Added in the year of £1.9 billion or 51.6 pence per share was higher than 2015/16 (£1.8 billion or 47.6 pence per share) primarily as a result of higher inflation on UK regulated assets (March 2017 RPI of 3.1%, prior year 1.6%) and improved US performance. Of the £1.9 billion Value Added in 2016/17, £1,463 million was paid to shareholders as cash dividends and £189 million as share repurchases (offsetting the scrip issuance during the year), with £289 million retained in the business.

A target for Value Growth, a derivative of Value Added, is included in the incentive mechanisms for executive remuneration within the LTPP. You can find more information about our Directors’ Remuneration Report on pages 54-71.

Adjusted EPS

Adjusted earnings represents profit for the year attributable to equity shareholders. This excludes exceptional items and remeasurements (see page 195). Adjusted EPS provides a measure of shareholder return that is comparable over time.

 

 

Total Adjusted EPS pence

 

LOGO

Comparatives have been restated to reflect the impact of additional shares issued as scrip dividends.

For the year ended 31 March 2017, total adjusted EPS increased by 9.8 pence to 73.0 pence reflecting increased regulated revenues in the UK and US, including a significant benefit from timing, the benefit of foreign exchange rates, reduced depreciation in the UK Gas Distribution business and a lower effective tax rate, partly offset by increased financing costs.

A target for adjusted EPS is included in the incentive mechanisms for executive remuneration within the APP. You can find more information about our Directors’ Remuneration Report on pages 54-71.

Regulated asset base growth

Maintaining efficient growth in our regulated assets ensures we are well positioned to provide consistently high levels of service to our customers and increases our revenue allowances in future years. While we have no specific target, our overall aim is to achieve between 5% and 7% of regulated asset base growth each year.

 

Total regulated asset base and regulated asset base growth £bn

 

LOGO

In total, including all of the regulated asset value (RAV) of UK Gas Distribution, our UK RAV and US rate base increased by £3.8 billion (10%) in the year to £42.6 billion. The increase reflects the continued high levels of investment in our networks in both the UK and US, together with the impact of the stronger US dollar. Following the sale of a 61% interest in the UK Gas Distribution business on 31 March 2017 the Group’s total RAV and rate base decreased to £37.1 billion (including a 39% share of the RAV of the disposed UK Gas Distribution business).

 

 

  National Grid Annual Report and Accounts 2016/17   Progress against our current strategy   13


Table of Contents

    

 

Our business model

How we generate long-term value

    

 

Our business

Our transmission and distribution businesses in the UK and US operate as regulated monopolies. During 2016/17, they generated 96% (2015/16: 91%) of Group adjusted operating profit. Regulators safeguard customers’ interests by setting the level of charges we are allowed to pass on and the standards of performance we must achieve.

In the UK, we have one regulator, Ofgem, which regulates our electricity and gas businesses. As System Operator we make sure that supply and demand are balanced in real time and we facilitate the connection of assets to the transmission system. In the US, our retail activities are regulated by state utility commissions (in New York, Massachusetts and Rhode Island) and by the Federal Energy Regulatory Commission (FERC) for wholesale activities, including interstate transmission and wholesale electricity generation.

The foundations of our business model

Our people and our culture

Our business is built by our people. We work hard to make sure that we keep them as safe as possible. At the end of 2016/17, after the sale of a majority interest in our UK Gas Distribution business and the transfer of its employees to the Consortium, we had more than 6,000 people working in the UK and nearly 16,000 in the US.

Being a responsible business

Doing the right thing is a responsibility we take seriously. Being a responsible and sustainable business is fundamental to the way we work and how we manage our impact on the communities in which we operate.

Our relationships with stakeholders and regulators

We engage widely in debate that helps guide future energy policy direction. We work with our regulators to help them develop the frameworks within which we can meet the changing energy needs of the communities we serve.

Our customer focus

Our customers’ wants and needs are evolving with a greater desire to manage their energy use and expectations of how we interact with them. To remain relevant to our customers, we must understand and respond to their changing requirements and deliver outstanding experiences, products and services.

Innovation

Thinking differently and challenging the norms allow our people to develop innovative and more efficient ways of delivering our services and maintaining our networks.

Our financial capital and fixed asset base

The way in which our investment is funded is an important part of our business. As a UK business with a secondary ADS listing in New York, long-term sustainable assets and strong credit ratings, we are able to secure efficient funding from a variety of sources.

 

How we generate value

 

 

 

 

We are a long-term asset-backed business. The diagram below illustrates how our regulated businesses create value, over time in the UK and US.

 

LOGO

 

  The vast majority of our revenues are set in accordance with our regulatory agreements, (see pages 174–179) and are calculated based on a number of factors: investment in network assets; performance against incentives; allowed returns on equity and cost of debt; and customer satisfaction.    Our ability to convert revenue to profit and cash is important. By managing our operations efficiently, safely and for the long term, we are able to generate strong sustainable cash flows to finance returns through dividends but also to provide funds for growth.     

We invest efficiently in our networks to deliver strong and sustainable growth in our regulated asset base over the long term.

 

We continually assess, monitor and challenge investment decisions in order to allow us to continue to deliver safe, reliable, and cost-effective networks.

 

 

 

 

Our stakeholders

 

 

 

Our measures of success

 

 

 

 

Our business creates value for our stakeholders in both financial and non-financial terms.

  

 

Our KPIs benchmark our performance in each of these key areas as shown below.

 

 

 

 

 

We create value for our stakeholders and communities by:

  
 

  operating as safely, reliably and sustainably as possible;

 

  focusing on affordability to reduce the impact on customer bills;

 

  delivering essential services, while managing loss of supply and customer service issues in a timely way; and

 

  aiming to improve customer satisfaction at all times.

 

  

    Operating excellence/safety

 

    Network reliability

 

    Greenhouse gas emissions

 

    Customer satisfaction

 

 

 

 

We create value for our people by:

  
 

  paying them a market competitive wage, and an overall pay package that rewards competency and performance; and

 

  providing an inclusive culture and encouraging development and employee enablement.

 

  

    Employee engagement

 

    Workforce diversity

 

 

 

 

We create value for our shareholders by:

  
 

  making sure our regulatory frameworks maintain an acceptable balance between risk and return;

 

  operating within our regulatory frameworks as efficiently and compliantly as possible;

 

  performing well against our regulatory incentives, so we can make the most of our allowed returns;

 

  careful cash flow management and securing low-cost funding; and

 

  disciplined investment in our networks and protecting our reputation.

 

  

    Adjusted EPS

 

    Returns on equity

 

    Value added

 

 

 

 

14   National Grid Annual Report and Accounts 2016/17   Strategic Report  


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Internal control and risk management

 

The Board is committed to protecting and enhancing our reputation and assets, while safeguarding the interests of our shareholders. It has overall responsibility for the Group’s system of risk management and internal control.  

 

Managing our risks

National Grid is exposed to a variety of uncertainties that could have a material adverse effect on the Group’s financial condition, our operational results, our reputation, and the value and liquidity of our shares.

The Board oversees the Company’s risk management and internal control systems. As part of this role, the Board sets and monitors the amount of risk the Company is prepared to seek or accept in pursuing our strategic objectives (our risk appetite). The Board assesses the Company’s principal risks and monitors the risk management process through risk review and challenge sessions twice a year. Over the course of the year, the Board has also considered specific principal risks including cyber security, emerging technology, the future role of the System Operator, asset safety, Brexit and strategic workforce planning.

Risk management process

Overall risk strategy, policy and process are set at the Group level with implementation owned by the business. Our enterprise risk management process provides a framework through which we can consistently identify, assess and prioritise, manage, monitor and report risks, as shown in the diagram below. The process is designed to support the delivery of our vision and strategy, as described on page 8.

Risk management activities occur through all levels of our organisation. Through a ‘top down, bottom up’ approach, all business functions identify the main risks to our business model and to achieving their business objectives. They assess each risk by considering the financial and reputational impacts, and how likely the risk is to materialise. They identify and implement the actions being taken to manage and monitor those risks and indicate the adequacy of our existing risk controls. The identified risks and actions are collated in risk registers and reported at functional and regional levels of the Group.

An important feature of our risk management process is our three lines of defence model. Each business function owns and is responsible for managing its own particular risks (the first line of defence). A central risk management team (the second line of defence) acts as an advisory function on implementing the risk process and also provides independent challenge of the principal risk assessments and actions taken to mitigate and manage those risks. This team partners with the business functions through nominated risk liaison staff members and collaborates with assurance teams and specialists, such as the safety and compliance management teams to evaluate gaps in controls, identify performance trends and provide recommendations for improvements. Our internal audit function then audits selected controls to provide independent assessments of the effectiveness of our risk management and internal control systems (the third line of defence).

Regional senior management regularly reviews and debates the outputs of the bottom-up risk management process. This helps ensure the business is aligned to the Company’s strategic objectives and that the prioritisation of the principal risks is discussed regularly. The most significant risks for the UK and US businesses are highlighted in regional risk profiles and reported to the Chief Executive.

We develop our main strategic uncertainties or ‘principal risks’ for the Company through discussing the Group risk profile with the Group Executive Committee and the Board. These risks are reported and debated with the Group Executive Committee and Board every six months. Workshops are held with UK and US business leadership teams so we can make sure the principal risks remain closely aligned to our strategic aims and that no significant risks (or combination of risks) are overlooked.

The Board and leadership teams also discuss the results of testing our principal risks. The aim of this testing is to establish the impact of the principal risks on the Group’s ability to continue operating and meet its liabilities over the assessment period. We test the impact of these risks on a reasonable worst case basis, alone and in clusters, over a five-year assessment period. This work informs the viability statement (see page 19).

The outcomes from each level of the risk review process are fed back to the relevant teams and incorporated as appropriate into the next cycle of our ongoing risk process.

 

 

 

Risk management process

 

  

Feedback and reporting

 

 

LOGO

  

LOGO

 

 

 

 

  National Grid Annual Report and Accounts 2016/17   Internal control and risk management   15


Table of Contents

    

 

Internal control and risk management continued

 

 

Our principal risks

Accepting that it is not possible to identify, anticipate or eliminate every risk that may arise and that risk is an inherent part of doing business, our risk management process aims to provide reasonable assurance that we understand, monitor and manage the main uncertainties that we face in delivering our objectives. This includes consideration of inherent risks, which exist because of the nature of day-to-day operations in our industry, and financial risks, which exist because of our financing activities. Our principal risks and a summary of

management and mitigation actions are provided in the table below. We have provided the overview of the key inherent risks we face on pages 180–183, as well as our key financial risks, which are incorporated within the notes to our consolidated financial statements on pages 92–165. Our corporate risk profile contains the principal risks that the Board considers to be the main uncertainties currently facing the Group as we endeavour to achieve our strategic objectives. Following the referendum vote for the UK to leave the EU and the consequential uncertainties in the political and economic environment,

the Financial Reporting Council (FRC) has highlighted matters for boards to consider. In relation to principal risks, the FRC states that boards must consider the nature and extent of risks and uncertainties arising from the result of the referendum and the impact on the future performance and position of the business. Consequently, our risk owners have considered Brexit in their assessments of the principal risks. These assessments continue as we gain more clarity on the likely impact of Brexit on our business. Our principal risks are shown in the table below.

 

 

 

Risk area

 

  

Risk description

 

  

Example of mitigations

 

 

Growth   

Failure to identify and execute the right opportunities to deliver our growth strategy.

Failure to grow our core business and have viable options for new business over the longer term would adversely affect the Group’s credibility and jeopardise the achievement of intended financial returns.

 

Our ability to achieve our ambition for growth is subject to a wide range of external uncertainties, including the availability of potential investment targets and attractive financing and the impact of competition for onshore transmission in both the UK and US; and internal uncertainties, such as the performance of our operating businesses and our business planning model assumptions.

  

 Processes and resources are in place to review, undertake due diligence and progress new investment opportunities, dispose of existing businesses and identify and execute on opportunities that provide organic growth. These processes, along with twice-yearly Board strategy offsite discussions, are reviewed regularly to ensure they remain supportive of our short- and long-term strategy. We regularly monitor and analyse market conditions, competitors and their potential strategies, the advancement and proliferation of new energy technologies, and the performance of our Group portfolio.

 

 While good progress has been made this past year, we must remain focused on increasing development opportunities in our core business and emerging opportunities. Mitigating actions focus on building our business development pipeline and our capability to pursue non-organic growth options.

 

 

Energy policy   

Failure to secure satisfactory regulatory outcomes and to influence future energy policy.

Policy decisions by regulators, governments and others directly affect our business. We must engage widely in the energy policy debate, making sure our position and perspective help to shape future policy direction.

  

 In both the UK and US we strive to maintain a good understanding of the regulatory agenda and emerging issues, so that robust, public interest aligned responses can be selected and developed in good time. Our reputation as a competent operator of important national infrastructure is critical to our ability to do this.

 

 As part of our new business strategy, we have renewed our stakeholder engagement strategy to improve focus on business objectives. The new strategy incorporates senior executive ownership of each priority, and the development of key positions and engagement plans by cross-functional teams.

 

 

Emerging technology   

Failure to effectively respond to the threats and opportunities presented by emerging technologies, particularly adapting our networks to meet the challenge of increasing distributed energy sources.

Technology developments in areas such as solar energy, energy storage, electric vehicles and distributed generation have developed at a faster pace than many anticipated. We face the challenge of adapting our networks to meet new demands as well as ensuring we act on the opportunities that will benefit our customers and stakeholders.

  

 We created a technology team within our Strategy function to develop relationships with emerging and technology-centric organisations, to monitor disruptive technology and business model trends and to act as a bridge for emerging technology into the core regulated businesses and business development teams. In addition, the partnership with Energy Impact Partners was established to gain exposure to emerging start-up companies. The new National Grid Ventures function will further the focus on new strategies, business development and technology and innovation.

 

 

Safety   

Catastrophic asset failure resulting in a significant safety event.

Safety is a fundamental priority. Some of the assets owned and operated by National Grid are inherently hazardous and process safety incidents, while extremely unlikely, can occur. Our objective is to be an industry leader in managing the process safety risks from our assets to protect our employees, contractors and the communities in which we operate. We operate in compliance with regional legislation and regulation. In addition, we identify and adopt good practices for safety management.

  

 We continue to commit significant resources and financial investment to maintain the integrity of our assets and we strive to continuously improve our key process safety controls. Our Group-wide process safety management system is in place to ensure a robust and consistent framework of risk management exists across our higher hazard asset portfolio.

 

 We have a mature insurance strategy that uses a mix of self-insurance, captives and direct (re)insurance placements. This provides some financial protection in respect of property damage, business interruption and liability risks. Periodically, independent surveys of key assets are undertaken, which provide risk engineering knowledge and best practices to the Group with the aim of further reducing our exposure to hazard risks.

 

 

 

16   National Grid Annual Report and Accounts 2016/17   Strategic Report  


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   Strategic Report

 

 

 

 

Risk area

 

  

Risk description

 

  

Example of mitigations

 

 

Data management   

Failure to operate with a sufficiently mature business data management capability.

The need for accurate, timely, and meaningful data lies throughout the organisation and is critical to our core processes and our ability to grow the business. We must rely upon the performance of our systems and data to demonstrate the value of our business to our shareholders, meet our obligations under our regulatory agreements and comply with agreements with bond holders and other providers of finance.

  

 We have developed data management principles and minimum standards with supporting guidelines. These documents provide clarity around what is expected, with a strong focus on what we need in place to keep us safe, secure and legally compliant.

 

 These standards have been launched in the business and will be developed in the coming year. In support of this, we are also developing a capability framework, to make sure our people have the appropriate skills and expertise in data management. The businesses will continue to develop their own implementation plans against these new standards and capabilities. The aim of these plans will be to ensure we can demonstrate we are compliant with the minimum standards and have the core capabilities in place for all of our business critical data.

 

 To support these efforts, we are establishing regional centres of excellence for data management. Their role will be to provide expertise to the businesses and to help provide assurance around the effectiveness of the data management standards.

 

 

Cyber breach   

We experience a major cyber security breach of business and critical national infrastructure (CNI) systems.

Due to the nature of our business we recognise that our CNI systems may be a potential target for cyber threats. We must protect our business assets and infrastructure and be prepared for any malicious attack.

  

 We use industry best practices as part of our cyber security policies, processes and technologies. Our cyber security programme is a global programme of work which started in 2010 and continues to be modified and updated to this day. This programme is intended to reduce the risk that a cyber threat could adversely affect the Company’s business resilience.

 

 We continually invest in cyber strategies that are commensurate with the changing nature of the security landscape. This includes collaborative working with BEIS and the Centre for Protection of National Infrastructure on key cyber risks and development of an enhanced CNI security strategy and our involvement in the US with developing the National Institute of Standards and Technology Cyberspace Security Framework. We also collaborate with a number of regulatory agencies focused on protection of CNI.

 

 

Leadership capacity   

Failure to build skills and leadership capacity (including effective succession planning) required to deliver our vision and strategy.

It is through the high-quality work of our employees that we will achieve our vision, respond to the changing needs of our stakeholders and create a competitive advantage. Obtaining and fostering an engaged and talented team that has the knowledge, training, skills and experience to deliver on our strategic objectives is vital to our success. We must attract, integrate and retain the talent we need at all levels of the business.

  

 Strategic workforce planning allows us to effectively inform our strategic resourcing plans. Our entry level talent development schemes (graduate training and apprenticeships) are a potential source of competitive advantage in the market place. We are involved in a number of initiatives to help secure the future engineering talent required. Improvements to our talent processes mean we continue to improve in identifying talent and in accelerating development of future leaders (e.g. our Accelerated Development Programme).

 

 The rigour of our succession planning and development planning process has been improved, particularly at senior levels and is now being applied deeper into the organisation.

 

 In all strategies and programmes we continue to promote inclusion and diversity.

 

 To help understand our workforce, we formally solicit employee opinions via a Group-wide employee survey that is conducted annually.

 

 

 

  National Grid Annual Report and Accounts 2016/17   Internal control and risk management   17


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Internal control and risk management continued

 

 

Our internal control process

We have a number of processes to support our internal control environment. These processes are managed by dedicated specialist teams, including risk management, ethics and compliance management, corporate audit and internal controls, and safety, environment and health. Oversight of these activities is provided through regular review and reporting to the Board and appropriate Board committees as outlined in the Corporate Governance section on pages 32–52.

Monitoring internal control is conducted through established boards and committees at different levels of the organisation. Deficiencies are reported and corrected at the appropriate entity-level. The most significant risk and internal controls issues are monitored at the Senior Executive and Board level. The Audit Committee is responsible for keeping under review and reporting to the Board on effectiveness of reporting, internal control policies, compliance with Sarbanes-Oxley (SOX), Bribery Act legislation, appropriateness of financial disclosures and procedures for risk and compliance management, business conduct and internal audit.

Reviewing the effectiveness of our internal control and risk management

Each year the Board reviews the effectiveness of our internal control systems and risk management processes covering all material systems, including financial, operational and compliance controls, to make sure they remain robust.

The latest review covered the financial year to 31 March 2017 and the period to the approval of this Annual Report and Accounts. In this review, the Board considered the effectiveness of areas such as the control environment, risk management and internal control activities, including those described below.

Fostering a culture of integrity is an important element of our risk management and internal controls system. National Grid’s values – ‘do the right thing’ and ‘find a better way’ – provide a framework for reporting business conduct issues, educating employees and promoting a culture of integrity at all levels of the business. We have policies and procedures in place to communicate behaviour expected from employees and third parties, and to prevent and investigate fraud and bribery and other business conduct issues. We monitor and address business conduct issues through several means, including a biannual review by the Audit Committee.

Overall compliance strategy, policy and frameworks are set at the Group level with implementation owned by the business. The business is responsible for identifying compliance issues, continuous monitoring, and developing actions to improve compliance performance. We monitor and address compliance issues through several means including reviews at US and UK leadership meetings and a biannual review by the Audit Committee.

The Certificate of Assurance (CoA) from the Chief Executive to the Board provides overall assurance around the effectiveness of our risk management and internal controls systems. The CoA process operates via a cascade system and takes place biannually in support of the half- and full-year results. The Audit Committee considers the CoA and provides a recommendation to the Board in support of its review.

The periodic SOX reports on management’s opinion on the effectiveness of internal controls over financial reporting are received by the Board in advance of the half- and full-year results. They concern the Group-wide programme to comply with the requirements of s404 of the Sarbanes-Oxley Act and are received directly from the Group Controls team; and through the Executive and Audit Committees.

The Board evaluated the effectiveness of management’s processes for monitoring and reviewing internal control and risk management. It noted that no significant failings or weaknesses had been identified by the review and confirmed that it was satisfied the systems and processes were functioning effectively.

Our internal control and risk management processes comply with the requirements of the UK Corporate Governance Code. They are also the basis of our compliance with obligations set by SOX and other internal assurance activities.

Internal control over financial reporting

We have specific internal mechanisms that govern the financial reporting process and the preparation of the Annual Report and Accounts. Our financial controls guidance sets out the fundamentals of internal control over financial reporting, which are applied across the Company.

Our financial processes include a range of system, transactional and management oversight controls. In addition, our businesses prepare detailed monthly management reports that include analysis of their results, along with comparisons to relevant budgets, forecasts and prior year results. These are presented to, and reviewed by, senior management within our Finance function.

These reviews are supplemented by quarterly performance reviews, attended by the Chief Executive and Finance Director. The reviews consider historical results and expected future performance and involve senior management from both operational and financial areas of the business.

As part of our assessment of financial controls in previous years, we identified a number of weaknesses in our US financial control framework. We are making progress in remediating these weaknesses. For more information, including our opinion on internal control over financial reporting, see page 180.

 

 

18   National Grid Annual Report and Accounts 2016/17   Strategic Report  


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   Strategic Report

 

 

Viability statement

 

The Board’s consideration of the longer-term viability of the Company is an extension of our business planning process, which includes financial forecasting, a robust risk management assessment, regular budget reviews and scenario planning. Our business strategy aims to make sure that our operations and finances are sustainable.

Although it has considered adopting a longer period, the Board believes that five years is the most appropriate timeframe over which we should assess the long-term viability of the Company. The following factors have been taken into account in making this decision:

 

1. We have reasonable clarity over a five-year period, allowing an appropriate assessment of our principal risks to be made;

 

2. In order to test the five-year period the Board considered whether there are specific, foreseeable risk events relating to the principal risks that are likely to materialise within a five to ten year period, and which might be substantial enough to affect the Company’s viability and therefore should be taken into account when setting the assessment period. No risks of this sort were identified; and

 

3. It matches our business planning cycle.

We have set out the details of the principal risks facing our Company on pages 16–17, and described the process we use on page 18. Over the course of the year the Board has also considered the principal risks shown in the table below in detail.

In addition to the principal risks, the Board has considered the impact of Brexit and the sale of a majority share in our UK Gas Distribution business. We are not of the view that Brexit will have an impact that could affect the viability of the Company. In relation to the sale

of a majority interest in the UK Gas Distribution business, the Board has also concluded that this will not have an adverse impact on the viability of the Company.

The Board has discussed the potential financial and reputational impact of the principal risks against our ability to deliver the Company’s business plan. This describes and tests the significant solvency and liquidity risks involved in delivering our strategic objectives within our business model.

The Board assessed our reputational and financial risk capacity, and reviewed the stress testing of the principal risks against that risk capacity, based on assessing reasonable worst-case scenarios over the assessment period. The reputational and financial impacts (to the nearest £500 million) were considered. The risks relating to growth, skills and leadership capacity were not tested, as the Board did not feel they would threaten the viability of the Company within the five-year assessment period.

We chose a number of scenarios for individual testing for impact on the Company’s viability, including the following:

 

 

Scenario 1 – A cyber-attack on our critical national infrastructure leading to a serious loss of service.

 

Scenario 2 – A catastrophic gas pipeline failure on one of our assets leading to an explosion and loss of service.

 

Scenario 3 – A serious fire in our Liquefied Natural Gas terminal at the Isle of Grain.

 

Scenario 4 – A serious system breach leading to loss of customer data.

 

Scenario 5 – Emerging technology leading to significant numbers of people going ‘off grid’.

In addition to testing individual principal risks, the Board also considered the impact of a cluster of the principal risks materialising over the assessment period. Scenarios developed to represent reasonable worst-case examples of principal risk clusters were assessed for cumulative impact upon our reputation and stakeholder trust. We chose a combination of risks that would represent the greatest potential financial impact and a combination that would represent a potentially significant long-term impact.

 

 

Scenario 6 – A cyber security attack and catastrophic US asset failure occurring together within the assessment period.

 

Scenario 7 – A significant safety event followed by a cyber-attack resulting in a loss of supply and loss of data.

No principal risk or cluster of principal risks was found to have an impact on the viability of the Company. Preventative and mitigating controls in place to minimise the likelihood of occurrence and/or financial and reputation impact are embedded within our assurance system.

In assessing the impact of the principal risks on the Company, the Board has considered the fact that we operate in stable markets and the robust financial position of the Group, including the ability to sell assets, raise capital and suspend or reduce the payment of dividends. It has also considered Ofgem’s legal duty to have regard to the need to fund licenced National Grid Gas plc and National Grid Electricity Transmission plc activities.

Each Director was satisfied that they had sufficient information to judge the viability of the Company. Based on the assessment described above and on page 16, the Directors have a reasonable expectation that the Company will be able to continue operating and meet its liabilities over the period to May 2022.

 

 

Risk    Matters considered by the Board

 

Failure to secure satisfactory regulatory outcomes/ failure to influence future energy policy.

  

 

Updates and reviews of:

     the future role of the ESO;

     the impact of Brexit;

     US Regulatory Strategy and initiatives to improve customer service; and

    UK Regulatory Strategy.

 

 

Catastrophic asset failure resulting in a significant safety event.

  

 

Safety is a fundamental priority and as such is looked at in detail by the Safety, Environment and Health Committee who have delegated authority from the Board. The Board receives an oral report from the Committee Chairman after every meeting. Additionally, the Board reviews the current safety performance of the Company at each meeting.

 

 

We experience a major cyber security breach of business and CNI systems/data.

  

 

The Board has received regular updates on cyber security. From April 2017 the Board will receive cyber security updates three times a year.

 

The Board has also undertaken cyber security training.

 

 

Failure to identify and execute the right opportunities to deliver our growth strategy.

  

 

The Board has held three strategy sessions this year.

 

We fail to effectively respond to the threats and opportunities presented by emerging technology, particularly the challenge of adapting our networks to meet the challenges of increasing distributed energy resources.

  

 

The impact of emerging technology is a key part of our strategy sessions.

 

Failure to build skills and leadership capacity (including effective succession planning) required to deliver our vision and strategy.

  

 

The Board has had two sessions on strategic workforce planning and building our human resources capability.

 

  National Grid Annual Report and Accounts 2016/17   Viability statement   19


Table of Contents

    

 

Financial review   

 

National Grid delivered good performance in 2016/17. We increased investment in our network assets to provide safe and reliable services for millions of customers and successfully completed the sale of a majority interest in our UK Gas Distribution business.

  

 

 

 

 

This section

We provide additional commentary on our KPIs and other performance metrics used to monitor our business performance. Analysis of our financial performance and position as at 31 March 2017, including detailed commentary on the performance of our operating segments (including UK Gas Distribution), is located in the financial statements. However, this analysis still forms part of our Strategic Report financial review.

 

See pages 198–199 for commentary on our financial performance and position for the year ended 31 March 2016 compared with 31 March 2015. We have also included analysis of our UK regulated financial performance by segment on page 98.

 

 

In focus

Use of adjusted profit and definitions of alternative performance measures:

page 193.

 

Commentary on the consolidated income statement:

page 85.

 

Commentary on results of our principal operations by segment:

pages 97–98.

 

In focus

Reconciliations of adjusted profit measures: page193.

 

Commentary on statement of financial position:

page 89

Additional commentary on financial KPIs

 

This year, as a result of the UK Gas Distribution sale, our financial statements are more complex than in prior years. In particular, we report our earnings for the Group excluding UK Gas Distribution (‘continuing operations’) separately from the results of that

business, which we report within discontinued operations.

The commentary below is focused principally on the results for the continuing Group.

 

 

 

 

      2017     2016  
      Continuing
Operations
    Discontinued
Operations
    Total     Continuing
Operations
    Discontinued
Operations
    Total  

Statutory operating profit

     3,208       894       4,102       3,225       860       4,085  

Exceptional items and remeasurements

     565             565       (11     22       11  

Adjusted operating profit

     3,773       894       4,667       3,214       882       4,096  

Adjusted net finance costs

     (1,029     (146     (1,175     (856     (157     (1,013

Share of post-tax results of joint ventures and associates

     63             63       59             59  

Adjusted tax

     (666     (142     (808     (604     (149     (753

Attributable to non-controlling interests

           1       1       (1     (2     (3

Adjusted earnings

     2,141       607       2,748       1,812       574       2,386  

Adjusted EPS

     56.9       16.1       73.0       48.0       15.2       63.2  

Statutory earnings

     1,810       5,985       7,795       1,901       690       2,591  

Statutory EPS

     48.1       159.0       207.1       50.4       18.3       68.7  

 

Measurement of financial performance

We describe and explain our results principally on an adjusted basis and explain the rationale for this on page 193. We present results on an adjusted basis before exceptional items and remeasurements. See pages 193–195 for further details and reconciliations from the adjusted profit measures to IFRS, under which we report our financial results and position. Further commentary on movements in the income statement is provided on page 85.

On a statutory basis, operating profit and earnings include a £633 million charge in respect of environmental and gas holder demolition costs and a £68 million gain on commodity contracts in the US. Our total statutory earnings and EPS figures include the profit arising from the sale of the UK Gas Distribution business.

Adjusted operating profit from continuing operations

Adjusted operating profit for the year ended 31 March 2017 was £3,773 million, up £559 million (17%) compared with last year. Operating profit increased in all of our regulated business segments.

 

 

LOGO

For the year ended 31 March 2017, adjusted operating profit in the UK Electricity Transmission segment increased by £199 million to £1,372 million. Revenue was £462 million higher, mainly reflecting higher system balancing revenues, increased regulated revenue allowances and the impact of higher volumes. Pass-through costs were £263 million higher, mainly due to increased system balancing costs. Regulated controllable costs were £25 million lower including reduced environmental costs partly offset by increased employee costs. Depreciation and amortisation costs were £31 million higher, reflecting the continued capital investment programme, and other costs were £6 million lower than prior year including lower asset disposal costs.

UK Gas Transmission adjusted operating profit increased by £25 million to £511 million. Revenue was £33 million higher, including increased regulated revenue allowances in the year and higher volumes than expected, partly offset by lower LNG storage revenues following a site closure. After deducting pass-through costs, net revenue was £31 million higher than prior year. Regulated controllable costs were £2 million higher than last year, with lower LNG storage costs offset by costs resulting from an increase in the number of employees to support higher levels of asset health investment. Depreciation and amortisation costs were £8 million higher, reflecting ongoing investment. Other operating costs were £4 million lower than last year.

Within our US Regulated business, adjusted operating profit increased by £528 million to £1,713 million. The stronger dollar increased revenue and operating profit in the year by £1,160 million and £184 million respectively compared to last year’s results. Excluding the impact of exchange rate movements, revenue

 
 

 

20   National Grid Annual Report and Accounts 2016/17   Strategic Report  


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Strategic Report

 

 

increased by £278 million. Increased revenue allowances under new rate cases, the benefit of capex trackers and over-recovery of allowed revenues due to cold weather were partly offset by lower commodity cost recoveries. Overall pass-through costs reduced by £231 million (excluding the impact of foreign exchange). Regulated controllable costs increased by £152 million at constant currency, partly as a result of increased information systems costs, write-offs of prior years’ capital costs and higher costs of health care and other benefits. These were partly offset by a £32 million decrease in bad debt costs. Depreciation and amortisation costs were £24 million higher this year at constant currency as a result of ongoing investment in our networks. Other operating costs were £21 million higher at constant currency, reflecting increased operating taxes and cost of removal of existing assets.

Adjusted operating profit in Other activities was £193 million lower at £177 million. In the US, adjusted operating profit was £80 million lower (including £3 million of foreign exchange benefit) partly reflecting higher US project development costs. In addition, 2015/16 included a £49 million gain on disposal of the Iroquois pipeline. In the UK, adjusted operating profit was £113 million lower including lower auction revenues from the French Interconnector and increased business change costs.

Adjusted earnings from continuing operations

For the year ended 31 March 2017, adjusted net finance costs were £173 million higher than they were in 2015/16 at £1,029 million, with the impact of higher UK RPI inflation on index-linked borrowings and increased average net debt levels combined with the impact of the stronger US dollar. This was partly offset by lower tax and pension-related interest.

Our adjusted tax charge was £62 million higher than it was in 2015/16. This was mainly due to higher profits before tax partly offset by some tax settlements in respect of prior years. The effective tax rate for 2016/17 was 23.7% (2015/16: 25.0%).

The earnings performance described above has translated into adjusted earnings of £2,141 million, up £329 million on last year. This equates to adjusted earnings per share (EPS) of 56.9 pence, up 8.9 pence (19%) on 2015/16.

Discontinued operations

Discontinued operations are comprised primarily of the UK Gas Distribution and Xoserve businesses. Adjusted operating profit for discontinued operations increased by £12 million to £894 million. Operating profit from Xoserve decreased by £8 million, reflecting system implementation costs. In UK Gas Distribution, revenue was £36 million lower. This primarily reflects the non-recurrence of last year’s revenue over-recovery compared

to allowance. Pass through costs were £2 million lower and regulated controllable costs were £13 million higher including costs resulting from an increase in the number of employees. Depreciation and amortisation costs were £84 million lower reflecting the cessation of depreciation from 8 December 2016, following the agreement for the sale of a majority stake in the business. Other costs were £17 million higher than prior year, which included the release of provisions for gas holder demolition costs.

Scrip restatement

In accordance with IAS 33, all EPS and adjusted EPS amounts for comparative periods have been restated as a result of shares issued through the scrip dividend scheme.

Group return on equity (RoE)

We measure our performance in generating value for our shareholders by dividing our annual return by our equity base.

Group RoE has been calculated for the year including a full year of contribution from the disposed UK Gas Distribution business.

Group RoE has decreased during the year to 11.7%, from 12.3% in 2015/16. During the year, the UK regulated businesses (including Gas Distribution) delivered a solid operational return of 13.1% in aggregate (2015/16: 13.3%), including an assumption of 3% long-run average RPI inflation. US operational return of 8.2% (fiscal year) was up on last year’s 8.0% (calculated on a calendar year basis), reflecting increased revenues from new rate plans in MECO, KEDNY and KEDLI.

As discussed earlier profits from Other activities in the Group were lower than last year, adjusted interest costs for the continuing and discontinued businesses combined were higher and the effective tax rate was lower.

Regulated asset base growth

In total, including all of the regulated asset value (RAV) of UK Gas Distribution, our UK RAV and US rate base increased by £3.8 billion (10%) in the year to £42.6 billion. The increase reflects the continued high levels of investment in our networks in both the UK and US, together with the impact of the stronger US dollar. Following the sale of a 61% interest in the UK Gas Distribution business on 31 March 2017 the Group’s total RAV and rate base decreased to £37.1 billion (including a 39% share of the RAV of the disposed UK Gas Distribution business).

The UK RAV (including 100% of the RAV of Gas Distribution) increased by £1.1 billion, reflecting significant capital expenditure, together with inflation. RPI inflation at 3.1% (March to March), was in line with our 3% long-term expectation.

UK RAV growth also included capitalised efficiencies or ‘performance RAV’ of £110 million this year.

US rate base has increased by £2.7 billion this year. Of this, £1.9 billion was due to foreign exchange movements increasing the rate base reported in sterling. Excluding foreign exchange, rate base increased by £0.8 billion, reflecting a significant year of US investment.

Value Added

Our dividend is an important part of returns to shareholders along with growth in the value of the asset base attributable to equity investors. These are reflected in the Value Added metric that underpins our approach to sustainable decision-making and long-term incentive arrangements.

Value Added for the year has been calculated on a combined basis and so excludes the impact of the UK Gas Distribution sale, which completed on 31 March 2017.

Overall Value Added in the year was £1.9 billion or 51.6 pence per share as set out below:

 

    

Year ended 31 March

 

£bn at constant
currency
       2017         2016         Change  

UK regulated assets1

   26.6     25.9     +0.7  

US regulated assets1

   17.1     16.3     +0.8  

Other invested capital

   2.2     2.0     +0.2  

Total assets

   45.9     44.2     +1.7  

Dividend paid

         +1.5  

Share buyback

         +0.2  

Movement in goodwill

         –  

Net debt2

   (29.1)    (27.6)    -1.5  

Value Added

             +1.9  

 

1. Includes assets held outside RAV and rate base including deferrals of cost recoveries e.g. environmental and pension costs.
2. Net debt at 31 March 2017 adjusted to remove the impact of the UK Gas Distribution sale.

 

    

Year ended 31 March

 

          2017         2016 

Value Added per share

   51.6p    47.6p

Value Added in the year was higher than 2015/16 (£1.8 billion or 47.6 pence per share) as a result of higher inflation on UK regulated assets (March 2017 RPI of 3.1%, prior year 1.6%) and improved US performance. Of the £1.9 billion Value Added in 2016/17, £1,463 million was paid to shareholders as cash dividends and £189 million as share repurchases (offsetting the scrip issuance during the year), with £289 million retained in the business.

The Board is confident that growth in assets, earnings and cash flows, supported by improving cash efficiency and an exposure to attractive regulatory markets, should help the Group to maintain strong, stable credit ratings and a consistent prudent level of gearing, while delivering attractive returns for shareholders.

 

 

  National Grid Annual Report and Accounts 2016/17   Financial review   21


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Financial review continued

    

    

    

 

Other performance measures

Regulated return on equity

US and UK regulated returns are calculated using the capital structure assumed within their respective regulatory arrangements and, in the case of the UK, assuming 3% RPI inflation. As these assumptions differ between the UK and the US, RoE measures are not directly comparable between the two geographies. In our performance measures, we compare achieved RoEs to the level assumed when setting base rate and revenue allowances in each jurisdiction.

UK regulated return on equity

UK RoE has decreased 20bps to 13.1%. This reduction in RoE reflects a reduction in incentive performance year-on-year, particularly as a result of the decline in legacy revenue incentive recoveries in the Gas Transmission business. Totex out-performance was at a similar level to last year, representing 160bps of our out-performance over allowed returns.

 

 

 

UK return on equity %

 

LOGO

US regulated return on equity

US RoE for fiscal year 2016/17 increased 20bps to 8.2%, compared to calendar year 2015, reflecting the benefit of new rate cases and capital trackers on the sizeable investment programme. The 8.2% achieved return compares to an allowed return of 9.5%.

 

 

 

US return on equity %

 

LOGO

Return on capital employed

RoCE provides a performance comparison between our regulated UK and US businesses and is one of the measures that we use to monitor our portfolio of businesses. The following table shows our RoCE for our businesses over the last five years:

 

 

Return on capital employed %

 

LOGO

The UK RoCE has decreased from 8.1% to 7.8% in 2016/17. This reflects the reduction in legacy incentive revenues in our Gas Transmission business in the year.

US RoCE has remained at the same level as last year at 5.7%. Regulated financial performance has increased compared with last year, offset by growth in the rate base, driven by capital investment.

Capital expenditure

For the year ended 31 March 2017, capital expenditure of £3,735 million for the continuing business was £408 million higher than last year. The Group also invested £127 million in a number of joint ventures including a new electricity interconnector between the UK and Belgium and £42 million into a partnership with Sunrun Inc. in the US. In addition, the Group invested a further £10 million in the St William Homes joint venture with Berkeley Group.

Our US Regulated business continues to increase levels of investment in network reinforcement and resilience. Capital expenditure in 2016/17 was £391 million higher than last year, and reflected higher spend on gas mains replacement, gas customer growth and system reinforcement together with the impact of a stronger US dollar.

 

 

 

Capital expenditure for continuing operations £m

 

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Discontinued operations

UK Gas Distribution and Xoserve capital expenditure was £22 million higher than last year at £588 million, reflecting higher system reinforcement workload.

Dividend growth

We remain committed to our dividend policy which aims to grow the dividend per share at least in line with the rate of RPI inflation each year for the foreseeable future.

During the year we generated £1.2 billion of business net cash flow after our capital expenditure programmes. This has enabled the growth of the dividend per share in line with average RPI, being 2.1% (2015/16: 1.1%; 2014/15: 2.0%), taking into account the recommended final dividend of 29.10 pence per ordinary share.

During the year, the Company has repurchased shares in the market with the overall goal being to reduce the dilutive effect of the scrip as much as possible to the extent that is consistent with maintaining the Group’s strong financial position as reflected in its credit rating.

Net debt and credit metrics

We expect capital investment programmes and network enhancement will continue to be funded by market borrowings. We continue to borrow at attractive rates when needed and the level of net debt remains appropriate for the size of our business.

During 2016/17, net debt has decreased by £6 billion. This is driven by cash flows related to the disposal of 61% of our UK Gas Distribution business of £10.2 billion and business net cash inflows (after cash capital investment) of £1.3 billion (excluding UK Gas Distribution disposal costs), partly offset by outflows from interest, dividends, tax and other financing flows of £2.7 billion, with non-cash movements such as foreign exchange and accretion of interest increasing net debt by a further £2.8 billion.

A key measure we use to monitor financial discipline is retained cash flow divided by adjusted net debt (RCF/net debt). This is a measure of the operating cash flows we generate, before capital investment but after dividends paid to shareholders, compared with the level of debt we hold. The principal adjustments made to net debt are in respect of pension deficits and hybrid debt instruments. The impact of the UK Gas Distribution transaction has a positive effect on the metric in the year of sale. RCF/net debt was 15.8% for the year (2015/16: 11.5%; 2014/15: 11.2%). We have actively managed scrip uptake through buying back shares when supported by sufficient headroom in the RCF/net debt metric. Deducting the costs of buying back these shares reduces RCF/net debt to 14.9% for the year.

Our long-term target for RCF/net debt is to exceed 9.0%, which is consistent with the A3 rating threshold used by Moody’s, the rating agency.

We additionally monitor interest cover, which is a measure of the cash flows we generate compared with the net interest cost of servicing our borrowings. Interest cover for the year was 5.0 times (2015/16: 5.5 times; 2014/15:

5.1 times). Our target long-term rate for interest cover is in excess of 3.0 times.

 

 

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In focus

Commentary on the consolidated cash flow statement

page 91

 

Commentary on borrowings

page 127–128

 

In focus

UK regulation pages

174–175

 

UK regulation pages

176–179

  

Regulatory financial performance

 

Timing and regulated revenue adjustments

As described on pages 174 to 179, our allowed revenues are set in accordance with our regulatory price controls or rate plans. We calculate the tariffs we charge our customers based on the estimated volume of energy we expect will be delivered during the coming period. The actual volumes delivered will differ from the estimate. Therefore, our total actual revenue will be different from our total allowed revenue. These differences are commonly referred to as timing differences.

 

If we collect more than the allowed revenue, the balance must be returned to customers in subsequent periods, and if we collect less than the allowed level of revenue we may recover the balance from customers in subsequent periods. In the US, a substantial portion of our costs are pass-through costs (including commodity and energy efficiency costs) and are fully recoverable from our customers. Timing differences between costs of this type being incurred and their recovery through revenue are also included in timing.

 

The amounts calculated as timing differences are estimates and subject to change until the variables that determine allowed revenue are final.

 

Our continuing operating profit for the year includes a total estimated in-year over-collection of £398 million (2015/16: £1 million under-collection). Our closing balance at 31 March 2017 was £414 million over-recovered. In the UK, there was cumulative over-recovery of £82 million at 31 March 2017 (2016: under-recovery of £133 million for continuing operations). In the US, cumulative timing over-recoveries at 31 March 2017 were £332 million (2016: £135 million over-recovery). A sizeable part of that balance will be returned to customers next year.

 

In addition to the timing adjustments described above, as part of the RIIO price controls in the UK, outperformance against allowances as a result of the totex incentive mechanism, together with changes in output-related allowances included in the original price control, will almost always be adjusted in future revenue recoveries, typically starting in two years’ time. We are also recovering revenues in relation to certain costs incurred (for example pension contributions made) in prior years.

 

As required under accounting standards our current IFRS revenues and earnings include these amounts that relate to certain costs incurred in prior years or that will need to be repaid or recovered in future periods. Such adjustments will form an important part of the continuing difference between reported IFRS results and underlying economic performance based on our regulatory obligations.

 

  

For our UK regulated businesses as a whole (excluding the UK Gas Distribution business), timing and regulated revenue adjustments totalled £408 million in the year (2015/16: £227 million). In the US, accumulated regulatory entitlements cover a range of different areas, with the most significant being environmental remediation and pension assets, as well as deferred storm costs.

 

All regulatory entitlements are recoverable (or repayable) over different periods, which are agreed with the regulators to match the expected payment profile for the liabilities. As at 31 March 2017, these extend until 2071.

 

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Principal operations – UK

 

  

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consecutively, on the standard of apprentice training offered by our Academy. Addressing the skills shortage, and providing high-quality training, remains important to us. You will find further details on this and additional awards on pages 30–31.

 

Operational performance

Our key performance indicators are reported in detail on pages 10–13. Our network reliability figures decreased slightly for Gas Transmission and Gas Distribution and are marginally below target this year. Electricity Transmission exceeded target. We continue to work on initiatives that aim to strengthen reliability, such as our asset health improvement work. For example, we have made good progress on the Feeder 9 gas pipeline replacement project. This involves boring a five kilometre tunnel beneath the River Humber to replace a section of gas pipeline. We are also developing new technologies to deliver work faster and increase network reliability. This includes using a malleable material that can be quickly installed to replace porcelain and polymer insulators where underground cables and overhead technology meet.

 

We have worked hard to find ways of operating more efficiently, so we can make our business more agile and competitive. For example, our Electricity Transmission business is now carrying out protection system replacements in less than half the time and for significantly lower cost. Within Gas Transmission, we initiated a project to upgrade some air compressor units, reducing carbon dioxide emissions by 1,228 tonnes, and yielding long-term financial savings of £2.42 million.

 

We installed new gas control systems and made significant progress in installing new electricity control systems – these will help us meet the challenges of the changing energy world and, therefore, help us balance gas and electricity even more efficiently, keeping costs to consumers down.

 

We have used our regulatory innovation funding to develop ways to serve our customers more effectively, provide greater value, and shape the energy systems of the future. Through Project

Nicola Shaw, Executive Director, UK, describes significant developments that include the sale of a majority interest in the Gas Distribution business and the conclusion of Ofgem’s mid-period review of the RIIO price control for Transmission.

 

  

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Nicola Shaw CBE

Executive Director, UK

 

     

This year, sadly, safety has been brought into the sharpest focus for all of us.

A National Grid employee died following an incident at our East Claydon substation. We have undertaken a detailed internal investigation to establish exactly how and why this happened and to learn all possible lessons from it. We are continuing to co-operate with the Health and Safety Executive (HSE) as it carries out its independent investigation. We are also implementing a wide-ranging plan aimed at delivering safety improvements. Safety will continue to be a fundamental priority.

 

Looking now at organisational developments, this year, in line with our plans, we separated Gas Distribution into a stand-alone business and sold a majority interest. While preparing the business for sale and a new ownership structure, we maintained our focus on operational delivery, which resulted in continued solid performance for Gas Distribution. You can read more about the performance of this business on pages 20–22.

 

In addition, the Board approved the second interconnector between the UK and France (IFA2), and we launched our new smart metering business. You can read more about these developments on pages 28–29.

 

As John has described in his review on pages 6–7, we issued a joint statement with BEIS and Ofgem regarding the enhanced role and greater separation of the ESO function. This is a sensible step forward, recognising the need for stability in the organisation during a period of rapid industry change, and the importance of bolstering the perceived independence of the ESO within the National Grid Group.

 

We welcomed the conclusion of the mid-period review of the RIIO price control for Transmission which has given us certainty over our core revenues for the remaining RIIO period. Ofgem made some adjustments to allowances in both Electricity and Gas Transmission for outputs no longer needed in the RIIO period, and approved additional funding for new activities undertaken by the ESO.

 

We have also taken the decision to volunteer a deferral of £480 million of RIIO-T1 allowances. This deferral will enable better alignment of the allowances with the likely timing of spend and also help to lower bills in the near term.

 

  

In focus

Evolving energy landscape

11.9GW

is the capacity of installed solar PV in the UK in March 2017 (compared to 0GW in March 2007).

        

 

Cost savings for consumers

£200m

is the approximate expected cost saving resulting from awarding Enhanced Frequency Response contracts for more than 200MW of battery storage in July 2016.

        

 

Transmission

284TWh

of electricity flowed across the transmission network in 2016/17, enough to boil 2.3 trillion kettles.

        

 

90.5bcm

of gas was transported across the transmission network in 2016/17, enough to fill the Albert Hall 914,000 times.

        

 

Distribution

10.9m

is the approximate number of consumers served by the gas distribution networks.

        
     

Ofgem continues its work to enable onshore competition in electricity transmission. The majority of projects will not be contested, and National Grid Ventures is preparing to compete for any that are. We are also providing input and support into the ongoing development of the regulatory framework for competition.

 

Earlier in 2017, BEIS confirmed, through the ‘Building our Industrial Strategy’ green paper, its intention to focus on developing technical education and skills. So, I was particularly delighted when we received an Outstanding grade from Ofsted, for the third time

  
        

 

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Switchgear replacement in Walpole                                   

 

“Replacing our switchgear in Walpole in the UK was a complex operation. It involved replacing 23 circuits – some owned by National Grid, others by UK Power Networks and Western Power Distribution. It was originally installed in the 1960s, and updating it was important, helping make sure it continues to provide a reliable service.

 

The replacements needed to be done in a specific order and involved an enormous amount of planning. When I took on responsibility for the project, we gradually developed a strong collaborative partnership approach with National Grid – concentrating on outcomes that were best for both companies.

 

A weekly technical issues conference call was an important part of developing a team spirit. Although I created a technical issues log it was National Grid who picked this up and reviewed it each week on the conference call – a good example of National Grid’s responsiveness during this project.”

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“The positive team ethic, which we developed together over a period of time, led to an extremely productive 2016.”

 

Geraint Hancock

Project Manager at UK Power Networks

 

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response to fluctuations in system frequency and contracts have been awarded for over 200 MW of battery storage. Our Demand Turn Up service was used for the first time during the summer, calling on organisations to make productive use of excess electricity in the system during this traditionally low-usage period.

 

We developed these balancing services in anticipation of fundamental changes in system operation. This year, for the first time, we saw periods where no coal-fired power stations generated electricity and periods where the Scottish network was operated successfully with no fossil fuel generation. This was against a backdrop of an increase in installed wind and solar generation of more than 10%.

 

We continue to provide input to Government and Ofgem on the development of future energy systems. This includes the call for evidence on ‘A Smart Flexible Energy System’, which examines how we can make the most of innovation and new technologies in designing the future electricity system.

At a European level, we have worked closely with organisations such as ENTSO-E and ENTSOG (the European Network of Transmission System Operators – for electricity and gas respectively) to implement a number of framework changes in a way that works for Britain’s energy market and our customers.

 

Looking ahead

Our main focus in the UK is on the first of our three strategic priorities described on page 8, which is to drive a step change in core business performance. We have detailed plans in place to improve safety, our delivery for customers and our efficiency. We are continuing work in a number of priority areas, including the separation of the ESO.

 

I am proud to be the executive sponsor for this year’s UK employee chosen charity, which is Alzheimer’s Society. I look forward to providing an update on this in next year’s Report.

 

CLoCC (Customer Low Cost Connections), for example, we’re challenging every aspect of the current Gas Transmission customer connections process. It aims to reduce the time to connect from three years to less than one, and reduce the cost from up to £2 million to significantly less than £1 million. It will also make it easier for non-traditional customers to connect to the NTS.

 

In November 2016, Ofgem confirmed funding for new Network Innovation Competition projects. We were successful in our bid with UK Power Networks on the ‘Power Potential’ project, which is a new £9.5 million market trial relating to voltage control. Also, National Grid will work with SP Energy Networks on a £19.9 million project that will help address some of the current and future challenges associated with the stability of Britain’s electricity transmission system as we transition to low-carbon energy. Details of our innovation projects are published at www.nationalgrid.com/innovation.

 

This year we made good progress on several major customer connection projects. We have improved the way we consult with all our stakeholders on major projects by simplifying how we present information – using clear language, more visual displays and virtual reality modelling – and by holding more events in a variety of easily accessible venues. We received positive feedback on our stakeholder engagement via our major project survey.

  

 

Although we exceeded our customer satisfaction targets, the figure for Electricity Transmission decreased slightly compared to last year. We are working hard across our UK business to place customers at the heart of our operations. We’re holding workshops for customers so we can gain a more in-depth understanding of their requirements. We have also started to examine each point of contact they have with our Company, so we can identify where we can improve our processes and our customers’ experience with us. We will be testing proposed improvements with customers before we implement them.

 

Shaping the future of energy

This year we launched a nationwide conversation on the future of gas to gather insights on the future role of gas and the gas transmission network. Gas will continue to be an important part of the mix in ensuring a secure energy supply at best value for consumers while Britain transitions to a low-carbon future. By engaging with stakeholders to understand what customers and end consumers value, this project will help us to identify optimal levels of future investment in the system and innovative ways to adapt our commercial arrangements.

 

We have collaborated with organisations that provide demand side flexibility to develop new electricity balancing services. Enhanced Frequency Response provides a sub-second

  
     
     
     
     
     
     
     
     
     
     
     
     
     
     
     

 

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I believe that our focus on providing affordable, safe, reliable energy for all customers will make us a great operating company.

 

Safety

This year, the US business has seen a 5% reduction in the number of injuries requiring medical attention beyond first aid. Safety, Health and Environment (SHE) plans addressing current risks and injury trends were expanded to all managers. To increase transparency, under-performing teams were required to develop and communicate performance improvement plans to the executive leadership. Additional focus has been on reducing road traffic collisions through targeted training and communications.

 

We will continue to use SHE plans to focus on hazard elimination and road traffic collision reduction in 2017/18. We will also be implementing a mental well-being programme.

 

A clean energy company

Another factor in becoming a great operating company is becoming a clean energy company. This is nowhere more apparent than in Rhode Island where, in a first-in-the-nation milestone, we began delivering electricity generated by an offshore wind farm.

 

In December, after just 11 months of construction on ‘sea2shore: The Renewable Link project’, we began delivering electricity generated by the offshore Block Island Wind Farm to the electricity grid in Rhode Island and to customers.

 

Dean Seavers, Executive Director, US, provides an overview of performance and developments during 2016/17, including progress on our rate cases across the region.

 

  

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Dean Seavers

Executive Director, US

 

In focus

Electricity

3.5m

approximate number of customers across upstate New York, Massachusetts and Rhode Island.

 

Gas

3.6m

approximate number of customers across upstate New York, New York City, Long Island, Massachusetts and Rhode Island served by our gas distribution networks.

     

When I think about the past year, it’s the times spent visiting with customers that stand out. I feel fortunate because wherever I am in our service territory, I see solid evidence that we are making energy more affordable, safe, and reliable for all customers. We’re doing it through infrastructure investments, energy efficiency, and economic development.

 

While energy can’t be free, our customers shouldn’t have to pay for waste. The work we’re doing in each of our jurisdictions shows how we’re eliminating waste, becoming a clean energy company, and future-proofing our business for generations to come.

 

Becoming a great operating company

We aspire to be a great operating company and one way is by making rate cases a priority. Our rate plans set the foundation for how we run our business and serve our customers and communities, focusing on safe, reliable, and affordable electricity and gas service. Our rate plans inform infrastructure investment, innovation and bill impact.

 

After several years under the same rate structures in all three states we serve, we filed new rate cases last year. Like any business or municipality, our costs have risen, so we filed a rate proposal in Massachusetts to increase electricity distribution rates, and two proposals in downstate New York, to increase gas delivery rates in New York City and Long Island.

 

In September, we received an order from the Massachusetts Department of Public Utilities (MADPU) that allows us to update our electricity distribution prices for the first time since 2010. The order lets us invest $249 million to update and strengthen the electricity system and recover the increasing costs of running our business, which include operation and maintenance expenses, property taxes and storm response.

 

  
        
     

In December, the NYPSC approved our rate proposals for KEDNY and KEDLI. The decision outlines a three-year rate plan for our 1.2 million gas customers in downstate New York, effective from 1 January 2017. By the end of 2019, we intend to invest $3 billion into our gas systems and replace 585 miles of ageing pipes in New York City and Long Island.

 

Our key objective for this year is to achieve a good outcome in our rate filing for Niagara Mohawk, which was filed in April 2017. This represents 30% of our US rate base.

 

The filing is the first full rate review for this utility since 2013 and will allow us to modernise the electric and gas networks to further enhance reliability and resiliency. It will also help us improve customer service, including programmes to assist vulnerable customers, promote economic growth and develop the energy infrastructure and technologies that support the demands of a modern energy system.

  

The Block Island Wind Farm is expected to supply approximately 30 MW of electricity, more than enough to meet Block Island’s entire current peak demand of 3-4 MW. The excess will be redirected to mainland Rhode Island via the submarine cable running between Block Island and the town of Narragansett.

 

Another example is our new approach to testing large-scale solar. We are deliberately targeting installations that will provide additional energy to communities when they need it the most, vastly improving the value of solar projects to customers.

 

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Buffalo Niagara Medical Campus

 

The Buffalo Niagara Medical Campus (BNMC) is an economic engine for the City of Buffalo and the region. A collection of hospitals, life science research and educational facilities, medical offices, and even a hotel, it encompasses 120 acres just north of the downtown business district.

 

Together, we have formed a unique energy partnership, as BNMC’s pace of growth is matched by its demand for energy. We developed a comprehensive strategy to transform the campus into a global leader in energy innovation, and are looking to extend the innovation approach to

 

  

 

surrounding neighbourhoods. It involves adopting new technologies and sustainable energy solutions – creating a blueprint for other large campus developments.

 

Matt Enstice, President and CEO of BNMC, believes the campus is firmly on the map and that its remarkable energy journey would not have been possible without National Grid.

  

 

 

heels of new legislation that makes it more attractive to choose emission-free automobiles by improving access to public charging.

 

We received good news in July that New Hampshire regulators had approved construction of the Merrimack Valley Reliability Project (MVRP) – a 24.4 mile, 345 kV overhead transmission line that will run in existing utility rights-of-way between Londonderry, New Hampshire, and Tewksbury, Massachusetts. The MVRP addresses the concerns of New England’s independent system operator, ISO-New England, relating to ageing infrastructure and anticipated increases in electricity demand.

 

In January, we assumed primary responsibility for developing the Vermont Green Line (VGL) project. VGL is a proposed 400 MW, HVDC electricity transmission project, designed to unlock and deliver reliable and affordable renewable energy to New England.

 

In August, we withdrew our petition for capacity on the Access Northeast (ANE) gas pipeline, after the Supreme Judicial Court ruled that Massachusetts electric companies could not charge their customers for the cost of building natural gas pipelines in New England.

 

ANE is designed to help secure New England’s clean energy future, ensure the reliability of the electricity system, and save customers more than $1 billion annually on their electricity bills. We continue to explore our options for a potential path forward with ANE and pursue a balanced portfolio of solutions to provide the clean, reliable, and secure energy our customers deserve.

 

Looking ahead

It’s been a busy year, living first-hand how we bring energy to life for our customers, stakeholders, and communities. And it’s what we’ll aim to do again next year. Our US priority initiatives support National Grid’s three strategic priorities – below are some examples.

 

We will find new ways of optimising our operational performance. We’ve started by enabling our supervisors to spend more time in the field, strengthening the connection to our customers, coaching and mentoring employees, and creating a learning and growth environment. Through a new gas enablement initiative, we are upgrading systems, improving processes and developing ways of working to serve our customers better. And, we are strengthening the energy supply chain that will take us to a decarbonised future.

 

Next, we will look for opportunities to grow our core business. We’ll do this through capital delivery and stakeholder engagement.

 

And, we will future-proof our business for technology and value shifts. This means continuing the work we are doing with Grid Modernization in Massachusetts, with REV in New York and with the New Energy initiative in Rhode Island.

          

 

“It’s a partnership model for the future, National Grid seeded initiatives that have changed the game.”

 

Matt Enstice, President & CEO,

Buffalo Niagara Medical

Campus, Inc. Canisius College

 

  

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We presently have 21 MW of National Grid-owned solar built or under contract in Massachusetts, with plans to add 14 MW more. This includes the ability to build 7 MW of renewable energy storage, marking the first time an investor-owned utility in the region will build, own, and test renewable energy paired with storage.

 

We’re also starting to add battery storage technology to our large-scale solar installations, experimenting with the same technology you’d find in a Tesla all-electric vehicle, but more than 10 times the size.

 

New York State’s Reforming the Energy Vision (REV) has enabled us to pursue innovative demonstration projects that address affordability and renewable energy.

 

Traditional solar installations generate electricity only for one resident or business who can afford it. Through our Fruit Belt Neighborhood Solar project in Buffalo, we are bringing rooftop solar to an entire city section. We will aggregate the power from 100 neighbourhood solar installations and share the benefits with residents who otherwise might not be in a position to install on their own.

 

Investing for the future

As I’ve described above, having the right rate plans in place allows us to invest. Below are some examples of how investments are helping us to future-proof our business for generations to come.

 

We are assisting with green transportation in Massachusetts. In January, we filed a proposal with MADPU to develop more than 1,200 electric vehicle charging ports at 140 sites over a three-year period. Our proposal came on the

  

 

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Principal operations – Other activities

This part of our operations includes non-regulated businesses and other commercial operations not included within the business segments.

 

 

National Grid Ventures

We have announced the creation of National Grid Ventures to drive growth outside of our regulated core in competitive markets across the US and the UK. The business will comprise all commercial operations in metering, LNG and electricity interconnectors, and focus on investment and future activities in emerging growth areas, a recent example of which is our partnership with Sunrun.

In focus

 

Sunrun

In January, we formed a partnership with Sunrun, the largest dedicated provider of residential solar systems in the US. This partnership comprises a $100 million equity investment in Sunrun’s portfolio of approximately 180 MW of residential solar systems across 18 states, including those in which we operate. National Grid Ventures will manage our interest in Sunrun.

Interconnectors

National Grid is the biggest operator and developer of electricity interconnectors to the UK, with two subsea links in operation and two currently under construction.

BritNed is a joint venture between National Grid and TenneT, the Dutch transmission system operator. It owns and operates a 1 GW HVDC link between England and the Netherlands. A substantial proportion of the flow over BritNed is in the import direction from the Netherlands to Great Britain.

Celebrating its 30th year of operation in 2016, the England–France interconnector (IFA) is a 2 GW HVDC link between the French and British transmission systems with ownership shared between National Grid and Réseau de Transport d’Electricité (RTE). As with BritNed, a substantial proportion of the flow continues to be in the import direction from France to Great Britain.

Following Board approval for the Belgium (Nemo Link) and Norway (North Sea Link) interconnectors in 2015, significant progress has been made on both projects.

Nemo Link, developed between National Grid and Elia, the Belgian transmission system operator, will connect Richborough in the UK and Herdersbrug in Belgium. The subsea cable will be 130 kilometres in length and have a capacity of 1 GW. Seabed surveys and construction work have already taken place on the project, which is planned to be operational in 2019.

North Sea Link (NSL) will connect Blyth in the UK and Kvilldal in Norway. Developed between National Grid and the Norwegian transmission system operator Statnett, NSL will be the longest subsea cable in the world at 720 kilometres. The 1.4 GW link is expected to be operational by 2021. Construction started in Norway in 2016, while work in the UK will begin this year.

The Board also approved the 240 kilometre IFA2 interconnector in November 2016. Developed with RTE, the 1 GW subsea cable will connect Hampshire in the UK and Normandy in France. The link is expected to be operational in 2020, with construction starting in 2018.

Grain LNG

Grain LNG is one of three LNG importation facilities in the UK. It operates under long-term contracts with customers and provides importation services of ship berthing, temporary storage, ship reloading and re-gasification into the NTS.

 

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“It’s a project that ticks the boxes – helping to meet renewable energy targets and keeping the lights on for customers.”

 

Nigel Williams

Project Director, North Sea Link

 

 
 

 

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Our road tanker loading facility was commissioned in November 2015. The new loading hub offers a more environmentally-friendly alternative fuel and allows road tanker operators to load and transport LNG in bulk. Grain carried out its 1,000th road tanker reload in 2016.

 

Metering

National Grid Metering (NGM) provides installation and maintenance services to energy suppliers in the regulated market in Great Britain. It maintains an asset base of around 12.3 million domestic, industrial and commercial meters.

 

Customer satisfaction scores for NGM remain positive for domestic, industrial and commercial businesses. We continue to work with our customers on areas for improvement by exploring additional products and services so we can respond to the rapidly changing non-domestic sector.

 

National Grid Smart became operational in November 2016, supporting energy suppliers in fulfilling their UK smart meter roll-out obligations. National Grid Smart offers a variety of services from meter asset financing and customer relationship management through to installation and maintenance services, and has secured customer contracts over the last six months. By the end of 2020, around 53 million smart meters will be fitted in more than 30 million premises (households and businesses) across England, Scotland and Wales.

 

UK Property

National Grid Property is responsible for the management, clean-up and disposal of surplus sites in the UK, most of which are former gas works. During 2016/17, we sold 19 sites and exchanged conditional contracts on a further 14 future land sales. We entered a new phase of our joint venture, St William Homes LLP, starting construction of 955 new homes on our first site at Battersea. Our estate management, gas holder dismantling and contaminated land clean-up programmes continue to reduce operational risk across our portfolio.

 

US non-regulated businesses

Some of our US businesses are not subject to state or federal rate-making authority. These include interests in LNG road transportation, some gas transmission pipelines (our minority equity interests in these are not regulated) and certain commercial services relating to solar installations, fuel cells and other new technologies that are an important part of our future.

          

 

North Sea Link

 

Stretching 720 kilometres under the North Sea, the  2 billion North Sea Link (NSL) will be the first electricity interconnector between the UK and Norway.

 

This joint project, between National Grid and Statnett, the Norwegian transmission operator, is the biggest of its kind in the world and will mean laying new cable over four years in challenging North Sea sub-sea

       

 

 

conditions. We’ve developed a close working partnership with Statnett – a one-team approach – so we can make sure the project progresses safely, economically and to stringent deadlines.

 

NSL will allow both countries to trade energy, and contribute to more production of renewable energy on both sides. This will give both countries a wider spread of electricity supply to turn to when they need it.

 

          

 

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Our people

If we are to achieve our strategic objectives, we need to make

sure our employees have the right skills and capabilities.

 

LOGO

 

Being good neighbours

“When someone does a great job, the company they work for needs to know and that’s why I’m writing to you.”

 

Ron Lamb, Rhode Island

“When we lost electricity in my neighbourhood in Rhode Island, I called to report the outage and then went to bed. I woke up at 3:30am and noticed we still didn’t have electricity, so I went downstairs to check the National Grid website, which showed a crew was assigned and the estimated time electricity would be back on was 8:00am. I looked out of the front window, to find a large crew of workers, trucks and equipment.

 

The thing that amazed me was this crew was going about doing their jobs making very little noise, I would never have known they were there. At 6:30am one of the guys came to tell us they’d repaired the cable and he brought me my newspaper, so I emailed to say thanks for being a good neighbour.”

    

Building skills and expertise to drive performance

Our sector is undergoing a period of massive transformation and uncertainty, so we are taking steps to help make sure our workforce capacity and capability remains flexible enough to deliver our strategic objectives. For example, we are using a new strategic workforce planning programme. This helps us determine where we could have future shortfalls in our workforce requirements across a range of possible scenarios over the next 10 years. It also helps us plan investment for recruitment and training, so we can make sure we always have the right skills in the right place at the right time.

 

During 2016/17, we have taken steps to improve our people’s capability, primarily across four main areas: leadership, contract management, stakeholder management and performance excellence. We are also setting the standards that we need to achieve in other capability areas, including data management, customer focus and commerciality.

 

Our Accelerated Development Programme is designed to enhance our leadership succession planning by developing the skills of employees seen as having potential to grow into our senior roles. During 2016/17, 117 participants started the 18-month programme.

 

Safeguarding the future

We remain committed to helping address the significant skills challenge facing the engineering profession in the UK and US.

 

In the UK, the 2015 Employer Skills Survey highlighted that 36% of hard-to-fill vacancies in the UK energy and utilities sector were due to a lack of proficient skills – well above the 23% national average and notably higher than any other sector.

  

In the US, we completed the seventh year of our National Grid Engineering Pipeline programme, designed to inspire high school students to pursue an engineering education and career. To date, 304 promising students have participated.

 

We promoted STEM education and careers to more than 300 middle and high school students during our Engineering our Future initiative. We also partner with seven local community colleges to deliver programmes designed to produce future electricity line workers.

 

We have further partnerships with the Center for Energy Workforce Development on its ‘energy industry fundamentals’; and with Jefferson Community College, Con Edison and Fort Drum to establish the Troops to Energy Natural Gas Bootcamp. This six-week training programme helps soldiers exiting the military transition to civilian work – and will help meet the need for natural gas workers in the northeast.

 

US work experience opportunities include summer internships – with some interns starting their journey into the energy industry through our Engineering Pipeline programme. Some students go on to join our Company through our graduate development programme or regular full-time opportunities. This past year, we have doubled our graduate development programme in the US and incorporated best practices from the UK, including adopting the UK’s online assessment and interview day processes.

 

Promoting an inclusive and diverse workforce

Our inclusion and diversity activities include attraction and recruitment, development, leadership, role modelling and cultural change.

    

 

To help address this, we are involved in a number of initiatives. For example, our Chief Executive and specialists from our Academy are members of both the Council and Delivery Board of the Energy Utility Skills partnership and have supported the creation of the Energy and Utilities’ Workforce Renewal Skills Strategy 2020. This has involved collaborating with the wider sector to address priorities such as recruitment, investment in skills and targeting skills gaps.

 

Our Academy offers residential work experience programmes for 100 young people annually, balanced 50/50 between boys and girls. We participate in the annual Big Bang Fair, which is designed to promote interest in STEM subjects and careers.

 

During 2016/17, 316 people have participated in our apprentice, engineering, student and graduate development programmes. In November 2016, our apprentice programme was ranked ‘Outstanding’ by Ofsted for the third time consecutively.

  

 

We aim to attract a diverse range of applicants, including under-represented groups. In the UK, our Women in National Grid Yearbook, which showcases a number of our UK female role models, is available to potential applicants so they can envisage a career with us. In the US, our priorities have included more veterans and women into ‘non-traditional’ roles, such as engineering and field technicians.

 

We recognise the value that a diverse workforce and an inclusive culture bring to our business. Our policy is that people with disabilities should have fair consideration for all vacancies against the requirements for the role. Where possible, we make reasonable adjustments in job design and provide appropriate training for existing employees who become disabled. We are committed to equal opportunity in recruitment, promotion and career development for all employees, including those with disabilities, and our policy recognises the right of all people to work in an environment that is free from discrimination.

 

30   National Grid Annual Report and Accounts 2016/17   Strategic Report  


Table of Contents
 

 

   Strategic Report

 

 

In focus

 

100%

The conversion rate for the natural gas technician certificate programme we have developed in partnership with the State University of New York. This initiative is designed to address future hiring needs for our gas operations.

 

 

6.5

days per employee

The average amount of technical, safety and professional effectiveness training undertaken by our employees in the UK and US during 2016/17.

LOGO

 

 

Celebrating our female role models

Vicky Higgin (pictured above), a senior leader in our Information Services function, won leader of the year at the FDM everywoman in Technology Awards, which recognise the value of women working in IT. Vicky, who joined National Grid in a junior role in 1997, was recognised for her leadership and varied National Grid career. This includes her work with Engineering UK, a charity that encourages young people into engineering.

We have reviewed some of our leadership development programmes to place a stronger emphasis on inclusion and diversity. For example we have further developed our unconscious bias training and added it to our US supervisor development programme.

We believe leadership involvement is an important factor in building an inclusive culture. Many leaders are sponsors of our employee resource groups or mentees in our reverse mentoring programme. These activities provide our leaders with a greater understanding of the challenges facing our diverse workforce, and more confidence in discussing diversity in the organisation. Senior role models are being encouraged to show how they are bringing an inclusive culture to life.

Our Employee Resource Groups build awareness and understanding of inclusion and diversity throughout the organisation. They also provide valuable feedback and suggestions for improvements. For example, a proposal from our US Work-Life group led to the launch of our new Parental Bonding Policy, which provides enhanced support to employees after the birth or adoption of a child. In the UK, ‘One’, our ethnic minority group, organised Black History Month events to raise the profile of ethnic diversity.

Externally, we were recognised as an employer of choice in the US with an award from the Human Rights Campaign Foundation as one of the ‘best places to work’ for LGBT equality. In the UK, our EmployAbility scheme, which provides supported work experience for young people with learning disabilities, is recognised as best practice by the Business Disability Forum.

Following the UK Gender Pay Gap

Information Regulations in the UK, approved by Parliament in February 2017, we will be disclosing additional pay gap information during 2017 according to the approach outlined in the regulations.

The table opposite shows the breakdown in numbers of employees by gender at different levels of the organisation. We have included information relating to subsidiary directors, as this is required by the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013. We define ‘senior management’ as those managers who are at the same level, or one level below, our Executive Committee. It also includes those who are directors of subsidiaries, or who have responsibility for planning, directing or controlling the activities of the Group, or a strategically significant part of the Group, and are employees of the Group.

Financial year ended 31 March 2017  
    

Our

Board

    

Senior

management

    

Whole

Company*

 

Male

     8        167        16,802  

Female

     4        68        5,330  

Total

     12        235        22,132  

Male %

     66.7%        71.1%        75.9%  

Female %

     33.3%        28.9%        24.1%  

 

 

 

* This measure is also one of our Company KPIs. See page 12 for more information.

Health and well-being

During 2016/17 we have continued to promote the importance of well-being across our business.

In the UK, we have a leading role in the Business in the Community Workwell campaign, which promotes mental well-being in the workplace. More than 900 people, including around 30 of our senior leaders, have attended our mental health first aid course to date. We also ran a diabetes awareness campaign in which employees could assess risk and learn more about diet and activity.

Our activities in the US included a programme aimed at reducing soft tissue injuries through early intervention and prevention. Specialists are available to employees, providing on-site therapy services and advice. Other activities included a focus on chronic disease prevention through educational programmes and wellbeing initiatives.

Building strong communities

We believe a strong community is good for the people who live there, good for our business and good for the wider economy. To further support the communities in which we work and live, we partner with charity organisations, and provide communities with one-off grants to support their social, economic and environmental development. We also empower our employees to pursue projects and their chosen causes through volunteering in their neighbourhoods.

We support local schools and colleges with work experience opportunities and careers advice sessions. Our engineers help to bring STEM subjects to life. Last year, our community engagement and investment in education was valued at £12,364,891, with our UK employees giving over 18,400 hours of volunteering support and the US providing more than 22,900 hours of interactions with young people on STEM subjects.

Human rights

Respect for human rights is incorporated into our employment practices and our values. See page 191 for more information.

 

 

  National Grid Annual Report and Accounts 2016/17   Our people   31


Table of Contents

    

 

Letter from the Chairman and

Corporate Governance contents

 

 

Sir Peter Gershon            

Chairman

 

  LOGO

 

  Corporate Governance contents  
  Letter from the Chairman      32  
 

 

 
  Corporate Governance   
  – Board focus      33  
 

 

 
  – Our Board      34  
 

 

 
  – Board composition      36  
 

 

 
  – Board and committee membership and attendance      37  
 

 

 
  – Directors’ induction programme      37  
 

 

 
  – Director development and training      37  
 

 

 
 

– Investor engagement

     37  
 

 

 
  Board and committee evaluation      38  
 

 

 
  Audit Committee      40  
 

 

 
  Finance Committee      45  
 

 

 
  Safety, Environment and Health Committee      46  
 

 

 
  Nominations Committee      47  
 

 

 
  – Board diversity      48  
 

 

 
  Management committees      49  
 

 

 
  Statement of compliance with the UK Corporate Governance Code      50  
 

 

 
  Index to Directors’ Report and other disclosures      53  
 

 

 
  Directors’ Remuneration Report      54  
 

 

 
  Dear Shareholders,  
  This last year has seen a significant focus on shaping the strategic direction of the Company and maximising value creation for our shareholders. The Board has overseen the sale of a majority interest in the Company’s UK Gas Distribution business, given approval for the IFA2 interconnector, the formation of a partnership with Sunrun in the US and the work undertaken to support a more independent electricity system operator in the UK.  
  We are mindful of value creation for shareholders as well as our responsibility to all stakeholders in our decision making. The Board always takes into consideration its fiduciary duties to the Company under the Companies Act 2006, in particular the duty to promote the success of the business, when arriving at decisions that it believes are in the best interests of shareholders and the long-term future of the Company.  
  The Board has also undertaken site visits in Buffalo, US, participated in three strategy sessions and received training on the Market Abuse Regulations that came into force in July 2016 as a result of EU legislation.  

 

 

Management reporting

During the year, a review was undertaken to make sure that the management reports to the Board were providing the information required to facilitate effective discussions and support decisions. Changes were also made to the timing and frequency of reporting to the Board. We believe that these changes will allow the Board to better monitor the performance of the Company and hold management to account.

Cyber security

Cyber security continued to be a key area of focus for the Board this year. In addition to various updates from management, an external advisor delivered a Board training session designed to highlight the role of the Board in effective cyber security governance and provide an insight to the key challenges unique to the Company. The training also sought to equip Board members with examples of questions to ask in order to challenge management and make sure that the controls in place align with the Company’s risk appetite and culture. Management has recently developed a new cyber security management report and we will continue to monitor the performance and level of risk on a regular basis next year.

Corporate Governance Reform

Corporate Governance developments continue to be subject to political and media scrutiny. This topic is kept under frequent review by your Board. In February, we responded to the Department of Business, Energy and Industrial Strategy’s consultation on Corporate Governance Reform. We also noted the Financial Reporting Council’s (FRC) intention to undertake a fundamental review of the UK Corporate Governance Code (the Code) and we will look to play an active role in the consultation process.

Board culture

In my role as Chairman, I am responsible for promoting a culture of openness and debate by facilitating the effective contribution of all directors in meetings. We welcome the FRC’s report on ‘Corporate Culture and the Role of Boards’ and the re-emphasis on the importance of setting the standards at the top of the Company to permeate throughout the organisation. Culture formed the basis of this year’s Board performance evaluation. You can read more about the process and outcomes of the evaluation on page 38.

Board changes

As previously announced, we will be saying goodbye to Ruth Kelly at the end of the 2017 AGM after nearly six years on the Board. Additionally, Steve Holliday stepped down from the Board in July last year and Nicola Shaw joined as Executive Director, UK the same month. More recently, we welcomed Pierre Dufour as a Non-executive Director in February. The Nominations Committee oversaw the rigorous selection process for Pierre’s appointment. You can read more about this on page 47.

LOGO

Sir Peter Gershon

Chairman

 

 

32   National Grid Annual Report and Accounts 2016/17   Corporate Governance  


Table of Contents
 

 

Corporate Governance

 

 

 

 

Looking back. Examples of Board focus during the year included:

 

 

 

Areas of focus

 

  

 

Commentary

 

  

 

The sale of the Gas Distribution business    The sale of the UK Gas Distribution business has been a feature on every agenda this year and the Board has had input into all the key decisions. The Board has received updates from the project management team on a range of topics, including the transfer of employees to the new, separate company, negotiations with the pension trustees and progress against the project timetable.    bids against a set of financial and non-financial criteria that evaluated the value of the bid but also the suitability of the bidder. Following discussion, the Board unanimously approved entering in to detailed discussions with the Consortium for the disposal of a majority interest in the UK Gas Distribution business and an announcement to the market was made.
   In September, an additional Board meeting was arranged to consider the first round bids and again in December to consider second round bids. The Board assessed the    Discussions in March and April focused on the most appropriate way to return the proceeds of the sale to shareholders.

 

The future of the System Operator    The Board has been kept involved with the future of the ESO ahead of the joint announcement with the government and Ofgem of a more independent system operator (ISO) earlier this year. Updates on progress were    received in April, June and November and the Board considered the proposed operator model and governance arrangements and whether the move to an ISO was in the interests of both customers and shareholders.

 

Cyber security    Cyber security has remained high on the Board agenda this year. In December the Board participated in a two-hour cyber training session delivered by an industry    expert. Moving forward the Board will also receive triannual cyber management reports to monitor this risk.

 

The strategic partnership with Sunrun in the US    In line with the Code, the Board, and in particular, the Non-executive Directors should constructively challenge and help develop proposals on Strategy. Further to discussions in the July and September strategy sessions    around distributed energy resources, the Board considered a proposal to form a strategic partnership with Sunrun in December. The proposal was carefully considered and approved.

 

European Energy and the implications of Brexit    Following the outcome of the EU Referendum, the Board discussed the implications for the Company at its June meeting. The issue was also considered in relation to the final investment decision for the IFA2 interconnector project with respect to access to the Internal Energy Market and any adverse effect on import tariffs.    The Board will receive an update on a triannual basis so it can monitor the external political environment and take this into account in its strategic decision making.

 

US regulatory rate case filings    The Board has received regular updates on the Company’s regulatory strategy and the progress of regulatory rate case filings in the US. Senior employees from the US jurisdictions have attended Board    meetings to provide an overview of the political and stakeholder context in each area and to discuss the opportunities and challenges that exist.

 

Mid-period review    In August, Ofgem published initial proposals for a mid-period review into the price controls for RIIO-T1. The Board has been kept up to date with progress on the Company’s response to the consultation and also market    reaction to the review stages. The Board noted Ofgem’s final decision in February and will continue to monitor the Company’s engagement with the regulator.

 

Principal risks and viability    The Board is responsible for determining the nature and extent of the Company’s principal risks. The Board discussed the Group risk profile in September and March and gave consideration to whether there were any changes to existing risks, any emerging risks, and whether the agreed principal risks were consistent with the Company’s risk appetite levels.    The impact of the principal risks was tested over the established assessment period of five years. The Board confirmed that it was satisfied with the assessment of the risks including the testing, management and mitigation. In May, the Audit Committee recommended the viability statement to the Board and it was approved.

 

Purpose, vision and strategy    In addition to time spent in Board meetings discussing strategy, the Board also participated in three separate strategy sessions this year. The first session focused on how the energy industry is evolving, the Company’s strategic priorities and proposals for developing the    Company’s purpose, vision and values. The final two sessions considered the Company’s capabilities and resources and also explored technology and innovation projects used internally and those available externally.

 

Site visits    As referenced last year, the Board meeting in September 2016 took place in Buffalo in the US. The Board members took this opportunity to explore the work undertaken by the Company in the local area such as the collaboration with the Buffalo Niagara Partnership and the Company’s    role in providing infrastructure for the developments in the River Bend area. The visit also allowed the Board to interact with various local stakeholders and employees and gain further insight in to the day-to-day operations of the Company.

 

Looking forward. The Board’s focus for next year is expected to include:

 

•  continued regular reviews of safety activities;

 

•  cyber security updates;

•  UK and US operational business overviews;

 

•  innovation;

•  preparation for RIIO T-2;

 

•  the 2017 UK Winter Outlook;

•  continued detailed review of our strategy for growth and its financing;

•  the implications of Brexit on our activities;

•  the future of the SO;

•  the outcome of the US regulatory rate case filings, including upstate New York, Rhode Island and the Massachusetts gas companies;

 

 

•  results and follow-up on the action planning from the Board and committee evaluation;

•  updates on UK and US corporate governance and other policy developments; and

•  results of the 2017 employee engagement survey.

 

 

 

  National Grid Annual Report and Accounts 2016/17   Corporate Governance   33


Table of Contents

Corporate Governance continued

 

 

 

Our Board

 

 

 

 

 

Key

 

A Audit Committee

 

F Finance Committee

 

N Nominations Committee

 

R Remuneration Committee S Safety, Environment and Health Committee

 

(ch) Chairman of committee

 

Including National Grid Group plc

 

Tenure as at 31 March 2017

 

Charts and committee membership are as at 17 May 2017

  

LOGO

Sir Peter Gershon CBE FREng (70)

Chairman N (ch)

 

Appointed: 1 August 2011 as Deputy Chairman and became Chairman with effect from 1 January 2012

 

Tenure: 5 years

 

Career and skills: Sir Peter is a Fellow of the Royal Academy of Engineering and has had a varied career holding a number of senior positions across multiple industries. His previous appointments include Chief Executive of the Office of Government Commerce, Managing Director of Marconi Electronic Systems and a member of the UK Defence Academy Advisory Board. Sir Peter brings to his role of Chairman of the Board extensive general management, government and advisory experience as well as significant board level experience, including a seven-year tenure as Chairman of Tate and Lyle plc from which he retired from on 31 March 2017. Sir Peter currently holds external appointments as a Non-executive Chairman of the Aircraft Carrier Alliance Management Board and a Trustee of The Sutton Trust.

 

Skills and experience:

Ci, Cu, E, GM, G and I.

  

LOGO

John Pettigrew FEI, FIET (48)

Chief Executive F

 

Appointed: 1 April 2014 and became Chief Executive with effect from 1 April 2016

 

Tenure: 3 years

 

Career and skills: John joined the Company in 1991 and progressed through a variety of roles before joining the Board as UK Executive Director in 2014. With over 25 years of varied experience at National Grid, his previous roles include Director of Engineering in the UK, Chief Operating Officer and Executive Vice President for the US Electricity Distribution & Generation business, Chief Operating Officer for UK Gas Distribution and UK Chief Operating Officer from 2012 to 2014. John’s extensive experience within the Company brings to the Board a deep understanding of the energy and utilities industry and operation within a regulatory environment as well as a full appreciation of the landscape National Grid works in.

 

Skills and experience:

E, G, GM, R and U.

  

LOGO

Nicola Shaw CBE (47)

Executive Director, UK

 

Appointed: 1 July 2016

 

Tenure: Less than a year

 

Career and skills: Nicola joined the Board in July 2016 as Executive Director following her previous roles as CEO at HS1 plc from 2011 to 2016 and FirstGroup plc from 2005 to 2010. She was also an independent Non-executive Director of Aer Lingus Group plc until September 2015. Nicola’s career, both in the UK and overseas, has included roles at the Strategic Rail Authority, Office of the Rail Regulator, Bechtel Ltd, Halcrow Fox, the World Bank and London Transport and she is currently a Non-executive Director of Ellevio AB, a Swedish electricity distribution company. Nicola has a broad range of experience and strong track-record working with the UK Government, the European Commission and Parliament and industry Regulators as well as leading important infrastructure businesses which she brings to her role as UK Executive Director on the Board and a member of the Executive Committee.

 

Skills and experience:

G, I, R and U.

LOGO

Andrew Bonfield (54)

Finance Director F

 

Appointed: 1 November 2010

 

Tenure: 6 years

 

Career and skills: Andrew is a chartered accountant with significant financial experience having previously held the position of Chief Financial Officer at Cadbury plc; he also spent five years as Executive Vice President & Chief Financial Officer at Bristol- Myers Squibb, an American pharmaceutical company. Andrew also has prior experience in the energy sector as he was Finance Director of BG Group plc from 2001 to 2002. He currently has an external appointment on the Kingfisher plc Board as a Non-executive Director. Andrew’s varied financial experience across several different industries enables him to bring valued and technical expertise to Board meetings through thorough knowledge of the financial industry both in the UK and internationally.

 

Skills and experience:

Fi, I and U.

  

LOGO

Dean Seavers (56)

Executive Director, US

 

Appointed: 1 April 2015

 

Tenure: 2 years

 

Career and skills: Dean began his career at the Ford Motor Company, moving to Tyco International Ltd where he held various senior management positions before joining General Electric Company/United Technologies Corporation. He was President and Chief Executive Officer of General Electric Security and then President, Global Services of United Technologies Fire & Security. Dean was also a member of the Board of Directors of the National Fire Protection Association and most recently he has been a lead network member at City Light Capital and President and Chief Executive of Red Hawk Fire & Security, LLC and currently holds an external appointment as a Board member of Red Hawk Fire & Security, LLC. Dean brings to the Board a wide range of financial and customer experience along with significant general management experience with a particular focus on change and performance improvement programmes.

 

Skills and experience:

Ci, Cu, Fi, GM and I.

  

LOGO

Nora Mead Brownell (69)

Non-executive Director N, R, S

 

Independent

 

Appointed: 1 June 2012

 

Tenure: 4 years

 

Career and skills: A key individual in the US energy industry, Nora has significant experience gained in a variety of roles including Commissioner of the Pennsylvania Public Utility Commission and FERC and former President of the National Association of Regulatory Utility Commissioners. Most recently, Nora sat on the Boards of ONCOR Electric Delivery Holding Company LLC and Comverge, Inc. She is currently a member of the Board of Spectra Energy Partners LP and the Advisory Board of Morgan Stanley Infrastructure Partners as well as a partner in ESPY Energy Solutions LLC. Through her Executive experience and her Non-executive directorships, Nora brings extensive experience in US Government and regulatory matters to the Board as well as significant expertise in the US utilities industry.

 

Skills and experience:

G, R and U.

  

LOGO

Jonathan Dawson (65)

Non-executive Director F, N, R (ch)

 

Independent

 

Appointed: 4 March 2013

 

Tenure: 4 years

 

Career and skills: Jonathan started his career in the Ministry of Defence before moving to Lazard where he spent more than 20 years. He was a Non-executive Director of Galliford Try plc, National Australia Group Europe Limited and Standard Life Investments (Holdings) Limited. Most recently Jonathan was Chairman of the Remuneration Committee and Senior Independent Director of Next plc. His extensive experience in the pensions and financial industries brings significant and in-depth understanding in remuneration and other financial matters to his role as Chairman of the Remuneration Committee and to the Board. Jonathan is currently Senior Independent Director and Chairman of the Audit & Risk Committee of Jardine Lloyd Thompson Group plc and Chairman and a founding partner of Penfida Limited.

 

Skills and experience:

B, Ci, Fi and P.

 

34   National Grid Annual Report and Accounts 2016/17   Corporate Governance  


Table of Contents
 

 

   Corporate Governance

 

 

 

LOGO

Pierre Dufour (62)

Non-executive Director N, R, S

 

Independent

 

Appointed: 16 February 2017

 

Tenure: Less than a year

 

Career and skills: Pierre started his career at SNC Lavalin Group, a Canadian engineering, procurement and construction management business. He joined Air Liquide in 1997, later going on to roles such as Chief Executive of the US operations, Chairman of the Board of Air Liquide Canada and several different positions within Air Liquide where he had responsibility for North American operations, while also overseeing safety and industrial risk management and operations in South America, Africa and the Middle East. Pierre then became Senior Executive Vice President of the Air Liquide Group with responsibility for all Air Liquide group activities across The Americas, Middle East, Africa and Asia. Pierre brings significant safety and engineering knowledge to the Board and, in addition to his executive experience, Pierre is also a Non-executive Director of Archer Daniels Midland.

 

Skills and experience:

Cu, E, GM, I and Sa.

  

LOGO

Therese Esperdy (56)

Non-executive Director A, F (ch), N

 

Independent

 

Appointed: 18 March 2014, and appointed to the Board of National Grid USA from 1 May 2015

 

Tenure: 3 years

 

Career and skills: Having started her banking career at Lehman Brothers, Therese joined Chase Securities in 1997 going on to hold a variety of senior roles at JP Morgan Chase & Co. These included roles as Head of US Debt Capital Markets and Global Head of Debt Capital Markets, co-head of Banking, Asia Pacific at JPMorgan and Global Chairman of the Financial Institutions Group, JPMorgan Chase & Co. Most recently, Therese was appointed as a Non-executive Director on the Imperial Brands PLC Board on 1 July 2016. Therese has significant experience in the financial services industry where she has operated across international markets and as a result brings this experience and insight to the Board and to her role as Chairman of the Finance Committee.

 

Skills and experience:

B, Ci, Fi and I.

  

LOGO

Paul Golby CBE FREng (66)

Non-executive Director A, N, S (ch)

 

Independent

 

Appointed: 1 February 2012

 

Tenure: 5 years

 

Career and skills: A fellow of the Royal Academy of Engineering, Paul has held a variety of roles within the energy and utilities industries and was an Executive Director of Clayhithe plc, before going on to join E.ON UK plc where he was Chief Executive and later Chairman. Paul also held previous appointments as a Non-executive Chairman of AEA Technology Group plc and Chairman of EngineeringUK. He is currently the Chairman of Costain Group plc, the UK National Air Traffic Services, the Engineering and Physical Sciences Research Council and a member of the Prime Minister’s Council for Science and Technology. Paul has significant experience in energy utilities, and within Government and regulatory industries with a specific background in safety and risk management which he brings to the Board and to his position as Chairman of the Safety, Environment and Health Committee.

 

Skills and experience:

Cu, E, G, R, Sa and U.

  

 

 

Skills and experience key

 

B Banking

 

Ci City*

 

Cu Customer

 

E Engineering

 

Fi Finance

 

GM General Management

 

G Government

 

I International

 

P Pensions

 

R Regulation

 

Sa Safety

 

U Utilities

 

*Understanding the concerns of the investment community and listed company matters.

 

 

Board gender

 

LOGO

 

 

Executive and Non-executive Directors

 

LOGO

 

 

Non-executive Director tenure

 

LOGO

 

LOGO

Ruth Kelly (49)

Non-executive Director A, F, N

 

Independent

 

Appointed: 1 October 2011

 

Tenure: 5 years

 

Career and skills: Ruth began her career in Government where she held various senior roles, including Secretary of State for Transport, for Communities and Local Government, for Education and Skills and Financial Secretary to the Treasury. She was a senior executive at HSBC until August 2015 before moving to her current role as Pro Vice Chancellor at St Mary’s University. Ruth is also Governor for the National Institute of Economic and Social Research and has also been a Non-executive Director on the Financial Conduct Authority Board since April 2016. She brings in-depth knowledge of Government and regulatory practice to the Board along with experience in banking and corporate finance.

 

Skills and experience:

B, Fi, G and R.

  

 

LOGO

Mark Williamson (59)

Non-executive Director and Senior Independent Director A (ch), N, R

 

Independent

 

Appointed: 3 September 2012

 

Tenure: 4 years

 

Career and skills: A chartered accountant, Mark has a strong financial background and significant, recent and relevant financial experience gained from roles as Chief Accountant and then Group Financial Controller of Simon Group plc, and Financial Controller and later Chief Financial Officer of International Power plc. Mark was also a Non-executive Director at Alent plc where he was Chairman of the Audit Committee and Senior Independent Director. As well as considerable financial experience, Mark brings a thorough knowledge of energy and regulatory matters and provides the Board with valuable insight in this area. Mark is currently Chairman of Imperial Brands PLC and will join the Board of Spectris plc as Non-executive Chairman with effect from 26 May 2017.

 

Skills and experience:

Ci, Fi, G, R and U.

  

 

LOGO

Alison Kay (53)

Group General Counsel & Company Secretary

 

Appointed: 24 January 2013

 

Career and skills: Alison has undertaken several roles since joining National Grid in 1996 including UK General Counsel and Company Secretary from 2000 to 2008 and Commercial Director, UK Transmission from 2008 to 2012. Before joining National Grid she was a corporate/ commercial solicitor in private practice. Alison is an experienced commercial lawyer bringing a wealth of practical advice and guidance to her current role. She has developed expertise in regulatory and contractual law and legal risk management through her experience at National Grid. She also brings rigour around corporate governance and reporting to the Board, gained partly through her current role and also in her previous role as Secretary to the boards of the subsidiary companies, National Grid Gas plc and National Grid Electricity Transmission plc. She has recently served as an observer on the Board of the Nuclear Decommissioning Authority.

  

 

  National Grid Annual Report and Accounts 2016/17   Our Board   35


Table of Contents

    

 

Corporate Governance continued

 

 

 

 

 

 

 

Key

Lines of reporting

Board to

Board committees

 

 

Executive Committee

to Board/Board

committees

 

 

Management

committees to

Executive Committee/

Board committees

 

 

Lines of

communication

 

 

Corporate Governance

Board composition

The successful delivery of our strategy depends upon attracting and retaining the right talent. This starts with having a high-quality Board. Balance is an important requirement for the composition of the Board, not only in terms of the number of Executive and Non-executive Directors, but also in terms of expertise, diversity and backgrounds.

While traditional diversity criteria such as gender and ethnicity are important, we also value diversity of skills, experience, knowledge and thinking styles. You can read about our Board diversity policy in the Nominations Committee report on page 48.

This year we welcomed Nicola Shaw on to the Board as Executive Director, UK on 1 July 2016 and Pierre Dufour as a Non-executive Director on 16 February 2017. Steve Holliday stepped down from the Board with effect from 22 July 2016. Ruth Kelly will step down from the Board at the conclusion of the 2017 AGM.

Our Board and its committees

The Board delegates authority to its Board committees to carry out certain tasks on its behalf, so that it can operate efficiently and give the right level of attention and consideration to relevant matters.

The committee structure, reporting and communication lines are set out in the diagram below and the role and responsibilities of the committees are set out in their respective terms of reference, available on our website. Committee agendas and schedules of items to be discussed at future meetings are prepared in accordance with the terms of reference of each committee and take account of other topical and ad-hoc matters.

In addition to the vertical lines of reporting, the committees communicate and work together where required. For example, the Finance Committee and the Audit Committee both review the going concern assumptions and provide recommendations to the Board.

At Board committee meetings, items are discussed and, as appropriate, endorsed, approved or recommended to the Board, by the committee. Following Board committee meetings, the chairman of each committee provides the Board with a summary of the main decisions and discussion points so the non-committee members are kept up to date with the work undertaken by each Board committee.

Below the Board committees are a number of management committees, including the Executive Committee. You can read more about some of the management committees, including the membership and operation of the Executive Committee, on page 49.

Reports from each of the Board committees together with details of their activities during the year are set out on the following pages.

 

 

Board and committee interactions

 

LOGO
 

 

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In focus

 

365

meetings held with institutional and private investors during the year in 11 countries

 

LOGO

 

Further detail on

www.nationalgrid.com/ investors

Board and committee membership and attendance

The table below sets out the Board and committee attendance during the year to 31 March 2017. Attendance is shown as the number of meetings attended out of the total number of meetings possible for the individual Director during the year.

If any Directors are unable to attend a meeting, they are encouraged to communicate their opinions and comments on the matters to be considered via the Chairman of the Board or the relevant committee chairman. Instances of non-attendance during the year were considered and determined as being reasonable in each case due to the individual circumstances.

All instances of Board and committee meeting non-attendances throughout the year were due to ad-hoc meetings being arranged at short notice meaning members were unable to attend due to prior engagements.

The Board has determined that Mark Williamson, Chairman of the Audit Committee, has recent and relevant financial experience; is a suitably qualified audit committee financial expert within the meaning of the SEC requirements; and is independent within the meaning of the New York Stock Exchange listing rules.

 
 Director    Board Meetings        Audit        Finance        Nominations        Remuneration        Safety,
Environment
& Health
 

 Sir Peter Gershon

     11 of 11                            7 of 7                    

 John Pettigrew

     11 of 11                   4 of 4                             

 Andrew Bonfield

     11 of 11                   4 of 4                            5 of 5  

 Dean Seavers

     11 of 11                                               

 Nicola Shaw1

     8 of 8                                               

 Nora Mead Brownell

     11 of 11                            7 of 7          8 of 8          5 of 5  

 Jonathan Dawson

     10 of 11                   3 of 4          6 of 7          8 of 8           

 Pierre Dufour2

     1 of 1                                     1 of 1          0 of 1  

 Therese Esperdy

     11 of 11          6 of 6          4 of 4          7 of 7                    

 Paul Golby

     11 of 11          5 of 6                   6 of 7          5 of 8          5 of 5  

 Ruth Kelly

     11 of 11          6 of 6          4 of 4          7 of 7                    

 Mark Williamson

     11 of 11          6 of 6                   7 of 7          8 of 8           

 Steve Holliday3

     3 of 3                                               

 

 Attendance notes

1. Nicola Shaw was appointed as Executive Director, UK with effect from 1 July 2016. 2. Pierre Dufour was appointed as a Non-executive Director with effect from 16 February 2017. 3. Steve Holliday stepped down from the Board with effect from 22 July 2016.

 

 

 

 

Directors’ induction programme

Following new appointments to the Board, the Chairman, Chief Executive and Group General Counsel & Company Secretary arrange a comprehensive induction programme. The programme is tailored based on experience and background and the requirements of the role.

Following Nicola Shaw’s appointment to the Board in July 2016 she has undertaken a thorough tailored induction which has included a number of site visits both in the UK and the US, along with meetings with all of the Company’s Directors and senior executives.

Pierre Dufour was appointed to the Board in February 2017 and is undergoing a structured induction which will include meetings with senior leaders from across the Company. He will also undertake visits to some of our operational sites to help build his understanding of the Company. Pierre’s induction is ongoing and will be reviewed by the Chairman to ensure that it is stretching and appropriate. Consideration is given to committee appointments and where relevant, tailored training can be undertaken.

Director development and training

As our internal and external business environment changes, it is important to make sure that Directors’ skills and knowledge are refreshed and updated regularly. The Chairman is responsible for the ongoing development of all Directors.

To strengthen the Directors’ knowledge and understanding of the Company, Board meetings regularly include updates and briefings on specific aspects of the Company’s activities. The Board has participated in a cyber training session, see page 32 for more details. The Board also undertook training on the new EU Market Abuse Regulations which came into force in July 2016 to ensure that they understood the new obligations and reporting requirements.

Updates on corporate governance and regulatory matters are also provided at Board meetings along with details of training and development opportunities available to our Directors. Additionally, the Non-executive Directors are expected to visit at least one operational site annually. In September, the Board visited one of our US sites in Buffalo, New York to gain an insight into one area of our US business operations.

Investor engagement

We believe it is important to maintain effective channels of communication with our debt and equity institutional investors and individual shareholders. This helps us to understand their views about the Company and allows us to make sure they are provided with timely and appropriate information on our strategy, performance, objectives, financing and other developments.

Institutional investors

We carry out a comprehensive engagement programme for institutional investors and research analysts, providing the opportunity for our current and potential investors to meet with executive and operational management.

This includes:

 

  meetings, presentations and webinars;
  attendance at investor conferences across the world;
  holding road shows in major investor centres, mainly in the UK, Europe and the US; and
  offering the opportunity for individual stewardship meetings.

In the last year, our engagement programme has focused on clarifying our Group growth expectations and updating investors on the progress of our rate case filings in the US and the proposed sale of the majority interest in our UK Gas

 
 

 

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Corporate Governance continued

 

Distribution business. We have also been explaining to investors how we expect the Company to continue to perform against its regulatory contracts in both the UK and US.

In September 2016 we arranged a seminar in London to provide institutional investors and research analysts with an opportunity to meet some of the leaders of businesses within our Other Activities such as Property, Grain LNG, Interconnectors and Metering, in addition to a presentation on US business development. The event was led by Andrew Bonfield and designed to provide an understanding of the current performance of this portfolio of businesses and their future outlook. A copy of the presentation and associated materials are available in the Investors section of our website.

In addition to these engagement activities, we will also be holding a stewardship meeting in July this year. The event is designed to update major investors on our activities over the year and future plans. It will also provide the opportunity for attendees to ask questions and meet members of the Board and for our Non-executive Directors to further develop their understanding of our shareholders’ views and concerns.

The Board receives regular feedback on investor perceptions and opinions about the Company. Specialist advisors and the Director of Investor Relations provide updates on market sentiment.

Additionally, each year, the Board receives the results of an independent audit of investor perceptions. Interviews are carried out with investors to establish their views on the performance of the business and management. The findings and recommendations of the audit are then discussed by the Board.

Debt investors

Over the last year senior group treasury representatives have met debt investors in Europe, Canada and the US to discuss various topics such as our full-year results and upcoming US rate case filings. We also met with debt investors in London, Edinburgh, Amsterdam and Paris in September 2016 to market the bonds issued for the new Gas Distribution company.

We also communicated with our debt investors through regular announcements and the debt investor section of our website which contains bond information, credit ratings and materials relating to the subsidiary year-end reports, and information about our long-term debt maturity profile so investors can see our future refinancing needs.

Individual shareholders

Engagement with individual shareholders, who represent more than 96% of the total number of shareholders on our share register, is led by the Group General Counsel & Company Secretary.

Shareholders are invited to learn more about the Company through our shareholder networking programme. The programme includes visits to UK operational sites and presentations by senior managers and employees over two days. UK resident shareholders can apply to take part in this programme via the Investors section of our website.

For information on the 2017 Annual General Meeting, please see page 52.

Board and committee evaluation

This was the second year of our three-year performance cycle, as shown in the diagram below. We undertook an internal Board performance evaluation, led by Sir Peter, and focused on the Company’s culture, as well as the role of the Board in shaping, monitoring and overseeing the culture.

LOGO

Board members completed a structured questionnaire with a series of open questions designed to assess how the Board effectively sets the ‘tone from the top’ and determines how effectively this is cascaded throughout the Company. The questions asked covered the following areas:

 

  clarity of the Company’s purpose and values;
  effectiveness of the Board’s oversight, shaping and monitoring of the Company’s culture;
  the balance and structure of Board governance;
  the ability of the Board to hold management accountable for operating the business day-to-day in alignment with the Company’s purpose and values;
  how the right tone in the boardroom can be set to reinforce the Company’s purpose and culture and to empower Board members to raise concerns; and
  ascertaining how the Company’s reward structure encourages behaviours consistent with the Company’s culture.

The Chairman then met with each Board member to discuss their responses to the questionnaire as well as their individual performance throughout the year.

The outcome of the Board evaluation was reported to the Board in April. The Board discussed the findings of this year’s evaluation and agreed a number of actions for the coming year as set out opposite.

The Board also discussed its performance generally and agreed that the Board had worked well together as a unit, discharged its duties and responsibilities effectively, and worked effectively with the Board committees.

Committee evaluation

An evaluation of committee performance was also conducted by the chairman of each of the Board committees. The process broadly followed that conducted by the Board with each committee using their own set of open questions.

Actions were identified as appropriate and agreement reached that the committees continued to operate effectively. Progress against the action plans will be monitored throughout the year by the respective committee and the Board.

Actions for 2017/18

  Develop a common definition of ‘culture’ for the Board and Executive Committee

Responsibility: Chief Executive/Group General Counsel & Company Secretary/Human Resources

  Determine the Board’s role in guiding the cultural destination of the Company

Responsibility: Chairman/Chief Executive/ Group General Counsel & Company Secretary/ Human Resources/Corporate Affairs

 

 

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Develop a method for the Board to track culture within National Grid

Responsibility: Executive Directors/Human Resources

Assist with the establishment of a desired culture throughout the National Grid businesses

Responsibility: Executive Directors/Group General Counsel & Company Secretary

 

Individual performance

As noted above, the Chairman met with each director individually to discuss their contribution and performance over the year.

 

As part of our annual evaluation process, Mark Williamson, as Senior Independent Director, led a review of the Chairman’s performance. The Non-executive Directors,

    

with input from the Executive Directors, assessed his ability to fulfil his role as Chairman. It was concluded that the Chairman showed effective leadership of the Board and his actions continued to influence the Board and wider organisation. Mark Williamson discussed the feedback and development opportunities with the Chairman.

 

Progress against actions from 2015/16

Progress against the actions from last year’s externally facilitated evaluation has been monitored by the Group General Counsel & Company Secretary and the Chairman throughout the year and an update on progress was provided at the April 2017 Board meeting. A commentary against each action from last year’s review is set out below. Progress against the actions from last year’s Board Committee evaluation has also been monitored throughout the year.

Update on actions from last year

 

Area   

 

Actions

 

   Commentary

 

Board papers

  

Give a renewed push to improve Board and committee papers, including the enforcement of standards of papers and timely submissions.

 

Responsibility: Chief Executive/ Group General Counsel & Company Secretary/Executive Directors

  

 

The Board and committee reporting templates and the sequencing of management reporting were reviewed and changes approved by the Executive Committee and Board. Enhancements were made to the Chief Executive’s Board report and new Key Performance Indicators and reporting dashboards were added to papers where appropriate.

 

The Chairman, Chief Executive and Group General Counsel & Company Secretary review the Board’s forward business schedule on a bi-annual basis to ensure the Board is considering the right matters in order for it to carry out its role effectively.

 

Additionally, the Group General Counsel & Company Secretary continues to work with the management team to enhance reporting standards, Executive ownership of papers, and the timeliness of paper submissions.

 

 

Bringing out strategic themes

  

 

Bring out strategic themes more clearly in the Board papers, pre-read papers and the Chief Executive’s report.

 

Responsibility: Chief Executive/Group General Counsel & Company Secretary

 

  

 

In order to more clearly bring out strategic themes in Board materials, the Chief Executive’s Board report was re-formatted to emphasise the key areas of focus for the Chief Executive. The Chief Executive also continues to review Board pre-read materials to ensure strategic themes are clearly articulated.

 

A review was also undertaken of the format of the Board agenda to identify any areas for improvements. Following review, the Board agenda format was confirmed as fit for purpose.

 

 

Strategic proposals

  

 

The Chairman will discuss with the Non-executive Directors the strategy items on the draft agenda for the next following meeting and articulate the views from the Non-executive Directors as to what is required at the Board meeting including any questions that need answering.

 

Responsibility: Chairman

 

  

 

In order to identify key focus areas for strategic discussions, the Non-executive Directors have been invited to review the items proposed for discussion at the Board Strategy session to be held in July 2017. As noted above, the Chairman, Chief Executive and Group General Counsel & Company Secretary review the Board’s forward business schedule on a bi-annual basis to ensure the Board is considering the right strategic topics.

 

Executive Committee members attend Board dinners in order to achieve alignment between the Board and the Executive management team on strategic matters.

 

Risk and risk management

  

 

Integrate risk more effectively into strategy development and planning.

 

Responsibility: Chief Executive/ Group General Counsel & Company Secretary/Executive Directors

  

 

Executive Directors present the risks and mitigations relating to their own areas at Board meetings as appropriate.

 

It is intended that a Company Risk Framework will be finalised and implemented during the 2017/18 financial year. Additionally, an externally facilitated review of risk appetite is to be undertaken during 2017/18 to identify how risk appetite can better inform decision-making in the future and how it is integrated into Board and committee reporting.

 

 

Board composition

  

 

Continue to consider the skills and capabilities needed on the Board for executing the Company’s future strategy.

 

Responsibility: Chairman

  

 

The Nominations Committee aims to keep the Board fresh with a diversity of skill sets. Therefore, during the year a formal process was undertaken by the Nominations Committee to find an appropriate addition to the Board of a new Non-executive Director, to strengthen the experience and skills on the Board and its committees. Pierre Dufour was appointed to the Board with effect from 16 February 2017.

 

A detailed review of the Board skills matrix will be undertaken during the 2017/18 financial year to assess the skills and capabilities required on the Board in the future.

 

 

People

  

 

Review whether there is enough focus on people on the Board agenda.

 

Responsibility: Chief Executive/ Group General Counsel & Company Secretary

 

  

 

The Nominations Committee undertook a review of Executive and senior succession planning and talent during the year.

 

In addition, senior leaders in the Company’s management team have been invited to Board dinners, providing the Board with further opportunities to spend more time with the Company’s management team.

 

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Corporate Governance continued

    

    

 

Mark Williamson Committee chairman        

 

  LOGO
 

 

Audit Committee

 

  Review of the year
 

This report provides an insight into the work of the Audit Committee over the year in relation to the UK and US businesses, the external auditors, and our role overseeing the Company’s internal assurance functions, as well as the significant issues relating to the financial statements which were debated by the Committee during the year.

 

  UK business review
 

A substantial proportion of the Committee’s time has been spent in relation to the sale of a majority interest in the UK Gas Distribution business.

 

 

The accounting for the transaction is complex and judgemental, and it follows that the reporting of the Group’s financial performance was more complex than usual, with the presentation of the UK Gas Distribution results as discontinued operations in the current and prior periods, additional subtotals in the income statement, and revised and additional disclosure notes, amongst other things.

 

 

The Committee has been focused on the impact on financial processes and systems as well as the staff within the UK finance function. In November, the Committee received a detailed update and briefing on the risks and responses identified by the UK finance team in relation to the business separation activities required in order to prepare the business for the sale.

 

 

The Committee has received regular updates on the progress of the sale and has challenged and monitored management’s judgements and estimates in relation to the financial statements. You can read more about this on page 43.

 

  The Committee met in addition to its usual meetings in April to consider the interim accounts of National Grid plc, which were required in support of the declaration of the special dividend. The Committee’s role in this part of the sale of the UK Gas Distribution business is set out in the Committee in action box set out above right.
 

 

US business review

 

We have seen a steady year of progress and improvements in the financial control environment in the US.

 

  Following the transition to a new jurisdictionally focused operating model in 2016 and supported by a strengthened US finance leadership team, the US business has continued to enhance the processes and controls within the financial controls environment and has successfully delivered the US finance transformation plan.

In June 2016 and January 2017, the Committee met in addition to its usual meetings to receive in-depth updates from the US finance team on progress against the initiatives underpinning the US finance team transformation plan and the improvements in the US financial controls environment.

Our US finance team have also demonstrated its ability to support the wider business as part of the rate case filings for Massachusetts, New York and Long Island, alongside business-as-usual activities.

Auditor transition

In May 2017, PwC completed their final audit for the Group for the year ended 31 March 2017. We thank PwC for all their hard work as our auditors since the inception of National Grid plc.

Deloitte will take office as the Company’s auditors for the year ending 31 March 2018, subject to shareholder approval at the 2017 AGM. We look forward to working with Deloitte and building constructive working relationships. Further details of the auditor transition are set out on page 44.

Looking forward

The Committee will be receiving regular updates, as appropriate, on the Group finance team’s preparations for and the impact of the new accounting standards which will become effective in the next couple of years – IFRS 9 financial instruments, IFRS 15 revenue from contracts and IFRS 16 leases.

 

The Committee in action

Interim accounts

In order to declare the special dividend following the sale of UK Gas Distribution, management was required to demonstrate that sufficient realised profits were available for distribution as at 31 March 2017 in the books of the parent company. As the balance sheet of the Company as at 31 March 2016 showed insufficient reserves, a set of unaudited interim accounts for National Grid plc were prepared on a stand-alone basis for the year to 31 March 2017 specifically for this purpose, as required by UK company law.

 

The Committee met in April 2017 to consider the draft interim accounts, and received a paper from management and advisors summarising the approach to reserves management, the level of profits available for distribution after these activities, and the key process and assurance activities undertaken to ensure that the interim accounts were free from material misstatement. Following due consideration, the Committee recommended the interim accounts for approval by the Board.

LOGO

Mark Williamson

Committee chairman

The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 – statement of compliance.

The Company confirms that it complied with the provisions of the Competition and Markets Authority’s Order for the financial year under review.

 

 

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Examples of Committee focus during the year included:

 

Areas of focus    Commentary

 

Viability statement

  

 

The viability statement requires the Board to confirm that it has assessed the Company’s principal risks and viability. At its September meeting as part of its bi-annual review of risk, the Board considered the Company’s principal risks. The impact of these risks over the assessment period was tested to determine whether or not there was a reasonable expectation that the Company would be able to continue to operate and meet its liabilities as they fall due during that period. This review then informed the wording of the viability statement in the Annual Report and Accounts.

 

The Committee considered the viability statement to be included in the Annual Report and Accounts at its meetings in March and May 2017 and recommended the statement to the Board for approval at its May meeting. You can find the viability statement on page 19.

 

 

Fair, balanced and understandable

 

  

 

The Committee considered the requirement of the Code to ensure that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable in the context of the applicable accounting standards and confirmed this view to the Board.

 

 

Financial reporting

  

 

The Committee monitors the integrity of the Group’s financial information and other formal documents relating to its financial performance and makes appropriate recommendations to the Board before publication.

 

An important factor in the integrity of financial statements is making sure that suitable and compliant accounting policies are adopted and applied consistently on a year-on-year basis and across the Group.

 

In May 2016, the Committee approved a framework for exceptional items which sets out the methodology for determining whether items of income and expense should be deemed exceptional. This did not represent a change in accounting policy but codified the approach adopted by management in the past. The framework sets out a three-stage process: consideration of the nature of the event, financial materiality, and the facts and circumstances. This framework was used by management to consider the presentation of exceptional items in relation to the UK Gas Distribution business sale transaction costs, environmental provisions and UK deferred tax credit.

 

 

External auditor independence and performance

  

 

Sarbanes-Oxley legislation (SOX) and the FRC’s UK Corporate Governance Code supported by its Guidance on Audit Committees set out the requirements and expectations for the role of audit committees in actively monitoring and reviewing the external auditors’ independence.

 

In May 2016, the Committee considered an assessment by the Corporate Audit team of controls in place to ensure that our external auditor, PwC, is independent from National Grid. The controls testing did not find any significant items that would impact auditor objectivity and independence.

 

The Committee also considered a revised Code for Recruitment of Employees from the External Auditor (Recruitment Code) which exists to help maintain the independence of the external audit. The revisions proposed strengthened the Recruitment Code by clarifying which roles within the Company could be considered financial reporting oversight roles. The proposed changes were consistent with the final draft of the FRC’s Revised Ethical Standard 2016 issued in April 2016.

 

The Committee also considered and approved amendments to the Company’s policy on the provision of non-audit services by the auditor to take account of the implementation of the EU Audit Regulation and Directive on non-audit services. See page 43 for more details.

 

Further details of the transition to Deloitte and the process undertaken to ensure that they were considered to be independent from 1 January 2017 are included on page 44.

 

 

Going concern statement

  

 

At its May meeting, the Committee considered the Group’s short-term liquidity and capital and considered it appropriate to adopt the going concern basis in the financial statements. The Board considered and approved the Committee’s recommendation at its May meeting. The Company’s going concern statement is set out on page 92, note 1A.

 

 

Disclosure Committee reports

  

 

When reviewing the half- and full-year announcements, the Committee considers reports of the Disclosure Committee. The Disclosure Committee also reports the results of its evaluation of the effectiveness of the Company’s disclosure controls to the Audit Committee. See page 49 for more information on the role of the Disclosure Committee.

 

 

Sarbanes-Oxley Act 2002 testing and attestations

  

 

The Committee receives regular updates on the status of testing and considers the impact of deficiencies reported in the past year. See page 18 for the Company’s statement on the effectiveness of internal control over financial reporting.

 

In September, alongside the SOX compliance update, the Committee received an update on the launch of a SOX refresh programme which would review the overall Group SOX approach following significant business change with the sale of the UK Gas Distribution business.

 

The Committee also received updates on the SOX control findings in March and May in support of the year-end accounts, as well as an update on the SOX refresh programme.

 

 

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Corporate Governance continued

 

 

Examples of Committee focus during the year included:

 

Areas of focus    Commentary

 

Corporate Audit

  

 

The Committee received regular controls updates from the Corporate Audit team. Management actions on audit findings have continued to be a focus at Executive meetings resulting in greater visibility of audit findings, increased ownership of actions and greater engagement by senior management.

 

In accordance with best practice, the Corporate Audit Charter was reviewed against the Institute of Internal Auditors (IIA) international standards and the IIA model charter. No changes to the charter were proposed.

 

See page 44 for more details on the work of the Corporate Audit team including the outcome of the recent review by the IIA.

 

 

Risk management

  

 

The Committee has been delegated responsibility by the Board for monitoring and assessing the effectiveness of our risk management processes. During the year, the Committee received reports to be considered by the Board on risk process developments to enable the Committee to keep fully appraised of changes in the risk profile of the Company and to allow it to monitor the management of risk throughout the year.

 

The Committee continues to monitor the effectiveness of the risk management and internal control processes during the year and reports to the Board on the outcome of its annual review which covers all material controls, including financial, operational and compliance controls.

 

You can read more about our risk management process and the review of effectiveness on pages 15 to 18. Details of our internal control systems, including those relating to the financial reporting process, can be found on pages 18 and 180.

 

 

Cyber security risk management

  

 

An update on the status of our cyber security risk management process and cyber security strategy was presented to the Committee in September 2016 and March 2017. The Committee noted that following an in-depth assessment of National Grid’s cyber security maturity, a revised cyber security strategy was developed.

 

The Committee also noted that during the development of the new strategy, Corporate Audit continued to provide assurance in relation to cyber security risk through delivery of a balanced portfolio of planned audits.

 

 

Compliance management

  

 

The Committee receives bi-annual reports on compliance with external legal obligations and regulatory commitments. These reports also updated the Committee on progress against the compliance improvement programme initiated in 2015. The Committee noted that significant progress had been made in strengthening the existing control framework with increased engagement and responsibility for actions improving our overall compliance performance.

 

The Committee also requested that a review of the assurance framework against best practice be undertaken to identify if there were additional areas of assurance that needed to be covered. The benchmarking exercise indicated that there were no significant areas not covered by the framework and that the approach was consistent with the peer group reviewed. Improvements identified would be incorporated into the assurance programme to help strengthen our assurance framework.

 

 

Business separation compliance

  

 

National Grid Gas’s Gas Transportation Licences require business separation between UK Gas Transmission and UK Gas Distribution to prevent any unfair advantage being obtained by our UK Gas Distribution business over other independent distribution networks. Business separation compliance reports are submitted to the Committee twice a year, in May and November.

 

The Committee noted that the Business Separation Compliance Officer was actively engaged in the sale of the UK Gas Distribution business with regard to the review of business separation licence obligations.

 

 

Business conduct

  

 

The Committee receives a bi-annual ethics and business conduct report so that it can monitor the management and mitigation of business conduct issues as part of the wider control framework.

 

The Committee reviews the confidential reporting procedures and whistleblowing procedures annually to make sure that complaints are treated confidentially and that a proportionate, independent investigation is carried out in all cases.

 

The Committee also receives annual reports on the Company’s anti-bribery procedures and reviewed their adequacy.

 

 

Committee performance evaluation

  

 

The Committee received updates on the action plan agreed following the 2015/16 Committee performance evaluation at its November 2016 and May 2017 meetings and noted the progress made against the actions identified.

 

The 2016/17 Board and committee evaluation was conducted internally, see page 38 for more details. The recommended actions for the Audit Committee were considered by the Committee in May and an action plan agreed.

 

 

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   Corporate Governance

 

 

    

    

    

    

 

Significant issues

The most significant issues the Committee considered in relation to the financial statements concerned the accounting implications of the sale of a majority interest in the UK Gas Distribution business and the US financial control environment, including plant accounting.

In addition to commentary in these areas, the independent auditors’ report (pages 75 to 82) also includes other areas of focus, including the accuracy and valuation of treasury derivative transactions, accounting for net pension obligations, revenue recognition, and valuation of environmental provisions which were also considered by the Committee during the year.

Accounting for the sale of the UK Gas Distribution business

The key accounting implications subject to detailed consideration by the Committee comprised:

 

  the point at which the business met the criteria to be classified as ‘held for sale’;
  the classification of costs between continuing and discontinued operations, (including exceptional and financing costs); and
  the accounting applied in respect of the retained 39% interest in the new separate business, including:
  the classification of the retained interest as an associate, reflecting significant influence exercised by the Group through its equity interest; and
  the assessment of the fair value of the retained interest on acquisition.

‘Held for sale’

IFRS 5 states that an asset is considered as held for sale provided two conditions are met: it must be available for immediate sale in its present condition and its sale must be highly probable.

The Committee challenged management on the identification of the point at which the UK Gas Distribution business sale transaction became highly probable. Having considered evidence concerning the receipt and evaluation of bids as well as progress on the business separation activities, the Committee concurred with management’s judgement that the sale was not deemed to be highly probable until shortly prior to the announcement on 8 December 2016. The resulting impact on depreciation and amortisation is set out in note 9.

Classification of costs

In relation to the classification of costs between continuing and discontinued operations, the Committee carefully considered management’s approach to the contractual and other arrangements put in place at the point of the business separation for the purposes of determining an appropriate allocation of costs throughout 2016/17 and prior periods. The Committee concurred with management’s analysis, and in particular the judgements described in note 9 concerning interest costs (including liability costs).

The retained interest

The Committee considered the judgements presented by management as regards the ‘fair value’ of the retained interest, of the UK Gas Distribution business. The Committee concurred with management that on the basis of evidence of recent and historic comparable transactions, a discount to the price paid by the Consortium for control should be reflected in the determination of the fair value of the retained interest. Refer to note 15 for further details.

The Committee also considered the accounting implications of the Further Acquisition Agreement relating to the option for the Consortium to acquire a further 14% interest in the UK Gas Distribution business, and the determination as to whether or not the contract contains an embedded derivative.

US financial control environment

The Committee has continued to devote a significant amount of time to reviewing progress made by management to remediate control deficiencies identified during 2015/16, in the US financial controls environment.

The Committee received updates on progress made by management against the measures taken and timetable to remediate the US financial control deficiencies. At year end the Committee was pleased to note that the majority of the control deficiencies identified had been remediated. Management are confident that the remaining control weaknesses in relation to plant accounting will be remediated in 2017/18.

As part of plant accounting, the Committee received regular updates in respect of a project to close out aged work orders addressing an issue identified during the 2015/16 external audit.

The Committee also received updates on the status of the US finance organisational design programme. Corporate Audit provided support during the transition to the new organisational design to ensure that the integrity of the US control environment was maintained.

External audit

The Committee is responsible for overseeing relations with the external auditors, including the proposed external audit plan, the approval of fees, and makes recommendations to the Board on their appointment or reappointment. Details of total remuneration paid to auditors for the year, including audit services, audit-related services and other non-audit services, can be found in note 3(e) of the consolidated financial statements on page 100.

Auditor appointment

Consistent with prior years, an annual review was conducted by the Committee of the level and make-up of the external audit and non-audit fees and the effectiveness, independence and objectivity of PwC. Following this process, the Committee was satisfied with the effectiveness, independence and objectivity of PwC and recommended to the Board their reappointment for the year ended 31 March 2017 at the 2016 AGM.

Following the audit tender, the Committee has recommended to the Board the appointment of Deloitte as auditors for the year ending 31 March 2018. A resolution to appoint Deloitte and giving authority to the Directors to determine their remuneration will be submitted to shareholders at the 2017 AGM.

Auditor independence and objectivity

The independence of the external auditors is essential to the provision of an objective opinion on the true and fair view presented in the financial statements. Auditor independence and objectivity is safeguarded by a number of control measures, including:

 

  limiting the nature and value of non-audit services performed by the external auditors;
  ensuring that employees of the external auditors who have worked on the audit in the past one year (two years for a partner of the audit team) are not appointed to roles with financial reporting oversight within the Company in line with our internal code;
  monitoring the changes in legislation related to auditor objectivity and independence to help ensure we remain compliant;
  providing a business conduct helpline that employees can use to report any concerns, including those relating to the relationships between Company personnel and the external auditor;
  the rotation of the lead engagement partner at least every five years (a new lead engagement partner was appointed for the 2015/16 financial year);
  PwC’s internal independence rules and processes, which have been designed to exceed professional standards and focus on both personal independence and scope of services;
  independent reporting lines from PwC to the Committee and the opportunity to meet with the Committee privately; and
  an annual review by the Committee of the structures, policies and practices in place to make sure the external auditors’ objectivity and independence is maintained.

During the year, the Committee considered and approved changes to the Company’s policy on the provision of non-audit services by the auditor to take account of the implementation of the EU Audit Regulation and Directive on non-audit services. The key changes made were to update the list of prohibited services, principally in respect of tax, and the introduction of a cap on the financial value of non-audit services to 70% of the average annual audit fees paid in the last three financial years. The cap will be implemented once we have three years of history of fees charged by Deloitte, and so will be effective for the financial year ending in March 2021.

 

 

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Corporate Governance continued

 

Audit quality

To maintain audit quality and provide comfort on the integrity of financial reporting, the Committee reviews and challenges the proposed external audit plan, including its scope and materiality prior to approval, to make sure that PwC has identified all key risks and developed robust audit procedures and communication plans.

The Committee also considers PwC’s response to accounting, financial control and audit issues as they arise, and meets with them at least annually without management present, providing the external auditors with the opportunity to raise any matters in confidence.

External audit transition arrangements

As described above, subject to shareholder approval of their appointment at the 2017 AGM, Deloitte will succeed PwC as the Company’s auditor for the year ending 31 March 2018.

Auditor independence

The Company and Deloitte planned for the firm to be independent in line with SEC requirements with effect from 1 January 2017. This date was chosen as the most appropriate date for Deloitte to start to ‘shadow’ the activities of PwC in the 2016/17 year-end audit.

In order for Deloitte to be considered independent with effect from 1 January 2017, non-audit services provided by the firm were curtailed in a staged and orderly fashion over the period between November 2015 and December 2016. Regular updates were provided to the Audit Committee on the status of ongoing non-audit services throughout this period and all services ongoing as at 1 January 2017 were re-approved by the Committee as at that date. With effect from this date, all non-audit services are subject to the same protocols and policies as those applied in respect of PwC.

In addition to the SEC requirements, Deloitte became subject to EU independence requirements with effect from 1 April 2017, being the first day of the year ending 31 March 2018, adding certain further restrictions on non-audit services (principally taxation).

Other audit transition activities

The Committee welcomed Deloitte LLP to the January, March, April and May 2017 Committee meetings to shadow PwC as part of the transition process. Deloitte were also granted access to management and key documents in the UK and US to assist in their transition activities.

Non-audit services provided by the external auditors

In accordance with our policy, non-audit services provided by the external auditors above a threshold of £50,000 require approval in advance by the Committee.

The Committee has delegated approval of services under this threshold to the Finance Director. A list of all approved non-audit work requests is presented to the Committee quarterly, as well as annually in aggregate to ensure the Committee is aware of all non-audit services provided.

Additionally, the Committee receives quarterly reports from management on non-audit services and other consultants’ fees to monitor the types of services being provided and fees incurred.

Approval for the provision of non-audit services is given on the basis the service will not compromise independence and is a natural extension of the audit, or if there are overriding business or efficiency reasons making the external auditors most suited to provide the service. Certain services are prohibited from being performed by the external auditors, as required under the Sarbanes-Oxley Act 2002.

Total non-audit services provided by PwC during the year ended 31 March 2017 were £17.3 million (2016: £8.9 million), representing 87% (2016: 63%) of total audit and audit-related fees (see note 3(e)). £10 million of the non-audit fees related to work performed by PwC relating to the disposal of the UK Gas Distribution business, including a vendor due diligence assignment, and work on the separation of the business and its support functions.

Both these projects were discussed by the Committee and approved in advance by the Chairman of the Audit Committee prior to work commencing. The Committee concluded that the appointment of PwC would allow the Group to realise significant benefit through the utilisation of PwC’s accumulated knowledge concerning the key financial reporting and IT systems, as well as their knowledge of the Gas Distribution business and the UK operations more generally.

Total audit and audit-related fees include the statutory fee and fees paid to PwC for other services that the external auditors are required to perform, such as regulatory audits and SOX attestation. Non-audit fees represent all other services provided by PwC not included in the above.

Non-audit services provided by PwC in the year included tax compliance services in territories other than the US (£0.4 million), the significant majority of which related to the UK.

The Committee considered that tax compliance services were most efficiently provided by the external auditors, as much of the information used in preparing computations and returns was derived from audited financial information. In order to maintain the external auditors’ independence and objectivity,

management reviewed and considered PwC’s findings and PwC did not make any decisions on behalf of management.

Non-audit services provided by Deloitte

As set out above, Deloitte became subject to the Company’s policy on the provision of non-audit services with effect from 1 January 2017.

Internal (corporate) audit

The corporate audit function provides independent, objective assurance to the Audit, Safety, Environment and Health and Executive Committees on whether our existing control and governance frameworks are operating effectively in order to meet our strategic objectives. Assurance work is conducted and managed in accordance with the IIA international standards for the Professional Practice of Internal Auditing and Code of Ethics. Following its most recent review, Corporate Audit was given the highest rating – Generally Conforms by the IIA on Standards and Code of Ethics.

To keep the Committee informed of trends identified from the assurance work and to update on progress against the corporate audit plan, the Head of Corporate Audit reports to the Committee at least twice each year. These reports present information on specific audits, as appropriate, summarise common control themes arising from the work of the team and update on progress with implementing management actions.

In order to meet the objectives set out in the Corporate Audit Charter, audits of varying types and scopes are conducted as part of the annual corporate audit plan. The audit plan is based on a combination of risk-based and cyclical reviews, together with a small amount of work that is mandated, typically by US regulators. The audit plan is agile and regularly reviewed to prioritise audits relevant to the needs of and to reflect evolving risks and changes to the business. The audit plan is now aligned between General Audit, Safety, Environment and Health and Information Systems audits allowing us to manage global and integrated audit opportunities. The audit plan was also reviewed and updated to reflect the audits attributed to the UK Gas Distribution business.

Inputs to the audit plan include principal risks, risk registers, corporate priorities, external research of emerging risks and trends, and discussions with senior management to make sure the plan aligns with the Committee and Company’s view of risk. The audit plan is considered and approved by the Committee annually and progress against the plan is monitored throughout the year.

The Committee is responsible for the appointment and removal of the Head of Corporate Audit. The Committee met privately with the Head of Corporate Audit during the year.

 

 

44   National Grid Annual Report and Accounts 2016/17   Corporate Governance  


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   Corporate Governance

 

 

    

    

    

 

Therese Esperdy

Committee chairman        

  LOGO
 

 

Finance Committee

  Review of the year
 

The financing and other related aspects of the Company’s sale of a majority interest in the UK Gas Distribution business remained a key area of focus for the Committee throughout 2016/17. The Committee also considered the impact of the sale on our retained business, including financing, insurance arrangements, liquidity management and pension funding.

 

 

The Committee oversaw several major aspects of the Gas Distribution sale process, including the sectionalisation of the National Grid UK Pension Scheme. This was a complex project that ran alongside the sale process, ensuring the continued protection of all scheme members’ benefits. See the Committee in action box opposite for more details of the Committee’s involvement.

 

 

During 2016/17, the Committee was briefed on funding activities in our US business, specifically the long-term bond issuance programme for our downstate New York gas businesses and our Massachusetts electricity operations business. The year saw the initial debt financing of the Company’s New York Transco joint venture. The completion of our first two Export Credit arrangements in relation to our new joint venture for our Norwegian interconnector represented another major achievement for the treasury team.

 

 

During the year, the Committee monitored the execution of management’s readiness plans in relation to the potential short-term market impacts of the Brexit referendum. The eventual market movements were well within our contingency planning, although the ever-changing macroeconomic and political environment remains a key focus for the Committee.

 

 

The Committee assessed the appropriateness of National Grid’s balance sheet hedging policy to determine whether the current policy continued to effectively manage the foreign exchange translation risk associated with our US investments. Following review, the Committee approved changes to the policy and agreed an implementation plan for the agreed policy change.

 

 

We continued to keep the Company’s insurance strategy under review. Specific focus areas during 2016/17 included the impact of the UK Gas Distribution business sale on our ongoing captive insurance programme together with a review of management’s proposals to consider the placement of cyber insurance across National Grid’s operations. Additionally, the Committee considered the Company’s approach to the insuring of construction risks of interconnector projects, a particularly bespoke insurance market.

 

Looking forward to 2017/18, we will continue to focus on the financing strategy for the reshaped Group following the sale of the majority interest in the UK Gas Distribution business. This, together with funding the ongoing capex programme in our US business remain the major focus areas for the treasury team.

We will also assess, with our tax team, the potential impact of anticipated US tax policy changes, as more details continue to emerge from the new administration in the US following the Presidential election.

Examples of other key matters the Committee considered during the year included:

  funding requirements and financing for the business plan;
  setting and reviewing treasury policies;
  counterparty risk policy;
  foreign exchange and interest rate risk management;
  treasury performance updates;
  UK and US tax updates;
  update on US energy procurement activities and electricity and gas trading activities in the UK;
  the triennial valuation of the National Grid Electricity Group of the Electricity Supply Pension Scheme;
  the draft going concern statement for the half- and full-year results prior to consideration by the Board; and
  update on US post-retirement employee benefits plans.

 

 

The Committee in action –

the sale of the UK Gas Distribution business

2016/17 saw a range of work streams across the financing and related aspects of the transaction. The Committee reviewed the planning for these, assessing various different options before overseeing the execution and approving related policy changes.

 

The Committee oversaw activities across a range of workstreams including:

 

  restructuring the existing UK debt portfolio;

 

  financing the new standalone UK Gas Distribution business prior to sale;

 

  sectionalisation of the National Grid UK Pension Scheme;

 

  establishing a new treasury team and banking group and implementing associated systems and committed lending facilities;

 

  establishing initial credit ratings for the new business and the retained Group;

 

  liaison with HMRC around the detailed transaction steps; and

 

  options for implementing a structure to enable additional debt leverage through the sale process.

 

On completion of the sale, the Committee reviewed the proposals for investing the proceeds of the sale (in excess of £5 billion) ensuring the Group’s counterparty risk policies were appropriately managed.

 

 

LOGO

Therese Esperdy

Committee chairman

 

 

  National Grid Annual Report and Accounts 2016/17   Finance Committee   45


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Corporate Governance continued

    

    

    

 

Paul Golby

Committee chairman        

  LOGO
 

 

Safety, Environment and

 

Health Committee

 

  Review of the year
 

In February, we welcomed Pierre Dufour to the Safety, Environment and Health Committee. He brings considerable experience as an engineer and in safety, industrial risk management and operations. Last month Andrew Bonfield stepped down from the Committee, having been a member for three years. His contribution to the Committee, as well as his chairmanship of the Engineering Assurance Committee (EAC), has been extensive.

 

 

Over the year, the Committee has seen the Company’s safety performance remain in line with last year with a Group employee lost time injury frequency rate of 0.10.

 

 

However, this good performance must be viewed in the context of the death in the UK last November of an employee working in our Electricity Transmission business, as referred to in the Chief Executive’s review on page 6. The Committee has spent time with the business seeking to understand the circumstances and causes of this fatality as well as the actions taken by the Company to ensure lessons are learnt. It will continue to receive updates as investigations proceed.

 

 

Road traffic collisions have reduced in both the UK and US following an increased programme of training for employees, although the level is still above target in the US. Cable strikes (a UK Gas Distribution measure) have reduced.

 

 

The US business is currently focusing on switching errors, which remain at an unsatisfactory level. An external consultant is currently reviewing relevant incidents from a human factors perspective and will be advising on ways to improve our training, processes and procedures in this respect.

 

 

More widely, the Committee has spent considerable time reviewing the safety culture of the Company. While this is generally very good, in some parts of the business the analysis of significant incidents has shown instances of processes not being followed or inappropriate behaviours. The Committee monitors the steps taken by the Company following significant incidents, including looking at its processes and procedures and how they are being applied (see the Committee in action box opposite).

 

  The Committee continues to receive reports from the EAC. In particular, we reviewed the progress made in succession planning for the Company’s engineering employee population as well as the career progression and additional specialist qualification options and incentives available for engineers within the Company. We were pleased to note the appointment of chief engineers for both gas and electricity, with Group-wide remits. The EAC also reported to the Committee on peer reviews and sharing of best practice

across the UK and US gas and electricity businesses, focusing in particular on asset data risk and its ongoing review of asset data records.

We have also continued to monitor the Company’s process safety management system. We received updates on the measures being taken to address levels of risk for major hazard assets, including key US LNG plants. The Committee also received updates on the Company’s US gas pipeline safety compliance and its interface with the NYPSC on the subject of new gas pipeline safety rules.

In terms of the environment, we have continued to monitor our strategy and approach to sustainability, as well as the Company’s external reporting of its environmental performance, including its greenhouse gas emissions. In particular, we reviewed the impact of the sale of the UK Gas Distribution business on the Company’s greenhouse gas emissions and its ability to meet its target of reducing emissions by 80% by 2050 against a revised 1990 baseline.

Examples of other matters the Committee reviewed during the year included:

  ongoing monitoring of safety performance and significant incidents in the UK and US;
  the expected impact of the UK Gas Distribution business sale on the Company’s safety and environmental performance;
  compliance and risk reporting for safety, environment and health matters;
  the Company’s approach to electromagnetic fields and its alignment with scientific research on the subject;
  sickness absence levels and trends for both UK and US businesses; and
  employee assistance programmes for mental well-being and their take up as well as soft tissue injury prevention programmes.

 

The Committee in action – safety processes and procedures

In its monitoring of major safety incidents and work on process safety management systems, the Committee has spent time looking at the processes and procedures that are in place and how these are implemented and applied in order to promote a strong safety culture across the whole of the Company.

 

When significant incidents occur, the Committee closely monitors management’s analysis of the causes, as well as reviewing the steps taken by the Company to promote awareness by both employees and contractors and to address the risk of recurrence of incidents, including safety ‘stand downs’, briefings and training.

 

It is essential that all employees and contractors should be able to understand and apply instructions as a matter of routine. Where processes and procedures become too long and complex, there may be a risk that they are misapplied, circumvented or ignored. In other cases, there may be a lack of risk and control awareness because processes and procedures are inadequately designed or controlled. The Company’s internal audit function, and its safety specialists, report regularly to the Committee on their findings and on work being undertaken to address these issues.

 

LOGO

Paul Golby

Committee chairman

 

 

46   National Grid Annual Report and Accounts 2016/17   Corporate Governance  


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   Corporate Governance

 

 

    

    

    

    

 

Sir Peter Gershon

Committee chairman        

 

 

 

LOGO

 

 

Nominations Committee

 

  Review of the year
 

Once again succession planning has been the main area of focus for the Committee during the year. It is important for the Board to anticipate and prepare for the future and to ensure that the skills, experience and knowledge at director and senior management level reflect the changing demands of the business. The process of building a strong and effective Board also requires a good balance of continuity and refreshment and the Committee has borne this in mind in its deliberations throughout the year.

 

 

Succession planning

We recognise that an active Nominations Committee is key to promoting effective board succession and we are committed to continuing to regularly review succession planning policy, taking into account the FRC’s guidance to ensure that our policy is aligned to Company strategy, both current and in the future.

 

Following a thorough and rigorous process, Pierre Dufour was appointed as a Non-executive Director to the Board on 16 February 2017 and Badar Khan was appointed to the Executive Committee on 1 April 2017; see opposite for more details on these search and appointment processes.

 

 

Composition

Balance and fit in terms of skills, knowledge and experience are important considerations in recruitment to the Board. Therefore, part of the selection process for Board appointments is for the Committee to review the existing skills and experience of the Board and consider the current composition against the needs of the business and the requirements of the new position. External benchmarking of skills and a review of potential external candidates is also undertaken by external search and assessment consultancies to make sure that the Committee is fully briefed when making its considerations.

 

 

The Committee also takes into account the need to make sure there is appropriate diversity on the Board, including diversity in thinking styles. The Committee has considered the external reviews on diversity published during the year, namely the Parker Review and the Hampton-Alexander Review. Further details on the Company’s approach to diversity are set out overleaf.

 

 

Board and committee membership

  Following the changes in Board membership, the composition of the committees was also reviewed. As a result, our new Non-executive Director, Pierre Dufour joined the Safety, Environment and Health Committee, Remuneration Committee and Nominations Committee upon appointment. Following Pierre’s appointment, Andrew Bonfield stepped down from the Safety, Environment and Health Committee on 21 April 2017 and Paul Golby stepped down from the Remuneration Committee on 16 May 2017.

The Committee in action – Non-executive search and appointment process

During the year a formal process was undertaken by the Committee to find an appropriate new Non-executive Director, to strengthen the experience and skills on the Board and its Committees.

 

  The Nominations Committee appointed The Zygos Partnership as the search consultancy. A Non- executive Director profile was reviewed and agreed by the Committee.
  Zygos conducted initial searches and produced a potential list of candidates which was reduced to a shortlist against the agreed profile.
  Zygos narrowed its shortlist and interviews were undertaken with the Chairman, Chief Executive and other members of the Board.
  References for the potential candidates were circulated to the Committee and a meeting was held in October 2016 where the Chairman invited feedback from the Committee on the search and interview process.
  The Committee agreed a preferred candidate and made a recommendation to the Board in February 2017.
  The Board approved the recommendation and Pierre Dufour was appointed to the Board with effect from 16 February 2017.

Search and appointment process to the

Executive Committee

The Committee was also involved in the recruitment process for the newly created Executive Committee position to lead the new business, National Grid Ventures. The search and appointment process for this position was as follows:

 

  the Nominations Committee appointed Heidrick and Struggles as the search consultancy. With input from the Committee a role and person specification was agreed;
  Heidrick and Struggles conducted initial searches for potential candidates, with both internal and external candidates being put forward for the role;
  a series of interviews were undertaken by the Chairman, Chief Executive and other members of the Board;
  the Committee considered the outcomes from the interviews and selected candidates for further consideration;
  final interviews with the candidates were carried out by John Pettigrew and members of the Executive Committee and Board;
  the Committee recommended Badar Khan for appointment to the Executive Committee; and
  the Board approved the appointment and Badar Khan joined the Company as a member of the Executive Committee on 1 April 2017.

Examples of other matters the Committee considered during the year included:

  review of the Chairman’s performance, led by Mark Williamson, the Senior Independent Director;
  review of Director independence and potential conflicts; and
  review of Executive Committee succession.

 

LOGO

Sir Peter Gershon

Committee Chairman

 

 

  National Grid Annual Report and Accounts 2016/17   Nominations Committee   47


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Corporate Governance continued

    

    

    

 

Board diversity

National Grid supports the creation of an inclusive and diverse culture which we believe supports the attraction and retention of talented people, improves effectiveness, delivers superior performance and enhances the success of the Company.

 

Following the publication of the Parker Review ‘Beyond One by ‘21’’ and the Hampton-Alexander Report the Committee considered the recommendations of these reports and approved updates to the Board diversity policy and the associated objectives.

 

We have previously reported against eight objectives, set out below, to measure our progress against our Board diversity policy. At its April 2017 meeting the Committee reviewed these objectives and agreed that the majority of these should no longer be objectives but instead be the minimum standard required to support our Board diversity policy. As a result, only one of the original eight objectives was retained and updated and a new objective was added to address the recommendations of the Parker Review and the Hampton-Alexander Report, as set out below.

 

The Board diversity policy reflects all of the previous objectives and the Committee will continue to follow the requirements of the old objectives including only engaging executive search firms who have signed up to the Voluntary

  

Code of Conduct on Gender Diversity, adopting best practice as appropriate, reviewing progress against the objectives and the policy annually and reporting on progress in this report.

 

Our Board diversity policy continues to promote an inclusive and diverse culture and reaffirms our aspiration to meet and exceed the recommended voluntary target of 33% of Board positions being held by women by 2020. This objective, as set out below, has been updated following the recommendations of the Hampton-Alexander Report, to extend this voluntary target of 33% women by 2020 to the Executive Committee and direct reports to this committee.

 

The Parker Review, published in November 2016, recommended every FTSE 100 board should have at least one director from a non-white ethnic minority by 2021. The Committee has reflected this recommendation in a new objective as set out below.

 

Examples of the initiatives to promote and support inclusion and diversity throughout our Company are set out on page 30.

 

 

Objectives    Progress

 

Current   

 

The Board aspires to meet the target of 33% of Board and Committee positions, and direct reports to the Executive Committee, to be held by women by 2020.   

Objective ongoing. We currently have 33% women on our Board and 22% women on our Executive Committee and 30% women direct reports to the Executive Committee.

 

  

The number of women in senior management positions and throughout the organisation is set out on page 31.

 

 

The Board aspires to meet the Parker Review target for FTSE 100 boards to have at least one director from a non-white ethnic minority by 2021.

 

   Objective met. We currently have one Director from a non-white ethnic minority on the Board.

 

Previous   

 

All Board appointments will be made on merit, in the context of the skills and experience that are needed for the Board to be effective.

 

   Objective met. The appointment of Pierre Dufour was made on merit.

 

We will only engage executive search firms who have signed up to the Voluntary Code of Conduct on Gender Diversity.

 

   Objective met. Heidrick and Struggles and The Zygos Partnership are signed up to the Voluntary Code of Conduct on Gender Diversity.

 

Where appropriate, we will assist with the development and support of initiatives that promote gender and other forms of diversity among our Board, Executive Committee and other senior management.

 

   Objective met. See page 30 for further details.

 

Where appropriate, we will continue to adopt best practice in response to the Davies Review.

 

   Objective met. Ongoing as appropriate.

 

We will review our progress against the Board diversity policy annually.

 

   Objective met. Ongoing.

 

We will report on our progress against the policy and our objectives in the Annual Report and Accounts along with details of initiatives to promote gender and other forms of diversity among our Board, Executive Committee and other senior management.

 

   Objective met. Ongoing.

 

We will continue to make key diversity data, both about the Board and our wider employee population, available in the Annual Report and Accounts.

 

   Objective met. Ongoing.

 

 

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Executive Committee membership key

 

1 John Pettigrew

Chief Executive and Committee chairman

 

2 Andrew Bonfield

Finance Director

 

3 Badar Khan

Group Director, Corporate Development and National Grid Ventures

 

4 Alison Kay

Group General Counsel & Company Secretary

 

5 Richard Adduci

Chief Information Officer

 

6 George Mayhew

Group Corporate Affairs Director

 

7 Dean Seavers Executive Director, US

 

8 Mike Westcott

Group Human Resources Director

 

9 Nicola Shaw

Executive Director, UK

 

Membership as at

1 April 2017

  

LOGO

  

 

Management committees

 

To help make sure we allocate time and expertise appropriately, the Company has a number of management committees, which include the Executive Committee, and Disclosure Committee. These committees provide reports, where relevant, to the appointing committee in line with our governance framework on the responsibilities they have been delegated. See page 36 for management committee reporting lines.

 

Executive Committee

Led by the Chief Executive, the Executive Committee oversees the safety, operational and financial performance of the Company. It is responsible for making day-to-day management and operational decisions it considers necessary to safeguard the interests of the Company and to further the strategy, business objectives and targets established by the Board. It approves expenditure and other financial commitments within its authority levels and discusses, formulates and approves proposals to be considered by the Board.

 

  

 

The nine Committee members have a broad range of skills and expertise, which are updated through training and development. Some members also hold external non-executive directorships, giving them valuable board experience. The Committee officially met 12 times this year, but the members interact much more regularly. Those members of the Committee who are not Directors regularly attend Board and committee meetings for specific agenda items. This means that knowledge is shared and all members are kept up to date with business activities and developments.

 

Disclosure Committee

The role of the Disclosure Committee is to assist the Chief Executive and the Finance Director in fulfilling their responsibility for overseeing the accuracy and timeliness of disclosures made – whether in connection with our presentations to analysts, financial reporting obligations, or other material stock exchange announcements, including the disclosure of price sensitive information.

 

This year the Committee met to consider the announcements of the full- and half-year results and reported on relevant matters to the Audit Committee. It also met in December to consider the announcement of the preferred bidder for the sale of a majority interest in the UK Gas Distribution business and again at the end of March to review the announcement of the completion of the sale and the option for the sale of a further 14% equity interest in the business.

 

The Committee reports the results of its evaluation of the effectiveness of the Company’s disclosure controls to the Audit Committee.

 

The Committee is chaired by the Finance Director and its members are the Group General Counsel & Company Secretary, the Group Tax & Treasury Director, the Group Financial Controller, the Director of Investor Relations, the Head of Corporate Audit and the Deputy Group General Counsel, with other attendees as appropriate.

  

 

The committee in action –

National Grid Smart (NGS)

Following the decision last year to invest in the NGS business, the Committee reviewed the investment opportunities of the business, and considered a number of matters impacting the opportunities, including the Government’s support for the smart metering roll-out in the UK, the associated roll-out challenges faced by the industry and the alignment of the NGS business to wider distributed energy opportunities.

 

The Committee challenged the NGS team on the business mobilisation progress, the strength of the customer pipeline, the service proposition, rental pricing and the operational capability required to make the business a success.

 

Acknowledging the competitive nature of the market, the Committee endorsed a governance framework that would enable NGS to respond quickly to future contracting opportunities, manage the performance of the business, and allow the Committee to monitor the performance of NGS as appropriate.

  
     

 

  National Grid Annual Report and Accounts 2016/17   Management committees   49


Table of Contents

Corporate Governance continued

    

 

Statement of compliance with the UK

Corporate Governance Code

The UK Listing Rules require that listed companies must include in their annual report a statement of whether the Company has complied with all the relevant provisions of the UK Corporate Governance Code (the Code). The Code was published in September 2014 and updated in 2016 to reflect forthcoming legislation on audit committees and auditor appointments, and is available in full at www.frc.org.uk.

For the year ended 31 March 2017, the Board considers that it has complied in full with the provisions of the 2014 Code. Our statement of compliance opposite explains the main aspects of the Company’s governance structure to give a greater understanding of how the Company has applied the principles and complied with the provisions in the Code. The Corporate Governance report also explains compliance with the Disclosure Guidance and Transparency Sourcebook. The index on page 53 sets out where to find each of the disclosures required in the Directors’ Report in respect of Listing Rule 9.8.4.

 

 

 

A. Leadership

 

     

 

A.1 The role of the Board

Our Board is collectively responsible for the effective oversight of the Company and its businesses. It also determines the strategic direction, business plan, objectives, principal risks, viability of the Company and governance structure that will help achieve the long-term success of the Company and deliver sustainable shareholder value.

 

The Board sets the risk appetite and principal risks for the Company and takes the lead in areas such as safeguarding the reputation of the Company and its financial policy, as well as making sure we maintain a sound system of internal control and risk management (see pages 15 to 18).

 

There is a clear schedule of matters reserved for the Board and a schedule of delegation, which were both reviewed and updated in January 2017. The schedule of matters reserved for the Board is available on our website, together with other governance documentation.

 

A.2 A clear division of responsibilities

The Board supports the separation of the roles of the Chairman and Chief Executive. The key responsibilities are clearly documented and reviewed when appropriate. The Chairman manages and leads the Board. The Chief Executive is responsible for the executive leadership and day-to-day management of the Company and the Group’s businesses, to ensure the delivery of the strategy agreed by the Board.

 

A.3 Role of the Chairman

The Chairman, who was independent on appointment, is responsible for the leadership and management of the Board and its governance. He makes sure the Board is effective in its role by promoting a culture of openness and debate, facilitating the effective contribution of all Directors and helping to maintain constructive relations between Executive and Non-executive Directors. The Chairman sets the Board’s agenda making sure consideration is given to the main challenges and opportunities facing the Company, and adequate time is available to discuss all items, including strategic issues.

 

  

A.4 Role of the Non-executive Directors

Independent of management, our Non-executive Directors bring diverse skills and experience, vital to constructive challenge and debate. Exclusively, they form the Audit, Nominations and Remuneration Committees, and their views are actively sought when developing proposals on strategy.

 

Our Senior Independent Director acts as a sounding board for the Chairman and serves as an intermediary for the other Directors, as well as shareholders when required.

 

Around each of the nine scheduled Board meetings, the Chairman held meetings with the Non-executive Directors without the Executive Directors present. These meetings were not held around the two ad-hoc Board meetings in September and December to consider the bids in relation to the sale of the UK Gas Distribution business.

  
 

 

50   National Grid Annual Report and Accounts 2016/17   Corporate Governance  


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   Corporate Governance

 

 

    

    

    

    

 

 

 

  

B. Effectiveness

 

     

 

  

B.1 The composition of the Board

The Board believes it operates effectively with an appropriate balance of independent Non-executive and Executive Directors who have the right balance of skills, experience, independence and knowledge of the Company. Details of our Board, their individual biographies and committee membership are set out on pages 34 and 35. Board and committee attendance during the year to 31 March 2017 is set out on page 37. The independence of the Non-executive Directors is considered at least annually along with their character, judgement, commitment and performance on the Board and relevant committees. The Board took into consideration the Code and indicators of potential non-independence, including length of service. At year end, all of the Non-executive Directors, with the exception of the Chairman, whose independence is only determined on appointment, have been determined by the Board to be independent.

 

B.2 Appointments to the Board

 

The Nominations Committee, which comprises the Chairman and Non-executive Directors, leads the process for Board appointments and makes recommendations to the Board. Further details of appointment processes for Nicola Shaw and Pierre Dufour, succession planning and the role of the Nominations Committee can be found on page 47.

 

The Zygos Partnership and Heidrick and Struggles provided external search consultancy services in relation to the above appointments. Neither have any other connection to the Company other than providing these external search consultancy services.

 

B.3 Time commitment

Non-executive Directors are advised of the time commitment expected from them on appointment. External commitments, which may impact existing time commitments, must be agreed with the Chairman. Details of external appointments are set out in the biographies on pages 34 and 35. As part of the evaluation of the Chairman, the Non-executive Directors, with input from the Executive Directors, assessed his ability to fulfil his role as Chairman, taking into account other significant appointments.

  

With the agreement of the Board, Executive Directors gain experience of other companies’ operations, governance frameworks and boardroom dynamics through non-executive appointments. The fees for these positions are retained by the individual. For further details about the Directors’ service contracts and letters of appointment, see page 61 of the Directors’ Remuneration Report.

 

B.4 Development

 

All new Directors are provided with a full induction programme when they are appointed to the Board. Details of Director induction and development can be found on page 37.

 

B.5 Information and support

The Group General Counsel & Company Secretary makes sure that appropriate and timely information is provided to the Board and its committees and is responsible for advising and supporting the Chairman and the Board on all governance matters. All Directors have access to the Group General Counsel & Company Secretary and may take independent professional advice at the Company’s expense in conducting their duties. To support discussion and decision making, Board and committee members receive papers sufficiently in advance of meetings so that they can prepare for and consider agenda items. Additionally, the Chairman holds a short meeting with the Non-executive Directors before each Board meeting to discuss the focus of the upcoming meeting as well as afterwards to share feedback from the meeting. Similarly, the Chief Executive holds a short meeting with the Executive Directors and the Group General Counsel & Company Secretary after each meeting and shares the feedback from these meetings with the Chairman. A clear set of guidelines are in place to assist the Executive Directors and management on the content and presentation of papers to the Board and committees. A further refresh of the Board paper process took place this year. See page 39 for more details.

  

B.6 Evaluation

 

See pages 38 and 39 for more information on our Board evaluation. During the year, the Chairman met each Director individually to discuss their contribution, performance over the year and training and development needs. Following these meetings, Sir Peter confirmed to the Nominations Committee that he considered that each Director demonstrated commitment to the role and their performance continued to be effective. At a private meeting of the Non-executive Directors, Mark Williamson, as Senior Independent Director, led a review of the Chairman’s performance. The Non-executive Directors, with input from the Executive Directors, assessed his ability to fulfil his role as Chairman and considered the arrangements he has in place, given he was also chairman of a FTSE 250 company during the year and the Aircraft Carrier Alliance Management Board and a Trustee of The Sutton Trust. They concluded that Sir Peter’s performance continued to be effective.

 

B.7 Election/re-election

Each Director is subject to election at the first AGM following their appointment, and re-election at each subsequent AGM. Following recommendations from the Nominations Committee the Board considers all Directors continue to be effective, committed to their roles and have sufficient time available to perform their duties. Therefore, in accordance with the Code, Pierre Dufour will seek election and all other Directors (except Ruth Kelly) will seek re-election at the 2017 AGM as set out in the Notice of Meeting.

 

  National Grid Annual Report and Accounts 2016/17   Statement of compliance   51


Table of Contents

 

Corporate Governance continued

    

    

    

 

Statement of compliance with the UK

Corporate Governance Code continued

 

 

 

C. Accountability

 

 

D. Remuneration

 

 

E. Relations with shareholders

 

 

C.1 Financial and business reporting

The requirement for Directors to state that they consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable remains a key consideration in the drafting and review process. The coordination and review of the Annual Report and Accounts is conducted in parallel with the formal audit process undertaken by the external auditors and the review by the Board and its committees (of relevant sections).

 

The drafting and assurance process supports the Audit Committee’s and Board’s assessment of the overall fairness, balance and clarity of the Annual Report and Accounts and the statement of Directors’ responsibilities as set out on page 74. The independent auditors’ report is on pages 75 to 82 and the Company’s business model is on page 14.

 

C.2 Internal control and risk management

The Board has carried out a robust assessment of the principal risks facing the Company including those that would threaten the business model, future performance, solvency or liquidity. Further details can be found on pages 16 and 17.

 

The Board also sets the Company’s risk appetite, internal controls and risk management processes. The Board undertakes a review of their effectiveness annually. Further details are set out on pages 15 to 18.

 

The activities of the Audit Committee, which assists the Board with its responsibilities in relation to risk and assurance, are set out on pages 40 to 44.

 

C.3 Audit Committee and auditors

The Audit Committee report on pages 40 to 44 sets out details of how the Committee has discharged its duties during the year, matters reviewed by the Committee and how it ensures the auditors’ objectivity, effectiveness and continued independence.

 

 

 

D.1 The level and components of remuneration

The Remuneration Committee is responsible for recommending to the Board the remuneration policy for Executive Directors and other members of the Executive Committee and for the Chairman, and for implementing this policy. The aim is to align remuneration policy to Company strategy and key business objectives and make sure it reflects our shareholders’, customers’ and regulators’ interests.

 

The Remuneration Report on pages 54 to 71 outlines the activities of the Committee during the year and sets out the proposed Directors’ remuneration policy which will be presented to shareholders for approval at the 2017 AGM. The new resolution to approve the remuneration policy is set out in the Notice of Meeting for the 2017 AGM.

 

D.2 Procedure

For further information on the work of the Remuneration Committee and Directors’ remuneration packages see the Directors’ Remuneration Report on pages 54 to 71. The Committee’s terms of reference are available on our website.

 

E.1 Dialogue with shareholders

The Board as a whole is responsible for making sure that satisfactory dialogue with shareholders takes place. We believe that effective channels of communication with the Company’s debt and equity institutional investors and individual shareholders are very important. More information about our approach to relations with shareholders can be found on page 37.

 

E.2 Constructive use of General Meetings

The AGM provides a key opportunity for the Board to communicate with and meet shareholders. Shareholders are able to learn more about the Company through exhibits and can ask questions directly of the Board. Company representatives and our Registrar are also on hand to answer any questions shareholders might have.

 

Our AGM will be held on Monday 31 July 2017 at The International Convention Centre in Birmingham and broadcast via our website. The Notice of Meeting for the 2017 AGM, available on our website, sets out in full the resolutions for consideration by shareholders, together with explanatory notes and further information on the Directors standing for election and re-election.

 

We will also be holding a General Meeting on 19 May 2017 to seek shareholder approval for a proposed share consolidation in connection with the return of cash as a result of the sale of a majority interest in our UK Gas Distribution business.

 

In addition, at the General Meeting, shareholder approval will in addition be sought to renew the annual authority to enable the Company to make market purchases of its own shares, as well as to allot ordinary shares and to disapply pre-emption rights, to cover the period between the date of the General Meeting and the 2017 AGM.

 

52   National Grid Annual Report and Accounts 2016/17   Corporate Governance  


Table of Contents

LOGO

Corporate Governance
Index to Directors’ Report and other disclosures
(starting on page indicated)
AGM 52
Articles of Association 184
Audit information 74
Board of Directors 34
Business model 14
Change of control provisions 190
Code of Ethics 190
Conflicts of interest 190
Contractual and other arrangements 174
Directors’ indemnity 191
Directors’ service contracts and letters of appointment 61
Directors’ share interests 68
Diversity 30
Dividends 5
Events after the reporting period 185
Financial instruments 123
Future developments 9
Greenhouse gas emissions 12
Human Rights 191
Important events affecting the Company during the year 6
Internal control 15
Internal control over financial reporting 18
Listing Rule 9.8.4 R cross reference table 191
Material interests in shares 186
People 30
Political donations and expenditure 191
Research and development 191
Risk management 15
Share capital 186
National Grid Annual Report and Accounts 2016/17
Index to Directors’ Report and other disclosures
53


Table of Contents

    

 

Corporate Governance continued

    

    

    

 

Jonathan Dawson

Committee chairman        

 

  LOGO
 

 

Annual statement from the

Remuneration Committee chairman

 

 

Introduction

Three years ago, at our 2014 AGM, shareholders approved a new three-year remuneration policy for National Grid, with 96% of the votes in favour. At our 2015 and 2016 AGMs shareholders supported our execution of the policy with 97% of the votes in favour each year. This year we are seeking your approval of our remuneration policy for a further three years.

 

 

We have reviewed the remuneration policy reflecting on the wider environment as well as the strategic review of our business, leading to an evolution of National Grid’s purpose, vision, values and strategy. In this context, we consider that the existing framework will continue to provide executives with an appropriate opportunity to earn remuneration in line with National Grid’s overall performance and strategy. We are therefore proposing that the 2014 policy is renewed without any changes either to the structure, or to the maximum amounts for the APP and LTPP.

 

 

The key elements of our remuneration approach are:

 

       significant weighting towards the Long Term Performance Plan (LTPP) versus the Annual Performance Plan (APP);
    the bulk of senior executive remuneration is paid in National Grid shares, with all of the LTPP paid only in shares, and half of the APP paid in shares;
    very high levels of personal shareholding required to be held by senior executives – specifically, 500% of pre-tax salary for the Chief Executive and 400% for other Executive Directors;
    a three-year performance period for measuring potential awards under the LTPP, coupled with a holding period of a further two years, irrespective of whether the mandatory personal shareholding target has been attained;
    performance metrics for the LTPP which are Return on Equity (measuring management’s performance in generating profit from the business) and Value Growth (measuring management’s creation of shareholder value over the longer term); and
   

malus and clawback provisions applicable to both the APP and LTPP.

 

 

We think that the best way to make sure management and other shareholders share the same interest comes from requiring executives to have a very substantial personal shareholding in National Grid. We want executives to view their remuneration from employment at National Grid as a mix of annual earnings, together with both the growth of their shareholdings in National Grid and the value of dividends received. As a result, we consider that the remuneration policy currently in place demonstrates close alignment between management and other shareholders, and a proper focus on generating long-term value.

Review of remuneration policy

The Committee held a number of discussions last Autumn to determine whether any material changes to the remuneration policy would be appropriate for the future. Discussions covered recent trends in remuneration strategy adopted by other major UK corporates, an appraisal of developments in other major jurisdictions, data comparing National Grid’s remuneration policy and outturns against peer group companies, and the pay and conditions for employees below Board level. The main questions we considered were:

 

       Is the current split between short-term and long-term incentive pay appropriate?
    Are we incentivising behaviours that support National Grid’s strategy and values?
    Are we paying executives fairly for performance and is this appropriate in the context of the wider employee population?
   

Is the overall amount paid to senior management aligned with shareholder value creation?

 

The conclusion we reached was that the overall structure which we initiated three years ago remains appropriate for National Grid. We felt that to make any significant changes to the policy – particularly given that the first LTPP awarded under the 2014 policy had yet to vest – was premature for a long-term business. We also felt that the division between short-term and long-term pay gave proper focus and weight to generating long-term returns for shareholders.

There is no single approach to executive pay that is definitively ‘right’ for all companies. What we did was to appraise the way National Grid creates value for its shareholders over time, and fulfils its national and societal obligations, recognising also that we are in a competitive market for senior executive talent. Against this backdrop, we believe the overall structure described above remains fair.

We are proposing some minor modifications to the metrics (but not the quantum) in respect of both the APP and LTPP for the implementation of the policy in 2017/18. More specifically, for the APP we will sharpen the focus on annual regional performance for the UK and US Executive Directors, with half of the weighting of the financial performance being on regional RoE and half on regional Value Added. There will be no change to the financial performance metrics for either the Chief Executive or the Finance Director. The LTPP will then focus solely on long-term Group performance for all Executive Directors with a 50% weighting on Group RoE and a 50% weighting on Group Value Growth. These changes should enhance the visibility for executives between their annual performance and short-term incentive outcome, while reinforcing executives’ collective incentive on sustaining long-term Group performance. No changes are being proposed to the maximum level of awards in respect of either the APP or the LTPP.

Page 70 provides more detail on the implementation of our policy related to incentive plans for 2017/18.

We also looked at pension provisions as part of our policy review, including in relation to other employees of the Company. The annual contribution to a Defined Contribution plan (DC) is 30% of base salary for UK-based Directors and certain other senior UK-based employees. In the US the contribution rate is up to 13% of base salary plus APP award for US-based Directors and certain other senior US-based employees. Pension contributions are tiered by managerial grade down to 12% of base salary in the UK, and in the US 4-8% of base salary plus APP award (depending on age and years of service). To highlight the flexibility on any pension arrangements for new UK-based Directors, we have modified the wording in the policy related to UK DC pension contributions to ‘up to’ 30%.

 

 

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National Grid Annual Report and Accounts 2016/17

  Corporate Governance