Want more information or help?
Capita Registrars
For queries about ordinary shares:
The Bank of New York Mellon
For queries about American
Depositary Shares:
0871 402 3344
Calls cost 8p per minute plus
network extras. Lines are
open 8.30am to 5.30pm,
Monday to Friday.
If calling from outside the
UK: +44 (0)20 7098 1198
Textphone: 18001 0871 664 0532
1-800-466-7215
If calling from outside the US:
+1-201-680-6825
Visit the National Grid Share Portal
www.nationalgridshareholders.com
Email: nationalgrid@
capitaregistrars.com
www.mybnymdr.com
Email: shrrelations@
bnymellon.com
National Grid Share Register,
Capita Registrars, The Registry,
34 Beckenham Road,
Beckenham, Kent BR3 4TU
The Bank of New York Mellon,
Depositary Receipts,
PO Box 43006, Providence,
RI 02940-3006
Further information about National Grid
including share price and interactive
tools can be found on our website:
www.nationalgrid.com
Have you received unsolicited
investment advice?
Shareholders are advised to be wary
of any unsolicited advice or offers,
whether over the telephone, through
the post or by email. If you receive any
such unsolicited communication please
check the company or person
contacting you is properly authorised
by the FCA before getting involved.
You can check at www.fca.org.uk/
consumers/protect-yourself and can
report calls from unauthorised firms to
the FCA by calling 0800 111 6768.
A
n
n
u
a
l
R
e
p
o
r
t
a
n
d
A
c
c
o
u
n
t
s
2
0
1
2
/
1
3
Cautionary Statement
This document comprises the Annual
Report and Accounts for the year ending
31 March 2013 for National Grid and its
subsidiaries. It contains the Directors’
Report and Financial Statements,
together with the Independent Auditors’
Report thereon, as required by the
Companies Act 2006. The Directors’
Report, comprising pages 06 to 91
and 170 to 189, has been drawn up in
accordance with the requirements of
English law, and liability in respect thereof
is also governed by English law. In
particular, the liability of the Directors for
these reports is solely to National Grid.
This document contains certain
statements that are neither reported
financial results nor other historical
information. These statements are
forward-looking statements within the
meaning of Section 27A of the Securities
Act of 1933, as amended, and Section
21E of the Securities Exchange Act of
1934, as amended. These statements
include information with respect to
our financial condition, our results of
operations and businesses, strategy,
plans and objectives. Words such as
‘anticipates’, ‘expects’, ‘should’, ‘intends’,
‘plans’, ‘believes’, ‘outlook’, ‘seeks’,
‘estimates’, ‘targets’, ‘may’, ‘will’,
‘continue’, ‘project’ and similar
expressions, as well as statements in
the future tense, identify forward-looking
statements. These forward-looking
statements are not guarantees of our
future performance and are subject to
assumptions, risks and uncertainties that
could cause actual future results to differ
materially from those expressed in or
implied by such forward-looking
statements. Many of these assumptions,
risks and uncertainties relate to factors
that are beyond our ability to control or
estimate precisely, such as changes in
laws or regulations, announcements from
and decisions by governmental bodies or
regulators (including the timeliness of
consents for construction projects);
breaches of, or changes in,
environmental, climate change and health
and safety laws or regulations, including
breaches arising from the potentially
harmful nature of our activities; network
failure or interruption (and our actual or
perceived response thereto), the inability
to carry out critical non network
operations and damage to infrastructure,
due to adverse weather conditions
including the impact of Superstorm Sandy
and other major storms as well as the
results of climate change or due to
unauthorised access to or deliberate
breaches of our IT systems or otherwise;
performance against regulatory targets
and standards and against our peers with
the aim of delivering stakeholder
expectations regarding costs and
efficiency savings, including those related
to investment programmes and internal
transformation projects (including the US
foundation programme); and customers
and counterparties failing to perform their
obligations to the Company. Other factors
that could cause actual results to differ
materially from those described in this
document include fluctuations in
exchange rates, interest rates and
commodity price indices; restrictions and
conditions (including filing requirements)
in our borrowing and debt arrangements,
funding costs and access to financing;
regulatory requirements for us to maintain
financial resources in certain parts of our
business and restrictions on some
subsidiaries’ transactions such as paying
dividends, lending or levying charges;
inflation; the delayed timing of recoveries
and payments in our regulated
businesses and whether aspects of our
activities are contestable; the funding
requirements and performance of our
pension schemes and other post-
retirement benefit schemes; the loss
of key personnel or the ability to attract,
train or retain qualified personnel and
any significant disputes arising with
our employees or the breach of laws
or regulations by our employees; and
incorrect or unforeseen assumptions or
conclusions (including financial and tax
impacts and other unanticipated effects)
relating to business development activity,
including assumptions in connection with
joint ventures.
For further details regarding these and
other assumptions, risks and uncertainties
that may affect National Grid, please read
the Strategic Review section including the
‘Risk factors’ on pages 176 to 178 of this
document. In addition, new factors
emerge from time to time and we cannot
assess the potential impact of any such
factor on our activities or the extent to
which any factor, or combination of
factors, may cause actual future results
to differ materially from those contained
in any forward-looking statement. Except
as may be required by law or regulation,
the Company undertakes no obligation
to update any of its forward-looking
statements, which speak only as of the
date of this document.
The contents of any website references
in this document do not form part of
this document.
Annual Report and Accounts 2012/13
National Grid plc
Trusted to connect
Headlines
£3,644m +4%
£3,754m +6%
Adjusted operating profit† 2011/12: £3,495m
Operating profit 2011/12: £3,539m
56.1p +12%
62.6p +13%
Adjusted earnings per share† 2011/12: 50.0p (i)
Earnings per share 2011/12: 55.6p (i)
£23.8bn +7%
$15.0bn +4%
UK regulatory asset value 2011/12: £22.2bn
US rate base 2011/12: $14.5bn
40.85p +4%
11.2%
Ordinary dividends 2011/12: 39.28p
Group return on equity 2011/12: 10.9%
† Excludes the impact of exceptional items, remeasurements and stranded cost recoveries. See page 50 for more information
about these adjusted profit measures
(i) Comparative earnings per share data has been restated for the impact of the scrip dividend issues.
Our financial results are reported in sterling. The average exchange rate, as detailed on page 50 was $1.57 to £1 in 2012/13
compared with the average rate of $1.60 to £1 in 2011/12. Except as otherwise noted, the figures in this Report are stated
in sterling or US dollars. All references to dollars or $ are to the US currency.
Segmental reporting
The performance of our principal businesses
is reported by segment, reflecting the
management responsibilities and economic
characteristics of each activity.
Throughout this Report, the following colours
are used to indicate references to a particular
segment:
UK Transmission
UK Gas Distribution
US Regulated
Activities which do not fall within these
segments are reported separately and
are identified as:
Other activities
Discussion relating to the Company
as a whole is identified as:
Company activities
Important dates
5 June 2013
Ordinary shares go ex-dividend
for 2012/13
24 July 2013
Scrip election date
29 July 2013
Annual General Meeting and
interim management statement
21 August 2013
2012/13 final dividend paid to
qualifying shareholders
For a full search facility, please go to the pdf of our Annual Report and Accounts 2012/13
in the investor relations section of our website and use a word search.
www.nationalgrid.com
Designed and produced by
c o n r a n d e s i g n g r o u p
Printed on Amadeus 100% Recycled Offset paper.
The paper is independently certified according to
the rules of the Forestry Stewardship Council® (FSC).
The manufacturing mill holds the ISO 14001 environmental
certification and the EU Eco-label (EMAS).
Printed by Pureprint Group, ISO 14001, FSC® certified
and CarbonNeutral®.
Contents
We have changed the way we present our Annual
Report and Accounts so we can describe strategic
information and our business model in a way that
we believe is easier to understand. This information
is set out in our Strategic Review, with more
detailed information, where relevant, included
in Additional Information.
We use a number of technical terms and abbreviations within
this document. In the interest of saving paper, we do not define
terms or provide explanations every time they are used; please
refer to the glossary on pages 190 to 193 for this information.
Directors’ Report
The Directors’ Report, prepared in accordance with the
requirements of the Companies Act 2006 and the UK Listing
Authority’s Listing, and Disclosure and Transparency rules,
comprising pages 6 to 91 and 170 to 189, was approved by
the Board and signed on its behalf by:
Alison Kay
Group General Counsel & Company Secretary
Company number 4031152
15 May 2013
Important notice
This document contains certain statements that are neither reported financial
results nor other historical information. These statements are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. For a description of factors that could affect future results,
reference should be made to the full cautionary statement on the back
cover of this document and to the risk factors section on pages 176 to 178.
Strategic Review pages 01 to 57
02 Chairman’s statement
04 Chief Executive’s review
06 Financial review – in brief
08 Our vision and strategy
10 Operating environment
12 What we do
17 Where we operate
18 Principal operations
26 Our Board
28 Our governance structure
30
32 What are the risks?
34 How executive remuneration aligns to Company strategy
36 What did we achieve?
44 Measuring performance – our KPIs
46 Financial review
Internal control and risk management
Corporate Governance pages 58 to 91
The Corporate Governance Report, introduced by the Chairman,
contains details on the activities of the Board and its committees
during the year, including reports from the Nominations, Audit
and Remuneration Committees, as well as details of our
shareholder engagement activities.
58 Corporate Governance contents
59
Cross reference to Directors’ Report statutory
and other disclosures
68 Remuneration Report
91 Shareholder engagement
Financial Statements pages 92 to 169
Including the Independent Auditors’ reports, consolidated
financial statements prepared in accordance with IFRS and
notes to the consolidated financial statements, as well as the
Company financial statements prepared in accordance with
UK GAAP.
92
Introduction to the financial statements
93 Statement of Directors’ responsibilities
94 Audit opinions
96 Contents of financial statements
Additional Information pages 170 to 196
Additional disclosures and information, definitions and glossary
of terms, summary consolidated financial information and other
useful information for shareholders including contact details for
more information or help.
170 Contents of additional information
190 Definitions and glossary of terms
Copyright National Grid plc 2013 ©, all rights reserved. The commission
of any unauthorised act in relation to this document may result in civil
and/or criminal action.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
01
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information
Chairman’s statement
“ The challenges we have over the coming years in the UK and US
require a fresh focus, so we have been investing time and effort
to develop the Board, refreshing its balance of skills, experience,
knowledge and diversity.” Sir Peter Gershon Chairman
The Board is proposing a
recommended final dividend of
26.36p
2011/12: 25.35p
Impressions and reflections on 2012/13
This has been a significant year for National Grid, which has
seen substantial change in both the UK and US.
One of the most important changes we have seen is Ofgem’s
introduction of RIIO, a new eight year regulatory framework in
the UK. In February 2013, we agreed all the UK RIIO price control
arrangements proposed by Ofgem. The Board believes the
combination of revenue allowances and incentive mechanisms
provides a good opportunity to earn appropriate returns for
investors, while delivering essential infrastructure investment
for the benefit of consumers and the UK economy.
The Board has seen improved operational performance in the
US, as well as the outcome of important rate filings, as Steve
describes in his review on page 05. Also in the US, our response
to Superstorm Sandy showed we have made improvements
in our operational processes and the way we interact with
our stakeholders.
Superstorm Sandy was a significant example of the changing
weather patterns that we are increasingly seeing in both the UK
and US, with 2012 being one of the wettest years on record in
the UK. This creates considerable operational challenges for
our business and, when severe weather events occur, we need
to be able to respond effectively and efficiently.
We announced our new dividend policy in March 2013. This
has been a top priority for the Board over the last year and is an
important part of the way we create shareholder value. The new
policy will aim to grow the ordinary dividend at least in line with
the rate of RPI inflation each year for the foreseeable future.
It will also support our long-term ambition to target a sustainable
dividend in real terms for our shareholders, while helping us
maintain the strong balance sheet we need to fund the business.
The Board has recommended an increase in the final dividend
to 26.36p per ordinary share, ($2.0088 per American Depositary
Share), in line with our one year policy of targeting 4% growth in
the year 2012/13, bringing the full year dividend to 40.85p per
ordinary share.
Being a responsible business
We contribute to our communities directly and indirectly in many
ways. We maintain and operate the critical infrastructure needed
to keep the lights on and the heating working across the UK and
northeastern US, we employ more than 25,000 people and in
2012/13 contributed £1.2 billion in taxes in the UK alone.
02
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review
Our contribution goes further. For example, we estimate we
support around 30,000 jobs in the first tier of our supply chain –
in other words, jobs in companies that are our suppliers across
the globe.
We are proud of our role serving the communities in which
we operate. We strive to be a responsible business, seeking
to balance the need to build infrastructure efficiently with
consideration for the environment.
We are constantly looking for new ways to build and maintain
our networks, applying innovative design and being both creative
and flexible in our approach to connecting people to the energy
they need.
The way in which we conduct business with our partners is
equally important. Our aim of forging strong relationships built
on trust is reflected in our refreshed vision statement. It is also
reflected in our line of sight – the framework that we use to link
our objective setting right back to our strategy and vision. In
addition to focusing on what we must do to achieve our vision,
we are now placing even greater emphasis on how we do it.
I firmly believe that a company needs to act and behave
responsibly in seeking to meet the varied needs of its many
stakeholders, and our role as an essential utility reinforces that
requirement. To this end, we are implementing a comprehensive
communications programme in 2013/14 to help remind all
employees of the standards that are expected of us collectively
and as individuals.
Effective governance
We are implementing the phased transition of the Board’s
membership that I set out in last year’s Annual Report and
Accounts. The challenges we have over the coming years in the
UK and US require a fresh focus, so we have been investing time
and effort to develop the Board, refreshing its balance of skills,
experience, knowledge and diversity. This brings a broad range
of perspectives and challenge, which together with strong
teamwork are important factors that I believe contribute to an
effective board.
Over the year we have welcomed Nora Mead Brownell, Mark
Williamson and, most recently, Jonathan Dawson to our Board
as Non-executive Directors. You can read more about the
committees they have joined on page 62, as well as the
appointment process on page 67.
As a result of the Board’s transition, Stephen Pettit and Linda
Adamany stepped down from the Board in 2012 and Ken Harvey
and George Rose will step down at this year’s AGM.
Ken has been the Senior Independent Director since 2004 and
chairman of the Remuneration Committee since 2011. Mark
Williamson will succeed Ken as Senior Independent Director
and Jonathan Dawson will take over from him as chairman
of the Remuneration Committee. George has been chairman of
the Audit Committee for more than 10 years and Mark Williamson
will take over this role when George steps down. Chairmanship
of these committees plays an important role in making sure the
Board meets its responsibilities to shareholders and stakeholders.
I would like to thank Ken and George for their commitment to the
Board and the very valuable contribution they have made.
Safety, the environment and health all form a crucial part of the
Company’s strategy. With this in mind, we have established a
new committee, which is able to provide a more in depth focus
on these areas. It can consider, for example, risk and compliance
matters in greater detail than was previously the case. The Safety,
Environment and Health Committee replaces the Risk &
Responsibility Committee and you can read more about its
work on page 66.
In January 2013, Helen Mahy left the Company after 11 years.
I would like to thank Helen for her valuable contribution and
commitment to the Company and the Board. We have appointed
Alison Kay as our new Group General Counsel & Company
Secretary. See page 182 for her biography.
Looking ahead
As we enter a new phase for National Grid, I believe we are
well positioned for the future. We have a refreshed Board that
is operating effectively and will continue to set the tone at the
top, helping us to meet the challenges we have on both sides
of the Atlantic.
On many occasions during the year – in particular during
Superstorm Sandy – our employees’ dedication to customers
has been outstanding. I am confident that our people will
continue to help make National Grid a company we can all be
proud of and I thank all our employees for their hard work and
commitment to our success.
Sir Peter Gershon
You can read more about some of the topics described
by Sir Peter on the following pages:
Our vision and strategy
pages 08 and 09
Our Board
pages 26 and 27
Internal control
and risk management
pages 30 and 31 and page 179
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
03
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Chief Executive’s review
“ National Grid’s job is to connect people to the energy they use,
safely. We are at the heart of one of the greatest challenges facing
our society – delivering clean energy to support our world long
into the future. We work with all our stakeholders to promote the
development and implementation of sustainable, innovative and
affordable energy solutions. And we are proud that our work, and
our people, underpin the prosperity and wellbeing of our customers,
communities and investors.” Steve Holliday Chief Executive
Impressions and reflections on 2012/13
It has been another hugely important year for National Grid,
both in the UK and US. We have been working hard to secure
appropriate regulatory arrangements while bedding down
significant organisational changes on both sides of the Atlantic.
These activities create the foundation for our long-term success,
in continuing to meet the needs of our customers, delivering
our targeted returns and securing long-term financing for
important investments.
In the US, following our restructuring and cost reduction
programme, we have continued to embed the process changes
we have introduced.
Superstorm Sandy tested the improvements we had made to
our emergency response processes. Throughout 2012, we
worked to improve these processes, from training and customer
communications through to the way we work on damage
assessment, repairing assets and providing accurate estimated
times of restoration.
We also had to respond to a significant snowstorm in the US
during the early part of 2013. As with Sandy, our employees’
hard work and dedication made sure that we were able to restore
power to our customers quickly and efficiently.
How we performed during 2012/13
After a challenging 2011/12, we boosted our efforts to improve
our safety performance. Regrettably, in early April 2013 one of
our contractors was fatally injured while working on a gas main
upgrade near Albany, New York. We have been thoroughly
investigating this tragic event in order to learn from it and prevent
a recurrence.
Safety is not just about keeping our people safe. It is also about
making sure members of the public are not put at risk by our
operations and we have seen significant progress in this area,
with a 41% reduction in injuries to members of the public
compared with last year.
04
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review We are committed to raising the standards of visible safety
leadership across the business and supporting a culture of
instinctive safety in our people. We have also been maintaining a
relentless focus on process safety, supported by a new process
safety management system.
We have delivered good financial performance across our
businesses with a 12% increase in adjusted earnings per share.
For more information on our financial results see page 06.
I am delighted that we received commendations for our
contribution to the success of the London 2012 Olympic and
Paralympic Games, working closely with the London Organising
Committee to safely ensure resilient energy supplies to the venues.
However, there are areas that we need to improve. For example,
in the UK we have a massive challenge to deliver the energy
infrastructure the country needs, while minimising the impacts on
communities and the environment. We know we need to change
the way we engage with our stakeholders and the public about
our infrastructure plans. We are making efforts to focus on this
through a campaign called Powering Britain’s Future. We have
held a number of forums bringing together leaders from across
the energy industry with stakeholders from government,
consumer and environmental groups. Our aim is to develop a
clearer energy story and explain the difficult decisions that need
to be taken when balancing the need for, and cost of, this new
infrastructure with protecting the landscape.
We are encouraging a national conversation about the UK
energy challenge and a platform for people to share their ideas
is provided at www.poweringbritainsfuture.co.uk.
In the US, we updated and consolidated our many legacy
systems on to one single platform. With a system implementation
of this scale and complexity we expected some difficulties
following go live. We have, however, experienced operational
difficulties that significantly exceeded our expectations and we
have devoted significant time and resources to resolving these.
Learning from these challenges and events is particularly
important if we are to drive continuous improvement.
Changes in regulation
We are restructuring our UK business, which includes focusing
the organisation on four main end-to-end processes that deliver
our regulatory outputs and value to our customers.
The changes aim to make sure we are well positioned to
deliver value under RIIO, the new regulatory framework, and
are prepared for our potential new role under Electricity Market
Reform (EMR). This is intended to provide greater financial
certainty to generation companies and aid growth of greener
sources of power that will need connecting to the grid.
In the US, we will continue to submit rate filings so we can
appropriately recover our cost of operations and invest so we
can provide for the safe, reliable and efficient delivery of energy
to customers. Over the past year, we received unanimous
approval from RIPUC for rates that took effect in February 2013.
Our New York filing also received unanimous approval, with
new rates taking effect in April 2013.
People
I am committed to developing all our employees to the best of
their abilities. I am also determined to create an inclusive, high
performance culture at National Grid. We need people with
the right skills and experience to meet the current and future
requirements of our business. This will include a mixture of
experienced engineers and development programme trainees,
from apprentices to graduates. That means we need people with
STEM (science, technology, engineering and mathematics) skills,
so I believe it is important for us to continue the work we are
doing with schools, to inspire the next generation of engineers
and technicians.
This will help us achieve our refreshed vision – ‘connecting you
to your energy today, trusted to help you meet your energy
needs tomorrow’.
The results of our 2013 employee opinion survey, completed by
79% of our employees, included an engagement score of 63%.
This is an important measure. It highlights, for example, the
extent to which employees would recommend National Grid to
others as a place to work, as well as giving their time and energy
to make it a success. For more information see page 39.
In the previous year’s survey, employees told us we could
increase the opportunities we provide for personal development.
Consequently, among the initiatives we have introduced is the
development of an academy – a global, centralised hub of all
our learning and development. This provides a clear learning
path for all our employees that is aligned to the needs of the
business. It brings together and shares best practice from
our own Company, as well as from our external partners.
I am proud of all our employees who have volunteered in their
local communities, giving their time, skills and enthusiasm
to support a wide range of projects. These ranged from
environmental initiatives to projects helping young people
improve their STEM skills, as well as supporting our various
partner charities, such as Special Olympics GB, Girls Inc. in
the US and City Year in both countries. I would like to take this
opportunity to say thank you to everyone who has been involved
in these valuable initiatives.
Our priorities for next year
• Safety – our safety performance is moving in the right
direction but it remains a top priority for us as we seek
to achieve a world-class safety level;
• Execution – we will only succeed if we deliver on our
commitments consistently, effectively and efficiently.
Performance matters and we have to push ourselves as hard
as we can to drive the performance edge we will need this
year; and
• Customer and communities – we have refined a lot of our
processes so customers and communities are at the heart of
our focus, but we still have a lot more to do.
Steve Holliday
You can read more about some of the topics described
by Steve on the following pages:
Financial review
pages 06 and 07 and 46 to 57
Employee engagement
page 38
US system update
page 38
US rate filings
pages 173 to 175
RIIO
pages 171 and 172
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
05
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Financial review – in brief
This year has seen good financial performance. Our financial
measures have mostly improved compared with the prior year
and we continue to see opportunities for growth in the future.
52% +100 bps
Total shareholder return
£3,644m +4%
Adjusted operating profit*
56.1p +12%†
Adjusted EPS*
£4,037m -10%
Cash generated from operations
13.6% +60 bps
UK return on equity
9.2% +40 bps
US return on equity
£33.7bn +8%
Regulated assets: UK RAV and sterling equivalent
of US rate base
* Items presented as adjusted exclude exceptional items, remeasurements
and stranded cost recoveries. See pages 50 and 51 for further details
† Comparative amounts have been restated to reflect the impact of additional
shares issued as scrip dividends
Total shareholder return (TSR)
We measure TSR as a key performance indicator (KPI) on a
cumulative three year basis. The measure reflects changes in
our share price and also assumes dividends paid to shareholders
over that period were reinvested in our shares. Cumulative TSR
for the period 1 April 2010 to 31 March 2013 was 52% (1 April
2009 to 31 March 2012: 51%; 1 April 2008 to 31 March 2011: 4%).
This reflects our strong dividend yield as well as the recovery in
the financial markets since 2008/09.
Earnings measures
Adjusted operating profit
Our adjusted operating profit has increased 4% to a record high
of £3,644 million, driven by higher net regulated income in our UK
Transmission and UK Gas Distribution businesses of £277 million
and £85 million respectively, as a result of the impact of inflation
and other price control allowances. Our US Regulated business
further contributed as a result of higher Niagara Mohawk deferral
recoveries and higher revenues from the increase in rate bases
of our FERC regulated entities.
Major storms in the US (Superstorm Sandy and Storm Nemo)
had an adverse impact on operating profit of £136 million in
2012/13, £20 million higher than the costs of Tropical Storm Irene
and the Massachusetts October snowstorm in 2011/12. Timing
benefits of £16 million in 2012/13 were in line with the £18 million
net benefit in 2011/12.
The £105 million decrease in adjusted operating profit for 2011/12
compared with 2010/11 was due to adverse timing differences
of £256 million and higher storm costs in the US of £116 million
(due to Tropical Storm Irene and the October snowstorm in
Massachusetts). These were partially offset by an increase in
UK regulated revenues of £220 million and improved results
from other activities.
Adjusted earnings and EPS
Our adjusted net interest charge remained broadly level with
2011/12 at £920 million, with a reduction in the cost of our
index-linked debt offsetting the impact of higher debt levels
and loss on disposal of financial instruments. The £217 million
decrease in adjusted net finance costs in 2011/12 to £917 million
was mainly due to: lower interest rates on short term instruments;
lower debt repurchase costs; the benefit of lower average net
debt as a result of those debt buy backs; and a favourable
variance in pension interest due to a higher than expected rate
of return on US pension assets.
Our adjusted tax charge was £69 million lower than 2011/12,
mainly due to changes in tax provisions in respect of prior years
and a 2% decrease in the UK statutory corporation tax rate in the
year, partially offset by increased taxes on higher taxable profits.
As a result of this, our effective tax rate for 2012/13 was 25.0%
(2011/12: 29.2%; 2010/11: 29.2%). The 2011/12 effective tax rate
before exceptional items, remeasurements and stranded cost
recoveries did not change from 2010/11 because a fall in prior
period tax credits was primarily offset by a 2% reduction in the
UK corporation tax rate and a change in the UK/US profit mix.
The above earnings performance has translated into adjusted
EPS growth in 2012/13 of 6.1p (12%) (adjusted EPS growth in
2011/12 of 0.4p (1%)). The impact of the movements above on
adjusted EPS for 2011/12 and 2012/13 has been shown in the
chart opposite:
06
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review US return on equity
The US ROE has increased 40 bps to 9.2%, mainly driven by
customer growth in our Massachusetts Gas business and
recognition of the full allowed return in our Niagara Mohawk
electricity business following the reversal of a prior period
provision. The increase of 50 bps from 2010 to 2011 mainly
related to the impact of our restructuring savings and the
full-year impact of our new Massachusetts Gas rate plan
which was effective from November 2010.
US return on equity
%
10
9
8
7
Dec 2010
Dec 2011
Dec 2012
Regulated assets
Our regulated assets have increased by £2.5 billion, reflecting
the continued high levels of investment in our network in both
the UK and US. The UK RAV increased by £1.6 billion reflecting
inflation and significant capital expenditure in our UK Transmission
business in particular. The US rate base increased by £0.9 billion,
£0.5 billion due to foreign exchange movements and £0.4 billion
due to investment in our networks and working capital movements.
Total regulated assets (continuing operations)
£m
27,943*
28,647*
29,909*
31,220
33,713 †
2009
2010
2011
2012
2013
* US rate base calculated as at 31 December for these years
† Estimated figure until the conclusion of the regulatory reporting cycle
Adjusted EPS
pence
2010/11
Operating profit
Interest
Tax
Minority interests
Shares*
2011/12
Operating profit
Interest
Tax
Joint ventures
2012/13
40
42
44
46
48
50
52
54
56
58
Year end EPS Decrease in EPS Increase in EPS
* Full year dilutive impact on the weighted average number of shares from the rights
issue which occurred part way through 2010/11
Cash generated from operations
Cash generated from operations was £4,037 million (2011/12:
£4,487 million; 2010/11: £4,854 million). Adjusted operating profit
before depreciation, amortisation and impairment increased by
£228 million year on year, however this was offset by a year-on-
year reduction in working capital of £556 million and the cessation
of stranded cost recoveries in 2012/13 (£247 million received in
2011/12). The adverse working capital is driven by the US, due to
the timing of cost recoveries from LIPA relating to Superstorm
Sandy, as well as increased receivables due to a colder winter
and higher commodity prices in 2013 compared with 2012.
The reduction in cash generated from operations from 2010/11 to
2011/12 reflected lower operating profits, unfavourable movements
in the UK due to higher Gas Distribution receivables, higher
pension deficit payments and lower stranded cost recoveries
than in 2010/11. These were offset by working capital
movements due to the weather in the US (including lower
receivables due to the milder winter, lower gas costs and
improved collections).
Asset return measures
UK return on equity
The UK ROE has increased 60 bps to 13.6%, mainly driven
by outperformance in the gas transmission and distribution
businesses against allowed returns, as well as the benefit of a
lower tax charge in the period. Our electricity transmission returns
have remained broadly constant year on year. The UK ROE for
2012/13 has now returned to the same level as 2010/11, following
UK RAV growth driven by RPI and investment in 2011/12.
UK return on equity
%
14
13
12
11
2010/11
2011/12
2012/13
Principal operations
pages 18 to 25
Key performance indicators
pages 44 and 45
You can read more about our performance and financial
results for the year on the following pages:
Financial review
pages 46 to 57
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
07
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information
Our vision and strategy
Our vision sets out our intentions and aspirations at the highest level,
while our strategic objectives outline what we need to do to achieve
that vision.
Our vision
Connecting you to your energy today, trusted to help you
meet your energy needs tomorrow.
Our strategy
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.
Deliver
operational
excellence
Engage our
people
Stimulate
innovation
Engage
externally
Embed
sustainability
Drive
growth
Our business model
What we do
How we do it
We are an international electricity and gas
company based in the UK and northeastern
US. We play a vital role in connecting millions
of people safely, reliably and efficiently to the
energy they use.
What we do and the way we do it are
equally important – from setting the tone
at the top and how we manage our internal
controls, to matters reserved to the Board
and our executive remuneration policies.
Operating environment
see pages 10 and 11
Our Board
see pages 26 and 27
What we do: Electricity and Gas
see pages 12 to 16
Our governance structure
see pages 28 and 29
Where we operate
see page 17
Principal operations
see pages 18 to 25
Internal control and risk management
see pages 30 and 31
How executive remuneration aligns to
Company strategy
see pages 34 and 35
What did we achieve?
Our work and people underpin the prosperity and wellbeing of our
customers, communities and investors. To read more about what we
achieved in 2012/13 see pages 36 to 43.
08
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review
What our vision and strategic objectives
mean to us
Our vision sets out our intentions and aspirations at the highest
level. Our strategic objectives set out what we believe we need
to achieve to deliver our vision and be recognised as a leader in
the development and operation of safe, reliable and sustainable
energy infrastructure.
Deliver operational excellence – achieve excellent levels
of safety, reliability, security and customer service.
Our customers, communities and other stakeholders demand
safe, reliable and secure 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.
Excellence in operational processes should allow us to manage
our assets efficiently, deliver network improvements quickly and
provide services that meet the changing demands of customers.
Engagement with our customers and communities will make sure
our outputs reflect their needs and priorities. It will help maximise
the benefits our stakeholders derive from the value we deliver.
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. Creating an engaged and
talented team that is aligned with our strategic objectives is vital
to our success. Our presence within the communities we serve,
the people we work with and our opportunities to grow both
individually and as a business are all important to making
National Grid a good place to work.
Stimulate innovation – promote new ideas to work more
efficiently and effectively.
Our commitment to promoting innovation underpins how we will
run our networks more efficiently and effectively and deliver on
our regulatory incentives. Across our business, we will explore
new ways of thinking and working to benefit every aspect of
how we deliver on our customer and stakeholder commitments.
Embedding innovation and new technology into our operations
makes sure we deliver continuous improvements in the quality
and cost of our services.
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, making sure our position and perspective shape
future policy direction. We also engage with our regulators to
manage uncertainty and provide the right mechanisms so we
can deliver infrastructure that meets the demands of a changing
energy landscape.
Embed sustainability – integrate sustainability into our decision
making to create value, 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. That culture will make sure we make decisions
that protect and preserve natural resources and benefit the
communities in which we operate. We remain committed to our
targets of a 45% reduction in Scope 1 and 2 greenhouse gas
emissions by 2020 and 80% by 2050.
Drive growth – grow our core businesses and develop future
new business options.
We continue our aim of gaining the best possible 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.
We review investment opportunities carefully and will only invest
where we can reasonably expect to earn an adequate return.
Combining this disciplined approach with operational and
procurement efficiencies gives us the best possible opportunity
to drive strong returns and meet our commitments to investors.
How our strategy creates value
Our vision and strategic objectives explain what is important
to us, so we can meet our commitments and deliver value.
Shareholder value
Regulatory frameworks – operating under robust regulatory
frameworks can help to reduce cash flow volatility. Shaping these
frameworks to maintain a balance of risk and return underpins
our investment proposition.
Reputation, safety and capability – our approach to safety and
our reliability record underpin our reputation and brand. These
are important factors that enable positive participation in regulatory
discussions and the pursuit of new business opportunities.
Efficient operations – efficient capital and operational
expenditure allows us to deliver regulatory outputs at a lower
cash cost and reduces working capital requirements.
Maximising revenues – positive performance under
incentive mechanisms, and delivery of the outputs our customers
and regulatory stakeholders require, helps us to maximise
allowed revenue.
Funding and cash flow management – positive net cash flows
and an innovative funding strategy help to deliver long-term
growth. Outperforming the allowed cost of debt can provide
improved profitability.
Disciplined investment – we can achieve future revenue and
earnings growth by increasing our regulatory asset value and
rate base in line with regulatory capital allowances. Investment
in non-regulated assets helps us to use and enhance our core
capabilities with the aim of delivering attractive returns.
Customer and community value
Safety and reliability – providing reliable networks in a safe
way is at the core of customer expectations.
Affordability – providing services in a cost efficient way helps
to reduce the impact on customer bills.
Customer service – providing reliable services that meet the
needs of our customers and communities is a crucial part of
the value they receive from us.
Environmental sustainability – we aim to protect the environment
and preserve resources for current and future generations.
Emergency services – we provide telephone call centres,
coordinate the response to make safe unplanned gas escapes
and respond to severe weather events.
Community engagement – we listen to the communities we
serve and work to address concerns about the development
of our networks. Our people volunteer for community based
projects and we support educational initiatives in schools.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
09
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Operating environment
Our operations are influenced and affected by what is going on in the
world around us. We shape our decision making to try and balance
the impact of these external factors, so we can deliver value for our
customers, shareholders and other stakeholders.
Macroeconomic factors
Our rate plans and price controls are agreed against the
backdrop of the broader macroeconomic environment.
In the UK, low economic growth is projected in 2013 and, as
a result, it is unlikely that we will see a significant decline in the
unemployment rate during 2013.
Unemployment in the US has seen a slow but steady decline
throughout 2012. However, with only modest growth forecast for
2013 this is likely to remain high for a while. In the US, we retain
some risk of bad debts when customers are unable to pay their
bills, so these conditions can have a more direct impact on our
financial performance.
In the US, consumer confidence has remained weak, with
more people believing that business conditions will worsen
in the short term than those believing they will improve. This
view puts considerable downward pressure on bills. We must
accommodate our customers’ affordability concerns while
fulfilling our obligations to provide safe and reliable services
and making necessary system investments.
The environment for infrastructure investment in the UK and
Europe is evolving, with new investors continuing to be attracted
to regulated assets. Sovereign wealth and infrastructure funds
are becoming more prominent investors in UK assets.
In the US, we saw a number of major utility mergers during 2012
as our peers and competitors sought to gain efficiencies from
greater scale and position themselves for growth opportunities.
We have also seen independent transmission developers
pursuing large scale projects connecting wind power across
the country, as well as prominent utilities investing capital in
non-regulated solar assets.
Changing energy mix
Our networks exist to transmit and distribute energy from its
source to its place of use. Changes to the energy mix and
location of centres of supply and demand will create pressures
on our networks. We may need to continue to invest in our
networks to meet these challenges.
In the UK, some older coal fired power stations are closing to
comply with the Large Combustion Plant Directive and recent
fuel prices have reduced the economic viability of gas fired
power stations to the point where some are now being
mothballed or closed. Looking further ahead, a continued
decline in fossil fuel fired electricity generation is to be expected
if the government’s carbon reduction targets are to be met.
New low carbon generation will not necessarily be located in
the same place as existing plant and will probably require new
connections. Where gas comes into the UK is also changing
with forecast reductions in North Sea production and increased
reliance on imported gas. We will need to adapt our network
to ensure sufficient capacity is in place to move gas from these
different source locations to the demand centres.
In the US, increased gas supplies, resulting from developments
in shale gas, have led to lower gas prices and created increased
demand. This is fuelling growth of gas distribution as customers
convert to gas.
Additionally, our electricity distribution customers benefit from
lower electricity prices as gas fired generation often sets the
market price for electricity in the northeastern US. As more
generation plants convert to low priced natural gas, opportunities
for investment in additional gas network capacity may arise.
Energy policy
Policy decisions by governments, government authorities and
others can have a direct impact on our business. They can affect
the amount and location of investment required in our networks
and the way we operate. They can also change our compliance
obligations. Understanding the evolving policy environment is
important to understanding the challenges and opportunities
we have ahead.
In the UK, energy policy continues to evolve from the Climate
Change Act 2008 which commits the UK government to
reducing UK greenhouse gas emissions to a level at least 80%
lower than a 1990 baseline by 2050.
In November 2012, the Energy Bill, which implements the main
aspects of Electricity Market Reform (EMR), was introduced
to parliament. EMR seeks to set out the future industry context
and promote investment in low carbon generation by providing
greater financial certainty to investors. The Energy Bill is expected
to receive Royal Assent this year.
At a European level, the three cornerstones of sustainability,
security of supply and affordability underpin energy policy.
Greater levels of market integration, interconnection and
renewable generation are fundamental to achieving these policy
objectives. While European developments present challenges,
the significant level of investment required may create
opportunities for growth.
10
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review Innovation and technology
New technology can change the way we do business. The pace
of technological development in the energy sector is accelerating
as new technologies take shape and approach commercial
viability. HVDC technology could play an important part in the
development of a more integrated electricity grid, particularly
the extension of offshore links. While carbon-based generation
is likely to remain a significant part of the global energy mix,
carbon capture and storage technologies may become critical
to governments achieving their climate change targets.
Technologies such as energy storage, electric transportation
and distributed generation, all have the potential to affect our
networks significantly.
The development of smart grids will change how loads are
balanced across the distribution network. It will allow our
customers to make smarter energy choices and will increase
network flexibility. New consumer products, such as alternative
fuelled vehicles and distributed generation, will increase
demand and require new infrastructure.
Innovation goes further than new technology. We need to
increase the flexibility of our infrastructure to respond to
developments as they arise. This can mean managing energy
and networks differently, rather than creating new infrastructure
to meet supply and demand changes.
In the US, many of the developments at a federal level have been
through federal agency regulations and Presidential executive
orders. We have supported some additional requirements,
such as those of the Environmental Protection Agency (EPA)
to implement new air and water quality regulations. We are also
working with EPA to ensure our Long Island power generation
fleet complies with any new regulations and to remediate
contaminated sites where we hold legacy liability.
At a state level, energy policy continues to evolve in the
northeastern US. This is driven by interest in promoting energy
efficiency, maintaining reliability and deploying renewable
technologies that help meet environmental and energy
diversity goals.
All of the states in which we operate have standards that meet
or exceed EPA’s regulations. In particular, the nine northeastern
states that participate in the Regional Greenhouse Gas Initiative
agreed to reduce power plant emissions and increase funding
for energy efficiency and clean energy.
Regulatory developments
In the UK, the regulatory focus during the year has been the
finalisation of the new RIIO price controls. RIIO gives greater
focus to incentives and innovation than the previous
regulatory regime.
The projected increase in offshore wind generation and
interconnection has created a debate on the regulatory
approach to electricity transmission investment – a debate we
are fully engaged in. Competition is already in place for offshore
development in the UK and Ofgem has stated its intent to
retain the option of using greater competition for certain large
onshore projects.
In the US, we have completed new rate filings for our gas
and electricity businesses in New York and Rhode Island. In
Massachusetts, we are actively involved with the Massachusetts
Commission and neighbouring utilities in the grid modernisation
notice of inquiry. This addresses grid reliability during extreme
weather conditions, system efficiency and interconnection
of distributed generation.
We are also actively involved in the New York Energy Highway
initiative to examine new ways of delivering infrastructure in
the state. All these initiatives will present new opportunities
to respond to customers’ needs and build the necessary
infrastructure to address these needs.
In addition to the investment required for new connections and
to meet the challenges of changing supply and demand patterns,
we need to replace ageing infrastructure in both the UK and US.
Cast iron gas mains still in use can be more than 100 years old
and over time can create a safety risk and also contribute to
greenhouse gas emissions through leaks.
The recent severe weather in the US has also highlighted the
potential need for additional investment in network resilience.
Regulators and policymakers are beginning to ask utilities to put
plans in place to strengthen their networks’ ability to withstand
the effects of severe weather.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
11
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information What we do
Electricity
The electricity industry connects generation sources to homes and
businesses via transmission and distribution networks. Electricity is
sold to consumers by companies who have bought it from the
generators and pay to use the networks across which it is transmitted.
E N ERATION
G
3.8 GW
Generation produced
in the US
US REGULATED
Generation
Generation is the production
of electricity from fossil fuel and
nuclear power stations, as well as
renewable sources such as wind
and solar. In the US, we own and
operate 50 fossil fuel powered
stations on Long Island and
4.6 MW of solar generation
in Massachusetts. We do not
own or operate any electricity
generation in the UK.
We sell the electricity generated
by our plants on Long Island to
LIPA under a long-term power
supply agreement. The contract
allows us to recover our efficient
operating costs and provides a
return on equity on our investment
in the generation assets.
For solar generation, we recover
our costs and a reasonable return
from customers in Massachusetts
through a solar cost adjustment
factor. This is added to the
electricity rate, net of revenues
earned from the solar assets.
Interconnectors
Transmission grids are often
interconnected so that energy
can flow from one country to
another. This helps provide
a safe, secure, reliable and
affordable energy supply for
citizens and society across
the region. Interconnectors
also allow power suppliers to
sell their energy to customers
in other countries.
Great Britain is linked via
interconnectors with France,
Ireland, Northern Ireland and the
Netherlands. National Grid owns
part of the interconnectors with
France and the Netherlands.
We also jointly own and operate
a 224 kilometre interconnector
between New England in the
US and Canada.
We sell capacity on our UK
interconnectors through auctions
and on our US interconnectors
through wholesale markets
and bilateral contracts.
OTHER ACTIVITIES
Approximately
260 km
Length of the BritNed
interconnector
I
N
TERCONN E C T
R S
O
A N SMISSION
T R
99.99999%
Electricity transmission
reliability in England
and Wales
US REGULATED
UK TRANSMISSION
Transmission
Transmission systems
generally include overhead
lines, underground cables and
substations. They connect
generation and interconnectors
to the distribution system.
We own and operate the
transmission network in England
and Wales; we operate but do
not own the Scottish networks.
In the US, we jointly own and
operate transmission facilities
spanning upstate New York,
Massachusetts, New Hampshire,
Rhode Island and Vermont.
We will operate and maintain
the transmission system on Long
Island, under contract to LIPA,
until December 2013.
For more information on how we
make money from our regulated
assets, see page 16.
12
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
D I S T R IBUTION
US REGULATED
US REGULATED
SUPP L Y
Strategic Review E N ERATION
G
US REGULATED
A N SMISSION
T R
US REGULATED
UK TRANSMISSION
OTHER ACTIVITIES
I
N
TERCONN E C T
R S
O
D I S T R IBUTION
3.4 million
Number of US
electricity customers
US REGULATED
Distribution
Distribution systems carry
lower voltages than transmission
systems over networks of
overhead lines, underground
cables and substations. They
take over the role of transporting
electricity from the transmission
network, and deliver it to
consumers at a voltage they
can use.
We do not own or operate
electricity distribution networks
in the UK.
In the US, our distribution
networks serve around 3.4 million
customers in upstate New York,
Massachusetts and Rhode Island.
In addition, we will operate and
maintain the distribution system
on Long Island, under contract
to LIPA, until December 2013,
providing service to around
1.1 million LIPA customers.
For more information on how we
make money from our regulated
assets, see page 16.
Supply
The supply of electricity
involves buying electricity and
selling it on to customers. It
also involves customer services,
billing and the collection
of customer accounts.
We do not sell electricity
to consumers in the UK.
All the states in which we operate
in the US are deregulated and
consumers can choose their
energy supplier. Where
customers choose National Grid,
they pay us for distribution and
electricity costs. Where they
choose to buy electricity from
third parties, they pay us for
distribution only and pay the third
party supplier for the electricity.
Our base charges for electricity
supply are calculated to recover
the purchased power costs.
US REGULATED
5
Number of US states in
which we operate
SUPP L Y
System operator
As system operator (SO)
for England and Wales, we
coordinate and direct electricity
flows onto and over the
transmission system, balancing
generation supply and user
demand. Where necessary,
we pay sources of supply and
demand to increase or decrease
their generation or usage.
We have the same role for the
two high voltage electricity
transmission networks in Scotland
and we have been appointed as
system operator for the offshore
electricity transmission regime.
Our charges for SO services
in the UK are subject to a price
control approved by Ofgem.
System users pay us for
connection, for using the system
and balancing services.
As electricity transmission system
operator, our price control
includes incentives to minimise
the costs and associated risks
of balancing the system through
buying and selling energy, as well
as procuring balancing services
from industry participants.
The form of this incentive under
RIIO has yet to be agreed and
is currently subject to industry
consultation.
In the US, these services
are provided by independent
system operators.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
13
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information What we do
Gas
The gas industry connects producers, processors, storage,
transmission and distribution network operators, as well as
suppliers to industrial, commercial and domestic users.
Transmission
The transmission systems generally include pipes,
compressor stations and storage facilities, including
LNG storage. They connect production through
terminals to the distribution systems.
In the UK, gas enters the transmission system
through importation and reception terminals and
interconnectors and may include gas previously
extracted and held in storage.
Compressor stations located along the network play
a vital role in keeping large quantities of gas flowing
through the system, particularly at times of high
demand. The gas transmission system has to be
kept constantly in balance, which is achieved by
buying, selling and using stored gas. This means
that, under normal circumstances, demand can
be met.
We are the sole owner and operator of gas
transmission infrastructure in Great Britain.
In the US, we hold a minority interest in two interstate
pipelines: Millennium Pipeline Company and Iroquois
Gas Transmission System. Interstate pipelines are
regulated by FERC.
For more information on how we make money from
our regulated assets, see page 16.
UK TRANSMISSION
7,660 km
Length of high pressure pipeline in the UK
TRANSMISSION
PRODUCTION & IMPORTATION
Approximately 12%
of UK gas was from LNG imports
OTHER ACTIVITIES
Production and importation
Gas used in the UK is sourced from gas fields in
the North and Irish seas, piped from Europe and
imported as LNG. Small amounts are produced
onshore. There are seven gas reception terminals,
three LNG importation terminals and three
interconnectors connecting Great Britain via
undersea pipes with Ireland, Belgium and the
Netherlands. LNG importers bring LNG from the
Middle East, the Americas and other places.
Gas is produced in the US Gulf Coast, midcontinent,
Western Rockies, Alberta, eastern shale supplies
and other unconventional sources in North America.
We do not produce gas in either the UK or US.
In the UK, we own and operate an LNG importation
terminal and storage facilities at the Isle of Grain
in Kent (Grain LNG).
Grain LNG charges customers under long-term
contracts for various services, including access
to our importation terminal, storage facilities and
capacity rights.
In the US, we own and operate LNG storage and
vaporisation facilities to support our gas distribution
businesses as well as an LNG storage facility in
Providence, Rhode Island, where we store gas
for third parties for a fee. We also buy gas directly
from producers and LNG importers for resale
to our customers.
14
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
DISTRIBUTION
UK GAS DISTRIBUTION
US REGULATED
US REGULATED
SUPPLY
Strategic Review PRODUCTION & IMPORTATION
OTHER ACTIVITIES
UK TRANSMISSION
TRANSMISSION
DISTRIBUTION
29,925
Number of new gas heating customers
connected in the US
UK GAS DISTRIBUTION
US REGULATED
Distribution
In the UK, gas leaves the transmission system and
enters the distribution networks at high pressure.
It is then transported through a number of reducing
pressure tiers until it is finally delivered to consumers.
There are eight regional distribution networks, four
of which are owned by National Grid.
Our UK distribution networks deliver gas to around
10.9 million consumers.
In the US, gas is delivered by the interstate pipeline
companies to local distribution networks. Each local
distribution company has a geographically defined
service territory and is the only local distribution
company within that territory. Local distribution
companies are regulated by the relevant local
state’s utility commission.
Our US gas distribution networks deliver gas to
around 3.5 million customers.
For more information on how we make money from
our regulated assets, see page 16.
Supply
Pipeline shippers bring gas from producers
to suppliers, who in turn sell it to customers.
We do not supply gas in the UK. However, we
own National Grid Metering, which provides meters
and metering services to supply companies,
under contract.
In the UK, customers pay the supplier for the cost of
gas and for getting it to them. We transport the gas
through our network on behalf of shippers, who pay
us transportation charges.
In the US, gas distribution companies, including
National Grid, sell gas to consumers connected
to their distribution systems.
In most cases in the US, where customers choose
National Grid, they pay us for distribution and gas
costs. Where they choose to buy gas from third
parties, they pay us for distribution only and pay
the third party supplier for the gas and upstream
transportation capacity.
Also in the US, except for residential consumers in
Rhode Island, customers may purchase their supply
from independent providers with the option of billing
for those purchases to be provided by us.
US REGULATED
3.5 million
Number of US gas customers
SUPPLY
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
15
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information What we do
How we make money from our regulated assets
Our transmission and distribution
businesses operate as regulated
monopolies. Regulators safeguard
customer interests by setting the level
of charges we are allowed to pass on,
so that we provide value for money,
maintain safe and reliable networks,
and deliver good customer service.
In the UK there is a single regulator, Ofgem. In the US, different
services and locations are regulated by different bodies. For
the areas in which we operate, these are the relevant state
regulators and FERC.
Each of our regulatory agreements can include differences
in structure, terms and values. Here, we have provided a
summary of our regulatory agreements. You can find more
details about these on pages 170 to 175.
The value of our regulated assets is calculated based on
the terms of our regulatory agreements. These may not be
calculated on the same basis as the accounting value of assets,
although the principles are similar. For example, building new
assets will generally increase regulated assets and disposing
of assets will generally decrease regulated assets. In the UK,
the value of regulated assets is also increased for inflation.
Our regulatory agreements also determine the amount we are
allowed to charge customers, commonly referred to as our
allowed revenues. Allowed revenue is calculated based on
a number of building blocks:
Depreciation of regulated assets – the value of regulated assets
is depreciated over an anticipated lifespan. The amount of
depreciation is included in our allowed revenue, which represents
the repayment of the amounts we have invested in the asset.
Return on equity and cost of debt – regulated assets are funded
through debt or equity and regulatory agreements set this ratio.
The equity portion earns a ‘return on equity’. This represents the
profit we can earn on our investment in regulated assets. The
debt portion earns an allowance based on the cost of debt
(interest costs). Some regulatory agreements allow us to charge
customers based on the actual interest we pay; others use an
external benchmark interest rate as a way to incentivise us to
raise debt efficiently. The benchmark interest method also
provides an opportunity to outperform our regulatory allowance.
Cost of service – in establishing our regulatory agreements, our
regulators consider what costs an efficiently run company would
incur to operate and maintain our networks. They vary and can
include costs relating to employees, office rental, IT systems and
taxes, for example. The regulators have different approaches to
determining what is considered an efficient or prudent cost and
this may be different to the actual costs we incur.
Performance against incentives – our regulatory agreements,
mainly in the UK, include incentives that are designed to
encourage specific actions, such as reducing greenhouse gas
emissions. Achieving performance beyond targets set out in
these incentive mechanisms can increase our allowed revenues
in the current year or a future year. Failing to achieve certain
minimum targets may lead to a reduction in our allowed revenue.
Commodity costs – in the US, we supply gas and electricity to
customers who have chosen us as their supplier. Most of our
regulatory agreements include mechanisms, known as trackers,
that allow us to recover the actual costs we incur when we buy
gas and electricity.
Deferrals – particularly in the US, the efficient costs we incur may
not be included in the calculation of allowed revenue in the same
year. Instead, these are deferred for regulatory purposes and we
can recover them in future years. For example, we incur costs
restoring power to customers immediately after a major storm.
However, these costs will generally be included in allowed
revenue over a number of years and may not start until the
relevant regulator has approved a request. This can be some
time after the storm and may not cover all the costs.
Timing differences – we use our allowed revenues to determine
our billing rates, which we calculate using a forecast of the
quantities that will be billed. Where there is a difference between
the actual and estimated quantities, the amount of revenue we
collect will be different to the allowed revenue. Consequently,
the over- or under-collected amounts are adjusted against the
following period’s allowed revenues.
To understand how RIIO in the UK affects this,
see pages 170 to 172
16
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review Where we operate
Our UK network
St. Fergus
to Ballylumford
to Dublin
Teesside
Barrow
Burton Point
Easington
Theddlethorpe
from the
Netherlands
Bacton
UK Transmission*
Scottish electricity
transmission system
English and Welsh electricity
transmission system
Approximately 7,200 kilometres (4,470
miles) of overhead line, 1,400 kilometres
(870 miles) of underground cable and
329 substations.
Gas transmission system
Approximately 7,660 kilometres
(4,760 miles) of high pressure pipe and
23 compressor stations connecting to
eight distribution networks and third
party independent systems.
Terminal
LNG terminal owned by National Grid
LNG terminal
Electricity interconnector
Gas interconnector
UK Gas Distribution*
Gas distribution operating area
Approximately 131,000 kilometres
(82,000 miles) of gas distribution pipeline
owned and operated by National Grid.
South Hook
Dragon
Our US network
Canada
to/from
Belgium
Principal offices
Owned office space:
Hinckley, Warwick and Wokingham
BritNed to/from
the Netherlands
Leased office space:
Solihull and London
Grain LNG
to/from
France
Vermont
Maine
Leased office space totalling 14,100
square metres (151,700 square feet) with
remaining terms of three to 10 years.
US Regulated*
Electricity transmission network
Gas distribution operating area
Electricity distribution area
An electricity distribution network of
approximately 116,250 circuit kilometres
(72,235 miles) in New England and
upstate New York.
A network of approximately 56,630
kilometres (35,190 miles) of gas pipeline
serving an area of approximately 25,545
square kilometres (9,475 square miles).
New York
New Hampshire
LIPA
Generation
Massachusetts
area overlap
Gas and electricity distribution
Connecticut
Rhode Island
Pennsylvania
New Jersey
Principal offices
Owned office space:
Syracuse, New York
Leased office space:
Brooklyn, New York and
Waltham, Massachusetts
Leased office space totalling approximately
53,000 square metres (570,000 square feet)
with remaining terms of 12 to 17 years.
At present, environmental issues are not preventing our UK and US businesses from utilising any material operating assets in the course of their operations.
* Access to electricity and gas transmission and distribution assets on property owned by others is controlled through various agreements
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
17
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information
Principal operations
UK Transmission
What we do
We own the electricity transmission system in England and
Wales. Our networks comprise approximately 7,200 kilometres
(4,470 miles) of overhead line, 1,400 kilometres (870 miles)
of underground cable and 329 substations. We are also the
national electricity transmission system operator, responsible
for both the England and Wales transmission system, and the
two high voltage transmission networks in Scotland, which
we do not own.
Day-to-day operation of the system involves the continuous
real-time matching of demand and generation output. We are
also designated as system operator for the new offshore
electricity transmission regime.
We own and operate the gas national transmission system
in Great Britain, with day-to-day responsibility for balancing
demand. Our network comprises approximately 7,660 kilometres
(4,760 miles) of high pressure pipe and 23 compressor stations.
Principal risks
• The energy landscape in the UK and Europe is changing.
These changes could have an impact on our business so it is
important that we are involved in the discussions surrounding
their development.
• In order to deliver strong financial and operational performance
under RIIO, we will need to successfully complete multiple
complex business improvement and transformation activities
that will affect our people, processes and systems.
• Delivery of construction projects, to which we are committed,
may be affected if we are unable to obtain planning consents
in a timely manner.
• Our operations could be disrupted by industrial action
by employees.
Where we are heading
2012/13 has been a significant year, marking the start of a major
transformation programme that will enable us to respond to our
changing external and internal operating environment.
Having established an operating model that allows us to see
and understand more clearly the performance of our regulated
businesses, we are now focused on driving performance
to make sure we meet the needs of our customers and
stakeholders and deliver value under the new price controls.
In particular we will need to be sharper in our commercial
relationships, driving the performance of our contractors.
We have been asked by DECC to act as delivery body for its
potential electricity market reforms (see page 10). We will carry
out analysis to help inform Government decisions on energy
policy, as well as administering key parts of the enduring regime.
Adjusted operating profit of Group total (%)
56
44
UK Transmission Rest of Group
How we are progressing
• Delivered strong safety, operational, customer and financial
performance in 2012/13.
• Secured new eight year price controls for electricity
transmission and gas transmission.
• Emphasised end-to-end electricity and gas transmission
processes in our organisational design.
• Refined our organisational design and appointed managers
into their roles. We are reducing the number of manager roles
by 22% and, at the same time, we have clearly articulated
people’s accountabilities.
• Fundamentally changed our partnering approach for delivering
major transmission capital projects. This involves revised
contracts with our electricity alliance partners that make
accountability clearer. We have also introduced additional
layers of competition for delivery of some aspects of our work.
Priorities for the year ahead
• Continue to improve safety performance and maintain focus
on specific areas including induced voltage.
• Build on the foundations we have established during 2012/13
and deliver under the first year of our new price control.
• Embed the organisational design through all layers of our business.
• Define and embed new ways of working.
• Continue to enhance our capabilities in process and performance
excellence, as well as commercial and contract management.
• Increase innovation to help us meet the output measures we
are committed to delivering under RIIO.
• Continue to work closely with DECC and Ofgem to help inform
and manage security of supply through a period of significant
change in the UK energy market.
£1.7bn
Capital investment in 2012/13
over 4,700
Employees at 31 March 2013
18
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review UK Transmission
The results of the UK Transmission segment for the years ended 31 March 2013, 2012 and 2011 were as follows:
Revenue
Operating costs excluding exceptional items
Adjusted operating profit
Exceptional items
Operating profit
Principal movements (2010/11 – 2012/13)
2010/11 adjusted results
Timing
Net regulated income
Regulated controllable
operating costs
Post-retirement costs
Depreciation & amortisation
Other
2011/12 adjusted results
Timing
Net regulated income
Regulated controllable
operating costs
Post-retirement costs
Depreciation & amortisation
2012/13 adjusted results
1,363
(91)
148
(24)
(1)
(31)
(10)
1,354
67
277
(24)
(7)
(58)
1,609
Increase in profit £m
Decrease in profit £m
1
,
1
0
0
1
,
2
0
0
1
,
3
0
0
1
,
4
0
0
1
,
5
0
0
1
,
6
0
0
1
,
7
0
0
1
,
8
0
0
Years ended 31 March
2013
£m
4,246
(2,637)
1,609
(43)
2012
£m
3,804
(2,450)
1,354
–
1,566
1,354
2011
£m
3,484
(2,121)
1,363
(70)
1,293
In year under-recovery of £21 million compared with
a prior year over-recovery of £63 million and a prior
year estimate variance of £7 million.
Revenues increased by £156 million driven by our
regulatory RPI-X pricing formula. This was partially
offset by a £20 million charge on the balancing
services incentive scheme due to higher than
expected costs for balancing services.
Increased costs are driven by higher full time
equivalent employee numbers as we increase
our capital investment programme and other cost
inflationary pressures. These have been partially
offset by lower material charges.
Higher average asset values due to the capital
investment programme.
Primarily relates to the impairment of LNG storage
assets that are no longer required.
In year over-recovery of £46 million compared with a
prior year under-recovery of £21 million. The estimated
closing over-recovered value at 31 March 2013 is
£24 million.
Increase in regulated revenues under UK price control
allowances partially offset by a £10 million increase in
charges under the balancing services incentive scheme.
Increased costs driven by inflation, higher maintenance
workload and recruitment and training costs
associated with our capital investment programme.
Increases in contribution rates for our defined benefit
pension schemes.
Higher average asset values due to the capital
investment programme and some one-time asset
write-offs.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
19
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Principal operations
UK Gas Distribution
What we do
We own and operate four of the eight regional gas distribution
networks in Great Britain. Our networks comprise approximately
131,000 kilometres (82,000 miles) of gas distribution pipeline
and we transport gas from the gas national transmission system
to around 10.9 million consumers on behalf of 26 gas shippers.
Gas consumption in our UK networks was 306 TWh in 2012/13
compared with 259 TWh in 2011/12.
We manage the national gas emergency number (0800 111 999).
This service, along with the enquiries lines, appliance repair
helpline and meter enquiry service, handled 2,480,669 calls
during 2012/13.
Principal risks
• The potentially dangerous nature of our activities, for our
employees, contractors and the public, drives us to stay
focused on process and personal safety.
• Our ability to deliver our operational performance and
standards of service relies on the underlying availability,
accuracy and integrity of our businesses’ systems and data.
• In order to deliver strong financial and operational performance
under RIIO, we will need to realise the benefits of our end-to-
end business processes and new contractual arrangements
with our alliance partners.
• Our operations could be disrupted by industrial action
by employees.
Where we are heading
Two years into our transformation programme in Gas
Distribution, we have established the foundations for success
under RIIO. We will now build on this so we can meet the needs
of our customers and stakeholders and deliver value under the
new price control.
Our customers and stakeholders have told us what they expect
of us through the RIIO ‘talking networks’ consultation, so we will
continue to make sure we can provide a safe and reliable service
at the right cost.
To make sure our transformation is sustainable we will continue
to develop a culture of process and performance excellence
so that all our people, including supervisors and field force, are
empowered to innovate and improve our business.
We will also increase our commercial and contract management
capability to make sure we can drive the performance of our
contractors who deliver a significant proportion of our work.
Adjusted operating profit of Group total (%)
22
78
UK Gas Distribution Rest of Group
How we are progressing
• Delivered strong safety, operational, customer and financial
performance in 2012/13.
• Secured a new eight year price control for Gas Distribution.
• Completed the roll out of new systems and processes through
our Gas Distribution front office (GDFO) project – a significant
milestone in our transformation programme. All four of our
gas distribution networks are now using GDFO systems to help
deliver our major processes: emergency response, repair,
mains replacement and connections.
• Maintained our focus on process and performance excellence
by continuing to build skills and capabilities and further
strengthening a culture of continuous improvement.
• Agreed new terms and conditions with our 1,900 directly
employed field force employees. The new arrangements
support improved productivity and increased flexibility, so
we can perform under RIIO.
• Agreed new contracts to deliver £3.5 billion of investment
(primarily mains replacement and connections). These Gas
Distribution strategic partnerships align our contract partners’
incentives with the way we are incentivised under RIIO.
Priorities for the year ahead
• Continue to improve safety performance and maintain focus
on specific areas, including reducing cable strikes and safer
operation of road vehicles.
• Maintain a strong focus on the service we provide to our
customers, including improving our response to complaints
and enquiries and showing our customer facing employees
how customers rate the service they provide.
• Continue to build our capabilities in process and performance
excellence, as well as commercial and contract management.
• Work closely with our Gas Distribution strategic partners so we
change to the new contracts quickly and smoothly. An effective
transition will help make sure we maintain a high standard of
work, strong safety and customer performance and continue
to meet work delivery targets.
• Increase innovation to help us meet the output measures we
are committed to delivering under RIIO.
£0.7bn
Capital investment in 2012/13
over 4,200
Employees at 31 March 2013
20
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review UK Gas Distribution
The results of the UK Gas Distribution segment for the years ended 31 March 2013, 2012 and 2011 were as follows:
Revenue
Operating costs excluding exceptional items
Adjusted operating profit
Exceptional items
Operating profit
Principal movements (2010/11 – 2012/13)
2010/11 adjusted results
Timing
Net regulated income
Regulated controllable
operating costs
Post-retirement costs
Depreciation & amortisation
Other
2011/12 adjusted results
Timing
Net regulated income
Regulated controllable
operating costs
Post-retirement costs
Depreciation & amortisation
Other
2012/13 adjusted results
Increase in profit £m
Decrease in profit £m
711
18
6
0
0
6
5
0
7
0
0
7
5
0
Years ended 31 March
2013
£m
1,714
(920)
794
(31)
763
2012
£m
1,605
(842)
763
(24)
739
2011
£m
1,524
(813)
711
(40)
671
Represents the collection of under-recoveries
from prior years.
Revenues increased driven by our regulatory
RPI-X pricing formula and performance under
incentive programmes.
Increased contractor and IS costs to support
the GDFO programme and achieving our standards
of service.
Higher average asset values due to the capital
investment programme.
The environmental provision costs incurred in the
prior year did not recur.
In year under-recovery of £10 million compared
with an over-recovery in the prior year of £22 million.
The estimated closing under-recovered value at
31 March 2013 is £8 million.
Revenues increased driven by our regulatory RPI-X
pricing formula and improved performance under
incentive programmes.
Increased costs driven by inflation, system
maintenance costs and one-off contract strategy
costs, partially offset by efficiencies enabled by
our new front office systems.
Increase in contribution rates for our defined benefit
pension schemes.
Higher average asset values due to the capital
investment programme and new front office systems.
72
(11)
1
(33)
5
763
(32)
85
(13)
(2)
(10)
3
794
8
0
0
8
5
0
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
21
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Principal operations
US Regulated
What we do
We own and operate electricity distribution networks in upstate
New York, Massachusetts, and Rhode Island. Through these
networks we serve approximately 3.4 million electricity
consumers in New England and upstate New York.
We also own and operate 50 electricity generation units on
Long Island that together provide 3.8 GW of power under
contract to LIPA. Our plants consist of oil and gas fired steam
turbine, gas turbine and diesel driven generating units ranging
from 2 MW to 385 MW.
Our US gas distribution networks provide services to around
3.5 million consumers across the northeastern US, located in
service territories in upstate New York, New York City, Long
Island, Massachusetts and Rhode Island. We added 29,925
new gas heating customers in these areas in 2012/13.
We are responsible for billing, customer service and supply
services. We forecast, plan for and procure approximately
13.9 billion standard cubic metres of gas and 30 TWh of
electricity annually across three states.
We own and operate an electricity transmission system of
approximately 14,000 kilometres (8,700 miles) spanning upstate
New York, Massachusetts, Rhode Island, New Hampshire
and Vermont operating nearly 160 kilometres (100 miles)
of underground cable and 522 substations.
We also maintain and operate the electricity transmission and
distribution system on Long Island owned by LIPA, covering
3,185 square kilometres (1,230 square miles). Our contract
with LIPA expires on 31 December 2013, and we will continue
to service and provide support during the transition process.
Principal risks
• The potentially dangerous nature of our activities, for our
employees, contractors and the public, drives us to stay
focused on process and personal safety.
• Our approach to preventing and responding to catastrophic
gas or electricity network interruptions is affected by the
increasing frequency and severity of storms and evolving
stakeholder expectations.
• The transformation of our information systems may fail
to deliver anticipated benefits, which could affect our US
business plan or cause delays to financial reporting that
breach our debt covenants.
• Our ability to recover incurred expenditure in a timely manner
may be affected by the changes in regulation or decisions
by regulators on regulatory filings.
£1.1bn
over 15,300
Capital investment in 2012/13
Employees at 31 March 2013
Adjusted operating profit of Group total (%)
34
66
US Regulated Rest of Group
Where we are heading
Having reorganised our US businesses in 2011 under a model
that acknowledges our regulatory jurisdictions, we have
introduced a programme that aims to make sure operational
excellence is a hallmark of our processes and culture by 2015.
We call this journey towards operational excellence Elevate 2015
and it focuses on eight end-to-end business processes. During
2012/13, we focused on our meter to cash and emergency
response processes. Others are now taking shape, including
workplace safety, network operations, rate case management,
customer service and asset maintenance.
As we enhance each business process, our decision-making
criteria are governed by four main principles: safety and
reliability, stewardship, customer responsiveness and
cost competitiveness.
How we are progressing
• Overall reliability improved for our electricity and gas
businesses despite the severe weather events experienced.
• Significant improvements to our emergency preparedness
processes to better address safety, customer satisfaction and
restoration response time. During Superstorm Sandy (see
page 37) and Storm Nemo our restoration efforts were lauded
by community leaders, regulatory officials and customers
for our emergency preparedness, community outreach and
communication, as well as relatively swift restoration times.
• New rate cases filed for our upstate New York and Rhode
Island gas and electricity businesses, each of which was
approved by its respective regulatory body. Officials praised
the quality of the Company’s rate case plan and supporting
data as well as our community outreach and communications.
• We implemented our new enterprise resource planning
system in November and December which, in time, is
expected to enable further operational efficiencies and
support process improvements.
Priorities for the year ahead
• Drive our focus and behaviours to prevent injuries and
safeguard the public.
• Improve the customer experience through end-to-end process
excellence and delivery of our work plan on time and on budget.
• Embed the new system into our end-to-end processes and
begin to extract value from this investment in line with our plan.
• Embed a regulatory focus and rate case readiness into our
business practices and systems. Commence preparations
for expected rate case filings in calendar year 2014 for the
electricity business in Massachusetts and the gas businesses
in downstate New York and Long Island.
• Increase the level of our engagement with and volunteering
in our communities.
22
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review US Regulated
The results of the US Regulated segment for the years ended 31 March 2013, 2012 and 2011 were as follows:
Years ended 31 March
Revenue excluding stranded cost recoveries
2013
£m
7,918
2012
£m
7,516
Operating costs excluding exceptional items, remeasurements and stranded cost recoveries
(6,665)
(6,326)
Adjusted operating profit
Exceptional items and remeasurements
Stranded cost recoveries
Operating profit
Principal movements (2010/11 – 2012/13)
1,253
170
14
1,437
1,190
(296)
260
1,154
2011
£m
8,391
(6,984)
1,407
(51)
348
1,704
2010/11 adjusted results
Exchange rate movements
2010/11 adjusted results
@ constant currency
Timing
Major storm costs
Net regulated income
Regulated controllable
operating costs
Post-retirement costs
Depreciation & amortisation
Bad debt
Other
2011/12 adjusted results
Exchange rate movements
2011/12 adjusted results
@ constant currency
Timing
Major storm costs
Net regulated income
Regulated controllable
operating costs
Post-retirement costs
Depreciation & amortisation
Bad debt
Other
2012/13 adjusted results
1,407
(22)
1,385
(183)
(116)
4
30
36
25
14
(5)
1,190
22
1,212
(37)
33
135
(19)
(29)
(17)
33
(58)
1,253
1
,
3
0
0
1
,
4
0
0
1
,
5
0
0
1
,
6
0
0
In year over-recovery of £17 million compared
with a prior year over-recovery of £200 million
(after adjusting for foreign exchange movements).
Effect of Tropical Storm Irene and the October
snowstorm.
Primarily results from our cost savings programme.
Early recovery of pension costs of employees
working on storm restoration in certain jurisdictions
and one-off costs in the prior year did not recur.
Favourable impact of extended asset lives for
certain assets following an engineering study and
reclassification of our New Hampshire businesses
as held for sale.
Lower reserve requirements due to lower revenues
late in the year as a result of mild weather and
favourable collection rates in New York.
In year under-recovery of £20 million compared with a
prior year over-recovery of £17 million (after adjusting
for foreign exchange movements). The estimated
closing over-recovered value at 31 March 2013 is
£110 million.
2012/13 includes the impact of Superstorm Sandy
and Storm Nemo. Net costs incurred in the US after
insurance proceeds were £33 million lower than prior
year (after adjusting for foreign exchange movements).
Reflects deferral recoveries in our upstate New York
businesses together with higher revenues from our
capital tracker regulatory arrangements.
Increased costs reflect inflation and higher spend
on IS outsourcing and security.
Primarily due to reductions in discount rates.
Lower bad debt expense due to improving economic
conditions and improved collections.
Increased property tax rates and assessed values,
together with higher environmental costs in 2012/13.
Increase in profit £m
Decrease in profit £m
9
0
0
1
,
0
0
0
1
,
1
0
0
1
,
2
0
0
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
23
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Principal operations
Other activities
Grain LNG
Grain LNG is one of three LNG importation facilities in the UK.
It was constructed in three phases becoming operational in 2005,
2008 and 2010 respectively. It operates under long-term contracts
with customers and provides importation services, storage and
send out capacity on to the national transmission system. We are
exploring with customers a number of developments to the Grain
site to enhance its revenue earning capability.
BritNed
BritNed is a joint venture between National Grid and TenneT, the
Dutch transmission system operator, which built, and now owns
and operates a 1,000 MW subsea electricity link between the
UK and the Netherlands, which is approximately 260 kilometres
(162 miles) in length. BritNed, which entered commercial
operations on 1 April 2011, is a merchant interconnector that sells
its capacity via a range of explicit and implicit auction products.
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 15 million
domestic, industrial and commercial meters. Through Ofgem’s
Review of Metering Arrangements, National Grid has been
appointed National Metering Manager to facilitate the transition
to smart metering in the domestic sector.
NGM has also been leading a pricing consultation to define the
tariff caps to apply in future to traditional domestic gas metering.
This process is due to conclude in summer 2013. In addition,
NGM has been further developing its services in the industrial
and commercial market.
NGM achieved its highest customer satisfaction scores for the
last six years for both domestic, and industrial and commercial
businesses.
UK Property
National Grid Property is responsible in the UK for the
management, clean up and disposal of surplus sites, most of
which are former gasworks. This year has seen us embedding
our outsourcing agreement with Capita Symonds that was
signed in May 2012 and our new tender arrangements for the
clean up of contaminated land. Both of these have started
to deliver operational and financial efficiencies in managing
and cleaning up our surplus estate.
Adjusted operating profit of Group total (%)
0
100
Other activities Rest of Group
Xoserve
Xoserve delivers transactional services on behalf of all the
major gas network transportation companies in Great Britain,
including National Grid. Xoserve is jointly owned by National
Grid, as majority shareholder, and the other gas distribution
network companies.
US non-regulated businesses
Some of our US businesses are not subject to state or federal
rate-making authority, including interests in certain of our
LNG road transportation, certain gas transmission pipelines
(the Millennium and Iroquois gas transmission pipeline projects
are regulated by FERC, however our minority equity interests
in them are not), and certain commercial services relating
to solar installations, fuel cells and other new technologies.
Corporate activities
Corporate activities comprise central overheads, insurance
and expenditure incurred on business development.
£0.2bn
Capital investment in 2012/13
over 900
Employees at 31 March 2013
excluding corporate activities
24
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review Other activities
The results of our other activities segment for the years ended 31 March 2013, 2012 and 2011 were as follows:
Revenue
Operating costs excluding exceptional items
Adjusted operating (loss)/profit
Exceptional items
Operating (loss)/profit
Principal movements (2010/11 – 2012/13)
2010/11 adjusted results
Exchange rate movements
2010/11 adjusted results
@ constant currency
Grain LNG
Property
Metering
Other
2011/12 adjusted results
Exchange rate movements
2011/12 adjusted results
@ constant currency
Major storm costs
Property
Metering
Other
119
1
120
20
27
2
(24)
(126)
26
(5)
188
(1)
187
(51)
2012/13 adjusted results
Increase in profit £m
Decrease in profit £m
(
5
0
)
(12)
0
5
0
1
0
0
1
5
0
2
0
0
2
5
0
Years ended 31 March
2013
£m
642
(654)
(12)
–
(12)
2012
£m
715
(527)
188
104
292
2011
£m
678
(559)
119
(42)
77
Full-year benefit of the phase III expansion
commissioned in 2010/11.
Lower environmental costs than the prior year.
We also benefited from a number of profitable
property sales.
Benefit of new customer contracts along with
reduced one-off costs that had depressed prior
year results.
Insurance costs for Superstorm Sandy incurred
in our insurance captive. Some of these costs
are expected to be recovered from the
reinsurance market.
Lower operating profits due to the disposal of
OnStream in the prior year, together with impact
of third party disputes on legacy meter pricing in
our regulated metering business.
Primarily represents spend on the implementation of
new US information systems and financial procedures.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
25
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Our Board
The successful delivery of our strategy is dependent upon
attracting and retaining the right talent. This starts with our
Board; a broad range of expertise and backgrounds ensures
a good balance of skills, expertise and knowledge. However,
creating a high performing Board where directors work well
together is not just about skills and experience; it is also about
behaviours and dynamics.
As already highlighted, the Board has been in a state of transition
recently. This has allowed us to think hard about creating an
inclusive and diverse culture that fosters positive behaviour
and encourages dynamics to come to the fore of all boardroom
interactions. We have used the opportunity of the Board refresh
to widen the range of knowledge and background of the
members. The appropriate skills base is complemented by a
diversity of ‘thinking styles’. Hence, lively debate and constructive
challenge is encouraged at all times; the boardroom is a place
where questions are valued, no debate is discouraged and all
Non-executive Directors have an equal voice regardless of their
background, expertise and tenure.
This enables the Board to be a ‘sounding board’ for ideas.
Management are encouraged to bring their proposals before the
Board during the development phase to allow the Non-executive
Directors the opportunity to input, challenge and review prior to
a project seeking full financial sanction. In this way, the Board
works collectively to challenge the Company to deliver superior
performance and enhances the Company’s ability to
understand and anticipate opportunities and challenges.
On these pages we set out the age, committee membership
and tenure of our Board members. For their full biographical
details, see pages 180 to 182.
Sir Peter Gershon CBE
FREng (66)
Chairman
N (ch)
1 year’s tenure
Steve Holliday FREng (56)
Chief Executive
F
12 years’ tenure^
Philip Aiken (64)
Non-executive Director
A, N, S (ch)
4 years’ tenure
Andrew Bonfield (50)
Finance Director
F
2 years’ tenure
Board diversity
The current Board
membership has three
female directors; a formal
board diversity policy has
been approved during the
year. You can read about
this in the Nominations
Committee report on
page 67.
Nora Mead Brownell (65)
Non-executive Director
N, R, S
Under 1 year’s tenure
Jonathan Dawson (61)
Non-executive Director
F, N, R
Under 1 year’s tenure
Paul Golby CBE FREng (62)
Non-executive Director
N, R, S
1 year’s tenure
26
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review Ken Harvey CBE (72)
Non-executive Director and
Senior Independent Director
N, R (ch), S
12 years’ tenure*
Ruth Kelly (45)
Non-executive Director
A, F, N
1 year’s tenure
Tom King (51)
Executive Director, US
5 years’ tenure
Maria Richter (58)
Non-executive Director
A, F (ch), N
9 years’ tenure
George Rose (61)
Non-executive Director
A (ch), N, R
12 years’ tenure*
Mark Williamson (55)
Non-executive Director
A, F, N
Under 1 year’s tenure
Nick Winser FREng (52)
Executive Director, UK
9 years’ tenure
Key
A Audit Committee
F Finance Committee
N Nominations Committee
R Remuneration Committee
Safety, Environment and
S
Health Committee
(ch) chairman of Committee
* Including Lattice Group plc
^ Including National Grid Group plc
Tenure as at 31 March 2013
With the agreement of the
Board, Executive Directors
may gain experience of
other companies’ operations,
governance frameworks
and boardroom dynamics
through non-executive
appointments. You can
read more about these in the
Board biographies on pages
180 to 182. The fees for these
positions are retained by the
individual, see page 84.
Our Chairman is responsible for the leadership and management
of the Board and its governance. By promoting a culture of
openness and debate, he facilitates the effective contribution of
all Directors and helps maintain constructive relations between
Executive and Non-executive Directors.
Our Chief Executive is responsible for the executive leadership
and day-to-day management of the Company, to ensure the
delivery of the strategy agreed by the Board. Through his
leadership of the Executive Committee, he demonstrates
commitment to safety, operational and financial performance.
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 as required.
Independent of management, our Non-executive Directors
bring diverse skills and experience, vital to constructive challenge
and debate. Exclusively, they form the Audit, Nominations,
Remuneration and SEH Committees, and have a key role
in developing proposals on strategy.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
27
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Our governance structure
Our Board
Committee
oversight
Our Board is collectively responsible for the effective oversight of the Company and its businesses.
It also determines the strategic direction 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
for the Company and takes the lead in areas such as safeguarding the reputation of the Company and
financial policy, as well as making sure we maintain a sound system of internal control (see page 30).
The Board’s full responsibilities are set out in the matters reserved for the Board, available on our website.
In line with these responsibilities and the key challenges and opportunities facing the Company,
the Chairman sets the Board’s agenda, making sure adequate time is available to discuss all agenda
The Board delegates authority to its 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.
These committees are summarised below and their full terms of reference are available on our
website. The committees communicate and work together where required – for example, on some
risk matters the Safety, Environment and Health Committee collaborates with the Audit Committee.
Committee agendas and schedules of items to be discussed at future meetings are prepared in line
with the terms of reference of each committee.
Audit Committee
Finance Committee
Nominations
Committee
Oversees the Company’s
financial reporting, and
internal controls and their
effectiveness, together with
the procedures for identifying,
assessing and reporting risks.
It also oversees the services
provided by the external
auditors and their
remuneration.
Sets policy and grants
authority for financing
decisions, credit exposure,
policy for hedging and foreign
exchange transactions,
guarantees and indemnities.
It also approves other
treasury, tax, pensions and
insurance strategies or, if
appropriate, recommends
them to the Board.
Responsible for considering
the structure, size and
composition of the Board and
committees, and succession
planning. It also identifies and
proposes individuals to be
Directors and executive
management reporting
directly to the Chief Executive,
and establishes the criteria
for any new position.
Management
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. The committee plays a key
role in the development of our people and driving a high performance culture. In line with common
practice, the Executive Committee has ceased to be a committee of the Board; its levels of
authority, role and responsibilities remain unchanged.
It approves expenditure and other financial commitments within its authority levels and discusses,
formulates and approves proposals to be considered by the Board.
There are currently ten members of the committee. They 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 also considers
succession planning and the talent pipeline to the committee.
The committee officially met 11 times this year, but the members interact much more regularly.
Those members of the committee who are not Directors all regularly attend Board and committee
meetings with Alison Kay, Group General Counsel & Company Secretary, secretary to the Board
and Nominations Committee. This means that knowledge is shared and every member is kept up
to date with business activities and developments.
28
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review items, including strategic issues. In order to operate effectively, the Board receives accurate,
timely and clear information, including updates on legal, regulatory, corporate governance and best
practice matters and presentations by internal and external advisors. 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. Additionally, the Non-executive Directors
are expected to visit at least one operational site to meet local management teams and discuss
aspects of the business with employees.
Attendance at Board and committee meetings during the year is set out on page 62.
Delegation
of authority
To support discussion and decision-making, committee members receive papers in advance of
meetings so they can prepare for and consider agenda items. Where appropriate, subject matter
experts give presentations and provide the opportunity for directors to ask questions. Following
discussion, as appropriate, matters are endorsed, approved or recommended to the Board by
the committee. The chairman of each committee provides the Board with a summary of the main
decisions and discussion points so the other directors are updated.
For more information about the Board and its committees and examples of the matters that they
have considered during the year, see Corporate Governance from page 58.
Remuneration
Committee
Safety, Environment
and Health Committee
Determines remuneration
policy and practices to
attract, motivate and retain
high-calibre executive
directors and other senior
employees to deliver value for
shareholders and high levels
of customer service, safety
and reliability.
In relation to safety,
environment and health,
the committee reviews the
strategies, policies, initiatives,
risk exposure, targets and
performance of the Company
and, where appropriate, of its
suppliers and contractors. It
also monitors the resources we
use for compliance and driving
improvement in these areas.
01
06
02
07
03
08
04
09
05
10
01 Steve Holliday Committee chairman
02 Andrew Bonfield Finance Director
03 Alison Kay Group General Counsel & Company Secretary
(see page 182 for her biography)
04 Tom King Executive Director, US
05 David Lister Chief Information Officer
06 George Mayhew Corporate Affairs Director
07 John Pettigrew UK Chief Operating Officer
08 Mike Westcott Global Human Resources Director
09 Nick Winser Executive Director, UK
10 Alison Wood Group Strategy & Corporate
Development Director
Management Committees
To help make sure we allocate time and expertise in the right way, the Company has a number of
management committees, which include the Disclosure Committee (see page 65 for more details),
Business Conduct Committees and the Global Retirement Plan Committee. These management
committees provide reports, where relevant, to the appointing committee in line with our
governance framework on the responsibilities they have been delegated.
Reporting and
recommendations
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
29
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Internal control and risk management
The Board is committed to protecting our reputation and assets, as
well as safeguarding the interests of our shareholders. We achieve
this through maintaining a sound system of internal control.
Oversight by the Board and Committees
Board of Directors
Maintains overall responsibility for the Company’s system of internal control and reviews
the effectiveness of the framework annually.
Audit Committee
Finance Committee
Safety, Environment and
Health (SEH) Committee
Executive Committee
Receives reports from the
specialist functions and
reviews the effectiveness
of internal controls over
financial reporting and risk
management procedures.
Also reviews the adequacy
of the external audit
process, including the
effectiveness, independence
and objectivity of the
external auditors.
Sets policy, monitors
compliance and grants
authority for financing
decisions, taxation,
insurance, pensions and
trading/hedging activities
in line with the Board’s
risk appetite.
Sets policies, implements
initiatives and monitors
compliance, and reviews
reports on key risks
associated with progress
towards our safety,
environment and health
objectives.
Reviews regular reports
from specialist functions
to monitor the adequacy
and effectiveness of the
internal control framework
and takes appropriate
action to safeguard the
interests of the Company
and to further our strategy
and business objectives.
Top down
The Board establishes the control environment, sets risk
appetite, approves policies and delegates responsibilities.
Bottom up
Detailed assessment by process owners and response
plans developed and monitored regularly.
Risk management
• works with the Board to determine
risk appetite and establish and
implement risk management
policies;
• responsible for the independent
review and challenge of risk
information throughout the
business, compilation and analysis
of risk profiles and monitoring risk
management processes within the
Group; and
• regularly reports on risks to the
oversight bodies.
Ethics and compliance management
• maintains our standards of ethical
Safety, environment and health
• develops policy recommendations
business conduct;
for the Board;
• promotes ethical behaviour and
• monitors safety, environment and
monitors compliance with external
legal and regulatory requirements; and
• operates our whistleblower helplines
and supports activities to prevent and
detect bribery.
health performance; and
• works with process owners to
deliver our safety, environment
and health objectives.
Corporate audit
• develops and executes a risk-based
Internal controls
• works with process owners to
audit plan; and
• provides independent, objective
assurance to the Audit Committee,
SEH Committee and the Executive
Committee on the extent to which
control and governance frameworks
are operating effectively.
identify, document and test the
design and operation of internal
control over financial reporting; and
• helps refine and improve controls
where required.
The Board and process owners are supported by these dedicated specialist teams.
30
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review Our system of internal control and, in particular, our risk
management process, has been designed to support our
strategic and business objectives as well as internal control
over financial reporting. We aim to do this through:
We put in place action plans, controls and other process
improvements designed to address the risks and issues we have
identified. We assess the effectiveness of our controls regularly
and seek independent assurance where it is appropriate to do so.
• mitigating risk;
• making sure our information, including financial reporting,
is accurate and reliable;
• complying with our obligations – both internal and external;
• applying sound governance practices; and
• making informed and timely decisions to further our objectives.
As we have shown in the diagram opposite, the Board
establishes the control environment. Supported by dedicated,
specialist teams, it sets risk appetite, approves policies and
monitors performance. Where appropriate it delegates authority
to its committees.
Combined with the assessments completed by process owners,
this top down and bottom up approach is used to maintain
quality within the internal control process.
Our internal controls are designed to manage rather than
eliminate material risks. We balance the costs of internal controls
with the magnitude and likelihood of the risks being managed in
light of our risk appetite.
Our internal control process
Our internal control process is based on thorough and systematic
processes that identify, assess and monitor business critical risks.
Identify risks
and issues
Monitor action
plans
N A L CON
T
R
O
L
TE R
IN
Design and
implement
controls and
process
improvements
Formally
report
outcomes
Assess
effectiveness
Accurate and reliable information plays a vital role in our
decision making, while education, training and awareness
are all important elements that help us maintain effective
internal controls.
Our internal control process starts with identifying risks,
compliance matters and other issues. We do this through routine
reviews carried out by process owners and facilitated by relevant
dedicated, specialist teams. We record risks in our risk register,
assess the implications and consequences for the Group and
determine the likelihood of occurrence.
We formally report the outcomes of our risk identification and
control assessments to senior management and the relevant
oversight bodies. This informs our decision-making and provides
assurances about our internal controls to management and
the Board.
We regularly monitor our action plans, other process
improvements and the status of risks. The results of our review
help update the process as the cycle continues.
Internal control over financial reporting
We have specific internal mechanisms to 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 Group and the group accounting guides
provide guidance on our accounting policies.
Within our processes we have system, transaction and oversight
controls. In addition, our businesses prepare detailed monthly
management reports which include analysis of their results along
with comparisons to relevant budgets, forecasts and prior year
results. These are presented to and challenged by senior
management within Finance. The Finance Director, in turn,
presents a consolidated management report to the Board.
These reviews are supplemented by quarterly performance
reviews, attended by the Chief Executive and Finance Director.
They discuss historical results and expected future performance
and involve senior management from both operational and
financial areas of the business.
Reviewing the effectiveness of our internal control
Each year the Board reviews the effectiveness of our internal
control process, including financial reporting, to make sure it
remains robust. The latest review covered the financial year
to 31 March 2013 and the period to the approval of this Annual
Report and Accounts. It included:
• the receipt of a letter of assurance from the Chief Executive
which consolidates the main matters of interest raised through
the year-end assurance process;
• where appropriate, assurance from our committees, with
particular reference to the reports received from the Audit and
SEH Committees on reviews undertaken at their meetings; and
• assurances about the certifications required under Sarbanes-
Oxley as a result of our US reporting obligations.
Our internal control processes comply with the Turnbull
guidance on internal control and the requirements of the UK
Corporate Governance Code. They are also the basis of our
compliance with obligations set by the Sarbanes-Oxley Act
2002 and other internal assurance activities.
For more information, including our opinion on internal
control over financial reporting, see page 179.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
31
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information What are the risks?
Below is an overview of some of the main risks we face that could have a material adverse effect on our
business, financial condition, results of operations and reputation, as well as the value and liquidity of our
securities. For a more comprehensive description, please see pages 176 to 178. We have included some
examples of the actions implemented to address these risks. It is not always possible to eliminate a risk
even where a response is in place and considered effective.
Some of our main risks
Risk description
Examples of mitigating actions
Aspects of the work we
do could potentially harm
employees, contractors,
members of the public
and the environment
• We have established safety and occupational health plans, programmes and procedures that
are aimed at continuous improvements in safety performance.
• Group wide initiatives are supplemented with specific regional safety programmes. These are
aimed at addressing specific areas so that safety is at the forefront of every employee’s mind.
We also benchmark against other industry groups to seek and implement best practice.
Events outside our control,
such as malicious attacks
(including cyber security
breaches) or severe storms,
could cause a major network
failure or compromise the
security of our physical assets,
processes, systems and data
Our core business and growth
strategies may be affected
negatively by changes to our
legal and regulatory framework
and future energy policies
Current and future business
performance may not meet our
expectations or those of our
stakeholders
• We continue to focus on process safety, aimed at preventing major incidents. This includes the
process and procedures governing the development and design of our assets, as well as the
competence of the people who will build, operate and maintain them.
• We monitor employee lost time injury frequency rate as a key performance indicator (KPI) as
described on page 45. We also have other measures relating to personal and process safety,
and use them to understand our safety strengths and identify any weaknesses we need
to address.
• We use industry best practices as part of our cyber security policies, processes and
technologies. We continually invest in cyber strategies that are commensurate with the
changing nature of the security landscape.
• Following the major US storms of 2011, we overhauled our emergency response processes
and have since used the improved processes, tools and approach during our response to
Superstorm Sandy and other severe weather events. We are using the lessons we have learnt
to further refine the end-to-end process.
• We participate in regulatory and energy policy development and implementation to help shape
the outcomes.
• In the UK, we are working with DECC on its proposals relating to Electricity Market Reform.
We have also restructured our business so we are prepared for our potential new role under
Electricity Market Reform and to make sure we are well positioned to deliver value under RIIO.
• Our UK price controls have ‘reopeners’ for some categories of expenditure where costs
and volumes are currently uncertain; we can use these reopeners in certain circumstances
to request additional allowances and output targets to be set when the cost and volumes
become clear.
• In the US, we are maintaining our jurisdictional focus and we will continue to file new rate
cases so our businesses can earn a fair and reasonable rate of return. Our rate filings include
structural changes where appropriate, such as revenue decoupling mechanisms, capital
trackers, commodity related bad debt true ups and pension and other post-employment
benefit true ups, as described on pages 173 to 175.
• We have restructured our UK business as described above, establishing end-to-end
process teams aimed at improving customer service and efficiency and building a culture
of continuous improvement.
• We have a three-year US strategy (Elevate 2015) focused on safety and reliability, customer
responsiveness, stewardship and cost competitiveness, with performance measures that
are tracked and reported monthly. US jurisdictional presidents continue to develop strong
relationships with local regulators and communities.
• Our US business has implemented a new enterprise resource planning system. The successful
delivery of this programme is seen as a key enabler for delivering our strategic objectives in
the US.
• We monitor network reliability, regulated controllable operating costs and customer satisfaction
as KPIs, as described on pages 44 and 45.
32
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review Some of our main risks
Risk description
Examples of mitigating actions
Business development
decisions may not deliver
targeted outcomes or meet
all stakeholder expectations
• We regularly monitor and analyse market conditions, competitors and their potential strategies,
as well as the performance of our Group portfolio. We are also looking to access new sources
of finance and capabilities through partnering.
• We have internal processes for the review and approval of investments in new businesses,
disposals of existing ones and organic growth investment opportunities. These are reviewed
and revised from time to time to ensure our approach supports our short- and long-term
strategies. We undertake due diligence exercises on acquisition or partnering opportunities
and carry out post-investment reviews to make sure lessons are learnt for the future.
Fluctuations in external market
conditions, including foreign
exchange, interest rates and
commodity prices, could affect
our financial position
• Our treasury function manages financial risks, including foreign currency and interest rate
risks, to within pre-authorised parameters and under policies and guidelines approved by
the Finance Committee.
• For our US-based regulated businesses, within predefined risk parameters, we use forward
purchase contracts for electricity, gas and electricity capacity, as well as derivative instruments
linked to those commodities.
An inability to access capital
markets at commercially
acceptable interest rates
could affect how we maintain
and grow our business
• We identify short-term liquidity and long-term funding requirements by regularly producing
short- and long-term cash flow forecasts, along with undertaking financial headroom analysis.
The assessment of our liquidity takes into account the regulatory requirements that may restrict
our ability to pay dividends from some of our operating businesses.
• We maintain a number of commercial paper and medium-term note programmes to facilitate
short- and long-term debt issuance.
• We manage refinancing risk by limiting the amount of debt maturities on borrowings in each
financial year.
Customers and counterparties
may fail to meet their obligations
such as paying bills or delivering
contracted services
• Security deposits or other forms of collateral may be obtained from commercial and industrial
customers to reduce the risk from customer default.
• In the US, we have processes and programmes aimed at minimising bad debts from
retail customers.
• We maintain a diverse range of commodity suppliers to reduce the credit or non performance
risk from the failure of any one supplier.
• The Finance Committee has agreed a policy for managing financial counterparty risk. This sets
exposure limits based on an individual counterparty’s credit rating from independent rating
agencies. We also consider other leading indicators of counterparty financial distress and
reduce exposure below the approved limits, if appropriate.
• Where multiple financial transactions are entered into with a single financial counterparty,
a netting arrangement is usually put in place to reduce our exposure to the credit risk.
• We introduced a new global leadership development framework in 2012.
• We are developing a global, centralised academy to allow us to gather and share best
practice from within National Grid and from our external partners. This should help us
build the skills and capabilities our business will need in the future, as well as contributing
to employee development.
• We have described on pages 38 and 39 some of the ways we seek to engage employees,
including how we promote inclusion & diversity.
• We monitor employee engagement as a KPI, as described on page 45, and formally solicit
employee opinions via a Group wide employee survey annually.
We may fail to attract,
develop and retain employees
and leadership with the
competencies, values and
behaviours required to deliver
our strategy and vision
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
33
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information How executive remuneration aligns
to Company strategy
The Remuneration Committee aligns the remuneration policy
to our Company strategy and main business objectives.
Performance-based incentives are earned through achieving
demanding targets for short-term business and individual
performance, as well as creating long-term shareholder value.
Aligning performance-based remuneration to shareholder, customer and community value
Our strategy
Deliver
operational
excellence
Engage our
people
Stimulate
innovation
Engage
externally
Embed
sustainability
Drive
growth
Value drivers
Shareholder value
• Regulatory frameworks
• Reputation, safety and capability
• Efficient operations
• Maximising revenues
• Funding and cash flow management
• Disciplined investment
Customer and community value
• Safety and reliability
• Affordability
• Customer service
• Environmental sustainability
• Emergency services
• Community engagement
Performance measures in the APP (i) and LTPP (ii)
The measures in the APP and LTPP are
designed to drive the highest possible
performance for our stakeholders. Financial
measures are included in the APP and LTPP
to align our incentive plans with the interests
of our shareholders. In addition, the APP has
stretching individual performance objectives.
In order to provide balance for all our
stakeholders, the Remuneration Committee
has discretion to reduce APP awards for safety,
governance and service-related incidents.
Shareholder value
Dividends generated through profitability and cash
flows today
Sustainable long-term growth in share price, generated
through predictable future profitability
Customer and community value
A positive impact on the people and communities we serve
(i) Annual Performance Plan.
(ii) Long Term Performance Plan.
34
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review The Remuneration Committee determines remuneration
policy and practices through which we aim to attract, motivate
and retain high-calibre Executive Directors and other senior
employees to deliver value for shareholders and high levels
of customer service, safety and reliability.
LTPP
Performance measure
Adjusted EPS
Alignment to strategy
While aligning the remuneration policy to our strategic objectives,
the Remuneration Committee aims to ensure the policy:
• reflects shareholders’ and customers’ interests;
• takes into account risk-related factors; and
• contributes to driving the highest possible ethical standards.
Each year we review our incentive plans, ie the APP and LTPP,
to confirm the performance measures remain closely aligned
with the Company’s strategic objectives.
Relative TSR compared
with the FTSE 100
Definitions and
performance period
Threshold performance
– where EPS growth
exceeds RPI growth by 3%
Upper target performance
– where EPS growth
exceeds RPI growth by 8%
Performance period
– 3 years
Threshold performance
– where TSR is at the
median of the FTSE 100
Weighting
50% of the plan
25% of the plan
Upper target performance
– where TSR performance is
7.5% above that of the median
company in the FTSE 100
Performance period
– 3 years
APP
Financial measures
for 2012/13 (i)
Steve Holliday and
Andrew Bonfield
Nick Winser
Tom King
Adjusted EPS
Adjusted EPS
Adjusted EPS
Consolidated
cash flow
Consolidated
cash flow
Consolidated
cash flow
UK ROE
UK adjusted
operating profit
US operating
profit (US
GAAP basis)
US ROE
UK ROE
US cash flow
N/A
N/A
US ROE
(i) Financial measures represent 70% of the APP.
Individual performance objectives in the APP reflect 30% of the
plan and are defined in terms of target and stretch performance
requirements. The performance objectives change each year,
depending upon business priorities. Examples of individual
objectives include regulatory management, business development
activities and customer satisfaction improvement programmes.
The Remuneration Committee may use its discretion to reduce
APP awards to take account of significant safety or service
standard incidents. In addition, the Remuneration Committee
considers environmental, social and governance issues in its
assessment of performance.
UK and US ROEs – based
on UK Transmission and UK
Gas Distribution ROEs and
on US Regulated returns
Threshold performance
– where allowed regulatory
returns are achieved (UK)
and -1% (US)
25% of the plan
Upper target performance
– where allowed regulatory
returns are out-performed
by 2% (UK) and 1% (US)
Performance period
– 4 years
If the Remuneration Committee considers the underlying
financial performance of the Company does not justify the
vesting of LTPP awards, even if some or all the performance
measures are satisfied in whole or in part, it can declare that
some or all the awards lapse.
Overall, the Remuneration Committee believes the measures
offer a balance between meeting the needs of all our
stakeholders and incentivising Executive Directors to achieve
sustainable performance.
For full details about our remuneration policy and how it is
implemented, please see the Remuneration Report on pages
68 to 90
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
35
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information What did we achieve?
It has been another important year for National Grid as we secured
appropriate regulatory changes and continued to bed down
organisational change in both the UK and US. Here, we highlight
some of the work we did, and initiatives we introduced, during
2012/13 to support delivery of our strategy.
Delivering operational excellence
Safety remains a top priority for us and we strive to
improve our performance. We also recognise the vital
importance of good customer service and community
relationships. Our licences and regulatory agreements
set our reliability targets and these are linked to our
revenue streams.
Safety
Our ambition is to achieve a world-class safety level by 2015,
featuring a lost time injury frequency rate of below 0.1. We intend
to achieve this through a relentless leadership focus, robust safety
management systems and tactical actions focused on our main
risks, which may vary between regions and business areas.
Our employee lost time injury frequency rate for 2012/13 was
0.17, compared with 0.18 in 2011/12. While this represents a
marginal improvement we recognise that we need to do more to
achieve our ambition. We have included below some examples
of our main safety initiatives, which aim to reduce incidents.
In the UK, we introduced our Take Care campaign, which
focused on cable avoidance in our UK Gas Distribution business.
We also updated our overhead line rules for work at height and
guidance about the use of equipment at height.
We connect office-based employees to the safety aspects of
our operational activities through targeted campaigns, raising
the profile of safety in the workplace and behaviours at home.
Examples of our initiatives during 2012/13 include interactive
experiences, screen savers and seasonal safety messages.
In the US, we launched an initiative aimed at reducing and
eliminating risks associated with securing loads. This involved
upgrading vehicles and improving load securing devices, as well
as training and exercises.
At a local level, we developed safety plans that gave supervisors
and crew leaders greater authority to take action to address
their most pressing safety needs. We also arranged a number of
sessions in which survivors of utility industry accidents shared
how their lives had changed in an instant and talked to employees
about how they can make a personal commitment to safety.
In 2012/13, we published our Company wide process safety
management system and updated our process safety
commitment statement. We have modified our global incident
reporting system so we can better differentiate process related
incidents to improve communication, enhance visibility and share
information relating to process safety events.
We have been continually increasing awareness and developing
our safety culture through training initiatives, including elearning.
Delivering customer service
We measure the success of our customer service initiatives
through the Ofgem customer satisfaction studies and
independent customer research in the UK. In the US, several
independent customer research studies and other measures
are used to supplement the four J.D. Power and Associates
customer satisfaction studies. The results of the studies can
be found on page 45.
In the UK, our customer satisfaction results have
demonstrated improvement in some areas in Transmission
and Gas Distribution. In the US, although the overall JD Power
residential customer satisfaction quartile results remained
unchanged and commercial studies saw a decline, we achieved
significant improvements in key internal transaction studies
including website satisfaction and electricity order fulfilment.
Work continues to enhance service to our customers as part
of our Elevate 2015 programme, large end-to-end process
review and improvement activities, customer callback
programme, and our more actionable approach to measuring
customer satisfaction.
Improving our customer communications
In our UK Gas Distribution business we have been improving
the literature we send to our customers. From information cards
and leaflets to letters, we are making sure the content is more
reader friendly and refreshing the way it is presented.
36
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review
One area in which we have been improving how we
communicate with customers is our response to storms.
Through Twitter and Facebook we are now providing real-time
weather updates, safety tips, outage reporting, restoration times
and community resources before, during and after a storm. We
are also using YouTube and Flickr to illustrate, through videos
and photos, how we prepare for storms and restore service.
More than 104,000 US customers are enrolled in our broadcast
text alert programme, which we activate during major storms
to provide outage updates and safety tips. During 2012/13, we
launched a further texting programme that provides area specific
outage numbers and estimated restoration times.
From their mobile devices, US customers can now report and
check the status of their outages, as well as view important safety
tips, contact information and outage data including maps, online
via m.nationalgrid.com. During the February 2013 snowstorm,
more than 11,000 customers reported outages through this
website, which received around 205,000 visits.
As part of our preparations to respond to Superstorm Sandy,
the most devastating storm to hit the US eastern seaboard in
more than 100 years, more than 250 employees supported the
community liaison effort, assigned to the towns expected to be
hardest hit by the storms.
Reliability
We aim to deliver reliability by: planning our capital investments
to meet challenging demand and supply patterns; designing
and building robust networks; risk-based maintenance and
replacement programmes; and detailed and tested incident
response plans.
In the UK, we are pleased to report that our Gas Distribution
business successfully met all its regulatory standards of service
again this year with all networks running on Gas Distribution front
office systems for emergency, repair, mains replacement and
connections activities.
In the US, we met all but three of our regulatory reliability
and service replacement targets. In New York, two gas
metrics were slightly below target due to the severe impact
of Superstorm Sandy and we have petitioned for an exemption
on these measures in light of the special circumstances. In
Massachusetts, we missed one of our electricity circuit level
metrics and avoided a financial penalty due to earned offsets
for good performance on the system metrics.
For further details on our reliability performance, see page 45.
UK business changes
We are restructuring our UK business so that we are well
positioned to deliver value under RIIO and are ready for our
potential new role under Electricity Market Reform.
We have completed our UK organisational design for senior
leaders. We are consulting UK Transmission employees on
a number of changes which, if agreed, will reduce costs and
increase efficiency. We have redefined our organisational design,
reducing the number of manager roles by 22%.
During the year, new terms and conditions of employment have
been agreed for around 1,900 Gas Distribution directly employed
field staff. The changes focus on rewarding individual rather than
collective performance.
From 1 April 2013, UK Gas Distribution entered into contracts
with Balfour Beatty Utility Solutions and a joint venture of
Morrison Utility Services and Skanska Construction UK Limited
called tRIIO, to replace our previous alliance and coalition
arrangements. Mainly covering our mains replacement
programme, the contractual framework is aligned to the new
regulatory incentives regime.
Preparing for London 2012
The process instruction books that we used during the London
2012 Olympic Games contained information that would be
needed in the event of a gas emergency at any of the venues or
on the routes. We also established ‘flying squads’ – teams who
provide 24/7 cover using motorbikes to allow faster response.
US storm response updates
Superstorm Sandy was a significant test for our emergency
response processes, which we overhauled following the major
storms of 2011. Throughout 2012, we focused on employee
development and training and upgrading our restoration
processes and equipment. We improved the way we work
on damage assessment, customer communications, securing
restoration resources, repairing assets and providing accurate
estimated times of restoration.
Before Sandy made landfall, we had thousands of employees
ready in support roles, a full complement of line and tree crews,
as well as hundreds of supplemental crews from across 40
states and five provinces in Canada.
Upstate New York, Massachusetts and Rhode Island had about
530,000 electricity outages and around 700 flood related gas
outages (mainly in Rhode Island). We completed restoration
in these service territories in six days.
In downstate New York, it took more than two weeks to restore
the LIPA served Nassau and Suffolk Counties, which saw around
1.1 million wind and flood related electricity outages. These
same counties, along with Brooklyn, Queens and Staten Island,
experienced more than 140,000 flood related gas outages.
The Governor of New York has established a commission
(commonly referred to as the Moreland Commission) to review
the response of New York utility companies to storms in recent
years. That Commission has indicated that it will conclude its
work in late spring or early summer. In December 2012, MADPU
issued an order detailing penalties associated with the response
by a number of utilities to Tropical Storm Irene and the October
snowstorm in 2011. This included a penalty of around $19 million
relating to our Massachusetts Electric business. We are
appealing this decision, as are the other utilities involved.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
37
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information What did we achieve?
Continued
US foundation programme
We have continued work on our US foundation programme
throughout the year. The programme relates to the development
and implementation of our new US enterprise resource planning
system, which went live during November and December 2012.
The successful delivery of this programme is seen as a key
enabler for delivering our strategic objectives in the US, by
creating an integrated platform that allows process and system
standardisation across our activities. The new system replaced
two legacy and a number of ancillary systems and will support
business processes for finance, human resources, supply chain
and certain elements of our operational systems such as fleet
and inventory management.
As with many system implementations of this magnitude and
complexity, we expected some degree of difficulty in the months
following go live. We have, however, experienced operational
difficulties that significantly exceeded our expectations. The most
substantial of these related to our payroll processing, where
we experienced a number of errors in employee pay and delays
in providing employees with their statutory tax statements.
We implemented an extensive stabilisation programme to identify
and resolve or mitigate these payroll issues and by year end they
were substantively resolved. These and other system conversion
difficulties and their consequential impacts have delayed
production of local financial reporting. As a result, we have
sought extensions of time relating to the filing of certain financial
reports and other related regulatory filings from our US regulators,
from some finance providers and other parties requiring financial
statements from some of our operating companies.
Recognising the importance of these issues we have focused
considerable efforts on their resolution, together with external
support. We have undertaken a review of the project
implementation to identify lessons learnt, particularly focused on
the payroll issues, and this has been presented to the Audit
Committee. We will continue to assess these lessons and identify
changes to processes for other similar programmes in the future.
Engaging our people
Engaging our people helps to retain the best possible
range of talent and experience, which will be necessary
to meet the needs of our business. We are committed
to developing our employees to the best of their abilities
and to creating an inclusive and diverse culture.
We measure employee engagement through our employee
opinion survey. Below we describe the results of this year’s
survey and highlight some of the actions that have been taken
in response to previous ones.
Development
The results of our 2012 survey showed that one of the three
main factors driving engagement in our Company was having
opportunities for personal development.
To develop the leadership capability of our next generation of
managers and middle level leaders, we introduced a new global
leadership development framework in 2012.
Our academy
We are developing an academy, which is a global, centralised hub
of all our learning and development. This provides a clear
learning path for our employees. It brings together and shares
best practice from our own Company and external partners.
Our UK business has developed an education and readiness
programme to raise everyone’s awareness and understanding
of RIIO, and how we will need to change the way we work both
as an organisation and as individual employees.
In the UK, our graduate retention levels are consistently high,
standing at 85% in January 2013. We also achieved a number
of awards (see panel – External recognition).
We provide training and other support so that our people can
build, maintain and operate our networks safely and reliably.
During 2012/13, we provided around 150,000 days of training
for our employees and 20,000 days of training for non employees
globally. We also increased the amount of specialist technical
training delivered in-house, to reduce costs.
Appreciate
The results of past employee surveys showed us that employees
see recognition as an important part of engagement. So, we
have launched ‘appreciate’, a global recognition programme that
encourages our people to recognise and reward their colleagues
for a job well done. Features include career milestones and the
Chairman’s Awards, as well as an online system employees
can use to send and receive feedback on great work they see.
The system also administers non-financial awards.
External recognition
Some of the awards and other means of external recognition
we have received over the last year include:
• Inclusion in the Times Top 50 Employers for Women 2013.
We have appeared in the list since 2006.
• A ranking of 84 in the Times Top 100 Graduate Employers
– up 11 places from 2011.
• Moving from 14 to 3 in The Job Crowd Top 50 Companies
for Graduates to work for and first place for working within
the energy and science sector.
• Recognised by Diversity Inc. magazine as one of the top
seven regional utilities for diversity in the US, as well as
by Diversity Careers in Engineering/Technology as a best
diversity company.
38
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review Promoting inclusion & diversity
We aim to develop and operate our business with an inclusive
and diverse culture, with equal opportunity in recruitment, career
development, training and reward. This applies to all employees
regardless of race, gender, nationality, age, disability, sexual
orientation, gender identity, religion and background. Where
existing employees become disabled, our policy is to provide
continued employment and training wherever practical.
These policies support the attraction and retention of the best
people, improve effectiveness, deliver superior performance and
enhance our success.
We promote inclusion & diversity both within and outside our
Company. In the US, we recognise the markets in which we
conduct business are becoming increasingly diverse. We reflect
this through our supplier diversity programme, through which
we invite small businesses, as well as ones owned by women,
veterans or people from minority groups, to participate in
our sourcing opportunities. This means we can provide a fair,
competitive environment that includes all firms in the communities
we serve. Our female employees are able to access the
Springboard and Spring Forward development programmes
in the UK and Women Empowered in the US. On the basis of
headcount, the percentage of women in management positions
is 25.5%, a figure we intend to improve, and 22.7% of employees
throughout the Company are women.
In the US, we attended 41 recruiting events focused on people
with disabilities, ethnic diversity, women and veterans.
Our employee survey
The results of our 2013 survey, which was completed by 79%
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 fallen by three points to 63%. It is fair
to assume the problems we experienced with payroll in the US
and the extensive changes we have introduced in the UK have
contributed to the fall in our engagement score.
Managers receive a simple scorecard that aims to create greater
leadership accountability and we produce survey reports and
action plans at Company, regional, business unit, function and
team levels. Managers also have access to an engagement
framework. This provides them with practical tools and guidance
to support them when developing action plans for their teams.
Attracting the best people
During 2012/13, we received more than 90,000 applications for
jobs and have welcomed nearly 2,000 new employees globally.
We have introduced a web-based recruitment system to improve
our hiring process in the UK and are planning a similar initiative
in the US.
In the UK, we have continued our programmes designed to
inspire the engineers and scientists of the future. Last year,
around 6,500 young people discovered more about energy
through National Grid employees, and thousands more visited
our website www.nationalgrideducation.co.uk.
In the US, we face similar challenges in attracting top quality,
well trained candidates so we can maintain the number and
quality of our workforce. Over the next 10 years, we expect
to fill a significant number of management roles that require
an engineering background, delivering a number of initiatives
similar to those in the UK.
We also completed the third year of our engineering pipeline
programme, which aims to inspire promising students to become
engineers and provide them an opportunity for fast tracked
employment with National Grid. During the year we selected
40 high calibre, high school students into the programme.
Stimulating innovation
Encouraging and adopting new ideas helps us to work
efficiently and effectively. This in turn helps us to access
investment and growth opportunities as well as to
engage with our regulators. It is essential to efficiently
deliver what is required.
New sources of funds
This year we issued more than £5 billion in new bonds and other
debt to raise new capital as well as to refinance maturing debt.
As we continue to invest in our networks and other assets, we
will need to raise new financing in the future. To attract good
pricing for our debt and maintain a strong balance sheet, we
consider different options for how and where to do this.
Over the past year we achieved two firsts for National Grid.
We issued our largest maple bond – one that is issued by a
foreign company in the Canadian market for Canadian investors.
We achieved a nominal amount of C$750 million – the largest
ever corporate maple bond at the time – and followed this two
months later with a second maple bond with a nominal amount
of C$400 million.
We also issued our first hybrid bonds, achieving nominal
amounts of £1 billion and €1.25 billion – both with very good
pricing. A hybrid bond has certain characteristics of both debt
and equity and, as a result, is treated by our rating agencies as
half equity and half debt in their analysis. This in turn helps us
maintain our credit ratings, while securing the funding we need.
Massachusetts energy-saving initiatives
In Massachusetts, we developed energy-saving initiatives
together with customers during a first of its kind summit
designed to help shape the state’s 2013-2015 energy efficiency
plan. We have also run a number of promotional events to
highlight incentives to help customers save energy.
Our efforts have earned us a number of awards, including the
Energy Star 2012 Environmental Protection Agency Award
for Excellence for innovative customer outreach programmes.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
39
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information What did we achieve?
Continued
UK innovation initiatives
We have commissioned a study highlighting a least cost route
to how the UK can meet its 2020 renewable and 2050 carbon
targets. The study paid particular attention to heat and described
the transitional and long-term role gas has to play as part of a
balanced approach. The analysis has been adopted by DECC
and has been used extensively in the development of the
government’s heat policy paper The Future of Heating: Meeting
the Challenge, published in March 2013.
We have been involved in a project that is investigating the
feasibility of injecting hydrogen gas, generated from electrolysis
fed from excess renewables, into the UK gas networks. The
project includes preliminary research into the application for the
UK market and the creation of a generation simulation model.
This aims to identify the possible scale of production and
financially viable production facilities, as well as options for use.
We are also a partner in the European Gas Research Group,
investigating the safe transportation, network developments
and implications for customer appliances of hydrogen enriched
natural gas.
We have continued to make good progress on developing the
T-pylon and reached a major milestone this year by erecting the
first full size prototype suspension pylon in January followed in
April by the tension pylon. We are now conducting mechanical
tests to verify the pylon’s capabilities. You can read more about
the project in our T-pylon blog, available on our website.
Our partnership with Manchester University in the UK has
seen the development of an electrically insulating composite
cross arm for transmission pylons. In future this may allow us
to increase the voltage on overhead lines from 275 to 400 kV
without replacing the existing pylons with taller structures.
Smart grid pilot in Massachusetts
We received approval of our $43.6 million (£27.8 million) smart
grid pilot programme in August 2012. The pilot will be conducted
in the US city of Worcester, Massachusetts. It will test customer
acceptance of new technology, ranging from new meters to
devices on our grid, to in-home devices that should help them
save energy.
Plans are under way to open a new sustainability hub that will
provide customers with an opportunity to see new technology
and find out more about environmental issues.
In May 2012 we announced that we will participate in the Green
Button initiative, a programme inspired by the White House’s
challenge to the energy industry. It is a joint effort among several
utilities, technology companies and the federal government to
help consumers save energy and money by providing access
to standardised, routine, easy to understand data relating to their
energy usage.
We plan to offer Green Button to the 15,000 customers who
will be included in our smart grid pilot in Worcester.
Cable avoidance in Gas Distribution
Launched in 2012, our Take Care (cable avoidance risk
elimination) campaign promotes good practice and is designed
to fit with our ways of working. We will be evaluating technology
used for processes ranging from vacuum excavation to cable
location as well as looking at how we can better collaborate
and share knowledge.
Real-time information sharing
In the US, we have developed new technology to help keep
our community liaison employees up to date with near real-time
information during storms. Developed at a cost of less than
$150,000, it displays information from many systems, from
estimated restoration times to the location of crews, hospitals,
schools and our lines, using a geographic mapping application.
Using the same technology, we built a damage assessment
application to help better forecast restoration times. Employees
and contractors use tablets or smartphones to collect information
about parts of the system that are damaged. This information is
instantly shared with our command centre and our jurisdictional
presidents. It is also used to provide information to crews, which
helps us to provide quicker restoration responses.
IdeasNet
Our strategy recognises that innovation must go beyond new
technologies, as we look to embrace continuous improvement
within everything we do.
During the year, we trialled programmes aimed at helping us
improve the way we collaborate, share knowledge, generate
ideas and exchange good practices. This involved using online
social tools, including IdeasNet, which encourages employees
to submit ideas that will improve the efficiency and effectiveness
of our processes.
In the UK for example, many employees responded to a challenge
to find ways of digging fewer and smaller holes as part of the
work we do in our Gas Distribution business. A number of these
ideas have been taken forward to the next stage of development.
40
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review Engaging externally
We work with external stakeholders to shape energy
policy as these decisions directly affect our business.
We seek to understand the expectations of all our
stakeholders so we can deliver a service that meets
their needs.
Talking networks
Consulting with the people who have a stake in what we do
has always been fundamental to National Grid.
In preparing for the new UK regulatory framework RIIO, we
wanted to make sure we fully understood our stakeholders’
priorities and could take their views into account when
shaping our delivery plans.
Regulatory agreements
In the UK, we have agreed all the price control arrangements
Ofgem has proposed for RIIO. In the US, we reached agreement
on our rate case filings in Rhode Island and New York. We expect
to file our next round of rate cases in 2014, including filings for
our electricity business in Massachusetts and our downstate
gas businesses in New York. More details on these filings can
be found on pages 172 to 175. Our objective is to have the right
cost of service with the ability to earn a fair and reasonable rate
of return while providing a safe and reliable service to customers.
Powering Britain’s Future
In the UK, we have launched a nationwide conversation about
the challenges we face in delivering the energy infrastructure the
country needs and minimising the impacts on communities and
the environment.
Our Powering Britain’s Future campaign aims to raise awareness
about the scale of the energy challenge facing the UK and find
common ground with stakeholders and the public so we can
work together to find solutions.
The campaign started with a stakeholder forum in London,
bringing together senior representatives from bodies including
the Campaign to Protect Rural England, the consumer group
Which? and the National Trust, as well as industry and
government leaders.
You can find out more about the campaign at
www.poweringbritainsfuture.co.uk.
Our Brussels office
In 2012, we opened an office in Brussels to give us a closer insight
into the evolution of EU policy and legislation in the energy sector.
We have continued our talking networks initiative to gather
views from consumers, government, the energy sector and
environmental organisations through workshops, surveys,
meetings and forums. We have published the outcome of our
consultations on the talking networks section of our website,
describing the feedback we received and the action we are
taking as a result.
Stakeholder engagement is an enduring approach that will
continue through the RIIO period and beyond. Through talking
networks we continue to encourage our stakeholders to let us
know how we are doing, how they would like to engage with
us and where we should focus our resources.
Doing the right thing
Conducting our business in an ethical manner is extremely
important to us and at the heart of our policy of doing the
right thing. We were very disappointed when we fell short of the
standards we expect during some interactions with New York
state employees. Following our disclosure to and continued
cooperation with regulators, we agreed to pay a fine of
$1.67 million to NYPSC. We have updated our internal policies
and enhanced our business ethics training to help prevent a
recurrence. We have also completed an independent review of
our ethics and compliance programme. The Joint Commission
on Public Ethics has not yet concluded its review of this matter.
Engaging customers in the US
Our US tagline – ‘Here with You, Here for You’ – reflects our
renewed commitment to customers and local communities.
In 2012, we engaged with customers at nearly 280 local events,
including county fairs in New York, Massachusetts and Rhode
Island. Through these events, we highlighted our legacy in each
respective community and talked to customers about safety and
energy efficiency. We are confident that, because of our ongoing
presence, customers view us as a local company with deep
roots in our communities.
Formal opening of our Brussels office
January 2013 saw the formal opening of our office in Brussels,
which will help us gain closer insight into the evolution of EU
policy and legislation in the energy sector. Nick Winser
addressed around 100 invited guests including EU Energy
Commissioner Günther Oettinger, UK MEPs and senior
representatives of the Brussels energy community.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
41
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information What did we achieve?
Continued
Embedding sustainability
By embedding sustainability into our decision-making
we aim to create value, preserve natural resources and
respect the interests of our communities.
Climate change
This year our business units have continued their focus on
reducing greenhouse gas emissions and we remain on target to
achieve our 2020 and 2050 targets of a 45% and 80% reduction
in emissions.
Our approach to sustainability has involved developing our
long-term strategy under the banner of Our Contribution. This
responds to external drivers and input from stakeholders, drives
efficiency, supports growth and profitability, and aims to:
We measure and report our emissions of the six Kyoto
greenhouse gases using the methodologies set out in the WRI/
WBCSD Greenhouse Gas Protocol: A Corporate Accounting
and Reporting Standard (Revised Edition).
• build a culture of sustainability within our organisation; and
• integrate sustainability into our decision-making and everyday
activities, so we can protect and preserve natural resources,
as well as respect the interests of the communities in which
we operate.
Through our sustainability summit we worked with many of
our external stakeholders to discover and define our long-term
ambition for National Grid’s climate change, sustainability and
environmental strategy. The initial programme to deliver Our
Contribution builds on projects developed through the summit.
Among the initiatives has been the launch of a competition for
our UK suppliers. We have challenged them to find innovative
ways of implementing the principles of the circular economy,
promoted by the Ellen MacArthur Foundation, into the design of
the materials, plant, processes and equipment they supply to us.
We have robust investigation and remediation programmes
to clean up waste. We also have controls in place to minimise
or mitigate releases to the environment during remediation
activities. These range from containment to spill response
contracts and equipment.
We called on these controls following a spill of suspected
gas condensate and oily water in the Paerdegat Basin area of
Brooklyn, New York during our operations there. We engaged
a clean up contractor to clean out an affected sewer and used
sweeps and booms to capture floating material in the basin.
We will also consider whether a longer-term sampling and
remediation effort is needed. Our actions and investigations
continue but we may be subject to financial penalties as a
result of this incident.
Grain heat pipe
The combined facility is now fully operational (October 2012)
with hot water being supplied from the E.ON power station and
the heat being utilised by National Grid at the LNG terminal
to heat LNG and convert it back to gas for use in homes
and businesses.
Our total Scope 1 and 2 greenhouse gas emissions (excluding
line losses) for 2012/13 were around 8.2 million tonnes carbon
dioxide equivalent, representing a 58% reduction compared with
our 1990 baseline. This equates to an intensity of 569 tonnes per
£million of revenue.
Our Scope 1 and 2 greenhouse gas emissions are independently
verified; a copy of the verification statement is available on
our website.
We have continued our investigations into new technology
and processes in areas such as capturing SF6 emissions and
replacements for SF6 used in switchgear, where promising
alternatives include CF3I (trifluoroiodomethane) and vacuum
circuit breaker technology. As SF6 is 23,900 times more potent
than CO2 any reduction or elimination will play a significant role
in future emission reduction programmes.
Our Gas Distribution mains replacement programmes in the UK
and US have continued to deliver a reduction in emissions due
to gas leaks in line with expectations. In the UK, investment in
pressure management equipment and an increased focus on
system operating pressures has also helped reduce leakage.
In the US, we have completed the first phase of a project
designed to identify vulnerable redundant oil filled electrical
assets and remove them from the system. Our US electricity
generation operations have also been incorporated into our
US environmental management system, further extending
the coverage of our operations certified to the international
standard ISO 14001.
Driving growth
Growing our core businesses and developing future
new business options depend on delivery of our
investment plans. Combining this with operational
and procurement efficiencies contributes to our ability
to achieve strong returns and meet our commitment
to investors.
Capital expenditure in the UK
Capital expenditure in the UK this year was £2.5 billion. Much of
this work involves asset replacement but there are also a number
of new initiatives. Two significant projects we have been working
on are the Western Link and London power tunnels.
Western Link: The Western Link is a joint project with SP
Transmission, part of Iberdrola Group. It will bring renewable
energy from Scotland to homes and businesses in England and
Wales, via a pair of HVDC cables, approximately 422 kilometres
long, between Hunterston in Scotland and Deeside in North
Wales. The cable will travel for 385 kilometres under the Irish Sea
before coming ashore on the Wirral and travelling underground
to Deeside.
42
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review At present, the Scotland and England power transmission
networks are connected by two overhead power lines and
some smaller 132 kV circuits across the boundary which are
of limited capacity. The Western Link will provide a further
connection, easing pressure on the existing bottlenecks and
helping to bring more renewable energy through the system.
A contract valued at more than £1 billion has been let by the
joint venture to a consortium which will design, manufacture
and construct the link. Planning applications and easements
are in progress and work has started on site.
The project is expected to become operational in 2016.
Upgrading to natural gas in New York
We have begun work on a project to connect our existing
distribution systems in Brooklyn and Queens, New York – the
first pipeline to be installed in the area in 50 years. Known as the
Brooklyn/Queens Interconnect, it will help meet future energy
needs for customers.
This project will allow for more conversions to natural gas. The
additional capacity will give New York City property owners a
lower-cost alternative as they consider ways to comply with the
city’s Clean Heat initiative, which we support.
Power supply agreement with LIPA
We have a new agreement with LIPA that we filed with FERC
that when effective will give Long Island better options for
updating and modernising our power plants through repowering
existing facilities while reducing energy costs, further improving
environmental performance, and removing uneconomic
generation. This is an important part of the effort to enhance
the overall efficiency of Long Island’s power supply resources.
Strategic workforce planning
To help drive growth, we need to consider our long-term
workforce needs. Our strategic workforce planning approach
allows us to look ahead up to ten years and forecast these needs,
based on our business plans and an ageing workforce. In the
UK, the approach has allowed us to plan for RIIO, identifying
any gaps we may have in terms of skills and experience to meet
new ways of working under the new regulatory arrangements.
We are now taking the same strategic workforce planning
approach in our US business, beginning with our network
strategy and operations teams. In 2012, we implemented a
global workforce planning analytics tool and expect to develop
our plans further by building on what we have learnt in the UK.
Clean Line investment
In November 2012 we announced a $40 million equity
investment, of which $12.5 million was invested in 2012/13, in
Clean Line, a developer of long distance, HVDC transmission
projects to move renewable energy to market. This investment
provides an avenue into a potential growth market for us.
Carbon capture and storage
Carbon capture and storage (CCS) is an innovative technology
designed to capture, transport and permanently store carbon
dioxide emissions beneath the seabed.
The UK is well placed for the deployment of CCS technology
as there are clusters of power generation and industrial carbon
dioxide emitters with nearby storage. At National Grid, we are
looking to use our high pressure gas pipeline and wider project
experience to create the initial infrastructure for CCS. By doing
this, we believe we can demonstrate its potential and provide
a basis for deployment.
During 2012/13, we have secured a storage site in the North Sea
which has the capacity to support a network in the Yorkshire
and Humber region and potentially beyond – we are now further
appraising the site to confirm its suitability. We have also consulted
further on the proposed onshore pipeline route and have
identified sites for above ground infrastructure.
Power stations and industry in the Yorkshire and Humber area
produce around 15% of the country’s carbon dioxide emissions.
So, the decarbonisation of this cluster would bring significant
benefits to the UK and help meet statutory targets to reduce
greenhouse gas emissions by 80% by 2050.
London power tunnels
The aim of phase 1 of this project is to replace and upgrade
five major buried 275 kV cable circuits within the existing
London network. Three new tunnels totalling approximately
30 kilometres are currently under construction with 15 kilometres
already delivered to date. On completion, we will have energised
10 new 400 kV circuits, requiring around 200 kilometres of new
cable and including the construction of three new substations.
The total cost of the project is around £1 billion and we have
delivered around a tenth of this in 2012/13.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
43
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Measuring performance – our KPIs
Financial KPIs
Strategic element #
All
All
All
KPI
Total shareholder return
Adjusted earnings per share
Group return on equity
Stimulate innovation:
drive growth
Regulated controllable
operating costs
Definition
Average of the closing daily TSR levels for the
30 day period up to and including that date,
assuming dividends have been reinvested
Adjusted earnings~ divided by the weighted
average number of shares
Adjusted earnings~ with certain regulatory-
based adjustments divided by equity
Regulated controllable operating costs,
excluding bad debts, as a proportion of
regulated assets
Total shareholder return (TSR)
%
Adjusted earnings per share
pence ~ † ◊
Target: To increase
See page 06
Target: To increase
150
125
100
75
50
47.1
49.6
50.0
41.2
See page 06
56.1
31/03/08 31/03/09 31/03/10 31/03/11 31/03/12 31/03/13
National Grid plc FTSE 100
2008/09
2009/10 2010/11 2011/12 2012/13
Group return on equity
%
Regulated controllable operating costs
% of regulated assets ∆
Target: To increase
See page 47
Target: To decrease
See page 47
12.6
10.8
10.9
11.2
8.0
7.5
7.3
6.8
6.6
2009/10 * ‡ 2010/11* ‡
2011/12
2012/13
2008/09
2009/10 2010/11 2011/12 2012/13
# Refers to the six elements of our strategy: operational excellence; engage our people;
stimulate innovation; engage externally; embed sustainability; and drive growth
~ Adjusted earnings exclude exceptional items, remeasurements and stranded cost recoveries
† Comparative data has been restated for the effect of the bonus element of the rights issue
and the scrip dividend issues
◊ From continuing operations
* Rebased for rights issue
‡ Prior years have been restated for consistency
∆ Prior years have been restated on a constant currency basis
We measure the achievement of our
objectives, make operational and
investment decisions and reward
our employees using both qualitative
assessments and quantitative indicators.
To provide a full and rounded view of
our business, we use non-financial as
well as financial measures. Although all
these measures are important, some are
considered to be more significant than
others, and these are designated as KPIs.
KPIs are used to measure our progress
on strategic priorities, aligning with those
activities that combine to deliver our
strategy. Non-financial KPIs are often
leading indicators of future financial
performance as improvements in these
measures build our competitive advantage,
for example through attractive regulatory
arrangements and in competition for
future growth opportunities. Financial KPIs
are trailing indicators of the success of
past initiatives and specific programmes.
They also highlight areas for further
improvement and allow us to ensure
our actions are culminating in sustainable
long-term growth in shareholder value.
We have started a review to determine
whether the current Group KPIs remain
relevant under RIIO, as the way our allowed
revenues are calculated and how they will
vary according to our actual performance
has changed.
It is possible that this may lead to increased
volatility in our statutory revenue figures
or some changes to the balance between
operating and capital expenditure in the
business. We will report on the new KPIs
when they have been agreed by the Board.
Commentary on our overall financial
results can be found on pages 46 to 57,
and information on the performance and
financial results of each business area is
set out on pages 18 to 25.
44
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review Non-financial KPIs
Strategic element
KPI
Definition
Deliver operational excellence
Employee lost time injury
frequency rate
Number of employee lost time injuries per
100,000 hours worked on a 12 month basis
Deliver operational excellence
Network reliability targets
Engage our people
Employee engagement index
Various definitions appropriate to the relevant
business area
Employee engagement index calculated using
responses to our employee survey
Deliver operational excellence
Customer satisfaction
Our position in customer satisfaction surveys
Embed sustainability
Greenhouse gas emissions
Percentage reduction in greenhouse gas
emissions against our 1990 baseline
Employee lost time injury frequency rate
per 100,000 hours worked
Employee engagement index
%
Greenhouse gas emissions
% reduction against 1990 baseline
Target: Zero
0.25
See page 36
Target: To increase
See pages 38 and 39
Target: 45% reduction by 2020 and 80% reduction by 2050 See page 42
70
68
66
63
2008/09
2009/10 2010/11 2011/12 2012/13
0.18
0.18
0.17
0.15
2008/09
2009/10 2010/11 2011/12 2012/13
2008/09
2009/10 2010/11 2011/12 2012/13
Not
measured
42
55
51
55
58
Network reliability
Performance
Measure
Target
Electricity transmission – UK
99.9999
99.9999
99.9999
99.999999
99.99999
2008/09
2009/10
2010/11
2011/12
2012/13
Gas transmission – UK
Gas distribution – UK
Electricity transmission – US
Electricity distribution – US
100
100
100
100
100
99.9999
99.999
99.999
99.999
99.999
266
114
147
114
414
123
518 (i)
121
346
MWh losses
105 (ii)
Minutes of outage
%
%
%
2012/13
99.9999
100
99.999
*
*
*Targets are set jurisdictionally by operating company
(i) 2011/12 result restated to reflect final data.
(ii) 2012/13 result excludes New Hampshire which was sold during the year.
See pages 22 and 37 for additional details on Elevate 2015 and network reliability, respectively
Customer satisfaction
UK Gas Distribution
Gas distribution – US: Residential
Gas distribution – US: Commercial
Electricity – US: Residential
Electricity – US: Commercial
Performance (quartile)
Measure
Target
2009/10
2010/11
2011/12
2012/13
4th
3rd
2nd
4th
3rd
4th
2nd
4th
3rd
2nd
3rd
3rd
3rd
3rd
2nd
3rd
3rd
4th
3rd
3rd
Quartile ranking
Improve
Quartile ranking
Improve
Quartile ranking
Improve
Quartile ranking
Improve
Quartile ranking
Improve
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
45
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Financial review
Financial performance
Contents
Financial performance
47 Measurement of financial performance
47 Key performance indicators (KPIs)
47 Other performance measures
48 Earnings
48 Timing
48 Major storms
49 Adjusted earnings
49 Exceptional items
49 Commodity remeasurements
49 Exceptional finance costs and other remeasurements
49 Stranded cost recoveries
49 Exceptional taxation
49 Taxation
49 Tax strategy
49 Total tax contribution
49 Tax transparency
50 Tax losses
50 Development of future tax policy
50 Use of adjusted profit measures
50 Exchange rates
51 Reconciliations of adjusted profit measures
Financial position and resources
52 Summarised statement of financial position
52 Goodwill and intangibles
52 Property, plant and equipment
52 Investments and other non-current assets
53 Current assets
53 Current liabilities
53 Deferred tax liabilities
53 Provisions and other non-current liabilities
53 Net debt
55 Net pension and other post-retirement obligations
57 Off balance sheet items
57 Commitments and contingencies
57 Going concern
Andrew Bonfield
Finance Director
Introduction
This year has seen good financial performance across our
business. Notwithstanding the impact of major storms in the
US, we have seen a year of record adjusted operating profits.
Adjusted earnings per share at 56.1p has increased by 12%,
reflecting solid operational performance across all our regulated
businesses and driven by increased revenue from RPI indexation
and the rollover of the transmission price control in the UK and
increased deferral recoveries in upstate New York in the US.
Adjusted earnings also benefited from a lower effective tax rate
and flat net finance costs, partially offset by increased costs for
the implementation of our new enterprise resource planning
system in the US and other higher operating costs.
In the coming year, we will seek to extract additional value
from the investments we have been making through our
transformation programmes and restructurings, our focus on
end-to-end process improvements and our new US back office
system. Coupled with the new RIIO price controls in the UK and
the rate plans agreed in New York and Rhode Island in the US,
we are well positioned for the future.
Our confidence in the outlook for the Group has allowed the
Board to agree a new dividend policy to grow the dividend
at least in line with RPI inflation each year for the foreseeable
future. Our dividend is an important part of our returns to
shareholders along with growth in the value of the asset base
attributable to equity holders.
Continuing to deliver an attractive, growing dividend while
maintaining a strong balance sheet are key targets for us in
the coming years. We aim to do this through growth in assets,
earnings and cash flows, supported by improved cash
efficiency. Together with robust regulatory frameworks we are
confident that we can maintain strong, stable credit ratings
and a prudent level of gearing, while delivering attractive returns
to shareholders.
Andrew Bonfield
You may also be interested in the following sections
of our Report:
Financial review – in brief
page 06
What are the risks?
page 32
46
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review Measurement of financial performance
We principally discuss our results on an adjusted basis. The
rationale for using adjusted measures is explained on page 50.
Results on an adjusted basis are presented before exceptional
items, remeasurements and stranded cost recoveries. See
pages 50 and 51 for further details and reconciliations from the
adjusted profit measures to IFRS, under which we report our
financial results and position.
Key performance indicators (KPIs)
Our financial KPIs are set out on page 44. Details of the total
shareholder return (TSR) and adjusted earnings per share have
been discussed in the financial review – in brief section on
pages 06 and 07.
Group return on equity
We measure our performance in generating value for our
shareholders by dividing our annual return by our equity base.
Group ROE has increased in the year to 11.2%, reflecting our
focus on driving efficient growth in our business. The increased
return in 2012/13 was driven by higher revenues in the UK, due
to inflation and other allowances in our price controls, higher
US deferrals income and lower taxes due to a reduction in UK
corporation tax rates and changes to tax provisions. Offsetting
these, the return in 2012/13 was constrained by the impact of
major storms in the year. Excluding these major storm costs,
2012/13 ROE was 11.7% (2011/12: 11.3%; 2010/11: 10.8%).
Group return on equity
%
13
Other performance measures
Return on capital employed
RoCE is designed to provide a performance comparison
between our regulated UK and US businesses and is one of
the measures that we use to make strategic and investment
decisions around our portfolio of businesses.
The table below shows the RoCE for our businesses over the
last three years:
RoCE
UK regulated
US regulated
Years ended 31 March
2013
%
8.8
7.1
2012
%
8.6
6.8
2011
%
8.5
7.1
The UK RoCE has increased from 8.6% to 8.8% in 2012/13
mainly due to the benefits of inflation on our RPI-X price controls
together with strong performance under incentive schemes and
the decrease in the UK corporation tax rate from 26% to 24%.
The increase in the US RoCE from 6.8% to 7.1% is primarily due
to increased deferral recoveries for Niagara Mohawk. Excluding
the impact of major storm costs, the US RoCE would have been
7.7%, an increase of 0.1% compared with 2011/12 (7.6%).
Interest cover
In order to continue to deliver sustainable growth, we remain
disciplined in the way we manage our balance sheet. The
principal measure we use to monitor financial discipline is interest
cover, being a measure of the cash flows we generate compared
with the net interest cost of servicing our borrowings. The table
below shows our interest cover for the last three years:
12
11
10
2009/10
2010/11
2011/12
2012/13
Interest cover
Years ended 31 March
2013
times
3.9
2012
times
3.9
2011
times
3.8
Including major storms
Excluding major storms
Regulated controllable operating costs
We measure regulated controllable operating costs as a
proportion of our regulated assets, as measured by our UK RAV
and our US rate base.
This ratio reduced to 6.6% in 2012/13, compared with 6.8%
in 2011/12 and 7.3% in 2010/11 on a constant currency basis,
reflecting our continued focus on cost optimisation (particularly
in our US business) and our continued efficient investment in
regulated assets.
Interest cover for 2012/13 has remained the same at 3.9 times,
reflecting flat finance costs year on year.
The primary reasons for the increase in 2011/12 were a fall in
finance costs driven by interest rates on short-term instruments
combined with benefits from our 2010/11 debt buy back
programme partially offset by a small decrease in our operational
cash inflows for the year.
Our target long-term range for interest cover is between 3.0 and
3.5, which we believe is consistent with single A range long-term
senior unsecured debt credit ratings within our main UK
operating companies, National Grid Electricity Transmission plc
(NGET plc) and National Grid Gas plc (NGG plc).
Some of our regulatory agreements impose lower limits for the
long-term senior unsecured debt credit ratings that certain
companies within the group must hold or the amount of equity
within their capital structures. These requirements are monitored
on a regular basis in order to maintain compliance. One of the
key limits requires National Grid plc to hold an investment grade
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
47
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Financial review
Continued
long-term senior unsecured debt credit rating. We believe our
aim of maintaining single A range long-term senior unsecured
debt credit ratings within our main UK operating companies is
consistent with this. Further details on credit ratings can be
found on the debt investors’ section of our website.
Dividends and dividend cover
The proposed total ordinary dividend for 2012/13 amounts to
£1,494 million or 40.85 pence per ordinary share. This represents
an increase of 4% over the previous year’s ordinary dividend per
share of 39.28 pence.
Earnings
The following chart shows the five year trend in adjusted profit
attributable to equity shareholders of the parent (adjusted
earnings) and adjusted earnings per share.
Adjusted earnings and adjusted earnings per share*
£1,250m
£1,418m
£1,747m
£1,828m
£2,055m
56.1p
47.1p
49.6p
50.0p
Years ended 31 March
41.2p
Dividends
Interim
Final
Total
Dividends per ADS
Interim
Final
Total
2013
pence
14.49
26.36
40.85
$
1.15
2.01
3.16
2012
pence
13.93
25.35
39.28
$
1.10
2.02
3.12
2011
pence
12.90
23.47
36.37
$
1.02
1.90
2.92
2010
pence
13.65
24.84
38.49
$
1.15
1.77
2.92
2009
pence
12.64
23.00
35.64
$
0.95
1.74
2.69
Dividends expressed in dollars per ADS in the table above reflect
the amounts paid or payable to ADS holders, rounded to two
decimal places.
The final dividend proposed in respect of each financial year
is reported in the financial statements for the following year.
Therefore, the proposed final dividend for 2012/13 of 26.36 pence
per share, amounting to approximately £967 million (assuming
all dividends are settled in cash), will be reported in the financial
statements for the year ending 31 March 2014.
Dividend cover
Total ordinary dividends covered by:
Adjusted earnings
Earnings
Scrip take up
Dividend
2010/11 final
2011/12 interim
2011/12 final
2012/13 interim
Years ended 31 March
2013
times
2012
times
2011
times
1.4
1.5
1.3
1.5
1.4
1.8
Proportion taking up scrip
34%
7%
48%
35%
2008/09
2009/10
2010/11
2011/12
2012/13
Adjusted earnings Adjusted earnings per share
* From continuing operations
In accordance with IAS 33, all earnings per share and adjusted
earnings per share amounts for comparative periods have been
restated as a result of shares issued via scrip dividends and the
bonus element of the rights issue.
Diluted adjusted earnings per share and diluted earnings per
share are shown in the table below:
Adjusted diluted earnings per share
Diluted earnings per share
Years ended 31 March
2013
pence
2012
pence
55.8
62.3
49.7
55.4
2011
pence
49.3
60.9
Timing
As discussed on page 16, our allowed revenues are set in
accordance with our regulatory price controls or rate plans. We
calculate the billing rates we charge our customers based on the
estimated volume of energy we believe will be delivered during
the coming period. The actual volumes delivered will differ from
this estimate and 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 level of 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 addition, 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 operating profit for the year includes an estimated in year
over collection of £16 million (2011/12: £18 million; 2010/11:
£274 million) and our closing balance at 31 March 2013 was
£126 million over-recovered. All other things being equal, the
majority of that balance would normally be returned to customers
in the following year.
Major storms
In 2012/13, two major storms in the US, Superstorm Sandy and
Storm Nemo, had a material effect on the results of National
Grid. These two major storms reduced operating profit by
£136 million. In 2011/12, results were also affected by two major
storm events, Tropical Storm Irene and the October 2011
48
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review
snowstorms in Massachusetts, which reduced operating profit in
2011/12 by £116 million. There were no major storms in 2010/11.
The table below shows adjusted operating profit and operating
profit excluding the impact of timing differences and major storms.
Excluding the impact of timing differences and
major storms
Adjusted operating profit
Operating profit
Years ended 31 March
2013
£m
3,764
3,874
2012
£m
3,593
3,637
2011
£m
3,326
3,471
Adjusted earnings
The significant drivers affecting our adjusted earnings including
impacts on adjusted operating profit, adjusted net interest
charge and adjusted tax charge have been discussed in the
financial review – in brief section on pages 06 and 07.
Exceptional items
Exceptional charges of £84 million in 2012/13 consisted of
restructuring costs of £87 million less a gain on sale of our
EnergyNorth gas business and Granite State electricity business
in New Hampshire of £3 million.
Exceptional charges of £122 million in 2011/12 consisted of
restructuring charges of £101 million, environmental charges of
£55 million and impairment charges of £64 million, offset by net
gains on the disposals of subsidiaries of £97 million and other
net gains of £1 million.
Exceptional charges of £350 million in 2010/11 consisted
of restructuring costs of £89 million, environmental charges
of £128 million, impairment costs and related charges of
£133 million and other charges of £15 million, offset by net
gains on disposals of three subsidiaries and an associate
of £15 million.
Commodity remeasurements
Remeasurements on commodity contracts represent mark-to-
market movement on certain physical and financial commodity
contract obligations in the US. 2012/13 included a gain of
£180 million (2011/12: loss of £94 million; 2010/11: gain of
£147 million).
Exceptional finance costs and other remeasurements
There were no exceptional finance costs in 2012/13 or 2011/12.
There were £73 million of exceptional finance costs during
2010/11 relating to the early redemption of debt following the
rights issue in June 2010, offset by £43 million of exceptional
interest income relating to tax settlements in the US. Financial
remeasurements relate to net gains and losses on derivative
financial instruments, 2012/13 included a gain of £68 million
(2011/12: £70 million loss; 2010/11: £36 million gain).
Stranded cost recoveries
Stranded cost recoveries were substantially recovered in prior
years, the £14 million recognised in 2012/13 represents the
release of an unutilised provision recognised in prior years
related to the disposed plants (2011/12: £260 million; 2010/11:
£348 million).
Exceptional taxation
Taxation related to exceptional items, remeasurements and
stranded cost recoveries changes each year in line with the
nature and amount of transactions recorded.
In addition, exceptional tax from 2012/13 included an exceptional
deferred tax credit of £128 million arising from a reduction in
the UK corporation tax rate from 24% to 23% applicable from
1 April 2013. Similar reductions in the UK corporation tax rate
in 2011/12 from 26% to 24% and in 2010/11 from 28% to 26%
resulted in £242 million and £226 million deferred tax credit
respectively.
More information on exceptional items, remeasurements and
stranded cost recoveries can be found in note 3 to the
consolidated financial statements on page 112.
Taxation
Tax strategy
We manage our tax affairs in a proactive and responsible way
in order to comply with all relevant legislation and minimise
reputational risk. We have a good working relationship with all
relevant tax authorities and actively engage with them in order to
ensure that they are fully aware of our view of the tax implications
of our business initiatives. Responsibility for our tax strategy
rests with the Finance Director and the Global Tax and Treasury
Director who monitor our tax activities and report to the
Finance Committee.
Total tax contribution
We have taken the decision to provide additional information on
our total UK tax contribution. The total amount of taxes which we
pay and collect in the UK year on year is significantly more than
the corporation tax which we pay on our UK profits. Within the
total, we include significant other taxes paid such as business
rates and taxes on employment together with employee taxes
and other indirect taxes.
For 2012/13 our total tax contribution to the UK Exchequer,
inclusive of taxes collected and taxes borne, was £1.2 billion.
Taxes borne by the Company directly in 2012/13 were
£678 million, a 12% increase on taxes borne in 2011/12 of
£603 million, due to higher corporation tax payments in the
current year. Our 2011/12 total tax contribution was £1.1 billion.
The Hundred Group’s 2012 Total Tax Contribution Survey ranked
National Grid as the 16th highest contributor of UK tax. The
most significant amounts making up the 2012/13 amount were
as follows:
UK total tax contribution 2012/13
£m
47
441
1
122
343
243
392
Taxes borne
Taxes collected
VAT PAYE & NIC UK corporation tax
Business rates Other
Tax transparency
The UK tax charge for the year disclosed in the accounts in
accordance with accounting standards and the UK corporation
tax paid during the year will differ. For transparency, we have
included a reconciliation on page 50 of the tax charge for the
income statement to the UK corporation tax paid in 2012/13.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
49
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Financial review
Continued
The tax charge for the Group as reported in the income
statement is £624 million (2011/12: £521 million). The UK tax
charge as per note 5 to the accounts is £332 million (2011/12:
£175 million) and UK corporation tax paid was £243 million
(2011/12: £170 million), with the principal differences between
these two measures as follows:
Reconciliation of UK total tax charge per accounts
note 5 to UK corporation tax paid
Total UK tax charge per accounts note 5
(current tax £289 million (2012: £181 million) and
deferred tax £43 million (2012: £6 million credit))
Adjustment for non cash deferred tax items
Adjustments for accounts current tax charge relating
to prior years
UK current tax charge
UK corporation tax instalments not payable until
following year
UK corporation tax instalments of prior years paid in
current year
UK corporation tax paid
Years ended
31 March
2013
£m
2012
£m
332
(43)
17
306
175
6
5
186
(155)
(92)
92
243
76
170
Tax losses
We have total unrecognised deferred tax assets in respect
of losses of £335 million (2011/12: £362 million) of which
£319 million (2011/12: £353 million) are capital losses in the
UK. These losses arose as a result of the disposal of certain
businesses or assets and may be available to offset against
future capital gains in the UK.
Development of future tax policy
We believe the continued development of a coherent and
transparent tax policy in the UK is critical to help drive growth
in the economy. As a result, we are actively contributing to the
development of tax policy by engaging with government officials
to promote sustainable investment.
We also contribute to research into the structure of business
taxation and its economic impact by contributing to the funding
of the Oxford University Centre for Business Taxation at the
Saïd Business School.
We are a member of a number of industry groups which
participate in the development of future tax policy, including the
Hundred Group, which represents the views of Finance Directors
of FTSE 100 companies and several other large UK companies
and of which our Finance Director is Chairman of its Tax
Committee. This helps to ensure that we are engaged at the
earliest opportunity on taxation issues which affect our business.
Use of adjusted profit measures
In considering the financial performance of our businesses and
segments, we analyse each of our primary financial measures of
operating profit, profit before tax, profit for the year attributable to
equity shareholders and earnings per share into two components.
The first of these components is referred to as an adjusted profit
measure, also known as a business performance measure. This
is the principal measure used by management to assess the
performance of the underlying business.
Adjusted results exclude exceptional items, remeasurements and
stranded cost recoveries. These items are reported collectively
as the second component of the financial measures.
Note 3 on page 111 explains in detail the items which are
excluded from our adjusted profit measures.
Adjusted profit measures have limitations in their usefulness
compared with the comparable total profit measures as they
exclude important elements of our financial performance.
However, we believe that by presenting our financial performance
in two components it is easier to read and interpret financial
performance between periods, as adjusted profit measures are
more comparable having removed the distorting effect of the
excluded items. Those items are more clearly understood if
separately identified and analysed. The presentation of these two
components of financial performance is additional to, and not a
substitute for, the comparable total profit measures presented.
Management uses adjusted profit measures as the basis
for monitoring financial performance and in communicating
financial performance to investors in external presentations
and announcements of financial results. Internal financial reports,
budgets and forecasts are primarily prepared on the basis of
adjusted profit measures, although planned exceptional items,
such as significant restructurings, and stranded cost recoveries
are also reflected in budgets and forecasts. We separately
monitor and disclose the excluded items as a component
of our overall financial performance.
Reconciliations of adjusted profit measures to the total profit
measure, that includes both components can be found on
page 51.
Exchange rates
Our financial results are reported in sterling. Transactions for
our US operations are denominated in dollars and so the related
amounts that are reported in sterling depend on the dollar
to sterling exchange rate. As the average rate of the dollar
at $1.57:£1 in 2012/13 was stronger than the average rate of
$1.60:£1 in 2011/12, the same amount of revenue, adjusted
operating profit and operating profit in dollars earned in 2011/12
would have been reported as £150 million, £21 million and
£22 million higher respectively if earned in 2012/13. In 2010/11,
the average rate was $1.57:£1; if the revenue, adjusted operating
profit and operating profit in dollars recognised in 2010/11 was
earned in 2011/12 it would have been reported as £135 million,
£21 million and £26 million lower respectively.
The balance sheet has been translated at an exchange rate
of $1.52:£1 at 31 March 2013 ($1.60:£1 at 31 March 2012).
50
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review Reconciliations of adjusted profit measures
Reconciliation of adjusted operating profit to total
operating profit
Adjusted operating profit is presented on the face of the income
statement under the heading operating profit before exceptional
items, remeasurements and stranded cost recoveries.
Years ended 31 March
2013
£m
2012
£m
2011
£m
Adjusted operating profit
3,644
3,495
3,600
Exceptional items
Remeasurements – commodity contracts
Stranded cost recoveries
Total operating profit
(84)
180
14
(122)
(94)
260
(350)
147
348
3,754
3,539
3,745
Reconciliation of adjusted earnings per share
to earnings per share
Adjusted earnings per share is presented in note 6 to the
consolidated financial statements.
Years ended 31 March
2013
pence
2012
pence
2011
pence
Adjusted earnings per share
56.1
50.0
Exceptional items
Remeasurements
Stranded cost recoveries
2.0
4.3
0.2
4.7
(3.3)
4.2
Earnings per share
62.6
55.6
49.6
(0.5)
6.2
5.9
61.2
Reconciliation of adjusted operating profit to adjusted
earnings and earnings
Adjusted earnings is presented in note 6 to the consolidated
financial statements, under the heading adjusted earnings.
Years ended 31 March
2013
£m
2012
£m
2011
£m
Adjusted operating profit
3,644
3,495
3,600
Adjusted net finance costs
(920)
(917)
(1,134)
Share of post-tax results of joint ventures
18
7
7
Adjusted profit before tax
2,742
2,585
2,473
Adjusted taxation
(686)
(755)
(722)
Reconciliation of adjusted operating profit excluding
timing differences and major storms to total
operating profit
Adjusted operating profit excluding timing differences and
adjusted operating profit excluding timing differences and major
storms are discussed on pages 48 and 49.
Years ended 31 March
2013
£m
2012
£m
2011
£m
Adjusted operating profit excluding
timing differences and major storms
3,764
3,593
3,326
Major storms
(136)
(116)
–
Adjusted operating profit excluding
Adjusted profit after tax
2,056
1,830
1,751
timing differences
3,628
3,477
3,326
Attributable to non-controlling interests
(1)
(2)
(4)
Timing differences
16
18
274
Adjusted earnings
Exceptional items
Remeasurements
Stranded cost recoveries
Earnings
2,055
1,828
1,747
Adjusted operating profit
3,644
3,495
3,600
75
156
9
174
(122)
156
(16)
219
209
2,295
2,036
2,159
Exceptional items, remeasurements
and stranded cost recoveries
110
44
145
Total operating profit
3,754
3,539
3,745
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
51
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Financial review
Financial position and resources
Summarised statement of financial position
Goodwill and intangibles
Property, plant and equipment
Investments and other non-current assets
Pension assets
Current assets*
Current liabilities*
Deferred tax liabilities
Provisions and other non-current liabilities
Net debt
As at 31 March
2013
£m
2012
£m
5,617
5,322
36,592
33,701
753
195
687
155
3,201
2,611
(3,282)
(3,155)
(4,076)
(3,738)
(3,644)
(3,652)
(21,429)
(19,597)
The table below shows our capital expenditure, including
expenditure on both property, plant and equipment and
intangibles, over the last five years, by segment. The largest
area of organic growth is in the UK Transmission segment,
and we expect that to remain the case for the next few years.
Capital expenditure by segment
£m
427
958
598
307
1,021
670
275
1,092
281
1,052
669
645
1,432
1,397
216
1,124
666
1,680
Pensions and other post-retirement obligations
(3,694)
(3,088)
1,259
1,254
Net assets
10,233
9,246
* Excludes amounts related to net debt and provisions reported in other lines and
includes assets and liabilities of businesses held for sale
Goodwill and intangibles
Goodwill and intangibles increased by £295 million to
£5,617 million as at 31 March 2013. This increase primarily
relates to foreign exchange movements of £266 million and
software additions of £175 million offset by amortisation of
£101 million. In 2011/12, goodwill and intangibles increased by
£45 million to £5,322 million as a result of software additions
offset by amortisation and the impairment of the acquisition-
related intangible asset of £64 million. This related to the
contract to operate and maintain the electricity distribution
network on behalf of LIPA, which will not be renewed on
expiry in December 2013.
Property, plant and equipment
Property, plant and equipment increased by £2,891 million to
£36,592 million as at 31 March 2013. This was principally due
to capital expenditure of £3,511 million on the extension of
our regulated networks and foreign exchange movements of
£680 million, offset by £1,281 million of depreciation in the year.
Property, plant and equipment increased by £1,745 million to
£33,701 million for the year ended 31 March 2012 due to capital
expenditure of £3,172 million partially offset by £1,212 million
of depreciation and net disposals of £279 million, primarily the
disposal of OnStream in October 2011.
2008/09
2009/10
2010/11
2011/12
2012/13
UK Transmission UK Gas Distribution
US Regulated Other activities
Capital expenditure increased in each of the three regulated
businesses including record amounts in our UK Transmission
and US Regulated businesses.
As a result of capital expenditure in 2012/13, and after allowing
for depreciation, foreign exchange movements and in the UK,
inflation, we estimate that our regulated assets have increased
by approximately £2.5 billion (2011/12: £1.5 billion).
Investments and other non-current assets
Investments and other non-current assets have increased by
£66 million to £753 million. This is principally due to changes in
the fair value of our US commodity contract assets and available-
for-sale investments, and an equity investment in Clean Line
Energy Partners LLC of $12.5 million by 31 March 2013. For the
year ended 31 March 2012, investments and other non-current
assets decreased by £41 million to £687 million principally due
to a £58 million decrease in the fair value of our US commodity
contract assets driven by a fall in electricity prices partially offset
by an increase in other receivables.
52
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review Current assets
Current assets have increased by £590 million to £3,201 million
at 31 March 2013. Driven by the US, this primarily reflects the
timing of cost recoveries from LIPA relating to Superstorm Sandy
and an increase in trade receivables due to colder weather in
February and March 2013 compared with 2012, which also led
to an offsetting decrease in inventories which were £85 million
lower. For the year ended 31 March 2012, current assets
decreased by £211 million to £2,611 million. This was due to
a fall in trade receivables of £230 million, primarily reflecting the
impact of warmer weather in March 2012 on our US Regulated
segment revenues.
Current liabilities
Current liabilities have increased by £127 million to £3,282 million
due to increased payables and accruals relating to Superstorm
Sandy and Storm Nemo. Current tax liabilities were £152 million
lower primarily due to higher tax payments made in 2012/13 and
larger prior year tax credits arising in 2012/13, although these
were partially offset by a larger current year tax charge. For the
year ended 31 March 2012, current liabilities decreased by
£286 million to £3,155 million. Trade payables were £190 million
lower, reflecting the impact of lower commodity prices in our US
Regulated segment. Current tax liabilities were £120 million lower
primarily due to tax payments made in 2011/12.
Deferred tax liabilities
The net deferred tax liability increased by £338 million to
£4,076 million. The main reasons for this movement were the
£508 million deferred tax charge, including the impact of the
reduction in the statutory tax rate for future periods of £128 million,
partially offset by the deferred tax credit on actuarial losses on
pensions and other post-retirement benefits. For the year ended
31 March 2012, the deferred tax liability decreased by £28 million
to £3,738 million. This decrease mainly arose from the deferred
tax charge for the year of £381 million being more than offset by
the £403 million deferred tax credit arising on actuarial losses
relating to pensions and other post-retirement benefits.
Provisions and other non-current liabilities
Provisions and other non-current liabilities decreased slightly
by £8 million to £3,644 million as at 31 March 2013. Total
provisions increased by £29 million in the year. The underlying
movements include additions of £92 million and £83 million
to the environmental and other provisions respectively, as well
as foreign exchange movements of £65 million. The other
provisions additions include £33 million of increased liabilities
insured by our insurance subsidiaries. These are offset by
payments of £231 million in relation to all classes of provisions.
Other non-current liabilities have decreased by £37 million
reflecting changes in the fair value of US commodity contract
liabilities. For the year ended 31 March 2012, provisions and
other non-current liabilities decreased by £106 million to
£3,652 million. Additions to environmental provisions were
£58 million primarily due to revisions to our cost estimates.
This was offset by payments in relation to provisions totalling
£228 million.
Net debt
Funding and liquidity risk management
Funding and liquidity risk management is carried out by the
treasury function under policies and guidelines approved by
the Finance Committee of the Board. The Finance Committee
is responsible for the regular review and monitoring of treasury
activity and for the approval of specific transactions, the authority
for which fall outside the delegation of authority to management.
The primary objective of the treasury function is to manage our
funding and liquidity requirements. A secondary objective is to
manage the associated financial risks, in the form of interest
rate risk and foreign exchange risk, to within pre-authorised
parameters. Some examples of the management of funding
and liquidity are given on page 33 and details of the main risks
arising from our financing and commodity hedging activities can
be found in the risk factors discussion starting on page 176 and
in notes 30 and 31 to the consolidated financial statements.
Surplus funds
Investment of surplus funds, usually in short-term fixed deposits
or placements with money market funds that invest in highly
liquid instruments of high credit quality, is subject to our
counterparty risk management policy.
Net debt trend
Net debt at 31 March
£m
22,673
22,139
18,731
19,597
21,429
2009
2010
2011
2012
2013
The trend in net debt as shown in the chart above highlights our
rights issue in June 2010 and the significant capital expenditure
programme we have had in the last few years.
Composition of net debt
Net debt is made up as follows:
As at 31 March
2013
£m
2012
£m
Cash, cash equivalents and financial investments
6,102
2,723
Borrowings and bank overdrafts
Derivatives
Total net debt
(28,095)
(23,025)
564
705
(21,429)
(19,597)
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
53
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information
Financial review
Continued
The increase in net debt of £1,832 million to £21,429 million is
explained in the chart below:
Movements in net debt
£m
35
4,487
424
1,006
259
725
2,974
34
4,037
855
810
287
763
3,188
Factors
decreasing
net debt
Factors
increasing
net debt
Factors
decreasing
net debt
Factors
increasing
net debt
2011/12
2012/13
Capital expenditure and other investing activities Interest Tax
Dividends Non cash Operating cash flows Other
Factors decreasing net debt
Our primary source of cash relates to operating cash flows as
detailed separately below.
Factors increasing net debt
Our primary use of cash is for capital expenditure and other
investing activities. This has increased by £214 million year on
year primarily due to increased investment in our UK Transmission
business. We also utilised cash for dividends which decreased
by £196 million year on year. The decrease in cash dividends
is due to significantly higher scrip take up in the year compared
with 2011/12. This is offset by the growth in the dividend. Net
interest paid was £38 million higher than prior year, reflecting
higher average net debt during the year. Tax paid was £28 million
higher than prior year primarily due to higher taxable profits.
Non cash movements related to increases in the value of inflation
linked debt and remeasurements and movements in the sterling
to dollar exchange rate.
Operating cash flows
Cash generated from continuing operations
£m
4,372
4,854
4,487
4,037
3,564
2008/09
2009/10
2010/11
2011/12
2012/13
Cash flows from our operations are largely stable over a period
of years. Our electricity and gas transmission and distribution
operations in the UK and US are subject to multi-year rate
agreements with regulators. In the UK, we have largely stable
annual cash flows. However, in the US our short-term cash flows
are dependent on the price of gas and electricity and the
timing of customer payments. The regulatory mechanisms for
recovering costs from customers can result in significant cash
flow swings from year to year. Changes in volumes in the US,
for example as a consequence of abnormally mild or extreme
weather or economic conditions affecting the level of demand,
can affect cash inflows in particular.
For the year ended 31 March 2013, cash flow from operations
decreased by £450 million to £4,037 million as detailed on page
07. For the year ended 31 March 2012, cash flow from operations
decreased by £367 million to £4,487 million due to lower operating
profits, unfavourable working capital movements, higher pension
payments and lower stranded cost recoveries.
The increase of £482 million in 2010/11 to £4,854 million was
due to higher operating profits and lower pension payments.
Borrowings
The Finance Committee controls refinancing risk by limiting the
amount of our debt maturities arising from borrowings in any
one year which is demonstrated by our maturity profile.
The maturity profile of gross borrowings by our major entities
is illustrated below:
National Grid long-term debt maturity profile
£m
13/14
14/15
15/16
16/17
17/18
18/19
19/20
20/21*
21/22
22/23
23/24
24/25
25/26*
26/27
27/28
28/29
29/30
30/31
31/32
32/33
33/34
34/35
35/36
36/37
37/38
38/39
39/40
40/41
41/42
42/43
43/44
44/45
45/46
46/47
47/48
48/49
49/50
50/51
51/52
52/53
53/54
54/55
55/56
56/57
57/58
58/59
59/60
0
2
0
0
4
0
0
6
0
0
8
0
0
1
,
0
0
0
1
,
2
0
0
1
,
4
0
0
1
,
6
0
0
1
,
8
0
0
2
,
0
0
0
National Grid Gas Group National Grid Electricity Transmission
National Grid plc/NGG Finance National Grid USA operating companies
National Grid USA/National Grid North America Grain LNG
* Includes hybrid bonds at first callable date (euro: 2020; sterling: 2025).
Actual maturity of these bonds is euro: 2076; sterling: 2073
54
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review
During the year we continued to refinance where attractive
opportunities arose, including issuing our first hybrid bonds
worth £2.1 billion in March 2013. In total, we received £5.1 billion
of proceeds from new loans and debt issuance, including a
C$750 million bond in NGET in September 2012, and €1.25 billion
and £1 billion from the hybrid bonds in NGG Finance in March
2013. We also repaid a total of £1.2 billion of borrowings during
the year.
As at 31 March 2013, total borrowings of £28,095 million (2012:
£23,025 million) including bonds, bank loans, commercial paper,
finance leases and other debt had increased by £5,070 million
representing our new loans and debt issuances in the year. We
expect to repay £3,448 million of our maturing debt in the next
12 months including commercial paper and we expect to be able
to refinance this debt through the capital and money markets.
Further information on borrowings can be found on the debt
investors’ section of our website and in note 19 of the
consolidated financial statements.
Derivatives
Interest rate swaps
Cross-currency interest rate swaps
Foreign exchange forward contracts
Forward rate agreements
Inflation linked swaps
Total as at 31 March
2013
£m
303
512
(48)
(5)
(198)
564
2012
£m
187
740
59
(5)
(276)
705
We use derivative financial instruments to manage our exposure
to risks arising from fluctuations in interest rates and exchange
rates. We value our derivatives by discounting all future cash
flows by externally sourced market yield curves at the reporting
date, taking into account the credit quality of both parties. The
decrease in our derivatives of £141 million therefore represents
movements as a result of underlying market variables and the
composition of the derivative portfolio.
The currency exposure on our borrowings is managed through
the use of cross-currency swaps and results in a net debt profile
post-derivatives that is almost entirely sterling/dollar.
The impact on net debt from our use of derivatives can be seen
in the currency and interest rate profiles shown below:
Currency profile at 31 March 2013
%
23
7
32
38
38
62
Net debt pre-derivatives
Net debt post-derivatives
Sterling Dollar Euro Other
The interest rate profile of net debt is actively managed under
the constraints of our interest rate risk management policy as
approved by the Finance Committee. Our interest rate exposure,
and therefore profile, will change over time. The chart below
shows the interest rate profile of our net debt before derivatives.
Interest rate profile pre-derivatives at 31 March 2013
%
100%
76
30
(6)
Fixed RPI linked Floating
We have invested some of the proceeds from the issuance of our
hybrid bonds in short-term money funds at floating interest rates.
As a result, we are currently in a net asset position on floating
instruments and our exposure is shown as a negative in the
chart above.
The charts below show the impact, as at 31 March 2013, of
derivatives on our net debt for 2013/14 and future years. The
2013/14 position reflects the use of derivatives, including forward
rate agreements to lock in interest rates in the short term. The
effective interest rate on treasury managed debt for the year
was 5.1% (2011/12: 5.4%). The future years’ position excludes
derivatives that mature within the next year.
Interest rate profile post-derivatives at 31 March 2013
%
30
70
7
31
62
2013/14
Future years
Fixed RPI linked Floating
Further details on our foreign currency and interest rate risk
management can be found in the risk factors discussion on
pages 33 and 177 and in note 30(a) of the consolidated
financial statements.
Net pension and other post-retirement obligations
We operate pension arrangements on behalf of our employees in
both the UK and US and also provide post-retirement healthcare
and life insurance benefits to qualifying retirees in the US.
In the UK, the defined benefit section of the National Grid UK
Pension Scheme and the National Grid Electricity Group of the
Electricity Supply Pension Scheme are closed to new entrants.
We have started discussions with our employees and our trade
union partners to ensure our defined benefit pension schemes
are affordable and sustainable for the future. Membership of the
defined contribution section of the National Grid UK Pension
Scheme is offered to all new employees in the UK. We are
currently reviewing the defined contribution arrangement
we offer to employees and new hires in the UK.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
55
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Financial review
Continued
In the US, we operate a number of pension plans, which provide
both defined benefits and defined contribution benefits. We also
provide post-retirement benefits other than pensions to the
majority of employees. Benefits include healthcare and life
insurance coverage to eligible retired employees.
Pension plan assets are measured at the bid market value at the
reporting date. Plan liabilities are measured by discounting the
best estimate of future cash flows to be paid out by the plans
using the projected unit method. Estimated future cash flows are
discounted at the current rate of return on high quality corporate
bonds in UK and US debt markets of an equivalent term to
the liability.
A summary of the total UK and US assets and liabilities and the
overall net IAS 19 accounting deficit is shown below:
The investment profile of our pension plan assets is illustrated
below:
Pension plan assets at 31 March 2013
%
26
31
27
34
6
4
43
47
UK Pensions
US Pensions
Net plan liability
As at 1 April 2012
Exchange movements
Current service cost
Expected return less interest
Curtailments, settlements and other
Actuarial gains/(losses)
– on plan assets
– on plan liabilities
Employer contributions
As at 31 March 2013
Represented by:
Plan assets
Plan liabilities
Net plan liability
UK
£m
US
£m
Total
£m
(668)
(2,265)
(2,933)
–
(90)
66
(15)
1,028
(1,691)
201
(112)
(130)
3
(45)
148
(415)
486
(112)
(220)
69
(60)
1,176
(2,106)
687
(1,169)
(2,330)
(3,499)
17,392
5,893
23,285
(18,561)
(8,223)
(26,784)
(1,169)
(2,330)
(3,499)
The principal movements in net obligations during the year arose
as a consequence of a decrease in the discount rate following
declines in corporate bond yields. Actuarial gains on plan assets
reflected improvements in financial markets.
Plan assets are predominantly invested in equities, corporate
bonds, gilts, property and short-term investments. Our plans are
trustee administered and the trustees are responsible for setting
the investment strategy and monitoring fiduciary investment
performance, consulting with us where appropriate.
25
75
US other post-retirement benefits
Equities Corporate Bonds Gilts Property Other
Further information on our pension and other post-retirement
obligations, including details of the actuarial valuations that are
performed for our UK pensions can be found in note 29 to the
consolidated financial statements.
Actuarial valuation of UK pensions
A triennial valuation is carried out for the trustees of our two UK
defined benefit schemes by professionally qualified actuaries
and agreed with us following consultation. The next full actuarial
valuations of both the National Grid UK Pension Scheme and the
National Grid Electricity Group of the Electricity Supply Pension
Scheme are to be performed as at 31 March 2013 with the
valuation results expected to be agreed by mid 2014.
Further detail on the results of the last full triennial valuations
performed as at 31 March 2010 can be found in note 29 to the
consolidated financial statements.
56
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Strategic Review Off balance sheet items
There were no significant off balance sheet items other than the
contractual obligations shown in note 30(d) to the consolidated
financial statements, and the commitments and contingencies
discussed below.
Commitments and contingencies
The following table summarises the commitments and
contingencies outstanding at 31 March 2013 and 2012.
Future capital expenditure contracted
but not provided for
Operating lease commitments
Energy purchase commitments
Guarantees and letters of credit
2013
£m
2012
£m
3,011
2,728
742
3,995
1,332
706
4,174
1,344
The increase in capital expenditure contracted but not
provided for is a result of the continued ramp up in our capital
investment programme.
The energy purchase commitments reflect obligations to purchase
energy under long-term contracts. These contracts are used in
respect of our normal sale and purchase requirements and do
not include commodity contracts carried at fair value. Substantially
all our costs of purchasing electricity and gas supply for our
customers are recoverable at an amount equal to cost. The
timing of recovery can vary between financial periods leading to
an under- or over-recovery within any particular financial period
(see timing differences as discussed on page 48).
We propose to meet all our commitments, as well as working
capital requirements, from existing cash and investments,
operating cash flows, existing credit facilities, future facilities and
other financing that we reasonably expect to be able to secure
in the future.
Through the ordinary course of our operations, we are party
to various litigation, claims and investigations. We do not expect
the ultimate resolution of any of these proceedings to have a
material adverse effect on our results of operations, cash flows
or financial position.
Further information on commitments and contingencies can
be found in note 27 to the consolidated financial statements.
Going concern
Having made enquiries, the Directors consider that the
Company and its subsidiary undertakings have adequate
resources to continue in business for the foreseeable future,
and that it is therefore appropriate to adopt the going concern
basis in preparing the consolidated and individual financial
statements of the Company. The Directors consider that a
robust going concern assessment process was undertaken
and the results were discussed and challenged formally
at the Audit Committee in May 2013, who recommended
the Board’s approval at the meeting in May 2013 prior to
approving the Annual Report and Accounts.
The process undertaken involved consideration of the
forecasts produced for the UK and US businesses for a
period to March 2015. This period is considered to be the
‘foreseeable future’ as required for this going concern
assessment only, and is in accordance with company law,
accounting standards and the Listing Rules. The forecasts
include the impact of the RIIO price control framework on
our UK regulated businesses and the impact of agreed and
ongoing rate plan filings with the relevant US state and federal
bodies for our US businesses. While we have forecasts
that extend to the end of each of our current rate plans (for
example until 2021 for the UK regulated businesses), we have
not considered going concern formally for these periods, due
to the increased forecasting risk and uncertainty involved.
This assessment also considered the significant solvency
and liquidity risks involved in delivering our forecasts for the
foreseeable future. These are wider than the current global
economic uncertainty and include recognising the risks
around the continued significant investment programme
that the Group has committed to and the potential risk that
the credit ratings on some of our issued debt are changed.
Any change would increase the cost of servicing this debt,
therefore reducing the overall profitability of the Group. The
assessment also considered the Group’s ability to obtain
additional funding across a number of scenarios reflecting
the current economic uncertainty, especially in Europe. This
analysis also noted the fact that the debt markets remained
a viable source of funding for the Group even at the height
of the credit crunch in 2007 and 2008. Given the significance
of maintaining our overall credit rating, the Group has policies
and procedures in place to help mitigate this risk as far as
possible, as described on page 33. Additional oversight is
also provided by the Finance Committee (see page 66).
More detail on our financial risks, including liquidity and
solvency, is provided in note 30 to the consolidated financial
statements. There have been no major changes to the
Group’s significant liquidity and solvency risks in the year.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
57
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Corporate Governance
Governance contents
58 Governance framework
59 The Board
59 The Board and its committees
59 Board composition
59 Director induction and development
59 Non-executive Director independence
60 Board evaluation and effectiveness
60 Director election and re-election
62 Board and committee membership and attendance
63 Audit Committee
66 Finance Committee
66 Safety, Environment and Health Committee
67 Nominations Committee
68 Remuneration Report
91 Shareholder engagement
Governance framework
Compliance statement
The Board considers that it complied in full with the provisions
of the UK Corporate Governance Code 2010 (the Code) and,
additionally, the new edition of the UK Corporate Governance
Code 2012 (the new Code) during the financial year being
reported taking account of the transitional arrangements
suggested by the Financial Reporting Council for external
audit tendering.
This report explains key features of the Company’s governance
structure to provide a greater understanding of how the main
principles of the Code and the new Code have been applied
and to highlight areas of focus during the year. The report also
includes items required by the Disclosure and Transparency
Rules. The index at the top of the next page sets out where to
find each of the disclosures required in the Directors’ Report.
As required by the Code, our business model is explained
starting on page 08.
A full description of the matters reserved for the Board, together
with other documentation relating to the Company’s governance,
is available on our website.
Examples of changes during the year
On Stephen Pettit’s departure, the Risk & Responsibility
Committee which he chaired was replaced by a new committee,
the Safety, Environment and Health (SEH) Committee chaired by
Philip Aiken, to get a sharper focus on safety, environment and
health matters. The areas of responsibility previously covered by
the Risk & Responsibility Committee, and which are not within
the remit of the SEH Committee, including security, corporate
responsibility (beyond the specific areas of safety, environment
and health), business conduct and inclusion & diversity, are now
within the remit of the Board and other committees.
Additionally, in line with common practice, the Executive
Committee is no longer a committee of the Board, although its
levels of authority, role and responsibilities remain unchanged.
For more information on the role and responsibilities of the
Executive Committee, see page 28.
In relation to compliance with the new Code, the Board has
considered and endorsed the arrangements to enable it to
confirm the Annual Report and Accounts, taken as a whole,
is fair, balanced and understandable and no changes to the
assurance processes are required.
Chairman’s foreword
As part of the Board transition programme I reported last year,
Nora Mead Brownell, Mark Williamson and Jonathan Dawson
have joined our Board. We said goodbye to Stephen Pettit and
Linda Adamany in 2012, with Ken Harvey and George Rose
stepping down from the Board following the conclusion of this
year’s AGM.
On behalf of the Board, I would like to thank Ken and George for
their commitment to the Company and the valuable contribution
they have made as Non-executive Directors – they have carried
out their duties with diligence and care. Ken has been Senior
Independent Director since 2004 and Remuneration Committee
chairman since 2011, while George has been chairman of the
Audit Committee for more than ten years. These are important
roles in ensuring the Board meets its responsibilities to
shareholders and stakeholders. The Nominations Committee
report on page 67 sets out the recruitment processes followed
for our new Non-executive Directors.
The fresh insight and external perspectives that Nora, Mark
and Jonathan bring are complemented by the accumulated
Company knowledge and understanding that our longer serving
Directors provide. With the changes in membership, skills,
experience and dynamics arising from the refreshing of the
Board, we felt it would be timely to undertake an external review
of the Board and its committees’ performance and effectiveness.
The review was conducted with a focus on inclusion & diversity.
Further details of the process, as well as examples of agreed
actions, are set out on pages 60 and 61.
Following the publication of a new edition of the UK Corporate
Governance Code last autumn, we have produced this
year’s Annual Report and Accounts in line with the updated
requirements. This is part of our continuing commitment
to best practice in corporate governance and I am pleased
to tell you that we comply in full with the new requirements
as detailed in our compliance statement.
Additionally, we have made some changes to the presentation,
structure and content of the Annual Report and Accounts.
Our approach takes on board elements of the draft regulations
on narrative reporting and directors’ remuneration, published
by the Department for Business Innovation and Skills in the
last year.
I hope you find the changes helpful to your understanding
of our strategy and performance, as well as how these link
to Directors’ remuneration.
Sir Peter Gershon
Chairman
58
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Corporate Governance Directors’ Report statutory and other disclosures (starting on page indicated)
91 Annual General Meeting
180 Articles of Association
65 Audit information
26 Board of Directors
182 Change of control
53 Financial instruments
08 Future developments
30 Internal control
183 Material interests
182 Conflicts of interest
170 Contractual and other
in shares
arrangements
183 Directors’ indemnity
87 Directors’ share interests
48 Dividends
183 Events after the reporting
period
38 People
183 Policy and practice on
payment of creditors
provisions
182 Charitable donations
185 Code of Ethics
183 Political donations and
expenditure
08 Principal activities and
business review
183 Research and
development
30 Risk management
183 Share capital
The Board
The Board reserves a number of matters for its sole
consideration where these matters impact the strategic direction,
effective oversight and reputation of the Company.
Examples of Board focus during the year
• visible safety leadership and embedding genuine learning
to help prevent repeat injuries through safety initiatives;
• RIIO and US rate cases;
• major storm activity lessons learnt;
• US foundation programme systems implementation;
• the 2013 strategic business plan assumptions;
• Electricity Market Reform, including future generation scenarios;
• Group financing strategy;
• the new dividend policy;
• refreshed corporate vision statement;
• results of 2012 employee opinion survey, including proposed
high level actions to address key themes globally; and
• executive succession, including the results of external
assessment and benchmarking of high performing individuals.
Examples of expected Board focus for next year
• review of safety performance and initiatives;
• strategy sessions;
• change programmes in the UK business to reflect RIIO and
Elevate 2015 in the US;
• UK security of supply;
• US foundation programme post systems implementation review;
• UK and US operational deep dives;
• talent management update, including regeneration of ageing
workforce, capabilities, and inclusion & diversity; and
• results of 2013 employee opinion survey and proposed high
level actions.
The Board and its committees
In order to operate efficiently and to give appropriate attention
and consideration to matters, the Board has delegated
authority to its committees to carry out tasks as defined in
the committees’ terms of reference, which are available on
our website. Details about the workings of the Board and the
committee structure are set out in summary on pages 28 and 29
with reports from each Board committee together with details of
their activities during the year on pages 63 to 90.
The Executive Committee has responsibility for making
management and operational decisions about the day-to-day
running of the Company. Further information on the membership
and operation of the Executive Committee is included on pages
28 and 29.
Board composition
The phased and orderly transition of the Board has continued
as detailed in the Chairman’s foreword to this report, noting that
Maria Richter is expected to step down from the Board in July
2014. The Nominations Committee and the Board consider
balance as a key requirement for the composition of the Board,
not only in terms of the number of Executives and Non-
executives, but also with regard to the mix of skills, experience,
knowledge, independence and diversity. Biographical and
experience details for current Directors are set out on pages
180 to 182. The Directors during the year are set out on page 62
together with details of committee membership and attendance.
For further details regarding the Directors’ service contracts
and letters of appointment, see pages 78 and 79 in the
Remuneration Report.
Director induction and development
The Chairman, with the support of the Group General Counsel
& Company Secretary, is responsible for the induction of new
Directors and ongoing development of all Directors. Personal
development and training needs were discussed at the one-to-
one meetings with the Chairman as part of the Board performance
evaluation process.
As the internal and external business environment changes,
it is important to ensure the Directors’ skills and knowledge
are refreshed and updated regularly. Updates on corporate
governance and regulatory matters are provided at Board
meetings, with details of development opportunities available
in our online document library.
Non-executive Directors’ induction programme
On appointment to the Board, new Non-executive Directors
receive an induction programme including:
• Directors’ information pack to provide background
information on our businesses and operations, policies
and procedures as well as guidance on statutory duties
as a director and other corporate governance matters;
• one-to-one meetings with other Directors and senior
management in the UK and US; and
• operational site visits.
Programmes are tailored depending on the experience and
background of each individual and the committees on which
they serve.
Recognising that Nora’s experience is predominantly in the
US, her induction included a meeting with our external legal
advisors to discuss the duties and requirements of being
a director in the UK.
As Mark is chairman designate of the Audit Committee,
he has met with members of senior management from the
finance team including the Finance Director, Group Financial
Controller, Director of Corporate Audit and US Chief Financial
Officer. He has also met with our external auditors, analysts
and brokers.
Jonathan has met our external remuneration advisors
and senior management involved with the Remuneration
Committee as he will be taking over as committee chairman.
His induction programme includes meetings covering the
regulatory environment in which we operate and our
regulated businesses.
Non-executive Director independence
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, in its deliberations, specifically took into consideration the
Code and examples of indicators of potential non independence,
including length of service. Following the annual evaluation of
independence, with a particularly rigorous review for those
Directors who have served greater than six years, each of the
Non-executive Directors, with the exception of the Chairman, at
year end has been determined by the Board to be independent.
The experience and knowledge of Ken Harvey, George Rose
and Maria Richter, who have each served on the Board for more
than nine years, have been key to the orderly succession of our
Board, facilitating a structured handover and continuity during
this period of change.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
59
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Corporate Governance
Continued
Board evaluation and effectiveness
The Board agreed this year it would be beneficial and timely,
given the changes in Board composition, to undertake an
external evaluation of Board and committee performance to
provide fresh insight and objectivity to the process. Schneider
Ross was appointed to conduct an evaluation of the Board and
its committees, having previously provided inclusive leadership
training to the Company in 2009. The Board agreed this previous
relationship would not impact in any way the independence of
the review.
The Board recognises the value of inclusive leadership and
a diverse Board. In considering the review process this year,
it noted the anticipated benefits to be gained by undertaking
an external review from an inclusion & diversity perspective.
Board and committee evaluation process
1:1 interviews
with Directors
and members of the
leadership team
Oct – Nov
Action plans
agreed
Jan – Apr
M ONIT
O
N
R
I
N
G
TI O
C
A
Online
questionnaires
circulated
Nov
1:1 discussions
between Chairman
and Directors
Jan – Mar
Analysis of
responses.
Reporting and
recommendations
to Nominations
Committee
Dec – Jan
Schneider Ross
National Grid
Schneider Ross and National Grid
Schneider Ross held confidential one-to-one interviews with
24 people comprising Directors and members of the leadership
team. Mark Williamson and Jonathan Dawson did not participate
due to the timing of their appointments. The focus for these
discussions was on the behavioural aspects of Board
effectiveness such as:
• how the Board works together as a unit;
• the quality of inputs, discussions and decision-making;
• the leadership demonstrated both individually and collectively;
and
• specific themes, for example differences in perspectives
between male and female Board members and more recently
appointed Non-executive Directors were asked about their
integration and induction to the Board.
Questionnaires were designed to gather views and feedback
on the overall effectiveness, performance and processes of
the Board and each of the committees including the Executive
Committee. Additionally this year, regular attendees of the Board
and committee meetings were surveyed to gain a different
perspective and a more holistic picture of performance.
In total 47 people, including regular attendees and two
external advisors, were invited to complete questionnaires
anonymously online.
Schneider Ross presented the key conclusions of the evaluation
at a meeting of the Nominations Committee with the Executive
Directors present. Findings, which were debated openly, had
been grouped into three themes:
• Mechanics: for example the role, composition and processes
of the Board and its committees.
• Dynamics: such as teamwork, quality of discussions, debate
and decision-making.
• Specifics: including leadership, succession planning, risk
appetite and reporting, and inclusion & diversity.
As a result of their evaluation, Schneider Ross commented:
“With the Board in the later stages of its transition,
the boardroom dynamic continues to evolve. We have
made a set of recommendations which, taken together,
we believe should drive progress towards a truly high
performing, inclusive Board – where constructive
challenge from a diverse group of Non-executive
Directors makes its full contribution to excellent
decision-making.”
Each committee chairman was requested to prepare an action
plan for their respective committee for presentation to the April
Board meeting. Noting the suggestions, the Board agreed areas
of improvement and actions for further enhancements. Progress
against all action plans will be monitored throughout the year;
see table opposite for examples.
In addition to the review by Schneider Ross and on receipt of its
findings, Sir Peter met with each Board member to discuss their
individual performance, with the exception of Ken Harvey and
George Rose as they will not be standing for re-election at this
year’s AGM.
Progress against the examples from the combined action plan
reported last year, which includes items identified from the
performance evaluation process together with Sir Peter’s
complementary review, is set out opposite.
Director election and re-election
At a private meeting of the Non-executive Directors, Ken Harvey,
as Senior Independent Director, led a review of Sir Peter’s
performance. In their deliberations the Non-executive Directors,
with input from the Executive Directors, assessed his ability to
fulfil his role as Chairman. They concluded that Sir Peter’s
performance and contribution are strong and that he demonstrates
effective leadership. Ken also met privately with Schneider Ross
to discuss feedback on the Chairman obtained from their review,
which Ken then discussed with Sir Peter.
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. There have been no significant changes to
Sir Peter’s commitments during the year and the arrangements
he has in place to fulfil his role given he is also chairman of
another FTSE 100 company are considered effective. Therefore,
in accordance with the Code, all Directors, with the exception
of Ken Harvey and George Rose, will seek election or re-election
as set out in the Notice of the 2013 AGM.
60
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Corporate Governance Area
Actions for 2013/14
Mechanics
Chief Executive to meet with Executive Directors immediately after each Board meeting to discuss how the Board
operated as a team and contributions from Directors, and reflect on any learning. Feedback from these meetings
to be shared as appropriate with the Chairman.
Responsibility: Chief Executive
Review and build on the one page executive summary for non standard papers introduced in July 2012 and consider
its effectiveness in providing the Board with key information and clarity around requested contribution or action.
Responsibility: Chairman and Chief Executive
All committees, except the Nominations Committee and Executive Committee, to get together immediately before
or after their meetings to discuss papers, presenters’ contribution and any matters they wish to consider without
management present.
Responsibility: Committee chairmen
Thinking styles of candidates to the Board and Executive Committee to be taken into consideration once skill set
and experience confirmed.
Responsibility: Nominations Committee
Dynamics
Schedule a development session for the Board which may include thinking styles, inclusive leadership and
exploring positive challenge through questioning techniques.
Responsibility: Chairman and Group General Counsel & Company Secretary
Review the following month’s agenda and communicate to the Executive Directors the areas that presenters are
to focus on.
Responsibility: Chairman and Chief Executive
Specifics
Facilitate increased interaction between Non-executive Directors and high potential employees during site visits
and presentations at Board meetings.
Responsibility: Executive Directors
Appoint a taskforce to review gender diversity and employee turnover.
Responsibility: Chief Executive
Implement an inclusion & diversity scorecard and review progress with the Board.
Responsibility: Executive Committee
Area
Actions from 2012/13
Commentary
Board and committee performance evaluation
Membership
and attendees
During this period of Board transition,
membership of all committees is to be
reviewed to ensure appropriate alignment
of skills and knowledge.
Responsibility: Nominations Committee
As the Board transitions, committee composition has been
reviewed to ensure the right balance of skills and experience is
maintained taking into account the role and responsibilities of the
committee and the existing membership.
Training and
development
Role and
structure
Training and development is key for all
members of the Board. Formal training
plans will be agreed between each Director
and the Chairman.
Responsibility: Board members
A record of training and development activities undertaken by
Directors has been maintained throughout the year; for example
external briefings and seminars, which have been complemented by
technical and market updates to Board and committee meetings.
To review the terms of reference and
remit of the Risk & Responsibility
Committee, including the advice sought
from external advisors.
Responsibility: Chairman, Chief Executive
and Company Secretary & General Counsel
The new SEH Committee focusing on safety, environment and
health issues only, was formed at the end of July 2012 in place of
the broader Risk & Responsibility Committee. The new committee
considered its external advisors. The additional areas previously
reviewed by the Risk & Responsibility Committee were reallocated
between the Board, Audit Committee and Executive Committee.
Complementary review
Role and
structure
Enable the Board and its committees to
focus appropriately on addressing the key
challenges and opportunities.
Together with the formation of the new SEH Committee, agendas
were updated having reviewed the frequency with which items
should be considered during the year.
Non-executive
Directors
Facilitate an appropriate level of input
and constructive challenge from the
Non-executive Directors.
To facilitate preparations for and input to meetings, a secure online
document library has been introduced providing access to Board
and committee papers and reference materials.
Role and
structure
Establish more clarity about the levels
of assurance the Board needs in areas
outside the remit of the Audit Committee.
A project is ongoing to review key data provided to external parties
and the associated assurance processes.
Non-executive
Directors
Increase Non-executive Director
engagement with the operations.
Following positive feedback, the programme of Non-executive
Director visits to Company sites in the UK and US will be continued.
Role and
structure
Increase the effectiveness of scrutiny
of operations and business processes.
The SEH Committee provides more focused scrutiny of operations
and business processes in relation to safety, environment and health.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
61
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Corporate Governance
Continued
Board and committee membership and attendance
Listed below is the Board and committee membership and attendance. Instances of non attendance during the year were considered
and determined as being reasonable due to the individual circumstances. Should any Director be unable to attend a meeting, the
Chairman and committee chairman are informed and the absent Director is encouraged to communicate opinions and comments
on the matters to be considered.
Board and committee membership, attendance (i) and independence
Board
Audit
Committee
Finance
Committee
Nominations
Committee
Remuneration
Committee
SEH
Committee (ii)
Executive
Committee (iii)
Non independent
Non-executive Chairman
Sir Peter Gershon
Chief Executive
Steve Holliday
Executive Directors
Andrew Bonfield
Tom King
Nick Winser
Independent
Non-executive Directors
Ken Harvey
(Senior Independent Director)
Philip Aiken
Nora Mead Brownell (iv)
Jonathan Dawson (v)
Paul Golby
Ruth Kelly
Maria Richter
George Rose
Mark Williamson (vi)
Linda Adamany (vii)
Stephen Pettit (viii)
Total number of meetings
11 of 11
11 of 11
11 of 11
11 of 11
11 of 11
11 of 11
11 of 11
9 of 9
1 of 1
11 of 11
11 of 11
11 of 11
10 of 11
6 of 6
6 of 6
4 of 4
11
6 of 6
6 of 6
6 of 6
6 of 6
4 of 4
3 of 3
6
7 of 7
7 of 7
6 of 7
5 of 6
7 of 7
7 of 7
7 of 7
6 of 7
5 of 5
3 of 3
1 of 1
7
4 of 4
4 of 4
4 of 4
4 of 4
2 of 2
2 of 2
4
3 of 3
2 of 3
3 of 3
3 of 3
6 of 6
4 of 4
3 of 3
3 of 3
3 of 3
6 of 6
3 of 3
6 of 6
3 of 3
6
1 of 1
3
3
(i) Attendance is expressed as number of meetings attended out of number possible or applicable for the individual Director.
(ii)
The SEH Committee replaced the Risk & Responsibility Committee in July 2012. The Risk & Responsibility Committee held one meeting during the year, chaired by
Stephen Pettit and attended by all other members: Linda Adamany; Philip Aiken; Paul Golby and Ken Harvey.
(iii) Meeting attendance is reported until June 2012, after which the Executive Committee ceased to be a committee of the Board.
(iv) Nora Mead Brownell was appointed to the Board on 1 June 2012.
(v) Jonathan Dawson was appointed to the Board on 4 March 2013.
(vi) Mark Williamson was appointed to the Board on 3 September 2012.
(vii) Linda Adamany stepped down from the Board on 31 October 2012.
(viii) Stephen Pettit stepped down from the Board on 30 July 2012.
62
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Corporate Governance Audit Committee
George Rose
Committee chairman
Consistent with the early adoption of the new Code, we have
included additional information this year. We hope you find this
helpful in better understanding the work of the committee.
We have continued to closely monitor our US financial controls
programme that began during the last financial year. Given the
importance of this project, in June, I and two of my fellow
committee members met representatives from the US finance
team for an update on the progress of preparations and
training, ahead of the implementation of a new enterprise
resource planning system.
Following the reallocation of the responsibilities of the Risk &
Responsibility Committee at the end of July, the committee’s
remit was expanded to include reporting on our standards of
ethical business conduct. This aligns well with the other work
the committee reviews on fraud, bribery and internal controls.
During the year, we have said goodbye to Linda Adamany
and welcomed Mark Williamson to the committee. Mark has a
wealth of financial experience and will take over as committee
chairman when I stand down in July. To help with the handover
of responsibilities, I felt it was important for the committee,
especially Mark, to be involved in the development of the
committee’s action plan which stems from the results of this
year’s performance evaluation review. Mark has already made a
tangible contribution to the committee and I have no doubt it will
continue to perform effectively and evolve under his leadership.
George Rose
Review of the year
Some of the significant issues the Audit Committee considered
in relation to the financial statements during the year are set
out below:
• US financial controls programme;
• environmental provision;
• pensions; and
• recoverability and disclosure of storm costs.
Examples of other matters the Audit Committee reviewed:
• the revised corporate risk policy;
• Sarbanes-Oxley Act 2002 (SOX Act) testing and attestations;
• data assurance processes and the programme to improve
the Company wide framework; and
• business conduct reports, including employee survey results
in relation to questions on ethics, disciplinary statistics and
activities of the business conduct committees.
Experience
The Board has determined that George Rose and Mark
Williamson have recent and relevant financial experience and
are suitably qualified audit committee financial experts, within
the meaning of the SEC audit committee financial expert
requirements. The Board also considers George and Mark
to be independent within the meaning of the New York Stock
Exchange listing rules.
Mark Williamson joined the committee on 3 September 2012 and
will take over as chairman of the Audit Committee following the
AGM on 29 July 2013. A tailored induction programme has been
developed, see page 59 for details. In support of this, Mark has
been introduced to senior finance team members to enhance his
understanding of the finance function. At George’s invitation he
also attended meetings in May 2013 between the committee
chairman and management, and between the committee
chairman and the external auditors to strengthen the transfer
of knowledge and further develop key relationships.
The composition of the committee during the year is set out on
page 62, with biographical details and experience of members
on pages 180 to 182 respectively.
Financial reporting
The committee monitors the integrity of the Company’s financial
information and other formal documents relating to its financial
performance and makes appropriate recommendations to the
Board before publication.
A key factor in the integrity of financial statements is ensuring
that suitable and compliant accounting policies are adopted
and applied consistently on a year-on-year basis and across
the Company. In this respect, the committee also considered
the estimates and judgements made by management when
accounting for non-standard transactions, the treatment of
exceptional items and in provision calculations.
These considerations are supported by input from other
assurance providers, for example the group controls, risk
management and ethics and compliance teams, corporate
audit and the SEH Committee as well as our external auditors.
In addition, the committee also considers reports of the
Disclosure Committee, see page 65 for more information.
Summarised below are some of the significant issues the
committee considered in relation to the financial statements
during the year.
US financial controls programme: An important milestone
of the programme took place when we implemented a new
enterprise resource planning system, which went live during
November and December 2012. A status update was provided
at the January committee meeting and initial findings on the
lessons learnt, in particular in relation to payroll processing,
were presented to the committee in March.
At that meeting the committee discussed the initial findings
and noted the Executive Committee would review in depth
the lessons learnt and how these could be applied across
the business. An update will be provided to the Board in
June this year.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
63
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Corporate Governance
Continued
Environmental provision: at the half year and year end we
reviewed the Company’s environmental provision to ensure
that it remained appropriate. A deep dive on the process
of calculating the environmental provision summarising the
accounting requirements, the judgements involved in estimating
environmental liabilities and how these change over the life of the
site to which the liabilities relate, was presented at the September
meeting. The committee noted the report and agreed the
environmental provision recognised is appropriate; no follow
up action was required.
Pensions: movements in the market value of plan assets and
changes in economic assumptions, principally the discount rate,
were noted along with their consequential impact on net pension
and other post-retirement liabilities. Input from external actuaries
provided additional assurance over these assumptions. The
committee noted the proposed accounting treatment and
accepted the judgements of management.
Recoverability and disclosure of storm costs: the committee
discussed the disclosures around the financial impact of
Superstorm Sandy in our half year results statement, and the
impact of storm costs on cash flows and working capital.
The committee noted the position in relation to these evolving
disclosures with subsequent approval of the half year results
by the Board.
Confidential reporting procedures and whistleblowing
The integrity of the financial statements is further supported by
the confidential reporting and whistleblowing procedures in
place. The committee reviews these procedures once a year
to ensure that appropriate processes are in place to treat
complaints confidentially and implement proportionate,
independent investigation in all cases.
Internal (corporate) audit
The committee receives twice yearly reports on the control
environment from the Director of Corporate Audit. These reports
highlight key improvement themes and recommend areas
for business focus, with additional analysis provided around
causal factors such as knowledge and responsibility transfer.
In addition, the committee has visibility of management
responsiveness in addressing audit actions. The audit plan,
which contains mandatory, risk-based and cyclical reviews,
was approved by the committee in March 2012, and was built
around focus areas such as organisational change, major system
change, security and business resilience, and capital spend.
Corporate audit continue to plan on a risk-based approach for
the majority of work, but have introduced greater structure to
the smaller cyclical element of their work programme to ensure
coverage of key processes over a defined period. The inherent
risk of each process is assessed and in turn is used to inform
audit frequency, with elements of higher risk processes being
audited on a more frequent basis. The committee supports this
approach which was used for the first time in developing the plan
for the year ending March 2014.
External audit
The committee is responsible for overseeing relations with
the external auditors, including the approval of fees, and
makes recommendations to the Board on their appointment
and reappointment.
Details of total remuneration for auditors for the year, including
audit services, audit related services and other non-audit
services, can be found in note 2(e) of the consolidated financial
statements on page 110.
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 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 two years are not appointed to senior financial
positions within the Company, and the rotation of the lead
engagement partner at least every five years. The current lead
engagement partner has held the position for three years.
Non-audit services provided by the
external auditors
Non-audit services provided by the external auditors require
approval by the committee. Approval 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 SOX Act.
Total non-audit services provided by PwC during the year
ended 31 March 2013 were £2.3 million (2012: £3.8 million)
which comprised 23% (2012: 44%) of total audit and audit
related fees. Total audit and audit related fees include the
statutory fee and fees paid to PwC for other services which
the external auditors are required to perform, for example
regulatory audits and SOX Act attestation. Non-audit fees
represent all other services provided by PwC not included
in the above.
Significant non-audit services provided by PwC in the
year included quality assurance provided on the US
financial controls improvement programme (£0.7 million)
and tax compliance services in territories other than the
US (£0.5 million).
PwC were engaged on the US financial controls improvement
programme, as they were best placed to provide valuable
insight on the programme, given their in depth knowledge
of our control environment and relevant utilities experience.
They were appointed in an advisory capacity only and were
not involved in designing or implementing new controls and
processes, thereby helping to safeguard independence
and objectivity.
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
is 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.
64
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Corporate Governance 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 to ensure that PwC have identified
all key risks and developed robust audit procedures. 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.
Auditor appointment
An annual review is conducted by the committee of the level
and constitution of the external audit and non-audit fees and
the effectiveness, independence and objectivity of the
external auditors.
The annual review includes consideration of:
• the external audit process globally;
• the auditors’ performance;
• the expertise of the firm and our relationship with them; and
• the results of questionnaires completed by National Grid
employees engaged with the audit and members of the
Audit Committee.
Following this year’s annual review, the committee is satisfied
with the effectiveness, independence and objectivity of the
external auditors, and recommend to the Board their
reappointment for a further year. A resolution to reappoint PwC
and giving authority to the Directors to determine their
remuneration will be submitted to shareholders at the 2013 AGM.
Audit tender
PwC have been the Company’s external auditors since the
merger with Lattice Group plc in 2002, having been the incumbent
external auditors of both the merging parties. The new Code
requires FTSE 350 companies to put the audit services contract
out to tender at least once every ten years, to enable the
committee to compare the quality and effectiveness of the
services provided by the incumbent auditors with those of other
audit firms. Transitional arrangements provided by the Financial
Reporting Council indicate the Company should tender the audit,
at the latest, at the time of the next audit partner rotation currently
scheduled for 31 March 2015.
We may, however, put the audit out to tender at any time before
this date. There are no contractual obligations restricting our
choice of external auditors and no auditor liability agreement
has been entered into.
Audit information
Having made the requisite enquiries, so far as the Directors in
office at the date of the approval of this report are aware, there
is no relevant audit information of which the auditors are unaware
and each Director has taken all reasonable steps to make
themselves aware of any relevant audit information and to
establish that the auditors are aware of that information.
Internal control, risk and compliance
We consider regularly the effectiveness of financial reporting,
internal controls and compliance with applicable legal and
internal requirements. We also review the procedures for the
identification, assessment, mitigation and reporting of risks.
To continuously improve and remain at best practice levels, the
risk management team reviews risk standards, emerging trends
and concepts being driven by the main consultancy firms and
look to apply these as appropriate. The standards issued by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and the international risk standard ISO
31000 are used to inform the principles of our risk management
process as appropriate. Specific improvements delivered during
the year, and ongoing, to address key concepts within the
standards were noted by the committee at its meeting in
September. Details of our internal control and risk management
systems, including over the financial reporting process can be
found on pages 30 and 31 and page 179 with our risk factors
in full on pages 176 to 178.
The changes to the compliance management process reported
last year are now embedded and continue to evolve. During the
year the global ethics and compliance team has focused on
promoting improved consistency across compliance reports and
changes are being trialled in relation to fraud and bribery returns.
The committee received a paper on the Company’s anti-bribery
procedures and reviewed the adequacy of these. It noted that
no material instances of non compliance had been identified
and that progress continued on the minor improvements
recommended to the Board as a result of the prior year’s review.
Disclosure Committee
The role of the Disclosure Committee is to assist the Chief
Executive and the Finance Director in fulfilling their responsibility
for oversight of the accuracy and timeliness of the disclosures
made, whether in connection with our presentations to analysts,
financial reporting obligations or other material stock exchange
announcements.
This year the committee met for the purposes of considering the
announcements of the full and half year results and the interim
management statements and reported on the matters arising to
the Audit Committee. In doing so it spent time considering the
Company’s disclosure obligations relating to RIIO, US rate filings
and the effects of Superstorm Sandy. The committee also
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 Global Director of Tax and Treasury, the Group Financial
Controller, the Director of Investor Relations, the Director of
Corporate Audit and the Deputy Group General Counsel, with
other attendees as may be appropriate.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
65
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Corporate Governance
Continued
Finance Committee
Safety, Environment and Health Committee
Maria Richter
Committee chairman
Philip Aiken
Committee chairman
Following the departure of Stephen Pettit in July, we have
welcomed Mark Williamson and Jonathan Dawson to the
Finance Committee.
This year we have continued to focus on funding plans to
take into account international debt market conditions. The
committee received regular reports on treasury, tax, insurance
and pensions activities to keep us advised of progress and
we approved recommendations where appropriate.
External advisors gave presentations relating to the eurozone
crisis and the potential impact of worldwide derivatives
legislation from the G20 Accord in Pittsburgh. Additionally,
to ensure the committee was advised on the progress of
transactions such as the issuance of Canadian dollar, US dollar
and Hong Kong dollar bonds and floating-rate instruments,
updates were circulated between meetings.
Some items the committee considered and approved, due
to their nature, were also presented to the Board such as the
renewal of the SEC debt shelf, a legal requirement, and the
funding strategy. As a number of new Non-executive Directors
have joined the Board over the year, a presentation on the work
and remit of the committee was given to the Board in April
2013. This was aimed at helping all Directors understand the
role and responsibilities of the Finance Committee.
At the end of July last year, I was appointed as chairman of the
new Safety, Environment and Health (SEH) Committee which
replaced the Risk & Responsibility Committee. The new
committee focuses on these three areas in greater detail rather
than looking at all non-financial risks and compliance matters
as its predecessor did. It also monitors investigations into,
and measures taken following, major incidents.
In terms of safety, we have looked at the trends in high potential
incidents and how progress can be made in eliminating
avoidable significant injuries. We have also followed progress
with the new process safety management system, introduced
to improve management of the major hazard assets across
our businesses.
In relation to environmental matters, we have considered
our strategy and approach to sustainability following the
sustainability summit held in September 2012. In particular,
we have looked at how to replicate successful projects and
share learning.
We have continued to monitor the measures taken to promote
the health and wellbeing of our employees. This included a
focus on mental wellbeing with the ‘Elephant in the Room’
campaign, the introduction of fast track physiotherapy facilities
and cardiovascular risk management programmes,
encouraging employees to increase their physical activity.
Maria Richter
Review of the year
Examples of matters the Finance Committee considered during
the year include:
• long-term funding requirements, including the issuance of
new hybrid bonds, the largest bond issue by us to date, and
new maple bonds, one of which was the largest corporate
maple transaction of its kind in Canadian history at the time;
• setting and reviewing treasury policies;
• treasury performance updates provided at each meeting;
• UK and US tax updates;
• activities of the Energy Procurement Risk Management
Committee in the US;
• foreign exchange policy;
• underlying financial assumptions in the business plan;
• pensions updates including funding of the Company’s
pension deficits; and
• insurance renewal strategy.
Philip Aiken
Review of the year
Examples of matters the SEH Committee reviewed during the
year include:
• safety training session focusing on effective safety
discussions and process safety;
• lessons learnt and steps taken following the fatalities in the
UK and US during 2011/12;
• update on the UK safety strategy;
• safety leadership initiatives implemented, such as senior
employee safety days and unannounced safety visits;
• in depth review of our approach to safety in the US, and how
this compares with our peers;
• climate change strategy, including performance against
emissions targets and carbon budgets; and
• environmental incidents such as the Paerdegat Basin spillage,
see page 42.
66
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Corporate Governance Nominations Committee
Sir Peter Gershon
Committee chairman
As the phased transition of the Board has progressed, we
have continued to focus on the relevant skills, knowledge
and experience required to create a balanced and effective
Board. In selecting candidates for Non-executive Director
appointments, we considered not only qualifications but
independence, time commitment and how their personal
attributes would complement and enhance the diversity
already on the Board.
Most recently, Jonathan Dawson has joined the Board and
he will take over as chairman of the Remuneration Committee
when Ken Harvey steps down. Jonathan brings a wealth
of corporate finance knowledge and significant plc board
experience which we are confident will enable him to
contribute effectively to our Board.
In the search for our new Audit Committee chairman to take
over from George Rose, the balance between job experience
and personal style was key, noting Mark Williamson’s previous
role as an audit committee chairman, international expertise
and sector experience together with his strong communication
skills and personal motivation.
As reported last year, we welcomed Nora Mead Brownell to the
Board. She has actively contributed to discussions, is willing to
challenge during debates and brings to the table a wealth of US
regulatory and utilities expertise which has proved invaluable.
Sir Peter Gershon
Review of the year
Examples of matters the Nominations Committee considered
during the year include:
• succession planning, identified the core capabilities
of a chief executive to align with the Company’s future
strategic ambitions;
• recommendation to the Board of the change in Company
Secretary and Non-executive Director appointments;
• approval of board diversity policy, see opposite column for
details; and
• review of Board and committee evaluation process and
results, see page 60 for more information.
Recruitment Processes
Non-executive Directors
The recruitment processes undertaken for the appointment
of Nora, Mark and Jonathan were formal, rigorous and
transparent. The Nominations Committee appointed an
executive search consultancy, Spencer Stuart, JCA Group and
Russell Reynolds Associates respectively, and the following
process was undertaken:
• a role profile was prepared against which potential candidates
were considered;
• from a long list of candidates, a shortlist of preferred
candidates was selected;
• Sir Peter Gershon and a minimum of two other members of
the committee together with Steve Holliday interviewed the
shortlisted candidates. Additionally, Andrew Bonfield met
the shortlisted candidates for the future Audit Committee
chairman position;
• the committee considered the candidates against the objective
criteria set out in each profile, with due regard to diversity;
• a preferred candidate recommendation was made by the
committee to the Board for consideration and approval; and
• the Board agreed to the appointments as recommended.
Spencer Stuart, JCA Group and Russell Reynolds Associates
only provide recruitment consultancy services to the Company.
Board diversity and the Davies Review
The board diversity policy reaffirms our aspiration to meet the
target of 25% of Board positions to be held by women by 2015,
as set out by Lord Davies and continues to support the
engagement of executive search firms who have signed up to the
Voluntary Code of Conduct on gender diversity and best practice.
The Nominations Committee is responsible for developing
measurable objectives to support the implementation of the
board diversity policy and for monitoring progress towards the
achievement of these objectives.
We currently have 21.4% women on our Board, which will
change to 25% on the departure of Ken and George, and 20%
women on our Executive Committee. The Board expects the
diversity of the executive and leadership population to improve
by 2015. The number of women in management positions and
throughout the organisation is set out on page 39 along with
initiatives to develop women and promote diversity throughout
our organisation.
Our executive and leadership population is regularly and
rigorously assessed against achievement of individual objectives
and key leadership qualities to help build a sustainable
development and succession plan.
We have a programme of executive sponsorship and mentoring
of high potential female and minority ethnic managers in order
to ensure increased diversity throughout our leadership.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
67
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information
Remuneration Report
Pay policy report 2012/13
Remuneration Committee
Ken Harvey Committee chairman
I am pleased to present the Remuneration Report for 2012/13.
We have made no major changes to our remuneration policy
during the year. However, you will find changes to the format
of this year’s Remuneration Report where we have followed
some of the key reporting principles from the draft regulations
published by the Department for Business, Innovation & Skills
(BIS). The format of the report is, therefore, a policy report
detailing the remuneration policy (pages 68 to 79) and an
implementation report (pages 80 to 90) which details the
changes in the financial year, such as salary changes, Annual
Performance Plan (APP) payments and vested Performance
Share Plan (PSP) awards.
While we have adopted some of the BIS principles on a voluntary
basis this year, some elements of the draft regulations (at the
time of going to print) are subject to further amendment and
therefore full adoption will be implemented in a future year’s
report when the regulations become effective.
Examples of new areas of disclosure to be found in this report
include: the single figure table (page 83), the Chief Executive’s
total remuneration over the last five years (page 84) and the
spend on Executive Director pay relative to key metrics (page 85).
Our policy of relating pay to the Company’s business priorities
and its performance continues to be the strong principle
underlying the Remuneration Committee’s consideration of
executive remuneration. 2012/13 was a year of good financial
and operational performance. This included strong earnings
growth, the approval of a number of important regulatory
arrangements in the UK and US, strong reliability performance
Remuneration Committee
The Remuneration Committee members are Ken Harvey,
George Rose, Paul Golby, Nora Mead Brownell and Jonathan
Dawson. Each of these Non-executive Directors served
throughout the year, except Nora and Jonathan who joined the
Board on 1 June 2012 and 4 March 2013 respectively. Stephen
Pettit stepped down from the Board and the Committee on
30 July 2012.
The Global Human Resources Director and Global Head of
Compensation & Benefits provide advice on remuneration
policies and practices and are usually invited to attend
meetings, along with the Chairman, Chief Executive and
Group General Counsel & Company Secretary. No Director
or other attendee is present during any discussion regarding
his or her own remuneration.
As well as having regular meetings during the year, we have
an annual review and strategy meeting where we review our
remuneration practices and incentive plans to ensure they
remain aligned to the Company’s strategic goals. We also
and continued delivery of the significant investment programme
that will drive our long-term shareholder value. However, the
implementation of our enterprise resource planning system in
the US did not proceed in the way envisaged. These things are
taken into consideration when remuneration decisions are made.
Overall, we aim to ensure the Company continues to attract,
motivate and retain high calibre individuals to deliver the highest
possible performance for our shareholders and customers.
We believe the mix of our remuneration package provides
an appropriate and balanced opportunity for executives and
their senior teams. Our incentive plans are reviewed annually
to ensure they remain closely aligned with the Company’s
strategic objectives and our shareholders’ interests, while
continuing to motivate and engage the team leading the
Company to achieve stretching targets.
The remuneration framework for Executive Directors remains
relatively straightforward. Our incentive plans comprise of the
APP with a compulsory share deferral element and the Long
Term Performance Plan (LTPP). We have clawback provisions
for both those plans in the event of financial misstatement. We
have meaningful share ownership requirements for Executive
Directors which are exceeded in all cases (except for Andrew
Bonfield who is building up his shareholding), and the dilution
levels from our share plans remain well below prescribed limits.
We operate a mitigation policy in the event of early termination
by the Company of an Executive Director’s employment.
Following the introduction of the new UK regulatory framework
(RIIO – see pages 171 and 172 for further details), we have
commenced a review to assess its implications for our
remuneration strategy and, in particular, to examine whether
the performance measures used in the incentive plans align
with the optimum outcome for National Grid and all our
stakeholders. This work will continue over the coming months
and any changes will be presented to shareholders next year.
Ken Harvey
take the opportunity to assess external trends and best practice,
and undertake an in depth review of a particular remuneration
element each year.
Alignment of the remuneration policy with the
Company strategy
The Remuneration Committee aims to align the remuneration
policy to our Company strategy and key business objectives.
Therefore, the performance criteria in our incentive plans, both
short- and long-term, are designed to underpin the Company
vision and strategy.
When aligning the remuneration policy to our strategic objectives,
the Committee aims to ensure the policy reflects our shareholders’,
customers’ and regulators’ interests. In addition, the Committee
ensures the policy adheres to our internal control, risk and
compliance processes.
For further details about the alignment of the remuneration
policy to the Company strategy see page 34
68
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Corporate Governance
Remuneration policy
The Remuneration Committee determines remuneration policy and practices with the aim of attracting, motivating and retaining high
calibre Executive Directors and other senior employees to deliver value for shareholders, and high levels of customer service, safety
and reliability in an efficient and responsible manner. The Remuneration Committee sets remuneration policies and practices in line
with the Company’s strategy and best practice in the markets in which the Company operates. Remuneration policies continue to be
framed around the following key principles:
Competitive
package
with cost
management
Sustainable
growth
Total rewards are set at levels that are competitive in the relevant market. For UK-based Executive Directors,
the primary focus is placed on companies ranked (in terms of market capitalisation) 11-40 in the FTSE 100.
This peer group is considered to be appropriate for a large, complex, international but predominately
regulated business. For US-based Executive Directors, the primary focus is placed on US utility companies.
A significant proportion of the Executive Directors’ total reward should be performance based. Performance
based incentives are earned through the achievement of demanding targets for short-term business and
individual performance as well as long-term shareholder value creation.
Incentive plans, performance measures and targets are stretching and aligned as closely as possible with
shareholders’ long-term interests.
Motivation and
risk management
Remuneration structures should motivate employees to enhance the Company’s performance without
encouraging them to take undue risks, whether financial or operational.
The Remuneration Committee is briefed on key remuneration policy changes affecting employees more generally in the Company
and depending on the scope of that change its approval is sought. Having this wider insight into remuneration practices across the
Company means the Remuneration Committee can take this information into consideration when making decisions about the
Executive Directors’ remuneration.
The key elements of the remuneration package for Executive Directors are shown in the tables below:
Salary
Purpose and link
to strategy
To attract, motivate and retain high calibre Executive Directors and other senior employees to deliver value for
shareholders, and high levels of customer service, safety and reliability in an efficient and responsible manner.
Operation
Salaries are reviewed annually with changes effective from 1 June. Business and individual performance,
skills, the scope of the role and the individual’s time in the role are taken into account when assessing
salaries; as is market data for similar roles in the relevant comparator group (see details in the table above).
Opportunity
Salaries are targeted broadly at market median and any annual increases are aligned fully with salary
increases applied to other employees across the Company.
Adjustments in excess of the above may be made where there is a significant change in responsibilities.
Performance
metrics
Changes in
the year
None, other than day-to-day performance expectations in the role.
See Implementation report on page 80.
Page
See page 80 and Table 1A on page 86, footnote (i).
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
69
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Remuneration Report
Pay policy report 2012/13
Continued
Annual Performance Plan (APP) including Deferred Share Plan (DSP)
Purpose and link
to strategy
To reward the achievement of annual financial and strategic business measures, and the delivery of individual
objectives.
Deferred element encourages long-term shareholding and discourages excessive risk taking.
Operation
APP
The APP is designed to drive short-term performance against annual performance measures, variants of
which are cascaded down the organisation to all employees in the plan to provide a line of sight for
employees to connect day-to-day activities with our vision, strategy and key financial and service provision
metrics.
For Executive Directors, 70% of the APP is based on performance against financial measures and 30% on
individual objectives.
The chairman of the Audit Committee and a minimum of one member of the Safety, Environment and Health
Committee are members of the Remuneration Committee and therefore they are able to provide input from
those committees.
The Remuneration Committee retains the right, in exceptional circumstances, to reclaim any monies based
on financial misstatement and/or the misconduct of an individual through means deemed appropriate to
those specific circumstances.
Awards for UK-based Executive Directors are not pensionable but, in line with current US market practice,
US-based Executive Directors’ awards are pensionable.
DSP
50% of any award under the APP is deferred compulsorily into shares and held for three years before release,
subject to forfeiture on leaving in certain circumstances.
The Remuneration Committee may, at the time of release of the shares, use its discretion to pay a cash
amount equivalent to the value of the dividends that would have accumulated on the deferred shares.
The deferred shares may be forfeited if the Executive Director ceases employment during the three year
deferral period as a ‘bad leaver’, for example resignation.
The Remuneration Committee believes that requiring Executive Directors to invest a substantial amount
of their APP award in National Grid shares increases the proportion of rewards linked to both short-term
performance and longer term total shareholder return (TSR). This practice also ensures that Executive
Directors share a significant level of risk with the Company’s shareholders and their interests are aligned.
Opportunity
Maximum of 150% of salary.
Achievement of target performance results in payment of 40% of the maximum possible.
Performance
metrics
The financial measures of Company performance in 2012/13 were adjusted EPS (see page 48 for further
details) and consolidated cash flow.
The main divisional measures were operating profit, UK ROE and US ROE targets, with some employees
having slightly different targets depending on their role and area of the business. For more details on return
measures see page 07.
Individual objectives are defined in terms of target and stretch performance requirements, and change each
year depending on strategic business priorities.
When setting financial targets and individual objectives, and when reviewing performance against them, the
Remuneration Committee takes into account the long-term impact and any risks that could be associated
with those targets and objectives.
As part of a balanced scorecard approach, the Remuneration Committee may use its discretion to reduce
payments to take account of significant safety or service standard incidents, environmental, social and
governance issues when determining payments to Executive Directors. Those principles may then be
cascaded down the organisation to appropriate employee groups based on the specific circumstances.
Changes in
the year
None.
Page
Details of performance under the APP for 2012/13 can be found in the Implementation report on page 81.
70
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Corporate Governance Long Term Performance Plan (LTPP)
Purpose and link
to strategy
The LTPP is designed to drive medium- to long-term performance, aligning key strategic objectives to
shareholder interests. This plan replaced the Performance Share Plan (PSP).
Operation
Executive Directors and approximately 400 other senior employees who have significant influence over
the Company’s ability to meet its strategic objectives may receive an award which vests subject to the
achievement of performance conditions set by the Remuneration Committee at the date of grant.
Shares vest (over three or four years depending on the performance measure) conditional upon the
satisfaction of the relevant performance criteria. TSR and EPS targets are measured over a three year
performance period and ROE is measured over four years which more readily reflects the nature of that
metric.
This will result in partial vesting after three years, subject to performance, and the remainder relating purely
to ROE after four years.
25% of the shares awarded subject to each measure vest for threshold performance.
For performance between threshold and the upper target, the number of shares released is pro rated on
a straight-line basis.
In order to align better the interests of participants with those of shareholders, the rules of the LTPP allow
the Remuneration Committee to determine that dividends accrue on the shares comprised in the award.
The dividends are released in shares when the award vests, if and to the extent the performance criteria
are achieved.
See further details in the notes to this table below, including information on the PSP and the common policy
elements of both plans.
Opportunity
The value of shares (ADSs for US-based Executive Directors and relevant employees) constituting an award
(as a percentage of salary) varies by grade and seniority.
The maximum award level for Executive Directors is 200% of salary (225% of salary for the Chief Executive,
to further emphasise longer term performance related pay in his package).
The provisions in the LTPP rules allow awards up to a maximum value of 250% of salary to provide a degree
of flexibility for the future.
Performance
metrics
The same performance measures are cascaded to all participants in the LTPP.
The performance measures are defined on page 72 and are calculated by reference to:
• the annualised growth of the Company’s adjusted EPS (50% of the award);
• the Company’s TSR performance when compared with the FTSE 100 at the date of grant (25% of the
award); and
• ROE, measuring performance against allowed regulatory returns established through price control reviews
in the UK and rate case settlements in the US (25% of the award).
It is believed the level of challenge for the ROE performance ranges in the UK and US are broadly similar, to
provide stretch in both cases while at the same time being motivational for participants. The performance
ranges reflect the different impacts of regulated incentives in the UK and US.
Changes in
the year
None.
Page
Details of the awards vested and granted during 2012/13 can be found in the Implementation report on pages
82, 88 and 89.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
71
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Remuneration Report
Pay policy report 2012/13
Continued
Additional notes to the LTPP and PSP
LTPP
Details regarding the LTPP performance measures and vesting requirements are provided in the table below:
Performance measure
Definitions and measurement
Vesting requirements
EPS
TSR
ROE
The EPS measure is calculated by reference
to annualised growth in adjusted EPS (on a
continuing basis and excluding exceptional items,
remeasurements and stranded costs) over a
three year performance period. See page 48
for further details.
In calculating TSR (on an annualised compound
basis) it is assumed that all dividends are
reinvested. No shares will be released under the
TSR part of the award if the Company’s TSR over
the three year performance period, when ranked
against that of the FTSE 100 comparator group,
falls below the median.
The ROE measure is derived from the returns
on page 07. In the UK, this is based on the UK
Transmission and UK Gas Distribution ROEs.
For the US, it is based on US regulated returns
by jurisdiction. There is a four year performance
period. The Chief Executive and Finance Director
are targeted on both the UK and US ROEs. For the
UK- and US-based operational Directors, they are
targeted on their respective UK or US ROEs.
Threshold performance – 25% of the shares subject
to this measure will vest where EPS growth exceeds
RPI growth by 3 percentage points.
Upper target performance – 100% of the shares
subject to this measure will vest where EPS growth
exceeds RPI growth by 8 percentage points.
Threshold performance – 25% of the shares subject
to this measure will vest for TSR at median.
Upper target performance – 100% of the shares
subject to this measure will vest where National Grid’s
TSR performance is 7.5 percentage points above that
of the median company in the FTSE 100.
Threshold performance – 25% of the shares subject
to this measure will vest where the allowed regulatory
returns in the UK are achieved and 1 percentage point
below the allowed regulatory returns in the US.
Upper target performance – 100% of the shares
subject to this measure will vest for out-performance
of regulatory returns by 2 percentage points in the UK
and 1 percentage point in the US.
PSP (the predecessor to the LTPP) operated for awards between 2003 and 2010 inclusive
• The general operation of the PSP is similar to that detailed above under the LTPP, as is the population who participate in the plan.
• The value of shares (ADSs for US-based Executive Directors and relevant employees) constituting an award (as a percentage of
salary) varied by grade and seniority subject to a maximum, for all Executive Directors, of 200% of salary. The provisions in the
PSP rules allowed awards up to a maximum value of 250% of salary, although no awards were made above 200%.
• Shares vest after three years, conditional upon the satisfaction of the relevant performance criteria. Vested shares must then be
held for a further period (the retention period) after which they are released to the participant on the fourth anniversary of the date
of grant. During the retention period, the Remuneration Committee has discretion to pay an amount, in cash or shares, equivalent
to the dividend which would have been paid on the vested shares.
• Awards vest based on the Company’s TSR performance when compared with the FTSE 100 at the date of grant (50% of the award)
and the annualised growth of the Company’s EPS (50% of the award). The same performance criteria are cascaded to all
participants in the plan.
Details regarding the PSP performance measures and vesting requirements are provided in the table below:
Performance measure
Definitions and measurement
Vesting requirements
EPS
TSR
The EPS measure is calculated by reference
to annualised growth in adjusted EPS (on a
continuing basis and excluding exceptional items,
remeasurements and stranded costs) over a
three year performance period. See page 48
for further details.
In calculating TSR (on an annualised compound
basis) it is assumed that all dividends are
reinvested. No shares will be released under the
TSR part of the award if the Company’s TSR over
the three year performance period, when ranked
against that of the FTSE 100 comparator group,
falls below the median.
Threshold performance – 30% of the shares subject
to this measure will vest where EPS growth exceeds
RPI growth by 3 percentage points.
Upper target performance – 100% of the shares
subject to this measure will vest where EPS growth
exceeds RPI growth by 8 percentage points.
Threshold performance – 30% of the shares subject
to this measure will vest for TSR at median.
Upper target performance – 100% of the shares
subject to this measure will vest where National Grid’s
TSR performance is 7.5 percentage points above that
of the median company in the FTSE 100.
72
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Corporate Governance Common policy elements of the LTPP and PSP
• The Remuneration Committee believes the measures offer a balance between meeting the needs of shareholders (by measuring
TSR performance against other large UK companies) and providing a measure of performance (EPS growth and including ROE for
the LTPP) over which the Executive Directors have direct influence. All these measures are key financial performance indicators for
the Company, our shareholders and/or our regulators.
• No re-testing of performance is permitted for the awards that do not vest after the performance periods and any such awards lapse.
• If the Remuneration Committee considers, in its absolute discretion, the underlying financial performance of the Company does not
justify the vesting of awards, even if some or all the performance measures are satisfied in whole or in part, it can declare that some
or all the award lapses.
• In addition, the Remuneration Committee retains the right, in exceptional circumstances, to reclaim any monies based on financial
misstatement and/or the misconduct of an individual through means deemed appropriate to those specific circumstances.
• Under the terms of the LTPP and PSP, the Remuneration Committee may allow shares to vest early to departing participants,
including Executive Directors, to the extent the performance conditions have been met, in which event the number of shares that
vest will be pro rated to reflect the proportion of the performance period that has elapsed at the date of departure.
Benefits
Purpose and link
to strategy
To attract, motivate and retain high calibre Executive Directors and other senior employees to deliver value for
shareholders and high levels of customer service, safety and reliability in an efficient and responsible manner.
Operation
The Company provides competitive benefits to Executive Directors. Business expenses incurred are
reimbursed in such a way as to give rise to no benefit to the Executive Director.
Flexible benefits plan
Additional benefits may be purchased under the flexible benefits plan in which UK-based Executive Directors,
along with all other UK employees, have been given the opportunity to participate. The plan operates by way
of salary sacrifice, that is, the participants’ salaries are reduced by the monetary value used to purchase
benefits under the plan.
Similar plans are offered to US-based employees. However, they are not salary sacrifice plans and therefore
do not affect salary values. Tom King was a participant in such a plan during the year.
Opportunity
Benefits include a fully expensed car or a cash alternative in lieu of a car, use of a driver when required, private
medical insurance and life assurance.
Many of the flexible benefits are linked to purchasing additional healthcare and insurance products for
employees and their families. Andrew Bonfield participates in this plan and the impact on his salary is shown
in Table 1A on page 86.
Performance
metrics
Changes in
the year
None.
None.
Page
See page 86.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
73
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Remuneration Report
Pay policy report 2012/13
Continued
All-employee Share Plans
Purpose and link
to strategy
The all-employee share plans allow UK or US-based employees to participate in either HM Revenue &
Customs (UK) or Internal Revenue Service (US) approved plans. We believe by offering participation in such
plans, it encourages all employees (including Executive Directors) to become shareholders in National Grid.
Operation
Sharesave:
Employees resident in the UK are eligible to participate in the Sharesave plan. Under this plan, participants
may contribute between £5 and £250 in total each month, for a fixed period of three years, five years or both.
Contributions are taken from net salary.
SIP:
Employees resident in the UK are eligible to participate in the SIP. Contributions up to £125 are deducted from
participants’ gross salary and used to purchase ordinary shares in National Grid each month. The shares are
placed in trust.
US Incentive Thrift Plans:
Employees of National Grid’s US companies are eligible to participate in the Thrift Plans, which are tax-
advantaged savings plans (commonly referred to as 401(k) plans). They are defined contribution pension
plans that give participants the opportunity to invest up to applicable federal salary limits. The federal limits
for calendar year 2012 are: for pre-tax contributions a maximum of 50% of salary limited to $17,000 for those
under the age of 50 and $22,500 for those over 50; for post-tax contributions, up to 15% of salary limited to
the lesser of 100% of compensation or $50,000. For calendar year 2013, participants may invest up to the
applicable federal salary limits ie for pre-tax contributions a maximum of 50% of salary limited to $17,500
for those under the age of 50 and $23,000 for those over 50; for post-tax contributions up to 15% of salary
limited to the lesser of 100% of compensation or $51,000.
ESPP:
Employees of National Grid’s US companies are eligible to participate in the ESPP (commonly referred to
as a 423(b) plan). Eligible employees have the opportunity to purchase ADSs on a monthly basis at a 15%
discounted price. Under the plan employees may contribute up to 20% of base pay each year up to a
maximum annual contribution of $18,888 to purchase ADSs in National Grid.
Opportunity
Sharesave:
At the end of the savings period, contributions can be used to purchase ordinary shares in National Grid at
a discount capped at 20% of the market price set at the launch of each savings period.
SIP:
If the shares are left in trust for at least five years, they can be removed free of UK income tax and National
Insurance Contributions.
US Incentive Thrift Plans:
Employees may invest their own and Company contributions in National Grid shares or various mutual fund
options. The Company matches 50% of the first 8% of salary contributed.
ESPP:
Any ADSs purchased through the ESPP may be sold at any time, however, there are tax advantages for ADSs
held for at least two years from the offer date.
Performance
metrics
Changes in
the year
None for any of the all-employee share plans.
None for any of the all-employee share plans.
Page
See pages 87 and 90 for details of participation by the Executive Directors.
74
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Corporate Governance Share Ownership Guidelines
Purpose and link
to strategy
The Remuneration Committee believes the requirement to build up and maintain shareholding ensures
that Executive Directors share a significant level of risk with the Company’s shareholders and their interests
are aligned.
Operation
The Chief Executive is required to build up and retain a shareholding representing at least 200% of annual
salary. For other Executive Directors the requirement is 125% of salary. This will be achieved by retaining at
least 50% of the after-tax gain on any options exercised or shares received through the long-term incentive
or all-employee share plans and will include any shares held beneficially.
In addition, senior managers in the Company are encouraged to build up and retain a shareholding
representing at least 100% of annual salary.
Opportunity
N/A.
Performance
metrics
Changes in
the year
None.
None.
Page
See the shareholding table on page 82.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
75
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Remuneration Report
Pay policy report 2012/13
Continued
Pension
Purpose and link
to strategy
Operation
Opportunity
To reward sustained contribution, and assist attraction and retention. The National Grid Electricity Group of
the Electricity Supply Pension Scheme (NGEG of ESPS) is a defined benefit scheme which provides legacy
benefits which were available to all employees at the time Steve Holliday and Nick Winser joined the Company.
The scheme along with the National Grid UK Pension Scheme – defined benefit section (NGUKPS-DB) is now
closed to new members and new employees are offered membership of the NGUKPS defined contribution
section (NGUKPS-DC).
Steve Holliday and Nick Winser are provided with final salary pension benefits. Within the NGEG of ESPS the
pensionable salary is normally the base salary in the 12 months prior to leaving the Company, however, the
rules allow for indexed prior salaries to be used. Both Executive Directors participate in Flexible Pension
Savings (FPS), a salary sacrifice arrangement available to all members of the Company’s UK pension schemes.
Steve Holliday and Nick Winser have elected to participate in the unfunded scheme in respect of any benefits
in excess of the Lifetime Allowance or their Personal Lifetime Allowance. An appropriate provision in respect
of the unfunded scheme has been made in the Company’s balance sheet. Alternatively, these Executive
Directors are able to cease accrual in the pension schemes and take a 30% cash allowance in lieu of pension
if they so wish. This option is offered to current senior employees in the Company, except the cash allowance
varies depending upon organisational grade.
Andrew Bonfield is a member of the NGUKPS-DC. He has chosen to participate in FPS.
The benefits offered to Andrew Bonfield are in line with those offered to current senior employees in the
Company, except the total value of the Company contribution and cash allowance varies depending upon
organisational grade.
Following the changes to pensions tax relief introduced from April 2011, the Company reviewed the pension
benefits offered to members. The Company agreed that senior employees most likely to be affected by the
legislative changes will be offered more flexibility to take cash in lieu of Company contributions. The total level of
benefits offered in the form of cash and/or pension contributions will not change. The Company continues to
honour existing unfunded promises, however, no new unfunded promises have been granted since April 2006.
Tom King participates in a qualified pension plan and an executive supplemental retirement plan provided
by National Grid’s US companies. These plans are non-contributory defined benefit arrangements. The
qualified plan is directly funded, while the executive supplemental retirement plan is indirectly funded through
a ‘rabbi trust’.
US benefits are calculated using a formula based on years of service and highest average compensation over
five consecutive years. In line with many US plans, the calculation of benefits under the arrangements takes
into account salary, APP awards and incentive share awards (DSP), but not share options or LTPP/PSP awards.
For UK-based Executive Directors, the final salary pension schemes are designed to provide a pension of
one thirtieth of final salary at age 60 for each year of service subject to a maximum of two thirds of final salary,
including any pension rights earned in previous employment. Life assurance provision of four times
pensionable salary and a spouse’s pension equal to two thirds of the Executive Director’s pension are
provided on death.
Under the DC arrangement, if the Executive Director chooses to pay the maximum standard contribution of
5% of salary, the Company will typically pay a pension contribution of 30%. Alternatively, the Company will
pay a non-pensionable cash allowance to ensure the total value of the Company contribution (not including
contributions paid via FPS) and the cash allowance is equal to 30% of base salary. The latter option was
chosen by Andrew Bonfield. Life assurance provision of four times pensionable salary and a spouse’s pension
equal to one third of the Executive Director’s base salary are provided on death.
The normal retirement age for the US-based Executive Director under the qualified pension plan is 65. The
executive supplemental retirement plan provides unreduced pension benefits from age 55. On the death of
the Executive Director, the plans also provide for a spouse’s pension of at least 50% of that accrued by the
Executive Director. Benefits under these arrangements do not increase once in payment.
Performance
metrics
Changes in
the year
None.
None.
Page
See pages 83 and 87.
76
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Corporate Governance Performance elements in the Executive Directors’ remuneration package
Illustrated below is the current remuneration package for the Chief Executive and other Executive Directors (excluding pensions,
all-employee share plans and non-cash benefits) for assuming ‘on target’ performance and ‘maximum stretch’ performance for the
incentive plans (APP and LTPP).
The assumptions for ‘at threshold’ are based on 6.66% of maximum (10% of salary) for the APP and 25% of maximum (50% of salary)
for LTPP awards. For the Chief Executive, due to the higher LTPP award level, the ‘at threshold’ assumption is 56.25% of salary.
The assumptions used for target performance are based on 40% of maximum (60% of salary) for the APP and 50% of maximum
(100% of salary) for LTPP awards. For the Chief Executive, due to the higher LTPP award level, the target assumption is 112.5%
of salary.
Executive Directors’ remuneration package (key elements expressed as a percentage of the package)
Steve Holliday – 2012/13
34%
6%
60%
37%
41%
47%
22%
21%
32%
At threshold performance
On target performance
Maximum stretch performance
Base salary APP LTPP
Other Executive Directors UK and US – 2012/13
31%
6%
63%
38.5%
38.5%
45%
23%
22%
33%
At threshold performance
On target performance
Maximum stretch performance
Base salary APP LTPP
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
77
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information
Remuneration Report
Pay policy report 2012/13
Continued
Executive Directors’ service contracts, external appointments and retention of fees policy, termination and mitigation
Purpose and link
to strategy
In its consideration of these matters the Remuneration Committee takes into account the Companies Act
2006, the UK Listing Authority’s Listing Rules, the UK Corporate Governance Code and other requirements
of legislation, regulation and good governance.
Operation
Service contracts for all Executive Directors provide for one year’s notice by either party, which aligns to best
practice. Participation in our incentive and pension plans is governed by the policy for those plans (as detailed
in the policy tables on pages 70 to 76) and the respective plan rules. Participation in incentive plans is totally
at the discretion of the Remuneration Committee and is not a contractual right.
With respect to external appointments, with the approval of the Board, Executive Directors may normally
accept one external appointment as a non-executive director of another company and retain any fees
received for the appointment.
Opportunity
In the event of early termination by the Company of an Executive Director’s employment, contractual base
salary only reflecting the notice period would normally be payable.
The Remuneration Committee operates a policy of mitigation in these circumstances with any payments
being made on a monthly basis. The departing Executive Director would generally be expected to mitigate
any losses where employment is taken up during the notice period, however, this policy remains subject to
the Remuneration Committee’s discretion, based on the circumstances of the termination.
On cessation of employment, outstanding awards under the share plans will be treated in accordance with
the relevant plan rules approved by shareholders. Generally, ‘good leaver’ provisions apply for retirement,
redundancy, disability and ill health purposes where awards will be released to the departing Executive
Director. For PSP and LTPP, awards are released subject to performance at the time of leaving and time pro
ration based on the number of completed months that have elapsed during the performance period, from
the date of award to the termination date.
In the case of resignation, shares generally lapse under the share incentive plans, including those awarded
under the DSP.
At the absolute discretion of the Remuneration Committee, a departing Executive Director may receive a pro
rated APP payment based on the number of months that have elapsed during the performance period at the
time of leaving. Any such payment is subject to performance achieved against the financial measures and
individual performance objectives for that year.
None other than those detailed immediately above.
None.
For service contract dates, please see the table immediately below. In addition, details of those Executive
Directors who served as non-executive directors in other companies during the year ended 31 March 2013
can be found in the Implementation report on page 84.
Date of contract
1 April 2006
1 November 2010
28 April 2003
11 July 2007
Notice period
12 months
12 months
12 months
12 months
Performance
metrics
Changes in
the year
Page
Executive Directors
Steve Holliday
Andrew Bonfield
Nick Winser
Tom King
78
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Corporate Governance Non-executive Directors’ fees and letters of appointment
Purpose and link
to strategy
To remunerate Non-executive Directors, as Board members, to deliver value for shareholders and high levels
of customer service, safety and reliability in an efficient and responsible manner.
Operation
Non-executive Directors’ remuneration comprises a basic fee, a Committee membership fee per membership
and for those who are chairmen of committees, an additional fee.
Non-executive Directors do not participate in the APP or LTPP, nor do they receive any pension benefits from
the Company.
The Chairman is covered by the Company’s personal accident and private medical insurance schemes.
In addition, he may have a fully expensed car or cash in lieu of a car (with the use of a driver when required).
The Chairman’s letter of appointment provides for a period of six months’ notice by either party to give the
Company reasonable security with regard to his service. The terms of engagement of Non-executive
Directors other than the Chairman are also set out in letters of appointment. For all Non-executive Directors,
including the Chairman, their initial appointment and any subsequent reappointment is subject to election
by shareholders. The letters of appointment do not contain provision for termination payments.
Opportunity
The Chairman receives a single fee for undertaking all his duties.
For Non-executive Directors the fees include: a basic fee; committee membership fees; a fee for those who
chair a committee and a fee for the role of the Senior Independent Director.
Performance
metrics
Changes in
the year
None.
None.
Page
For dates of appointment to the Board and dates of next election, please see the table immediately below.
Non-executive Directors
Sir Peter Gershon
Ken Harvey (i)
Philip Aiken
Nora Mead Brownell
Jonathan Dawson
Paul Golby
Ruth Kelly
Maria Richter
George Rose (i)
Mark Williamson
Linda Adamany (ii)
Stephen Pettit (iii)
Date of appointment to the Board
Date of next election
1 August 2011
21 October 2002
15 May 2008
1 June 2012
4 March 2013
1 February 2012
1 October 2011
1 October 2003
21 October 2002
3 September 2012
1 November 2006
21 October 2002
2013 AGM
–
2013 AGM
2013 AGM
2013 AGM
2013 AGM
2013 AGM
2013 AGM
–
2013 AGM
–
–
(i) Ken Harvey and George Rose will step down from the Board at the close of the 2013 AGM.
(ii) Linda Adamany stepped down from the Board on 31 October 2012.
(iii) Stephen Pettit stepped down from the Board on 30 July 2012.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
79
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Remuneration Report
Implementation report 2012/13
Review of the year
During the year, the following regular agenda items have been discussed:
• review and approval of salary increases for Executive Directors and direct reports to the Chief Executive including the salary
budget for all non unionised employees in the Company;
• approval of the Remuneration Report and analysis of associated AGM voting levels;
• review of achievement for financial measures and individual objectives under the outgoing year’s APP;
• approval of the forthcoming year’s APP financial measures and individual objectives;
• review and approval of awards made under the LTPP;
• review of all share plan performance measures including the annual vesting of the PSP awards;
• review of Executive Director and senior management shareholding guidelines including achievement against them;
• review of risk matters in incentive plans;
• review of dilution levels; and
• review of the code of conduct for the independent remuneration advisors to the Remuneration Committee.
Annual review and strategy meeting (to ensure remuneration practices are reviewed and align to Company strategy)
• consideration of current guidelines by advisory bodies and institutional investors regarding executive remuneration, including
a detailed review of the draft BIS regulations;
• review of the Remuneration Report disclosures and voluntary early adoption of some of the key areas under the draft BIS
regulations;
• review of external market data for all areas of remuneration including performance measures used in incentive plans and plan
design; and
• discussion regarding performance measures for the APP and LTPP under RIIO.
Additional items during the year
• pension/retirement plan strategy discussion; and
• consideration of responses for BIS consultations.
The Board has accepted all the recommendations made by the Remuneration Committee during the year.
The Remuneration Committee has authority to obtain the advice of external independent remuneration consultants. It is solely
responsible for their appointment, retention and termination together with approval of the basis of their fees and other terms.
Remuneration Committee advisors are chosen following a robust tender process.
In the year to 31 March 2013, the following advisors provided services to the Remuneration Committee:
• Towers Watson, independent remuneration advisors. Separate teams in the firm provide general remuneration, pension and benefits
advice to the Company. In this respect, the Remuneration Committee is satisfied that any potential conflicts are appropriately
managed. Towers Watson is a member of the Remuneration Consultants’ Group and the Remuneration Committee has carefully
reviewed their voluntary code of conduct in relation to executive consulting in the UK;
• Alithos Limited, provision of TSR calculations for the PSP and LTPP;
• Linklaters LLP, advice relating to Directors’ service contracts as well as providing other legal advice to the Company; and
• KPMG LLP, advice relating to pension taxation legislation.
Salary
June 2012
Salary increases for Executive Directors during the reporting year (ie effective from 1 June 2012) were on average 2.74% and were
reported in the previous year’s Remuneration Report. Those increases were consistent with a salary increase budget of 3% for
employees generally across the business, UK and US.
June 2013
The Company is at the beginning of a number of important regulatory arrangements in both the UK and US, in particular the new
RIIO framework. In recognition of the significant changes being implemented across the business, the Executive Directors will not
receive salary increases in June 2013. The next review will, therefore, be in June 2014.
80
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Corporate Governance APP performance for 2012/13
The following table details the financial targets for 2012/13 and performance achieved against them as well as examples of performance
against individual objectives:
Financial measures for 2012/13
Between target and stretch
Between threshold and target
Below threshold
Examples of performance
against individual objectives
for 2012/13
Performance achieved
Performance achieved
Performance achieved
Performance achieved
Performance achieved
Steve Holliday &
Andrew Bonfield
Nick Winser
Tom King
Adjusted EPS
Adjusted EPS
Adjusted EPS
Consolidated
cash flow
Consolidated
cash flow
Consolidated
cash flow
UK ROE
UK adjusted
operating profit
US operating
profit
(US GAAP basis)
US ROE
UK ROE
US cash flow
N/A
N/A
N/A
N/A
US ROE
Steve Holliday has spearheaded an increased focus on safety (eg to reduce our lost time injury
frequency rate and the Take Care campaign, see page 36 for more details) and the development
and articulation of our new dividend policy. In addition, Steve has been instrumental in setting
the strategy and direction for our submissions to RIIO and our US rate case negotiations. Steve
continues to be influential in a number of important areas that have an impact on both the
Company and the UK economy generally including the engineering skills gap, building a
long-term energy infrastructure, and the improvement of youth employment through promoting
apprenticeships, tackling the numeracy challenge and providing more meaningful work
experience placements.
Andrew Bonfield has developed a long-term financing strategy to enable the Company to fund
its capital expenditure programme which included the issue of hybrid bonds at attractive interest
rates. In addition, Andrew has introduced new business planning and budget processes, and
has designed new performance metrics aligned to RIIO and other key initiatives which will be
used for internal management reporting from 2013/14. Andrew has continued to focus on
ensuring the Company continues to communicate effectively with the debt and equity markets.
Nick Winser has led the Company’s response to the UK regulatory process to ensure a
sustainable outcome for all parties, and the development of the draft Electricity Market Reform
(EMR) Bill, working closely with Government Ministers and other stakeholders. In addition, Nick
has been focused on the implementation of the UK operating model change programme, which
along with organisational structure changes, has included culture change initiatives, education
and training to equip the UK business for the introduction of RIIO.
Tom King has delivered the next phase of an end-to-end operational process enhancement
programme, which has focused on a number of processes including meter to cash and
emergency response this year. Tom also led the Company’s response to the severe storms
affecting our service territories during the period, working closely with the communities affected
and the regulators in those jurisdictions. In addition, Tom has led the US business through
multiple regulatory filings, resulting in sustainable outcomes for all three major rate case
negotiations during 2012/13.
While assessing performance against individual objectives, the Remuneration Committee takes into account broader
business performance, which this year included the issues surrounding the implementation of our enterprise resource
planning system in the US, see page 38 for further details.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
81
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Remuneration Report
Implementation report 2012/13
Continued
2012/13 APP awards as a percentage of salary
Executive Directors
Steve Holliday
Andrew Bonfield
Nick Winser
Tom King
%
85
96
92
72
Vested 2009 PSP award
The upper target for the EPS performance criteria was met partially (50.3% of the shares subject to that performance measure
vested) but threshold performance against the TSR element of the award was not achieved resulting in shares subject to that
measure lapsing. This resulted in vesting at 25.15% of the award. The shares then entered the retention period. The Remuneration
Committee agreed to pay a cash amount equivalent in value to the net dividends (after taxes, commissions and any other charges)
that would be paid during the retention period in respect of the shares comprised in the vested award. These payments were made
in August 2012 and February 2013, to align broadly with dividend payments to our shareholders (see Table 4 on page 89, footnote (ii)).
Vesting history of the PSP
The following table details the vesting of the PSP over the years it has been in operation, shown as a percentage of the award.
2003 award
(vested 2006)
2004 award
(vested 2007)
2005 award
(vested 2008)
2006 award
(vested 2009)
2007 award
(vested 2010)
2008 award
(vested 2011)
2009 award
(vested 2012)
0%
0%
100%
100%
65.15%
49.5%
25.15%
Vesting
average
48.54%
Note: All awards subject to a retention period before release.
Shareholding for Executive Directors
Each of the Executive Directors has surpassed the respective share ownership guideline (except for Andrew Bonfield who is more
recently appointed).
Executive Directors
Steve Holliday
Andrew Bonfield
Nick Winser
Tom King (vi)
Ordinary
shares at
31 March 2013
% of
salary
held in ordinary
shares (i) (ii )
630,476
505
295,775
274,010
484
0.54
417
285
Shares
in Trust at
31 March
2013 (iii) (iv )
439,792
84,334
201,579
288,640
Total
ordinary shares
and shares
in Trust at
31 March
2013 (iii) (iv )
% of
salary held in
ordinary shares
and shares in
Trust (i) (ii )
% of
salary held
in shares in
Trust (i) (ii )
Shares subject
to performance
conditions (v)
% of salary for
shares subject
to performance
conditions (i) (ii)
338
91
284
301
1,070,268
84,839
497,354
562,650
822
92
701
586
1,083,070
679,022
534,754
739,575
832
733
753
771
(i)
The salary used for calculating the value of shareholding is the salary earned in the year (see Table 1A on page 86).
(ii) The share price used for calculating the value of shareholding is 765p, which was the closing share price on 28 March 2013 (the last trading day in March 2013).
(iii) Shares held in Trust include vested but unexercised options for the Share Matching Plan (where applicable, see Table 3 on page 87), shares awarded under the DSP and
vested shares under the PSP (see Table 4 on pages 88 and 89). Unvested shares in the PSP and LTPP, and unexercised options held under Sharesave are not included.
(iv) Shares in Trust are shown on a gross basis, ie before deductions for income tax and other withholdings.
(v) Shares subject to performance conditions which may or may not vest. These shares have not been included in the earlier columns.
(vi) Shares converted from ADSs where each ADS represents five ordinary shares.
Share dilution through the operation of share-based incentive plans
Where shares may be issued or treasury shares reissued to satisfy incentives, the aggregate dilution resulting from executive
share-based incentives will not exceed 5% in any 10 year period. Dilution resulting from all incentives, including all-employee
incentives, will not exceed 10% in any 10 year period. The Remuneration Committee reviews dilution against these limits regularly
and under these limits the Company currently has headroom of 4.07% and 7.75% respectively.
82
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Corporate Governance Single figure calculation based on the draft BIS regulations. For further details, please see pages 86 to 89
Steve Holliday
Base Pay
APP
Benefits in Kind (cash and non-cash)
2009 PSP vesting value including cash payments in lieu of dividends
Pension
Total
Andrew Bonfield
Base Pay
APP
Benefits in Kind (cash and non-cash)
2009 PSP vesting value including cash payments in lieu of dividends
Pension
Total
Nick Winser
Base Pay
APP
Benefits in Kind (cash and non-cash)
2009 PSP vesting value including cash payments in lieu of dividends
Pension
Total
Tom King
Base Pay
APP
Benefits in Kind (cash and non-cash)
2009 PSP vesting value including cash payments in lieu of dividends
Pension
Total
2012/13
(£000s) (i )
996
846 (ii)
31
714 (iii)
812 (iv)
3,399
709
677 (ii)
54
–
213 (v)
1,653
543
500 (ii)
11
357 (iii)
336 (iv)
1,747
734
526 (ii)
24
494 (iii)
980 (vi)
2,758
(i) For Tom King the exchange rate averaged over the year 1 April 2012 to 31 March 2013 to convert dollars to UK pounds sterling is $1.57:£1.
(ii) The APP value reflects the full award before the deferral into shares on a compulsory basis.
(iii) During the year, the 2009 PSP award vested and entered a retention period, to be released in June 2013. The value shown uses the closing share price on the date of
vesting (2 July 2012) ie 681p.
(iv) The pension value represents the additional benefit earned in the year (excluding inflation as measured by the consumer price index (CPI)) multiplied by a factor of 20.
(v) Andrew Bonfield is a member of the DC section of NGUKPS. The pension value represents 30% of salary via a combination of a cash allowance in lieu of pension
contributions (£184,385) and Company pension contributions (£28,367).
(vi) The pension value represents the additional benefit earned in the year (excluding inflation) multiplied by a factor of 20.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
83
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Remuneration Report
Implementation report 2012/13
Continued
External appointments and retention of fees
In line with our policy, the table below details the Executive Directors who served as non-executive directors in other companies during
the year ended 31 March 2013.
Executive Directors
Steve Holliday
Andrew Bonfield
Nick Winser
Company
Retained fees (£)
Marks and Spencer Group plc
Kingfisher plc
Kier Group plc
85,000
80,000
44,000
Chief Executive’s total remuneration for the period 2008/09 to 2012/13
The following table provides details of the Chief Executive’s total remuneration for the period 2008/09 to 2012/13, using the same
methodology as that used for the single figure calculation.
Chief Executive’s total remuneration (£000s) (i)
APP awards as a percentage of maximum potential (%)
PSP awards vested as a percentage of maximum potential (%)
2008/09
2009/10
2010/11
2011/12
2012/13
3,624
92
100
3,982
95.33
100
3,805
81.33
65.15
3,604
68.67
49.5
3,399
56.65
25.15
(i) The values are based on the methodology used for the single figure calculation (see page 83 for further details) and therefore include salary, APP, Benefits in Kind, vested
PSP awards and pension benefits earned each year.
Total shareholder return performance graph
The graph below represents the comparative TSR performance of the Company from 31 March 2008 to 31 March 2013.
This graph represents the Company’s performance against the performance of the FTSE 100 index, which is considered suitable
for this purpose as it is a broad equity market index of which National Grid is a constituent. This graph has been produced in
accordance with the requirements of Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports)
Regulations 2008.
In drawing this graph, it has been assumed that all dividends have been reinvested. The TSR level shown at 31 March each year
is the average of the closing daily TSR levels for the 30 day period up to and including that date.
Total shareholder return
%
150
125
100
75
50
31/03/08
31/03/09
31/03/10
31/03/11
31/03/12
31/03/13
National Grid plc FTSE 100
84
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Corporate Governance Relative importance of spend on pay
The following table sets out the amount of Executive Directors’ total remuneration (using the single figure methodology used on
page 83) in 2012/13, compared with other key metrics.
Key metric
Market capitalisation as at 31 March 2013
Dividends (interim and final for year ended 31 March 2013)
Revenue
Adjusted operating profit
Cash flow generated from operations
Capital investment (including joint ventures)
Executive Directors’ total remuneration
Non-executive Directors’ fees
£m
28,040
1,494
14,359
3,644
4,037
3,700
10
In 2012/13 the basic fee for UK-based, Non-executive Directors was £60,000 pa and for those who are US-based, £72,000 pa. The
committee membership fee was £8,000 pa per membership and for those who are chairman of a committee, an additional fee of
£12,500 pa was paid. The Audit Committee chairman received a fee of £15,000 pa to recognise the additional responsibilities
commensurate with that role and the Senior Independent Director received a fee of £20,000 pa.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
85
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Remuneration Report
Implementation report 2012/13
Continued
Remuneration during the year ended 31 March 2013
Sections 1, 2, 3, 4 and 6 comprise the ‘auditable’ part of the Remuneration Report, being the information required by Schedule 8
of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008.
1. Directors’ emoluments
The following tables set out the pre-tax emoluments for the years ended 31 March 2013 and 2012, including APP awards but
excluding pensions, for individual Directors who held office in National Grid during the year ended 31 March 2013.
Table 1A
Year ended 31 March 2013
Executive Directors
Steve Holliday
Andrew Bonfield (iii)
Nick Winser
Tom King (iv)
Total
Salary (i)
£000s
APP
£000s
996
709
543
734
846
677
500
526
2,982
2,549
Benefits
in Kind (ii)
(cash)
£000s
Benefits
in Kind (ii)
(non-cash)
£000s
12
234
–
5
251
19
5
11
19
54
Year ended
31 March
2012
Total
£000s
1,873
1,625
1,054
1,284
5,836
Total
£000s
2,001
1,653
1,057
1,449
6,160
(i) For the reasons provided on page 80, the Executive Directors will not receive salary increases in June 2013, the next review will be in June 2014. As reported in last year’s
Remuneration Report, salaries effective from 1 June 2012 were: Steve Holliday £1,000,000; Andrew Bonfield £712,000; Nick Winser £546,000; and Tom King £724,203.
(ii) Benefits in Kind comprise benefits such as private medical insurance, life assurance, either a fully expensed car or cash in lieu of a car and the use of a driver when
required. In the case of Andrew Bonfield, a cash allowance in lieu of additional Company pension contributions is included (see Table 2 on page 87 for further details).
(iii) Andrew Bonfield participates in FPS which operates by way of salary sacrifice, therefore, his salary is reduced by the value of the benefits he has elected under the Plan.
The value of these benefits is included in the Benefits in Kind (non-cash) figure. The value is £442.
(iv) For Tom King the exchange rate averaged over the year 1 April 2012 to 31 March 2013 to convert dollars to UK pounds sterling is $1.57: £1.
Table 1B
Non-executive Directors
Sir Peter Gershon (i)
Ken Harvey (ii)
Philip Aiken
Nora Mead Brownell (iii)
Jonathan Dawson (iv)
Paul Golby (v)
Ruth Kelly (v)
Maria Richter
George Rose (ii)
Mark Williamson (vi)
Linda Adamany (vii)
Stephen Pettit (viii)
Total
Year ended 31 March 2013
Year ended
31 March
2012
Fees
£000s
Other
emoluments
£000s
Total
£000s
Total
£000s
475
108
84
73
6
76
76
101
91
44
51
32
17
–
–
–
–
–
–
–
–
–
–
–
492
108
84
73
6
76
76
101
91
44
51
32
1,217
17
1,234
228
104
76
–
–
13
38
101
91
–
88
97
836
(i)
Sir Peter Gershon’s other emoluments comprise medical insurance, cash in lieu of a car and the use of a driver when required. The figure shown for the year ended
31 March 2012 represents a partial year. Sir Peter Gershon joined the Board on 1 August 2011 as Deputy Chairman and became Chairman on 1 January 2012.
(ii) Ken Harvey and George Rose will step down from the Board at the close of the 2013 AGM.
(iii) Nora Mead Brownell joined the Board on 1 June 2012.
(iv) Jonathan Dawson joined the Board on 4 March 2013.
(v) The figures shown for the year ended 31 March 2012 represent partial years. Paul Golby joined the Board on 1 February 2012 and Ruth Kelly on 1 October 2011.
(vi) Mark Williamson joined the Board on 3 September 2012.
(vii) Linda Adamany stepped down from the Board on 31 October 2012.
(viii) Stephen Pettit stepped down from the Board on 30 July 2012.
86
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Corporate Governance 2. Directors’ pensions
The table below provides details of the Executive Directors’ pension benefits.
Additional
benefit earned
during
year ended
31 March 2013
pension
£000s
Accrued
entitlement
as at
31 March 2013
pension
£000s
50
–
22
49
474
–
266
479
Transfer value of accrued
benefits as at 31 March (i)
2013
£000s
12,330
–
6,185
3,827
2012
£000s
10,675
–
5,685
2,864
Increase in
transfer
value less
Directors’
contributions (ii)
£000s
1,655
–
500
963
Additional
benefit earned
in the year
ended
31 March 2013
(excluding
inflation)
pension
£000s
Transfer value
of increase in
accrued benefit
in the year
ended 31 March
2013 (excluding
inflation) and
Directors’
contributions (ii)
£000s
39
–
16
49
1,003
–
352
392
Table 2
Steve Holliday (iii) (iv)
Andrew Bonfield (v)
Nick Winser (iv) (vi)
Tom King (vii)
(i)
The transfer values shown at 31 March 2012 and 2013 represent the value of each Executive Director’s accrued benefits based on total service to the relevant date.
Transfer values for the UK-based Executive Directors have been calculated in line with transfer value bases agreed by the UK Pension Scheme Trustees. The transfer
values for the US-based Executive Director have been calculated using discount rates based on high quality US corporate bonds and associated yields at the relevant
dates.
(ii) The UK-based Executive Directors participate in FPS, a salary sacrifice arrangement. Therefore, contributions paid via salary sacrifice have not been deducted from the
figures in the table above. Information about the contributions paid via FPS can be found in footnotes (iii), (v) and (vi) below.
(iii) In addition to the pension above, for Steve Holliday there is an accrued lump sum entitlement of £126,000 as at 31 March 2013. The increase to the accumulated lump
sum including inflation was £4,000 and excluding inflation was £1,000 in the year to 31 March 2013. The transfer value information above includes the value of the lump
sum. Contributions were paid via FPS of £21,000.
(iv) The requirements for the calculation of pensionable salary in the table on page 83 are different to those for this table. Therefore, in order to achieve alignment between
the tables, figures reported in the 2011/12 Directors’ Remuneration Report for the transfer value of accrued benefits as at 31 March 2012 have been rebased.
(v) Andrew Bonfield does not participate in either of the Company’s defined benefit pension arrangements. Andrew is a member of the DC section of the NGUKPS and the
Company has made contributions of £28,367 to this arrangement. In addition, £14,183 was paid via FPS. Andrew also received a cash allowance in lieu of additional
Company contributions equal to 26% of base salary. This allowance is included in Table 1A on page 86.
(vi) In addition to the pension above, for Nick Winser there is an accrued lump sum entitlement of £306,000 as at 31 March 2013. The increase to the accumulated lump sum
including inflation was £11,000 and excluding inflation was £4,000 in the year to 31 March 2013. The transfer value information above includes the value of the lump sum.
Contributions were paid via FPS of £33,000.
(vii) For Tom King, the exchange rate as at 31 March 2013 was $1.51945:£1 and as at 31 March 2012 was $1.59960:£1. In addition to the pension quoted above, through
participation in the 401(k) plan in the US, the Company made contributions worth £1,878 to a defined contribution arrangement.
3. Directors’ interests in share options
Executive Share Option Plan (ESOP)
The table below provides details of the Executive Directors’ holdings of share options awarded under the Share Matching Plan (Share
Match) and Sharesave plans.
Table 3
Steve Holliday
Share Match
Sharesave
Total
Andrew Bonfield
Sharesave
Total
Options held
at 1 April 2012
Options
exercised or
lapsed during
the year
Market price
at exercise
(pence)
Options
granted
during
the year
Options held at
31 March 2013
Exercise price
per share
(pence)
Normal exercise
period
16,092
21,383
3,921
41,396
3,421
3,421
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
16,092
21,383
3,921
41,396
3,421
3,421
100 in total
Jun 2006 to Jun 2013
nil
May 2007 to May 2014
427.05
Apr 2014 to Sep 2014
445
Apr 2016 to Sep 2016
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
87
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information
Remuneration Report
Implementation report 2012/13
Continued
4. Directors’ interests in the LTPP, PSP and DSP
The table below provides details of the Executive Directors’ holdings of shares awarded under the LTPP whereby Executive Directors
receive a conditional award of shares, up to a current maximum of 200% of salary (225% of salary for the Chief Executive), which is
subject to performance criteria over a three year performance period for the annualised growth of the Company’s EPS (50% of the
award), see page 48 for further information, and the Company’s TSR performance (25% of the award) when compared with the
FTSE 100. The final 25% of the award is subject to ROE performance over four years. See page 07 for further information.
The table includes shares awarded under the PSP whereby Executive Directors received a conditional award of shares, up to a
maximum of 200% of salary, which is subject to performance criteria over a three year performance period. Awards vest based on
the Company’s TSR performance when compared with the FTSE 100 at the date of grant (50% of the award) and the annualised
growth of the Company’s EPS (50% of the award). Shares are then released on the fourth anniversary of the date of grant, following
a retention period.
The table includes share awards under the DSP, where Executive Directors receive an award of shares representing one half of any
APP award earned in the year. The deferred shares are held in Trust for three years before release.
PSP, LTPP
and DSP
conditional
awards at
1 April 2012
Awards
lapsed
during year
Awards
vested
in year
Release
of PSP
awards
in year
Awards
granted
during year
Market price
at award
(pence
except #)
Date of
award
(dd/mm/yy)
Conditional
awards at
31 March 2013
Release
date
(dd/mm/yy)
Table 4
Type of
award
Steve Holliday
PSP
PSP
PSP
LTPP
LTPP
DSP
DSP
DSP
DSP
156,653
–
–
156,653 (i)
391,212
292,823 (ii)
98,389 (ii)
384,220
362,148
–
68,960
130,636
97,359
–
–
–
–
–
–
–
–
–
–
–
68,960 (iii)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
584.57
472.89
25/06/08
25/06/09
–
25/06/12
98,389
25/06/13
494.5076
29/06/10
384,220
29/06/14
605.7605
28/07/11
362,148
28/07/14
& 28/07/15
28/06/15
& 28/06/16
336,702
668.2456
28/06/12
336,702
541.14
11/06/09
–
11/06/12
506.294
15/06/10
130,636
15/06/13
592.6
15/06/11
75,933
658.47
14/06/12
97,359
75,933
15/06/14
14/06/15
Total
1,591,188
292,823
167,349
156,653
412,635
1,485,387
Andrew Bonfield
Total
Nick Winser
PSP
LTPP
LTPP
DSP
DSP
PSP
PSP
PSP
LTPP
LTPP
DSP
DSP
DSP
DSP
236,464
229,463
–
29,184
–
495,111
78,292
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
78,292 (i)
195,521
146,348 (ii)
49,173 (ii)
196,356
174,986
–
33,804
64,370
48,354
–
–
–
–
–
–
–
–
–
–
–
33,804 (iii)
–
–
–
–
–
–
–
–
–
–
–
–
–
570.9098
30/11/10
605.7605
28/07/11
236,464
229,463
213,095
668.2456
28/06/12
213,095
–
592.6
15/06/11
55,150
658.47
14/06/12
29,184
55,150
763,356
30/11/14
28/07/14
& 28/07/15
28/06/15
& 28/06/16
15/06/14
14/06/15
268,245
–
–
–
–
584.57
472.89
25/06/08
25/06/09
–
25/06/12
49,173
25/06/13
494.5076
29/06/10
196,356
29/06/14
605.7605
28/07/11
174,986
163,412
668.2456
28/06/12
163,412
–
–
–
541.14
11/06/09
506.294
15/06/10
592.6
15/06/11
39,682
658.47
14/06/12
28/07/14
& 28/07/15
28/06/15
& 28/06/16
–
11/06/12
15/06/13
15/06/14
14/06/15
64,370
48,354
39,682
736,333
Total
791,683
146,348
82,977
78,292
203,094
88
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Corporate Governance Type of
award
Table 4
Tom King (iv)
PSP
PSP
PSP
LTPP
LTPP
DSP
DSP
DSP
DSP
PSP, LTPP
and DSP
conditional
awards at
1 April 2012
18,157
54,403
57,762
45,537
–
13,804
18,776
13,937
–
Awards
lapsed
during year
Awards
vested
in year
Release
of PSP
awards
in year
Awards
granted
during year
Market price
at award
(pence
except #)
Date of
award
(dd/mm/yy)
Conditional
awards at
31 March 2013
Release
date
(dd/mm/yy)
–
–
18,157 (i)
–
$57.2505 #
25/06/08
–
25/06/12
40,720 (ii)
13,683 (ii)
–
–
–
–
–
–
–
–
–
–
13,804 (iii)
–
–
–
–
–
–
–
–
–
–
–
– $38.6002 #
25/06/09
–
$37.4465 #
29/06/10
– $49.4093 #
28/07/11
13,683
57,762
45,537
44,616 $51.9094 #
28/06/12
44,616
25/06/13
29/06/14
28/07/14
& 28/07/15
28/06/15
& 28/06/16
– $39.2373 #
11/06/09
–
11/06/12
–
–
$37.7474 #
15/06/10
$48.261 #
15/06/11
11,332
$51.2887 #
14/06/12
15/06/13
15/06/14
14/06/15
18,776
13,937
11,332
205,643
Total ADSs
222,376
40,720
27,487
18,157
55,948
(i)
The 2008 PSP award vested partially (at a vesting level of 49.5% of the award) in July 2011 and then entered a retention period. The vested shares were released on the
fourth anniversary of the date of grant (ie June 2012). The closing share price on the date of release was 661p (ADS $51.52).
(ii) The 2009 PSP award vested partially in July 2012 at a vesting level of 25.15% of the award. The award then entered a retention period. Cash payments in lieu of dividends
accrued during the retention period were paid as follows: Steve Holliday £27,713 in August 2012 and £15,841 in February 2013; Nick Winser £13,850 and £7,917 respectively;
Tom King £17,575 and £10,020 respectively.
(iii) Following the three year deferral period, the 2009 DSP award was released in June 2012. Cash payments in lieu of dividends accrued during the deferral period were paid
as follows: Steve Holliday £110,642; Nick Winser £54,236 and Tom King £75,566. The closing share price on the date of release was 659.50p (ADS $51.19). Exceptionally,
this award for Steve Holliday and Nick Winser was made over restricted shares. The award was subject to income tax and National Insurance Contributions on grant and
therefore the shares shown reflect the net number of shares.
(iv) All awards were made over ADSs and each ADS represents five ordinary shares.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
89
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information
Remuneration Report
Implementation report 2012/13
Continued
5. Directors’ beneficial interests
The Directors’ beneficial interests (which include those of their families) in National Grid ordinary shares of 1117⁄43 pence each are shown
below.
Table 5
Sir Peter Gershon
Steve Holliday (ii) (iii)
Andrew Bonfield (ii) (iii)
Nick Winser (ii)
Tom King (iv)
Ken Harvey (v)
Philip Aiken
Nora Mead Brownell (vi)
Jonathan Dawson (vii)
Paul Golby
Ruth Kelly
Maria Richter
George Rose (v)
Mark Williamson (viii)
Linda Adamany (ix)
Stephen Pettit (x)
Ordinary shares at
31 March 2013
or, if earlier, on
retirement † (i)
Ordinary shares at
1 April 2012
or, if later, on
appointment *
Options/awards over
ordinary shares at
31 March 2013
Options/awards over
ordinary shares at
1 April 2012
41,486
630,476
505
295,775
274,010
5,236
4,900
5,000
–
2,500
800
14,357
6,792
4,726
2,800 †
4,061 †
18,055
484,560
287
224,473
209,285
5,236
4,900
– *
– *
2,500
800
14,357
6,792
– *
2,800
4,061
–
1,526,783
766,777
736,333
1,028,215
–
1,632,584
498,532
791,683
1,111,880
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(i)
(ii)
There has been no other change in the beneficial interests of the Directors in ordinary shares between 1 April 2013 and 15 May 2013, except in respect of routine
monthly purchases under the SIP (see note (iii) below).
Each of the Executive Directors, with the exception of Tom King, was for Companies Act purposes deemed to be a potential beneficiary under the National Grid plc 1996
Employee Benefit Trust and the National Grid Employee Share Trust. Steve Holliday, Andrew Bonfield and Nick Winser thereby have an interest in 16,092 and 600,216
ordinary shares in the aforementioned trusts respectively, as at 31 March 2013 (with the latter trust holding 86,708 ADSs in addition).
(iii) Beneficial interests include shares purchased under the monthly operation of the SIP in the year to 31 March 2013. In April and May 2013 a further 32 shares were
purchased on behalf of Steve Holliday and a further 31 shares were purchased on behalf of Andrew Bonfield, thereby increasing their beneficial interests.
(iv) Shares converted from ADSs where each ADS represents five ordinary shares.
(v) Ken Harvey and George Rose will step down from the Board at the close of the 2013 AGM.
(vi) Nora Mead Brownell joined the Board on 1 June 2012.
(vii) Jonathan Dawson joined the Board on 4 March 2013.
(viii) Mark Williamson joined the Board on 3 September 2012.
(ix) Linda Adamany stepped down from the Board on 31 October 2012.
(x) Stephen Pettit stepped down from the Board on 30 July 2012.
6. National Grid share price range
The closing price of a National Grid ordinary share on 28 March 2013 (the last trading day in March 2013) was 765p. The range during
the year (previous 52 weeks) was 765p (high) and 633p (low). The Register of Directors’ Interests contains full details of shareholdings
and options/awards held by Directors as at 31 March 2013.
The Remuneration Report has been approved by the Board and signed on its behalf by:
Ken Harvey
Chairman of the Remuneration Committee
15 May 2013
90
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Corporate Governance Shareholder engagement
We believe it is important to maintain effective channels of
communication with our debt and equity institutional investors
and individual shareholders to understand their views about the
Company and ensure they are provided with timely and
appropriate information on our strategy, performance,
objectives, financing and other developments.
The Company maintains appropriate controls on the
dissemination of price sensitive information. For more
information on the role of the Disclosure Committee, see
page 65.
A shareholder analysis and a list of material interests in our
shares are set out on pages 187 and 183 respectively.
Institutional investors
The Board oversees investor engagement, which is managed
by the Chief Executive, Finance Director and Director of Investor
Relations. We undertake a comprehensive programme of
engagement for institutional investors and research analysts,
including meetings, presentations, webinars and attendance at
key investor conferences, which provides the opportunity for
our current and potential investors to meet with Executive and
operational management.
In the past year, we have focused on updating investors about
regulatory processes in the UK and US, notably Ofgem’s RIIO
price controls.
The Board receives regular feedback on investor perceptions
and opinions about the Company and specialist advisors, our
brokers and the Director of Investor Relations provide updates
on market sentiment to the Board. The Board also receives
annually the results of an independent audit of investor
perceptions.
Sir Peter contacts our major shareholders at the time of our
full-year results to offer them the opportunity to meet with him,
the Senior Independent Director, and any of our other Non-
executive Directors, so they can discuss any issues they feel
unable to raise with members of the Executive team.
In addition to the engagement activities set out above, this year
we will be introducing a stewardship meeting. With a governance
theme, the event aims to provide investors with an insight into
our decision-making processes, the work of our committees
and the implications of the new regulatory regimes in the UK
and US. The event will also provide the opportunity for attendees
to ask questions and meet members of the Board and for our
newer Non-executive Directors to understand the views and
concerns of our shareholders about the Company.
Debt investors
Over the last year representatives from our treasury team,
together with the Finance Director and other senior
management from across the business, have met with debt
investors in Australia, Canada, Europe, the Far East and the US.
These events have been used to discuss key topics such as
Ofgem’s RIIO price controls and the regulatory process in the
US. A series of events were held ahead of our issuance of
£2.1 billion of hybrid bonds, to improve investor awareness and
increase take up.
With the total debt issued during the year at £5.1 billion, it is
important for us to explain to debt investors why this money
is required and what protections are in place to safeguard
their potential investment. We also communicate to our debt
investors through regular Company announcements as well
as via the debt investor section of our website, which contains
bond prospectuses, credit ratings, materials on the retail bond
issued in 2011 and subsidiary year-end reports. The website
also contains information on the long-term debt maturity profile,
enabling investors to see our future refinancing needs.
Individual shareholders
Engagement with individual shareholders, who represent more
than 95% of the shareholders on our share register, is led by the
Group General Counsel & Company Secretary. Shareholders
are invited to learn more about the Company through the
shareholder networking programme, see below, and the
exhibits at the AGM.
In addition, shareholders were also invited by Capita Registrars
to visit their offices to increase awareness of the services they
provide to our shareholders.
Annual General Meeting
This will be held on Monday 29 July 2013 at The International
Convention Centre in Birmingham. The Notice of Meeting for
the 2013 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. The AGM can be viewed
by webcast on our website where information on how to view
the webcast can also be found.
Shareholder networking
The shareholder networking programme normally takes place
twice a year and includes visits to UK operational sites and
presentations by senior managers and employees over two
days. The costs of the programme (including reasonable
shareholder travel to and from the event) are paid for by the
Company.
If you are a UK resident shareholder and would like to take part
please apply online via the Investors page on our website. You
can also apply in person at the AGM. Only those successful in
the selection ballot will be contacted, with priority given to those
who have not recently attended.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
91
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Introduction to the financial statements
We have adopted a revised presentational format to provide shareholders and users of these financial
statements with additional information and guidance and to make them easier to understand.
Throughout these financial statements we have included ‘Keeping it simple’ boxes, providing commentary
in plain English on what the disclosures mean and why they are important to the understanding of our
financial performance and position. We also include a number of boxes highlighting ‘Our strategy in action’
which draw out the key elements of our business model, set out in the Strategic Review on pages 01 to 57,
and show how the disclosures reflect this strategy.
Keeping it simple
Audit opinions
We have two audit opinions on our financial statements, reflecting our dual listing on the London Stock Exchange and the New York
Stock Exchange. Due to the different reporting requirements for each listing, our auditors are required to confirm compliance with
each set of standards in a prescribed format. There are also additional specific disclosure requirements due to our US listing
which are included in the notes.
Consolidated financial statements
We are required to present certain minimum information in the primary financial statements, which together set out the overview
of the results of the business for the year and financial position at year end.
The consolidated income statement shows all revenue earned and costs incurred in the year, with the difference being the overall
profit for the year.
The consolidated statement of comprehensive income records certain items as prescribed by the accounting rules. For us, the
majority of the income or expense included here relates to movements in actuarial assumptions on pension schemes and the
associated tax impact. These items are not part of profit for the year, yet are important to allow the reader to gain a more
comprehensive picture of our performance as a whole.
The consolidated statement of financial position sets out all the Group’s assets and liabilities at the year end, analysed between the
net assets we have for use in the business and those held for sale. As a capital intensive business, we have significant amounts
of physical assets and corresponding borrowings.
The consolidated statement of changes in equity shows the additions (where it came from) and reductions (where it went) to equity.
For us, the main items included here are the profit earned and dividends paid in the year.
The consolidated cash flow statement shows how the cash balance has moved during the year. Cash inflows and outflows are
presented to allow users to understand how they relate to the day-to-day operations of the business (Operating activities); the
money that has been spent or earned on assets in the year, including acquisitions of physical assets or other businesses (Investing
activities); and the cash raised from debt or share issues and other loan borrowings or repayments (Financing activities).
Notes
Notes to the financial statements provide additional information required by statute, accounting standards or other regulations to
assist in a more detailed understanding of the primary financial statements. In many notes we have included an accounting policy
that describes how the transactions or balance in that note have been measured, recognised and disclosed. The basis of
preparation section provides details of accounting policies that apply to transactions and balances in general.
92
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements Statement of Directors’ responsibilities
The Directors are responsible for preparing the Annual Report
and Accounts, including the consolidated financial statements
and the Company financial statements, the Directors’ Report,
including the Remuneration Report and the Strategic Review,
in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
have prepared the consolidated financial statements in accordance
with International Financial Reporting Standards (IFRS) as adopted
by the European Union, and the Company financial statements
and the Remuneration Report in accordance with applicable law
and United Kingdom Accounting Standards (United Kingdom
generally accepted accounting practice, UK GAAP). In preparing
the consolidated financial statements, the Directors have also
elected to comply with IFRS, issued by the International Accounting
Standards Board (IASB). Under company law the Directors must
not approve the financial statements unless they are satisfied that
they give a true and fair view of the state of affairs of the Company
on a consolidated and individual basis and of the profit or loss of
the Company on a consolidated basis for that period.
In preparing these financial statements, the Directors are
required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and estimates that are reasonable and
prudent;
• state that the consolidated financial statements comply with
IFRS as issued by the IASB and IFRS adopted by the European
Union and, with regard to the Company financial statements,
that applicable UK Accounting Standards have been followed,
subject to any material departures disclosed and explained in
the financial statements; and
• prepare the consolidated financial statements and Company
financial statements on a going concern basis unless it is
inappropriate to presume that the Company, on a consolidated
and individual basis, will continue in business, in which case
there should be supporting assumptions or qualifications as
necessary.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the Company on a consolidated and
individual basis, and to enable them to ensure that the consolidated
financial statements comply with the Companies Act 2006 and
Article 4 of the IAS Regulation and the Company financial
statements and the Remuneration Report comply with the
Companies Act 2006. They are also responsible for safeguarding
the assets of the Company and its subsidiaries and hence for
taking reasonable steps for the prevention and detection of fraud
and other irregularities.
Each of the Directors, whose names and functions are listed on
pages 26 and 27, confirms that:
• to the best of their knowledge, the consolidated financial
statements and the Company financial statements, which
have been prepared in accordance with IFRS as issued by
the IASB and IFRS as adopted by the European Union and
UK GAAP respectively, give a true and fair view of the assets,
liabilities, financial position and profit of the Company on a
consolidated and individual basis;
• to the best of their knowledge, the Annual Report and Accounts
includes a fair review of the development and performance
of the business and the position of the Company on a
consolidated and individual basis, together with a description
of the principal risks and uncertainties that it faces; and
• they consider that the Annual Report and Accounts, taken
as a whole, is fair, balanced and understandable and provides
the information necessary for shareholders to assess the
Company’s performance, business model and strategy.
By order of the Board
Alison Kay
Group General Counsel & Company Secretary
15 May 2013
Company number: 4031152
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
93
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Independent Auditors’ report
to the Members of National Grid plc
Audit opinion for Annual Report
and Accounts
We have audited the consolidated and Company financial
statements (the ‘financial statements’) of National Grid plc for
the year ended 31 March 2013, which comprise the basis of
preparation, recent accounting developments, consolidated
income statement, the consolidated statement of comprehensive
income, the consolidated statement of financial position, the
consolidated statement of changes in equity, the consolidated
cash flow statement, the accounting policies, the notes to the
consolidated financial statements, the Company balance sheet,
the Company accounting policies, and the notes to the Company
financial statements. The financial reporting framework that has
been applied in the preparation of the consolidated financial
statements is applicable law and International Financial Reporting
Standards (IFRS) as adopted by the European Union. The financial
reporting framework that has been applied in the preparation of
the Company financial statements is applicable law and United
Kingdom Accounting Standards (United Kingdom Generally
Accepted Accounting Practice).
Respective responsibilities of Directors
and Auditors
As explained more fully in the Statement of Directors’ responsibilities
set out on page 93, the Directors are responsible for the
preparation of the financial statements and for being satisfied
that they give a true and fair view. Our responsibility is to audit
and express an opinion on the financial statements in accordance
with applicable law and International Standards on Auditing
(UK and Ireland). Those standards require us to comply with
the Auditing Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and
only for the Company’s members as a body in accordance with
Chapter 3 of Part 16 of the Companies Act 2006 and for no other
purpose. We do not, in giving these opinions, accept or assume
responsibility for any other purpose or to any other person to
whom this report is shown or into whose hands it may come
save where expressly agreed by our prior consent in writing.
Scope of the audit of the financial
statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate
to the Group’s and Company’s circumstances and have been
consistently applied and adequately disclosed; the reasonableness
of significant accounting estimates made by the Directors; and
the overall presentation of the financial statements. In addition,
we read all the financial and non-financial information in the
Annual Report and Accounts to identify material inconsistencies
with the audited financial statements. If we become aware of any
apparent material misstatements or inconsistencies we consider
the implications for our report.
Opinion on financial statements
In our opinion:
• the financial statements give a true and fair view of the state
of the Group’s and of the Company’s affairs as at 31 March
2013 and of the Group’s profit and cash flows for the year
then ended;
• the consolidated financial statements have been properly
prepared in accordance with IFRS as adopted by the
European Union;
• the Company financial statements have been properly
prepared in accordance with United Kingdom Generally
Accepted Accounting Practice; and
• the financial statements have been prepared in accordance
with the requirements of the Companies Act 2006 and, as
regards the consolidated financial statements, Article 4 of the
lAS Regulation.
Opinion on other matters prescribed by the
Companies Act 2006
In our opinion:
• the part of the Remuneration Report to be audited has been
properly prepared in accordance with the Companies Act
2006; and
• the information given in the Directors’ Report for the financial
year for which the financial statements are prepared is
consistent with the financial statements.
Matters on which we are required to report
by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you
if, in our opinion:
• adequate accounting records have not been kept by the
Company, or returns adequate for our audit have not been
received from branches not visited by us; or
• the Company financial statements and the part of the
Remuneration Report to be audited are not in agreement
with the accounting records and returns; or
• certain disclosures of Directors’ remuneration specified
by law are not made; or
• we have not received all the information and explanations
we require for our audit.
Under the Listing Rules we are required to review:
• the Directors’ statement, set out on page 57, in relation
to going concern;
• the part of the Corporate Governance Statement relating to
the Company’s compliance with the nine provisions of the UK
Corporate Governance Code specified for our review; and
• certain elements of the report to shareholders by the Board
on Directors’ remuneration.
Nicholas Blackwood (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
15 May 2013
(a) The maintenance and integrity of the National Grid plc website is the responsibility of the Directors; the work carried out by the auditors does not involve consideration
of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially
presented on the website.
(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
94
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements Report of Independent Registered
Public Accounting Firm
to the Board of Directors and Shareholders of National Grid plc
A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorisations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection
of unauthorised acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
London
United Kingdom
15 May 2013
Audit opinion for Form 20-F
In our opinion, the accompanying consolidated statements of
financial position and the related consolidated income statements,
consolidated statements of comprehensive income, consolidated
cash flow statements and consolidated statements of changes
in equity, present fairly, in all material respects, the financial
position of National Grid plc and its subsidiaries at 31 March 2013
and 31 March 2012, and the results of their operations and their
cash flows for each of the three years in the period ended 31 March
2013 in conformity with International Financial Reporting Standards
as issued by the International Accounting Standards Board and
in conformity with International Financial Reporting Standards as
adopted by the European Union.
Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of 31 March 2013, based on criteria established in Internal
Control – Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
The Company’s management is responsible for these financial
statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the
Additional information section appearing on page 179 of
the 2013 Annual Report and Accounts.
Our responsibility is to express opinions on these financial
statements and on the Company’s internal control over financial
reporting based on our integrated audits. We conducted our
audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of
material misstatement and whether effective internal control
over financial reporting was maintained in all material respects.
Our audits of the financial statements included examining, on
a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit
of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
95
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Contents of financial statements
Consolidated financial statements
under IFRS
Basis of preparation
97 Basis of preparation
99 Recent accounting developments
Primary statements
100 Consolidated income statement
101 Consolidated statement of comprehensive income
102 Consolidated statement of financial position
103 Consolidated statement of changes in equity
104 Consolidated cash flow statement
Notes to the consolidated financial statements –
analysis of items in the primary statements
105 Note 1 – Segmental analysis
108 Note 2 – Operating costs
111 Note 3 – Exceptional items, remeasurements
and stranded cost recoveries
114 Note 4 – Finance income and costs
115 Note 5 – Taxation
119 Note 6 – Earnings per share
120 Note 7 – Dividends
120 Note 8 – Goodwill
121 Note 9 – Other intangible assets
123 Note 10 – Property, plant and equipment
125 Note 11 – Other non-current assets
125 Note 12 – Financial and other investments
126 Note 13 – Investments in joint ventures and associates
127 Note 14 – Derivative financial instruments
130 Note 15 – Inventories and current intangible assets
131 Note 16 – Trade and other receivables
132 Note 17 – Cash and cash equivalents
133 Note 18 – Businesses classified as held for sale
134 Note 19 – Borrowings
135 Note 20 – Trade and other payables
136 Note 21 – Other non-current liabilities
136 Note 22 – Pensions and other post-retirement benefits
138 Note 23 – Provisions
140 Note 24 – Share capital
141 Note 25 – Other equity reserves
142 Note 26 – Net debt
Notes to the consolidated financial statements –
supplementary information
143 Note 27 – Commitments and contingencies
144 Note 28 – Related party transactions
144 Note 29 – Actuarial information on pensions
and other post-retirement benefits
147 Note 30 – Financial risk
153 Note 31 – Commodity risk
154 Note 32 – Borrowing facilities
155 Note 33 – Subsidiary undertakings, joint ventures
and associates
156 Note 34 – Sensitivities on areas of estimation and uncertainty
158 Note 35 – Additional disclosures in respect of guaranteed
securities
Company financial statements
under UK GAAP
Basis of preparation
165 Company accounting policies
Primary statement
166 Company balance sheet
Notes to the Company financial statements
167 Note 1 – Fixed asset investments
167 Note 2 – Debtors
167 Note 3 – Creditors
168 Note 4 – Derivative financial instruments
168 Note 5 – Investments
168 Note 6 – Borrowings
168 Note 7 – Called up share capital
169 Note 8 – Reserves
169 Note 9 – Reconciliation of movements
in total shareholders’ funds
169 Note 10 – Parent Company guarantees
169 Note 11 – Audit fees
96
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements Basis of preparation
Accounting policies describe our approach to recognising
and measuring transactions in the year. Accounting policies
applicable across the financial statements are shown below.
Accounting policies that are specific to a component of the
financial statements have been incorporated into the note
that provides additional information regarding that component.
This section also shows areas of judgement and key sources
of estimation uncertainty in these financial statements as well
as new EU endorsed accounting standards, amendments
and interpretations, whether these are effective in 2013 or
later years. We explain how significant changes are expected
to affect our performance.
National Grid’s principal activities involve the transmission and
distribution of electricity and gas in Great Britain and northeastern
US. The Company is a public limited liability company incorporated
and domiciled in England, with its registered office at 1-3 Strand,
London WC2N 5EH.
The Company has its primary listing on the London Stock
Exchange and is also quoted on the New York Stock Exchange.
These consolidated financial statements were approved for issue
by the Board of Directors on 15 May 2013.
These consolidated financial statements have been prepared in
accordance with International Accounting Standards (IAS) and
International Financial Reporting Standards (IFRS) and related
interpretations as issued by the IASB and as adopted by the EU.
They are prepared on the basis of all IFRS accounting standards
and interpretations that are mandatory for periods ending
31 March 2013 and in accordance with the Companies Act 2006
applicable to companies reporting under IFRS and Article 4 of
the EU IAS Regulation. The 2012 and 2011 comparative financial
information has also been prepared on this basis.
The consolidated financial statements have been prepared on an
historical cost basis, except for the recording of pension assets
and liabilities, the revaluation of derivative financial instruments
and certain commodity contracts and investments classified as
available-for-sale.
The consolidated financial statements have been prepared on
a going concern basis following the assessment made by the
Directors as set out on page 57.
These consolidated financial statements are presented in pounds
sterling, which is also the functional currency of the Company.
The preparation of financial statements requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosures of contingent assets
and liabilities and the reported amounts of revenue and expenses
during the reporting period (see accounting policy C). Actual
results could differ from these estimates.
A. Basis of consolidation
The consolidated financial statements incorporate the financial
statements of the Company and its subsidiaries, together with
a share of the results, assets and liabilities of jointly controlled
entities (joint ventures) and associates using the equity method
of accounting, where the investment is carried at cost plus
post-acquisition changes in the share of net assets of the joint
venture, less any provision for impairment.
A subsidiary is defined as an entity controlled by the Company.
Control is achieved where the Company has the power to govern
the financial and operating policies of an entity so as to obtain
benefits from its activities.
Losses in excess of the consolidated interest in joint ventures and
associates are not recognised, except where the Company or its
subsidiaries have made a commitment to make good those losses.
Where necessary, adjustments are made to bring the accounting
policies used in the individual financial statements of the Company,
subsidiaries, joint ventures and associates into line with those
used by the Company in its consolidated financial statements
under IFRS. Intercompany transactions are eliminated.
The results of subsidiaries, joint ventures and associates acquired
or disposed of during the year are included in the consolidated
income statement from the effective date of acquisition or up to
the effective date of disposal, as appropriate.
Acquisitions are accounted for using the acquisition method,
where the purchase price is allocated to the identifiable assets
acquired and liabilities assumed on a fair value basis and the
remainder recognised as goodwill.
B. Foreign currencies
Transactions in currencies other than the functional currency of
the Company or subsidiary concerned are recorded at the rates
of exchange prevailing on the dates of the transactions. At each
reporting date, monetary assets and liabilities that are denominated
in foreign currencies are retranslated at closing exchange rates.
Non monetary assets are not retranslated unless they are carried
at fair value.
Gains and losses arising on the retranslation of monetary assets
and liabilities are included in the income statement, except where
the adoption of hedge accounting requires inclusion in other
comprehensive income – note 14.
On consolidation, the assets and liabilities of operations that have
a functional currency different from the Company’s functional
currency of pounds sterling, principally our US operations that
have a functional currency of US dollars, are translated at
exchange rates prevailing at the reporting date. Income and
expense items are translated at the weighted average exchange
rates for the period where these do not differ materially from
rates at the date of the transaction. Exchange differences arising
are classified as equity and transferred to the consolidated
translation reserve.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
97
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Key sources of estimation uncertainty that have significant risk of
causing a material adjustment to the carrying amounts of assets
and liabilities within the next financial year are as follows:
• Impairment of goodwill – note 8.
• Review of residual lives, carrying values and impairment
charges for other intangible assets and property, plant and
equipment – notes 9 and 10.
• Estimation of liabilities for pensions and other post-retirement
benefits – notes 22 and 29.
• Valuation of financial instruments and derivatives – notes 14,
30 and 31.
• Revenue recognition and assessment of unbilled revenue –
note 1.
• Recoverability of deferred tax assets – note 5.
• Environmental and decommissioning provisions – note 23.
In order to illustrate the impact that changes in assumptions
could have on our results and financial position, we have
included sensitivity analysis in note 34.
Basis of preparation
Continued
C. Areas of judgement and key sources
of estimation uncertainty
The preparation of financial statements requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosures of contingent assets
and liabilities and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from these
estimates. Information about such judgements and estimations
is contained in the notes to the financial statements, and the key
areas are summarised below.
Areas of judgement that have the most significant effect on the
amounts recognised in the financial statements are as follows:
• The categorisation of certain items as exceptional items,
remeasurements and stranded cost recoveries and the
definition of adjusted earnings – notes 3 and 6.
• Classification of business activities as held for sale and
discontinued operations – note 18.
• Hedge accounting – note 14.
• Energy purchase contracts classification as being for normal
purchase, sale or usage – note 27.
IFRS provides certain options available within accounting
standards. Choices we have made, and continue to make,
include the following:
• Presentation formats. We use the nature of expense method
for our income statement and total our statement of financial
position to net assets and total equity. In the income
statement, we present subtotals of total operating profit, profit
before tax and profit from continuing operations, together with
additional subtotals excluding exceptional items,
remeasurements and stranded cost recoveries. Exceptional
items, remeasurements and stranded cost recoveries are
presented separately on the face of the income statement.
• Customer contributions. Contributions received prior to 1 July
2009 towards capital expenditure are recorded as deferred
income and amortised in line with the depreciation on the
associated asset.
• Financial instruments. We normally opt to apply hedge
accounting in most circumstances where this is permitted.
For net investment hedges, we have chosen to use the spot
rate method, rather than the alternative forward rate method.
98
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements Recent accounting developments
New IFRS accounting standards and
interpretations adopted in 2012/13
During the year ended 31 March 2013, the Company has not
adopted any new IFRS, IAS or amendments issued by the IASB,
or interpretations issued by the IFRS Interpretations Committee,
which have had a material impact on the Company’s consolidated
financial statements.
New IFRS accounting standards and
interpretations not yet adopted
The Company enters into a significant number of transactions
that fall within the scope of IFRS 9 on financial instruments.
The IASB is completing IFRS 9 in phases and the Company
is evaluating the impact of the standard as it develops. It is
currently expected that the standard will be required to be
adopted by the Company on 1 April 2015. We are currently
assessing the likely impact of this standard on the Company’s
consolidated financial statements.
IFRS 10 on consolidated financial statements, IFRS 11 on joint
arrangements, IFRS 12 on disclosures of interests in other
entities and IFRS 13 on fair value measurements and consequent
amendments to IAS 27 and IAS 28 were issued in May 2011.
These standards are not expected to have a significant impact
on the consolidated financial statements. The standards are
required to be adopted by the Company on 1 April 2013.
The amended version of IAS 19 on employee benefits, issued in
June 2011 and effective for periods beginning after 1 January
2013, requires net interest to be calculated on the net defined
benefit asset/(liability) using the same discount rate used to
measure the defined benefit obligation. Where the expected
return on assets exceeds the discount rate, the adoption of the
amended standard will result in a reduction in reported net
income and an increase in other comprehensive income (OCI).
The impact on the Company’s financial statements for the period
of initial application of the amended standard will depend upon
reported pension assets and liabilities and the relationship
between the expected return on assets and the discount rate at
the date of adoption. If the amended standard had been adopted
for the year ended 31 March 2013, net income would have been
reduced by £142m and OCI increased by £146m.
The amendments to IAS 1 (Presentation of Financial Statements),
issued in June 2011 and effective for periods beginning on or
after 1 July 2012, require entities to group items presented in
OCI based on whether they are potentially reclassifiable to profit
or loss subsequently. It also requires tax associated with any items
presented before tax to be shown separately for each of the two
groups of OCI items. These amendments are presentational only
and will not affect the results of the Group when adopted.
Other standards and interpretations or amendments thereto
which have been issued, but are not yet effective, are not
expected to have a material impact on the Company’s
consolidated financial statements.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc
99
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Consolidated income statement
for the years ended 31 March
Revenue
Operating costs
Operating profit
Before exceptional items, remeasurements
and stranded cost recoveries
Exceptional items, remeasurements and
stranded cost recoveries
Total operating profit
Finance income
Before exceptional items
Exceptional items
Total finance income
Finance costs
Before exceptional items and remeasurements
Exceptional items and remeasurements
Total finance costs
Share of post-tax results of joint ventures and associates
Profit before tax
Before exceptional items, remeasurements
and stranded cost recoveries
Exceptional items, remeasurements and
stranded cost recoveries
Total profit before tax
Taxation
Before exceptional items, remeasurements
and stranded cost recoveries
Exceptional items, remeasurements and
stranded cost recoveries
Total taxation
Profit after tax
Before exceptional items, remeasurements
and stranded cost recoveries
Exceptional items, remeasurements and
stranded cost recoveries
Profit for the year
Attributable to:
Equity shareholders of the parent
Non-controlling interests
Notes
1(a)
2
2013
£m
2013
£m
14,359
(10,605)
2012
£m
2012
£m
13,832
(10,293)
2011
£m
2011
£m
14,343
(10,598)
1(b)
3
1(b)
4
3,4
4
4
3,4
4
13
1(b)
3
1(b)
5
3,5
5
3,644
110
1,252
–
(2,172)
68
2,742
178
(686)
62
3,754
3,495
44
1,301
–
3,600
145
3,539
3,745
1,281
43
1,252
1,301
1,324
(2,218)
(70)
(2,415)
(37)
(2,104)
18
(2,288)
7
(2,452)
7
2,585
(26)
2,473
151
2,920
2,559
2,624
(755)
234
(722)
261
(624)
(521)
(461)
2,056
3
240
1,830
208
1,751
412
2,296
2,295
1
2,296
62.6p
62.3p
2,038
2,036
2
2,038
55.6p
55.4p
2,163
2,159
4
2,163
61.2p
60.9p
Earnings per share*
Basic
Diluted
6
6
*Comparative amounts have been restated to reflect the impact of additional shares issued as scrip dividends
The notes on pages 105 to 164 form part of the consolidated financial statements.
100
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements Consolidated statement
of comprehensive income
for the years ended 31 March
Profit for the year
Other comprehensive (loss)/income:
Exchange adjustments
Actuarial net (losses)/gains
Deferred tax on actuarial net gains and losses
Net (losses)/gains in respect of cash flow hedges
Transferred to profit or loss on cash flow hedges
Deferred tax on cash flow hedges
Net gains on available-for-sale investments
Transferred to profit or loss on sale of available-for-sale investments
Deferred tax on available-for-sale investments
Share of post-tax other comprehensive loss of joint ventures
Other comprehensive (loss)/income for the year, net of tax
Total comprehensive income for the year
Attributable to:
Equity shareholders of the parent
Non-controlling interests
Notes
2013
£m
2012
£m
2,296
2,038
2011
£m
2,163
22
5
5
5
117
(930)
249
(31)
73
(13)
20
(10)
(2)
–
(527)
27
(1,325)
403
(18)
19
2
16
(9)
(2)
–
(887)
(95)
571
(181)
7
(7)
(2)
16
(3)
(1)
(4)
301
1,769
1,151
2,464
1,768
1
1,769
1,149
2
1,151
2,460
4
2,464
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 101
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Consolidated statement of financial position
as at 31 March
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Other non-current assets
Pension assets
Financial and other investments
Investments in joint ventures and associates
Derivative financial assets
Total non-current assets
Current assets
Inventories and current intangible assets
Trade and other receivables
Financial and other investments
Derivative financial assets
Cash and cash equivalents
Total current assets
Assets of businesses held for sale
Total assets
Current liabilities
Borrowings
Derivative financial liabilities
Trade and other payables
Current tax liabilities
Provisions
Total current liabilities
Non-current liabilities
Borrowings
Derivative financial liabilities
Other non-current liabilities
Deferred tax liabilities
Pensions and other post-retirement benefit obligations
Provisions
Total non-current liabilities
Liabilities of businesses held for sale
Total liabilities
Net assets
Equity
Called up share capital
Share premium account
Retained earnings
Other equity reserves
Shareholders’ equity
Non-controlling interests
Total equity
Notes
2013
£m
2012
£m
8
9
10
11
22
12
13
14
15
16
12
14
17
18
19
14
20
23
19
14
21
5
22
23
18
24
25
5,028
589
36,592
104
195
278
371
1,972
45,129
291
2,910
5,431
273
671
9,576
–
4,776
546
33,701
95
155
251
341
1,819
41,684
376
1,971
2,391
317
332
5,387
264
54,705
47,335
(3,448)
(407)
(3,051)
(231)
(308)
(2,492)
(162)
(2,685)
(383)
(282)
(7,445)
(6,004)
(24,647)
(1,274)
(1,884)
(4,076)
(3,694)
(1,452)
(20,533)
(1,269)
(1,921)
(3,738)
(3,088)
(1,449)
(37,027)
(31,998)
–
(87)
(44,472)
(38,089)
10,233
9,246
433
1,344
13,132
(4,681)
10,228
5
10,233
422
1,355
12,297
(4,835)
9,239
7
9,246
The consolidated financial statements set out on pages 97 to 164 were approved by the Board of Directors on 15 May 2013 and were
signed on its behalf by:
Sir Peter Gershon Chairman
Andrew Bonfield Finance Director
102
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements Consolidated statement of changes in equity
for the years ended 31 March
Other
equity
reserves(i)
£m
Total
shareholders’
equity
£m
Non-
controlling
interests
£m
At 1 April 2010
Profit for the year
Total other comprehensive income/(loss) for the year
Total comprehensive income/(loss) for the year
Rights issue
Transfer between reserves
Equity dividends
Scrip dividend related share issue
Issue of treasury shares
Purchase of own shares
Other movements in non-controlling interests
Share-based payment
Tax on share-based payment
At 31 March 2011
Profit for the year
Total other comprehensive income/(loss) for the year
Total comprehensive income for the year
Equity dividends
Scrip dividend related share issue
Issue of treasury shares
Purchase of own shares
Other movements in non-controlling interests
Share-based payment
Tax on share-based payment
At 31 March 2012
Profit for the year
Total other comprehensive income/(loss) for the year
Total comprehensive income for the year
Equity dividends
Scrip dividend related share issue
Issue of treasury shares
Purchase of own shares
Other movements in non-controlling interests
Share-based payment
Tax on share-based payment
Called up
share
capital
£m
298
–
–
–
113
–
–
5
–
–
–
–
–
416
–
–
–
–
6
–
–
–
–
–
422
–
–
–
–
11
–
–
–
–
–
Share
premium
account
£m
1,366
–
–
–
–
–
–
(5)
–
–
–
–
–
1,361
–
–
–
–
(6)
–
–
–
–
–
1,355
–
–
–
–
(11)
–
–
–
–
–
Retained
earnings
£m
7,316
2,159
390
2,549
–
3,101
(1,064)
206
18
(3)
–
25
5
12,153
2,036
(922)
1,114
(1,319)
313
13
(4)
–
24
3
12,297
2,295
(681)
1,614
(1,433)
623
19
(6)
–
20
(2)
(4,781)
–
(89)
(89)
3,101
(3,101)
–
–
–
–
–
–
–
(4,870)
–
35
35
–
–
–
–
–
–
–
(4,835)
–
154
154
–
–
–
–
–
–
–
4,199
2,159
301
2,460
3,214
–
(1,064)
206
18
(3)
–
25
5
9,060
2,036
(887)
1,149
(1,319)
313
13
(4)
–
24
3
9,239
2,295
(527)
1,768
(1,433)
623
19
(6)
–
20
(2)
At 31 March 2013
433
1,344
13,132
(4,681)
10,228
(i) For further details of other equity reserves, see note 25.
Total
equity
£m
4,211
2,163
301
2,464
3,214
–
(1,064)
206
18
(3)
(7)
25
5
9,069
2,038
(887)
1,151
(1,319)
313
13
(4)
(4)
24
3
9,246
2,296
(527)
1,769
(1,433)
623
19
(6)
(3)
20
(2)
10,233
12
4
–
4
–
–
–
–
–
–
(7)
–
–
9
2
–
2
–
–
–
–
(4)
–
–
7
1
–
1
–
–
–
–
(3)
–
–
5
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 103
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Consolidated cash flow statement
for the years ended 31 March
Cash flows from operating activities
Total operating profit
Adjustments for:
Exceptional items, remeasurements and stranded cost recoveries
Depreciation, amortisation and impairment
Share-based payment charge
Changes in working capital
Changes in provisions
Changes in pensions and other post-retirement benefit obligations
Cash flows relating to exceptional items
Cash flows relating to stranded cost recoveries
Cash generated from operations
Tax (paid)/received
Net cash inflow from operating activities
Cash flows from investing activities
Acquisition of investments
Proceeds from sale of investments in subsidiaries
Purchases of intangible assets
Purchases of property, plant and equipment
Disposals of property, plant and equipment
Dividends received from joint ventures
Interest received
Net movements in short-term financial investments
Net cash flow used in investing activities
Cash flows from financing activities
Proceeds of rights issue
Proceeds from issue of treasury shares
Purchase of own shares
Proceeds received from loans
Repayment of loans
Net movements in short-term borrowings and derivatives
Interest paid
Exceptional finance costs on the redemption of debt
Dividends paid to shareholders
Net cash flow from/(used in) financing activities
Net increase/(decrease) in cash and cash equivalents
Exchange movements
Net cash and cash equivalents at start of year
Net cash and cash equivalents at end of year (i)
(i) Net of bank overdrafts of £23m (2012: £33m; 2011: £42m).
Notes
2013
£m
2012
£m
2011
£m
1(b)
3
26(a)
17
3,754
3,539
3,745
(110)
1,361
20
(410)
(53)
(413)
(112)
–
4,037
(287)
3,750
(14)
183
(175)
(3,214)
32
21
29
(2,992)
(6,130)
–
19
(6)
5,062
(1,210)
452
(792)
–
(810)
2,715
335
14
299
648
(44)
1,282
24
146
(116)
(386)
(205)
247
4,487
(259)
4,228
(13)
365
(203)
(3,147)
24
26
24
553
(2,371)
–
13
(4)
1,809
(1,914)
(49)
(749)
–
(1,006)
(1,900)
(43)
–
342
299
(145)
1,245
25
185
(93)
(304)
(147)
343
4,854
4
4,858
(135)
11
(176)
(2,958)
26
9
26
(1,577)
(4,774)
3,214
18
(3)
767
(2,878)
348
(965)
(73)
(858)
(430)
(346)
(3)
691
342
104
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements Notes to the consolidated financial statements
– analysis of items in the primary statements
1. Segmental analysis
This note sets out the financial performance of the business split into the different parts of the business (operating segments).
We monitor and manage the performance of these operating segments on a day-to-day basis.
Our strategy in action
We own a portfolio of businesses that includes a mixture of cash generative developed assets with minimal investment requirements
(such as National Grid Metering, included within Other), businesses with low to medium levels of growth and positive cash generation
(such as UK Gas Distribution and US Regulated) and businesses with high levels of investment and growth (such as UK Transmission).
We generate 96% of our revenue from our regulated businesses in the UK and US. We work with our regulators to obtain robust
regulatory agreements that balance the risks we face with the opportunity to deliver reasonable returns for our investors. When
investing in non-regulated businesses we aim to leverage our core capabilities to deliver higher returns for investors.
Our regulated businesses earn revenue for the transmission, distribution and generation services they have provided during the
year. The revenue recognised may differ from the revenue allowed under our regulatory agreements and differences are adjusted
against future prices. Our non-regulated businesses earn revenue in line with their contractual terms.
Revenue primarily represents the sales value derived from the generation, transmission and distribution of energy, together with the
sales value derived from the provision of other services to customers and previously, recovery of US stranded costs during the year.
It excludes value added (sales) tax and intra-group sales.
Revenue includes an assessment of unbilled energy and transportation services supplied to customers between the date of the last
meter reading and the year end. This is estimated based on historical consumption and weather patterns.
Where revenue exceeds the maximum amount permitted by regulatory agreement and adjustments will be made to future prices to
reflect this over-recovery, no liability is recognised, as such an adjustment relates to the provision of future services. Similarly no asset
is recognised where a regulatory agreement permits adjustments to be made to future prices in respect of an under-recovery.
US stranded costs are various generation-related costs incurred prior to the divestiture of generation assets beginning in the late
1990s and costs of legacy contracts that are being recovered from customers. The recovery of stranded costs and other amounts
allowed to be collected from customers under regulatory arrangements is recognised in the period in which these amounts are
recoverable from customers. The recovery of stranded costs was substantially completed at 31 March 2012.
We present revenue and the results of the business analysed by operating segment, based on the information the Board of Directors
uses internally for the purposes of evaluating the performance of operating segments and determining resource allocation between
operating segments. The Board is National Grid’s chief operating decision-making body (as defined by IFRS 8 ‘Operating Segments’)
and assesses the performance of operations principally on the basis of operating profit before exceptional items, remeasurements
and stranded cost recoveries (see note 3).
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 105
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
Continued
1. Segmental analysis continued
The following table describes the main activities for each operating segment:
UK Transmission
UK Gas Distribution
US Regulated
High voltage electricity transmission networks, the gas transmission network
in Great Britain, UK liquefied natural gas (LNG) storage activities and the French
electricity interconnector.
Four of the eight regional networks of Great Britain’s gas distribution system.
Gas distribution networks, electricity distribution networks and high voltage electricity
transmission networks in New York and New England (including EnergyNorth and
Granite State up to the date they were sold on 3 July 2012) and electricity generation
facilities in New York and Massachusetts.
Other activities primarily relate to non-regulated businesses and other commercial operations not included within the above segments,
including: UK based gas and electricity metering activities; UK property management; a UK LNG import terminal; other LNG operations;
US unregulated transmission pipelines; together with corporate activities.
Sales between operating segments are priced considering the regulatory and legal requirements to which the businesses are subject.
The analysis of revenue by geographical area is on the basis of destination. There are no material sales between the UK and US
geographical areas.
(a) Revenue
Operating segments
UK Transmission
UK Gas Distribution
US Regulated
Other activities
Total excluding stranded
cost recoveries
Stranded cost recoveries
Geographical areas
UK
US
2013
Sales
between
segments
£m
(86)
(47)
–
(28)
Total
sales
£m
4,246
1,714
7,918
642
Sales
to third
parties
£m
4,160
1,667
7,918
614
Total
sales
£m
3,804
1,605
7,795
715
14,520
(161)
14,359
13,919
2012
Sales
between
segments
£m
(5)
(52)
–
(30)
(87)
Sales
to third
parties
£m
3,799
1,553
7,795
685
Total
sales
£m
3,484
1,524
8,746
678
13,832
14,432
2011
Sales
between
segments
£m
(7)
(60)
–
(22)
(89)
14,359
–
14,359
6,421
7,938
14,359
13,553
279
13,832
6,000
7,832
13,832
Sales
to third
parties
£m
3,477
1,464
8,746
656
14,343
13,988
355
14,343
5,556
8,787
14,343
In the UK, there was a cumulative over-recovery of £16m* at 31 March 2013 (2012: under-recovery of £26m*; 2011: under-recovery
of £34m*). In the US, accumulated regulatory entitlements to future revenue net of over- or under-recoveries amounted to £1,330m*
at 31 March 2013 (2012: £1,429m*; 2011: £1,618m*).
*Unaudited
106
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 1. Segmental analysis continued
(b) Operating profit
A reconciliation of the operating segments’ measure of profit to total profit before tax is provided below. Further details of the
exceptional items, remeasurements and stranded cost recoveries are provided in note 3.
Operating segments
UK Transmission
UK Gas Distribution
US Regulated
Other activities
Geographical areas
UK
US
Reconciliation to profit before tax:
Operating profit
Finance income
Finance costs
Share of post-tax results of joint ventures and associates
Profit before tax
(c) Capital expenditure, depreciation and amortisation
Operating segments
UK Transmission
UK Gas Distribution
US Regulated
Other activities
Geographical areas
UK
US
By asset type
Property, plant and equipment
Non-current intangible assets
Before exceptional items,
remeasurements and stranded
cost recoveries
After exceptional items,
remeasurements and stranded
cost recoveries
2013
£m
2012
£m
2011
£m
2013
£m
2012
£m
2011
£m
1,609
794
1,253
(12)
3,644
2,536
1,108
3,644
3,644
1,252
(2,172)
18
2,742
1,354
763
1,190
188
3,495
2,353
1,142
3,495
3,495
1,301
(2,218)
7
2,585
1,363
711
1,407
119
3,600
2,226
1,374
3,600
3,600
1,281
(2,415)
7
2,473
1,566
763
1,437
(12)
3,754
2,462
1,292
3,754
3,754
1,252
(2,104)
18
2,920
1,354
739
1,154
292
3,539
2,357
1,182
3,539
3,539
1,301
(2,288)
7
2,559
1,293
671
1,704
77
3,745
2,055
1,690
3,745
3,745
1,324
(2,452)
7
2,624
Capital expenditure
Depreciation and amortisation
2013
£m
1,680
666
1,124
216
3,686
2,471
1,215
3,686
3,511
175
3,686
2012
£m
1,397
645
1,052
281
3,375
2,217
1,158
3,375
3,172
203
3,375
2011
£m
1,432
669
1,092
275
3,468
2,310
1,158
3,468
3,292
176
3,468
2013
£m
(489)
(261)
(430)
(181)
2012
£m
(431)
(251)
(411)
(179)
2011
£m
(400)
(218)
(445)
(189)
(1,361)
(1,272)
(1,252)
(902)
(459)
(849)
(423)
(789)
(463)
(1,361)
(1,272)
(1,252)
(1,260)
(101)
(1,361)
(1,193)
(79)
(1,272)
(1,182)
(70)
(1,252)
Total non-current assets other than financial instruments, deferred tax assets and pension assets located in the UK and US were
£23,344m and £19,340m respectively as at 31 March 2013 (31 March 2012: UK £21,793m, US £17,666m; 31 March 2011: UK £20,720m,
US £17,003m).
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 107
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
Continued
2. Operating costs
Below we have presented separately certain items included in our operating costs. These include a breakdown of payroll costs
(including disclosure of amounts paid to key management personnel) and fees paid to our auditors.
Rentals under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease.
Before exceptional items,
remeasurements and stranded
cost recoveries
Exceptional items,
remeasurements and stranded
cost recoveries
2013
£m
1,361
1,441
1,251
1,384
969
2012
£m
1,267
1,389
1,356
1,518
955
2011
£m
1,245
1,460
1,547
2,102
945
805
818
581
487
3,017
407
2,348
298
2,210
2013
£m
–
22
(111)
(69)
–
–
–
48
2012
£m
5
82
89
5
–
–
–
54
10,715
10,058
10,388
(110)
235
Depreciation and amortisation
Payroll costs
Purchases of electricity
Purchases of gas
Rates and property taxes
Balancing Services Incentive
Scheme
Payments to other UK network
owners
Other
Operating costs include:
Inventory consumed
Operating leases
Research expenditure
(a) Payroll costs
Wages and salaries (i)
Social security costs
Pension costs (note 22)
Share-based payment
Severance costs (excluding pension costs)
Less: payroll costs capitalised
2011
£m
7
36
(65)
(82)
–
–
–
314
210
2013
£m
1,361
1,463
1,140
1,315
969
Total
2012
£m
1,272
1,471
1,445
1,523
955
2011
£m
1,252
1,496
1,482
2,020
945
805
818
581
487
3,065
407
2,402
298
2,524
10,605
10,293
10,598
389
109
15
360
97
15
451
89
16
2013
£m
1,625
120
209
20
16
1,990
(527)
1,463
2012
£m
1,597
116
208
24
35
1,980
(509)
1,471
2011
£m
1,592
119
208
25
56
2,000
(504)
1,496
(i)
Included within wages and salaries are US other post-retirement benefit costs of £49m (2012: £66m; 2011: £11m). For further information refer to note 22.
108
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 2. Operating costs continued
(b) Number of employees
UK
US
31 March
2013
Number
9,881
15,343
Monthly
average
2013
Number
9,800
15,446
31 March
2012
Number
9,675
15,970
Monthly
average
2012
Number
9,704
16,377
25,224
25,246
25,645
26,081
The vast majority of employees in the US are either directly or indirectly employed in the transmission, distribution and generation of
electricity or the distribution of gas, while those in the UK are either directly or indirectly employed in the transmission and distribution
of gas or the transmission of electricity. At 31 March 2013, there were 2,151 (2012: 2,357) employees in other operations, excluding
shared services.
(c) Key management compensation
Salaries and short-term employee benefits
Post-retirement benefits
Share-based payment
2013
£m
8
3
5
16
2012
£m
10
6
5
21
2011
£m
10
6
6
22
Key management compensation relates to the Board of Directors, including the Executive Directors and Non-executive Directors for
the years presented.
(d) Directors’ emoluments
Details of Directors’ emoluments are contained in the audited part of the Remuneration Report, which forms part of these financial
statements.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 109
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
Continued
2. Operating costs continued
(e) Auditors’ remuneration
Auditors’ remuneration is presented below in accordance with the requirements of the UK Companies Act 2006 and the principal
accountant fees and services disclosure requirements of Item 16C of Form 20-F:
Audit fees payable to the parent Company’s auditor and its associates in respect of (i):
Audit of the parent Company’s individual and consolidated financial statements
The auditing of accounts of any associate of the Company
Other services supplied (ii)
Total other services (iii)
Tax fees (iv)
Tax compliance services
Tax advisory services
All other fees (v)
Other assurance services
Services relating to corporate finance transactions not covered above
Other non-audit services not covered above
2013
£m
1.1
6.0
2.7
9.8
0.5
0.3
0.1
0.3
1.1
2.3
2012
£m
1.1
5.2
2.3
8.6
0.5
0.2
0.3
0.2
2.6
3.8
2011
£m
1.0
4.8
2.1
7.9
0.5
0.4
0.4
0.4
1.0
2.7
Total auditors’ remuneration
12.1
12.4
10.6
(i)
Audit fees in each year represent fees for the audit of the Company’s financial statements and regulatory reporting for the years ended 31 March 2013, 2012 and 2011,
and the review of interim financial statements for the six month periods ended 30 September 2012, 2011 and 2010 respectively.
(ii) Other services supplied represent fees payable for services in relation to other statutory filings or engagements that are required to be carried out by the auditors.
In particular, this includes fees for reports under section 404 of the US Public Company Accounting Reform and Investor Protection Act of 2002 (Sarbanes-Oxley)
and audit reports on regulatory returns.
(iii) There were no audit related fees as described in Item 16C(b) of Form 20-F.
(iv) Tax fees include amounts charged for tax compliance, tax advice and tax planning. Total tax fees for the year ended 31 March 2013 were £0.8m (2012: £0.7m; 2011: £0.9m).
(v) All other fees include amounts relating to assurance provided on transformation initiatives and sundry services, all of which have been subject to approval by the Audit
Committee. Total other fees for the year ended 31 March 2013 were £1.5m (2012: £3.1m; 2011: £1.8m).
In addition, fees of £0.1m were incurred in 2013 in relation to the audits of the pension schemes of the Company (2012: £0.1m;
2011: £0.1m).
Subject to the Company’s Articles of Association and the Companies Act 2006, the Audit Committee is solely and directly responsible
for the approval of the appointment, reappointment, compensation and oversight of the Company’s independent auditors. It is our
policy that the Audit Committee must approve in advance all non-audit work to be performed by the independent auditors to ensure
that the service will not compromise auditor independence. Certain services are prohibited from being performed by the external
auditors under the Sarbanes-Oxley Act 2002.
110
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 3. Exceptional items, remeasurements and stranded cost recoveries
To monitor our financial performance, we use a profit measure that excludes certain income and expenses. We call that measure
‘business performance’. We exclude items from business performance because we think these items are individually important to
understanding our financial performance and, if included, could distort understanding of the performance for the year and the
comparability between periods. This note analyses these items, which are included in our result for the year but are excluded from
business performance.
Our financial performance is analysed into two components: business performance, which excludes exceptional items, remeasurements
and stranded cost recoveries; and exceptional items, remeasurements and stranded cost recoveries. Business performance is used
by management to monitor financial performance as it is considered that it improves the comparability of our reported financial
performance from year to year. Business performance subtotals are presented on the face of the income statement or in the notes
to the financial statements.
Items of income or expense that are considered by management for designation as exceptional items include such items as significant
restructurings, write-downs or impairments of non-current assets, significant changes in environmental or decommissioning provisions,
integration of acquired businesses, gains or losses on disposals of businesses or investments and debt redemption costs as a
consequence of transactions such as significant disposals or issues of equity.
Costs arising from restructuring programmes include redundancy costs. Redundancy costs are charged to the income statement in
the year in which a commitment is made to incur the costs and the main features of the restructuring plan have been announced to
affected employees.
Remeasurements comprise gains or losses recorded in the income statement arising from changes in the fair value of commodity
contracts and of derivative financial instruments to the extent that hedge accounting is not achieved or is not effective. These fair
values increase or decrease because of changes in commodity and financial indices and prices over which we have no control.
Stranded cost recoveries represent the recovery, through charges to electricity customers in upstate New York and New England,
of historical generation-related costs, related to generation assets that are no longer owned by National Grid. Such costs have been
recovered from customers as permitted by regulatory agreements, with substantially all having been recovered by 31 March 2012.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 111
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
Continued
3. Exceptional items, remeasurements and stranded cost recoveries continued
Included within operating profit:
Exceptional items:
Restructuring costs(1)
Environmental charges(2)
Net gain on disposal of businesses(3)
Impairment charges and related costs(4)
Other(5)
Remeasurements – commodity contracts(6)
Stranded cost recoveries(7)
Included within finance income:
Exceptional items:
Interest credit on tax settlement(8)
Included within finance costs:
Exceptional items:
Debt redemption costs(9)
Remeasurements:
Net gains/(losses) on derivative financial instruments(10)
Total included within profit before tax
Included within taxation:
Exceptional credits arising on items not included in profit before tax:
Deferred tax credit arising on the reduction in the UK corporation tax rate(11)
Other(8)
Tax on exceptional items
Tax on remeasurements(6,10)
Tax on stranded cost recoveries
2013
£m
2012
£m
2011
£m
(87)
–
3
–
–
(84)
180
14
110
–
–
68
68
178
128
–
31
(92)
(5)
62
(101)
(55)
97
(64)
1
(122)
(94)
260
44
–
–
(70)
(70)
(26)
242
–
54
42
(104)
234
(89)
(128)
15
(133)
(15)
(350)
147
348
145
43
(73)
36
(37)
151
226
59
79
36
(139)
261
Total exceptional items, remeasurements and stranded cost recoveries after tax
240
208
412
Analysis of total exceptional items, remeasurements and stranded cost recoveries after tax:
Exceptional items after tax
Remeasurements after tax
Stranded cost recoveries after tax
Total
75
156
9
240
174
(122)
156
208
(16)
219
209
412
(1)
Restructuring costs for the year include: costs related to the restructuring of our UK operations of £66m in preparedness for
delivering RIIO; costs for transformation-related initiatives in the UK and US of £31m; and a credit of £10m for the release of
restructuring provisions in the UK recognised in prior years.
For the years ended 31 March 2012 and 31 March 2011, restructuring costs included: costs for the restructuring of our US
operations of £58m and £10m respectively which included severance costs and pension and other post-retirement curtailment
gains and losses; costs for transformation-related initiatives of £54m and £103m respectively; credits of £11m and £39m
respectively for the release of restructuring provisions in the UK recognised in prior years; and in 2011 a charge of £15m related
to the integration of KeySpan.
(2) For the years ended 31 March 2012 and 31 March 2011, environmental charges included £55m and £58m respectively related
to US specific exposures and £70m in 2011 related to UK specific exposures. Costs incurred with respect to US environmental
provisions are substantially recoverable from customers.
112
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements
3. Exceptional items, remeasurements and stranded cost recoveries continued
(3) During the year, we recognised a gain of £3m on the disposal of our EnergyNorth gas business and Granite State electricity
business in New Hampshire. During the year ended 31 March 2012, we sold two subsidiaries resulting in a gain on disposal of £72m.
We also recognised gains of £25m in relation to disposals of businesses in prior years, representing the release of various unutilised
provisions. During the year ended 31 March 2011, we sold three subsidiaries and an associate resulting in a gain of £15m.
(4)
Impairment charges and related costs for the year ended 31 March 2012 of £64m represented an impairment of intangibles
(originally recognised on the acquisition of KeySpan) related to our LIPA management services agreement contract, following the
announcement on 15 December 2011 that the agreement would not be renewed after 31 December 2013. During the year ended
31 March 2011, impairment charges and related costs included a charge of £49m related to an investment in a joint venture; an
impairment charge of £34m against the goodwill related to our US companies in New Hampshire; and a charge of £50m related
to our US generation assets for impairment and associated decommissioning.
(5) Other exceptional charges for the years ended 31 March 2012 and 2011 included an amortisation charge of £5m and £7m respectively
in relation to acquisition-related intangibles. For the year ended 31 March 2012, other exceptional charges also included a release
of £6m of unutilised provisions in our metering business, originally recognised during the year ended 31 March 2010. The charge
for the year ended 31 March 2011 included a penalty of £8m levied by Ofgem on our UK Gas Distribution business.
(6) Remeasurements – commodity contracts represent mark-to-market movements on certain physical and financial commodity
contract obligations in the US. These contracts primarily relate to the forward purchase of energy for supply to customers, or
to the economic hedging thereof, that are required to be measured at fair value and that do not qualify for hedge accounting.
Under the existing rate plans in the US, commodity costs are recoverable from customers although the timing of recovery may
differ from the pattern of costs incurred.
(7) Stranded cost recoveries of £14m substantially represent the release of an unutilised provision recognised in a prior period.
For the years ended 31 March 2012 and 2011, stranded cost recoveries on a pre-tax basis consisted of revenue of £279m and
£355m offset by operating costs of £19m and £7m respectively. This represented the recovery of some of our historical investments
in generating plants that were divested as part of the restructuring and wholesale power deregulation process in New England
and New York during the 1990s. The recovery of these stranded costs was substantially completed at 31 March 2012.
(8) During the year ended 31 March 2011, we reached agreement with the US tax authorities on the settlement of pre-acquisition tax
liabilities that resulted in the repayment of tax and interest accruing.
(9) Debt redemption costs in the year ended 31 March 2011 represent costs arising from our debt repurchase programme following
the rights issue on 14 June 2010.
(10) Remeasurements – net gains/(losses) on derivative financial instruments comprise gains/(losses) arising on derivative financial
instruments reported in the income statement. These exclude gains and losses for which hedge accounting has been effective,
which have been recognised directly in other comprehensive income or which are offset by adjustments to the carrying value
of debt. The tax charge in the year includes a credit of £1m (2012: £1m; 2011: £104m) in respect of prior years.
(11) The exceptional tax credit arises from a reduction in the UK corporation tax rate from 24% to 23% included and enacted in the
Finance Act 2012 and applicable from 1 April 2013. Other UK tax legislation also reduced the UK corporation tax rate in the prior
periods (2012: from 26% to 24%; 2011: from 28% to 26%). These reductions have resulted in a decrease in deferred tax liabilities.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 113
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information
Notes to the consolidated financial statements
Continued
4. Finance income and costs
This note details the interest income generated on our financial assets and the interest expense incurred on financial liabilities.
It also includes the expected return on pension assets, which is offset by the interest payable on pension obligations. In reporting
business performance, we adjust net financing costs to exclude any net gains or losses on derivative financial instruments included
in remeasurements.
Finance income
Expected return on pension and other post-retirement benefit plan assets
Interest income on financial instruments:
Bank deposits and other financial assets
Gains on disposal of available-for-sale investments
Finance income before exceptional items
Exceptional items
Exceptional interest credit on tax settlement
Finance income
Finance costs
Interest on pension and other post-retirement benefit plan obligations
Interest expense on financial liabilities held at amortised cost:
Bank loans and overdrafts
Other borrowings
Derivatives
Unwinding of discounts on provisions
Less: interest capitalised (i)
Finance costs before exceptional items and remeasurements
Exceptional items
Exceptional debt redemption costs
Remeasurements
Net gains/(losses) on derivative financial instruments included in remeasurements (ii):
Ineffectiveness on derivatives designated as:
Fair value hedges (iii)
Cash flow hedges
Net investment hedges
Net investment hedges – undesignated forward rate risk
Derivatives not designated as hedges or ineligible for hedge accounting
Exceptional items and remeasurements included within finance costs
Finance costs
Net finance costs
2013
£m
2012
£m
2011
£m
1,222
1,273
1,256
20
10
19
9
22
3
1,252
1,301
1,281
–
–
43
1,252
1,301
1,324
(1,153)
(1,203)
(1,231)
(65)
(1,052)
51
(75)
122
(2,172)
(84)
(1,105)
122
(72)
124
(85)
(1,184)
84
(128)
129
(2,218)
(2,415)
–
–
(73)
17
(7)
(26)
26
58
68
68
9
14
(15)
39
(117)
(70)
(70)
40
9
7
(16)
(4)
36
(37)
(2,104)
(2,288)
(2,452)
(852)
(987)
(1,128)
(i)
Interest on funding attributable to assets in the course of construction was capitalised during the year at a rate of 4.4% (2012: 5.2%; 2011: 5.3%).
(ii) Includes a net foreign exchange loss on financing activities of £32m (2012: £280m gain; 2011: £173m gain) offset by foreign exchange gains and losses on derivative
financial instruments measured at fair value.
(iii) Includes a net gain on instruments designated as fair value hedges of £67m (2012: £233m; 2011: £86m) offset by a net loss of £50m (2012: £224m; 2011: £46m) arising
from fair value adjustments to the carrying value of debt.
114
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 5. Taxation
Tax is payable in the territories where we operate, mainly the UK and the US. This note gives further details of the tax charge
and tax liabilities, including current and deferred tax. The current tax charge is the tax payable on this year’s taxable profits.
Deferred tax is an accounting adjustment to provide for tax that is expected to arise in the future due to differences in accounting
and tax bases.
The tax charge for the period is recognised in the income statement, the statement of comprehensive income or directly in equity,
according to the accounting treatment of the related transaction. The tax charge comprises both current and deferred tax.
Current tax assets and liabilities are measured at the amounts expected to be recovered from or paid to the taxation authorities. The
tax rates and tax laws used to compute the amounts are those that have been enacted or substantively enacted by the reporting date.
The calculation of the Group’s total tax charge involves a degree of estimation and judgement, and management periodically evaluates
positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation and establishes
provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred tax is provided for using the balance sheet liability method and is recognised on temporary differences between the carrying
amount of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit.
Deferred tax liabilities are generally recognised on all taxable temporary differences and deferred tax assets are recognised to the
extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. However,
deferred tax assets and liabilities are not recognised if the temporary differences arise from the initial recognition of goodwill or from
the initial recognition of other assets and liabilities in a transaction (other than a business combination) that affects neither the accounting
nor taxable profit or loss.
Deferred tax liabilities are recognised on taxable temporary differences arising on investments in subsidiaries and jointly controlled
entities except where the Company is able to control the reversal of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised,
based on the tax rates and tax laws that have been enacted or substantively enacted by the reporting date.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable
that sufficient taxable profits will be available to allow all or part of the deferred tax asset to be recovered. Unrecognised deferred tax
assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profits
will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax
liabilities and when they relate to income taxes levied by the same taxation authority and the Company and its subsidiaries intend to
settle their current tax assets and liabilities on a net basis.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 115
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
Continued
5. Taxation continued
Tax charged/(credited) to the income statement
Tax before exceptional items, remeasurements and stranded cost recoveries
Exceptional tax on items not included in profit before tax (note 3)
Tax on other exceptional items, remeasurements and stranded cost recoveries
Tax on total exceptional items, remeasurements and stranded cost recoveries (note 3)
Total tax charge
Taxation as a percentage of profit before tax
Before exceptional items, remeasurements and stranded cost recoveries
After exceptional items, remeasurements and stranded cost recoveries
The tax charge for the year can be analysed as follows:
Current tax
UK corporation tax at 24% (2012: 26%; 2011: 28%)
UK corporation tax adjustment in respect of prior years
Overseas corporation tax
Overseas corporation tax adjustment in respect of prior years
Total current tax
Deferred tax
UK deferred tax
UK deferred tax adjustment in respect of prior years
Overseas deferred tax
Overseas deferred tax adjustment in respect of prior years
Total deferred tax
Total tax charge
2013
£m
686
(128)
66
(62)
624
2013
%
25.0
21.4
2013
£m
306
(17)
289
50
(222)
(172)
117
60
(17)
43
325
139
464
507
2012
£m
755
(242)
8
(234)
521
2012
%
29.2
20.4
2012
£m
186
(5)
181
98
(144)
(46)
135
12
(18)
(6)
225
167
392
386
2011
£m
722
(285)
24
(261)
461
2011
%
29.2
17.6
2011
£m
168
(161)
7
105
(2)
103
110
53
(43)
10
393
(52)
341
351
624
521
461
Adjustments in respect of prior years include the following amounts that relate to exceptional items, remeasurements and stranded cost
recoveries: £nil for corporation tax (2012: £nil; 2011: £207m credit) and a £1m deferred tax credit (2012: £1m credit; 2011: £44m charge).
116
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 5. Taxation continued
Tax (credited)/charged to other comprehensive income and equity
Corporation tax
Share-based payment
Deferred tax
Share of other comprehensive income of joint ventures and associates
Available-for-sale investments
Cash flow hedges
Share-based payment
Actuarial (losses)/gains
Total tax recognised in the statement of comprehensive income
Total tax relating to share-based payment recognised directly in equity
2013
£m
1
–
2
13
1
(249)
(232)
(234)
2
(232)
2012
£m
(3)
–
2
(2)
–
(403)
(406)
(403)
(3)
(406)
2011
£m
(1)
(2)
1
2
(4)
181
177
182
(5)
177
The tax charge for the year after exceptional items, remeasurements and stranded cost recoveries is lower (2012: lower; 2011: lower)
than the standard rate of corporation tax in the UK of 24% (2012: 26%; 2011: 28%):
Before
exceptional
items,
remeasurements
and stranded
cost recoveries
2013
£m
After
exceptional
items,
remeasurements
and stranded
cost recoveries
2013
£m
Before
exceptional
items,
remeasurements
and stranded
cost recoveries
2012
£m
After
exceptional
items,
remeasurements
and stranded
cost recoveries
2012
£m
Before
exceptional
items,
remeasurements
and stranded
cost recoveries
2011
£m
After
exceptional
items,
remeasurements
and stranded
cost recoveries
2011
£m
Profit before tax
Before exceptional items, remeasurements
and stranded cost recoveries
Exceptional items, remeasurements and
stranded cost recoveries
Profit before tax
Profit before tax multiplied by UK corporation
tax rate of 24% (2012: 26%; 2011: 28%)
Effects of:
Adjustments in respect of prior years
Expenses not deductible for tax purposes
Non-taxable income
Adjustment in respect of foreign tax rates
Impact of share-based payment
Deferred tax impact of change in UK tax rate
Other
Total tax
Effective tax rate
2,742
–
2,742
658
(116)
37
(24)
133
2
–
(4)
686
%
25.0
2,742
178
2,920
701
(117)
169
(152)
157
2
(128)
(8)
624
%
21.4
2,585
–
2,585
672
1
36
(19)
75
1
–
(11)
755
%
29.2
2,585
(26)
2,559
665
–
55
(30)
75
1
(242)
(3)
521
%
20.4
2,473
–
2,473
692
(95)
42
5
74
1
–
3
722
%
29.2
2,473
151
2,624
735
(258)
204
(136)
120
1
(226)
21
461
%
17.6
Factors that may affect future tax charges
A reduction in the UK corporation tax rate to 21% from 1 April 2014 was announced in the Autumn Statement and a further reduction to
20% from April 2015 was announced in the 2013 UK Budget Report. These reductions have not been substantively enacted and have
not been reflected in these financial statements. The Group’s tax charge will reflect these reductions in the UK corporation tax rate
once the changes have been enacted.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 117
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
Continued
5. Taxation continued
Taxation included within the statement of financial position
The following are the major deferred tax assets and liabilities recognised, and the movements thereon, during the current and prior
reporting periods:
Deferred tax (assets)/liabilities
Deferred tax assets at 31 March 2011
Deferred tax liabilities at 31 March 2011
At 1 April 2011
Exchange adjustments
Charged/(credited) to income statement
Credited to other comprehensive income
Disposals
Reclassified as held for sale
Other
At 31 March 2012
Deferred tax assets at 31 March 2012
Deferred tax liabilities at 31 March 2012
At 1 April 2012
Exchange adjustments
Charged/(credited) to income statement
Charged/(credited) to other comprehensive income and equity
Other
At 31 March 2013
Deferred tax assets at 31 March 2013
Deferred tax liabilities at 31 March 2013
Accelerated
tax
depreciation
£m
Share-
based
payment
£m
(2)
5,186
5,184
10
307
–
(28)
10
–
5,483
(1)
5,484
5,483
149
329
–
–
5,961
(2)
5,963
5,961
(18)
–
(18)
–
–
–
–
–
–
(18)
(18)
–
(18)
–
2
1
–
(15)
(15)
–
(15)
Pensions
and other
post-
retirement
benefits
£m
(882)
111
(771)
(3)
128
(403)
–
1
3
(1,045)
(1,173)
128
(1,045)
(47)
132
(249)
–
(1,209)
(1,363)
154
(1,209)
Financial
instruments
£m
Other net
temporary
differences
£m
(60)
6
(54)
(1)
(34)
–
–
–
–
(89)
(98)
9
(89)
(1)
68
15
–
(7)
(16)
9
(7)
(706)
131
(575)
(4)
(20)
–
–
14
(8)
(593)
(702)
109
(593)
(32)
(23)
–
(6)
(654)
(777)
123
(654)
Total
£m
(1,668)
5,434
3,766
2
381
(403)
(28)
25
(5)
3,738
(1,992)
5,730
3,738
69
508
(233)
(6)
4,076
(2,173)
6,249
4,076
Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle
the balances net. The deferred tax balances (after offset) for statement of financial position purposes consist solely of deferred tax
liabilities of £4,076m (2012: £3,738m).
At the reporting date there were no material current deferred tax assets or liabilities (2012: £nil).
Deferred tax assets in respect of capital losses, trading losses and non-trade deficits have not been recognised as their future
recovery is uncertain or not currently anticipated. The deferred tax assets not recognised are as follows:
Capital losses
Non-trade deficits
Trading losses
2013
£m
323
1
11
2012
£m
353
2
7
The capital losses and non-trade deficits that arise in the UK are available to carry forward indefinitely. However, the capital losses can
only be offset against specific types of future capital gains and non-trade deficits against specific future non-trade profits. The capital
losses that arise in the US can only be offset against future capital gains but will expire in the year ended 31 March 2018 if they remain
unused. The trading losses arising in the UK are available to carry forward indefinitely and the trading losses arising in the US have a
20-year carry forward time limit.
The aggregate amount of temporary differences associated with the unremitted earnings of overseas subsidiaries and joint ventures for
which deferred tax liabilities have not been recognised at the reporting date is approximately £1,817m (2012: £1,729m). No liability is
recognised in respect of the differences because the Company and its subsidiaries are in a position to control the timing of the reversal
of the temporary differences and it is probable that such differences will not reverse in the foreseeable future. In addition, as a result of
a change in UK tax legislation, which largely exempts overseas dividends received on or after 1 July 2009 from UK tax, the temporary
differences are unlikely to lead to additional tax.
118
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 6. Earnings per share
Earnings per share (EPS) is the amount of post-tax profit attributable to each share. Basic EPS is calculated on profit for the year
attributable to equity shareholders divided by the weighted average number of shares in issue during the year. Diluted EPS shows
what the impact would be if all outstanding share options were exercised and treated as ordinary shares at year end.
Adjusted earnings per share, excluding exceptional items, remeasurements and stranded cost recoveries, are provided to reflect the
business performance subtotals used by the Company. For further details of exceptional items, remeasurements and stranded cost
recoveries, see note 3.
(a) Basic earnings per share
Adjusted earnings
Exceptional items after tax
Remeasurements after tax
Stranded cost recoveries after tax
Earnings
Weighted average number of shares – basic*
Earnings
2013
£m
2,055
75
156
9
2,295
Earnings
per share
2013
pence
56.1
2.0
4.3
0.2
62.6
2013
millions
3,664
*Comparative amounts have been restated to reflect the impact of additional shares issued as scrip dividends
(b) Diluted earnings per share
Adjusted earnings
Exceptional items after tax
Remeasurements after tax
Stranded cost recoveries after tax
Earnings
Weighted average number of shares – diluted*
Earnings
2013
£m
2,055
75
156
9
2,295
Earnings
per share
2013
pence
55.8
2.0
4.3
0.2
62.3
2013
millions
3,682
*Comparative amounts have been restated to reflect the impact of additional shares issued as scrip dividends
(c) Reconciliation of basic to diluted average number of shares
Weighted average number of ordinary shares – basic
Effect of dilutive potential ordinary shares – employee share plans
Weighted average number of ordinary shares – diluted
2013
millions
3,664
18
3,682
Earnings
2012
£m
1,828
174
(122)
156
2,036
Earnings
2012
£m
1,828
174
(122)
156
2,036
Earnings
per share
2012*
pence
50.0
4.7
(3.3)
4.2
55.6
2012
millions
3,659
Earnings
per share
2012*
pence
49.7
4.7
(3.2)
4.2
55.4
2012
millions
3,678
2012
millions
3,659
19
3,678
Earnings
2011
£m
1,747
(16)
219
209
2,159
Earnings
2011
£m
1,747
(16)
219
209
2,159
Earnings
per share
2011*
pence
49.6
(0.5)
6.2
5.9
61.2
2011
millions
3,525
Earnings
per share
2011*
pence
49.3
(0.5)
6.2
5.9
60.9
2011
millions
3,544
2011
millions
3,525
19
3,544
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 119
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
Continued
7. Dividends
Dividends represents the return of profits to shareholders. Dividends are paid as an amount per ordinary share held. We retain part
of the profits generated in the year to meet future growth plans and pay out the remainder in accordance with our dividend policy.
Interim dividends are recognised when they become payable to the Company’s shareholders. Final dividends are recognised when
they are approved by shareholders.
The following table shows the actual dividends paid to equity shareholders:
Interim – year ended 31 March 2013
Final – year ended 31 March 2012
Interim – year ended 31 March 2012
Final – year ended 31 March 2011
Interim – year ended 31 March 2011
Final – year ended 31 March 2010
2013
Total
£m
527
906
–
–
–
–
1,433
Pence
per share
14.49
25.35
–
–
–
–
39.84
Settled
via scrip
£m
Pence
per share
187
436
–
–
–
–
623
–
–
13.93
23.47
–
–
37.40
2012
Total
£m
–
–
497
822
–
–
1,319
Settled
via scrip
£m
Pence
per share
–
–
34
279
–
–
313
–
–
–
–
12.90
24.84
37.74
2011
Total
£m
–
–
–
–
451
613
1,064
Settled
via scrip
£m
–
–
–
–
65
141
206
The Directors are proposing a final dividend for the year ended 31 March 2013 of 26.36p per share that will absorb approximately
£967m of shareholders’ equity (assuming all amounts are settled in cash). It will be paid on 21 August 2013 to shareholders who are
on the register of members at 7 June 2013 and a scrip dividend will be offered as an alternative, subject to shareholders’ approval at
the Annual General Meeting.
8. Goodwill
Goodwill represents the excess of what we paid to acquire businesses over the fair value of their net assets at the acquisition date.
We assess whether goodwill is recoverable each year by performing an impairment review.
Goodwill is recognised as an asset and is not amortised, but is tested for impairment annually, or more frequently if events or
changes in circumstances indicate a potential impairment. Any impairment is recognised immediately in the income statement
and is not subsequently reversed.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign
entity and translated at the closing exchange rate.
Impairment
Goodwill is allocated to cash-generating units and this allocation is made to those cash-generating units that are expected to benefit
from the business combination in which the goodwill arose.
Impairments of goodwill are calculated as the difference between the carrying value of the goodwill and the estimated recoverable
amount of the cash-generating unit to which that goodwill has been allocated. Recoverable amount is defined as the higher of fair
value less costs to sell and estimated value-in-use at the date the impairment review is undertaken.
Value-in-use represents the present value of expected future cash flows, discounted using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have
not been adjusted.
Impairments are recognised in the income statement and are disclosed separately.
120
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 8. Goodwill continued
Cost at 1 April 2011
Exchange adjustments
Reclassified as held for sale (i)
Cost at 31 March 2012
Exchange adjustments
Cost at 31 March 2013
Net book value at 31 March 2013
Net book value at 31 March 2012
Total
£m
4,776
22
(22)
4,776
252
5,028
5,028
4,776
(i) Relates to our New Hampshire businesses which were classified as held for sale at 31 March 2012 (see notes 3 and 18).
The amounts disclosed above as at 31 March 2013 include balances relating to the following cash-generating units: New York £2,898m
(2012: £2,752m); Massachusetts £1,082m (2012: £1,028m); Rhode Island £403m (2012: £383m); and Federal £645m (2012: £613m).
Goodwill is reviewed annually for impairment and the recoverability of goodwill at 31 March 2013 has been assessed by comparing
the carrying amount of our operations described above (our cash-generating units) with the expected recoverable amount on a
value-in-use basis. In each assessment, the value-in-use has been calculated based on five year plan projections that incorporate
our best estimates of future cash flows, customer rates, costs, future prices and growth. Such projections reflect our current
regulatory rate plans taking into account regulatory arrangements to allow for future rate plan filings and recovery of investment.
Our plans have proved to be reliable guides in the past and the Directors believe the estimates are appropriate.
The future growth rate used to extrapolate projections beyond five years has been maintained at 2.25% (2012: 2.25%). The growth rate
has been determined having regard to data on projected growth in US real gross domestic product. Based on our business’ place in
the underlying US economy, it is appropriate for the terminal growth rate to be based upon the overall growth in real GDP and, given
the nature of our operations, to extend over a long period of time. Cash flow projections have been discounted to reflect the time value
of money, using an effective pre-tax discount rate of 9% (2012: 9%). The discount rate represents the estimated weighted average cost
of capital of these operations.
While it is possible that a key assumption in the calculation could change, the Directors believe that no reasonably foreseeable change
would result in an impairment of goodwill, in view of the long-term nature of the key assumptions and the margin by which the estimated
fair value exceeds the carrying amount.
9. Other intangible assets
Other intangible assets includes software and acquisition-related assets (such as brand names and customer relationships), which
are written down (amortised) over the length of period we expect to receive a benefit from the asset.
Identifiable intangible assets are recorded at cost less accumulated amortisation and any provision for impairment.
Other intangible assets are tested for impairment only if there is an indication that the carrying value of the assets may have
been impaired.
Impairments of assets are calculated as the difference between the carrying value of the asset and the recoverable amount, if lower.
Where such an asset does not generate cash flows that are independent from other assets, the recoverable amount of the cash-
generating unit to which that asset belongs is estimated.
Impairments are recognised in the income statement and are disclosed separately.
Any assets which suffered impairment in a previous period are reviewed for possible reversal of the impairment at each reporting date.
Internally generated intangible assets, such as software, are recognised only if: an asset is created that can be identified; it is probable
that the asset created will generate future economic benefits; and the development cost of the asset can be measured reliably. Where
no internally generated intangible asset can be recognised, development expenditure is recorded as an expense in the period in which
it is incurred.
On a business combination, as well as recording separable intangible assets possessed by the acquired entity at their fair value,
identifiable intangible assets that arise from contractual or other legal rights are also included in the statement of financial position
at their fair value. Acquisition-related intangible assets principally comprise customer relationships.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 121
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
Continued
9. Other intangible assets continued
Other intangible assets are amortised on a straight-line basis over their estimated useful economic lives. Amortisation periods for
categories of intangible assets are:
Amortisation periods
Software
Acquisition-related intangibles
Other – licences and other intangibles
Cost at 1 April 2011
Exchange adjustments
Additions
Disposals
Cost at 31 March 2012
Exchange adjustments
Additions
Disposals
Reclassifications (i)
Cost at 31 March 2013
Accumulated amortisation at 1 April 2011
Exchange adjustments
Amortisation charge for the year
Impairment charge for the year (note 3)
Disposals
Reclassifications between categories
Accumulated amortisation at 31 March 2012
Exchange adjustments
Amortisation charge for the year
Disposals
Reclassifications (i)
Accumulated amortisation at 31 March 2013
Net book value at 31 March 2013
Net book value at 31 March 2012
Years
3 to 10
10 to 25
3 to 5
Total
£m
919
2
203
(109)
1,015
26
175
(26)
(37)
1,153
(418)
(1)
(79)
(64)
93
–
(469)
(12)
(101)
9
9
(564)
589
546
Software
£m
Acquisition-
related
£m
Other
£m
800
1
203
(105)
899
20
175
(26)
(37)
1,031
(383)
(1)
(74)
–
89
16
(353)
(6)
(101)
9
9
(442)
589
546
115
1
–
–
116
6
–
–
–
122
(31)
–
(5)
(64)
–
(16)
(116)
(6)
–
–
–
(122)
–
–
4
–
–
(4)
–
–
–
–
–
–
(4)
–
–
–
4
–
–
–
–
–
–
–
–
–
(i) Reclassifications represents amounts transferred to property, plant and equipment (see note 10).
Following the recognition of an impairment charge in relation to acquisition-related intangibles, the net book value has been fully
written off.
122
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 10. Property, plant and equipment
The following note shows the physical assets controlled by us. The cost of these assets primarily represents the amount initially paid
for them. A depreciation expense is charged to the income statement to reflect annual wear and tear and the reduced value of the
asset over time. Depreciation is calculated by estimating the number of years we expect the asset to be used (useful economic life)
and charging the cost of the asset to the income statement equally over this period.
Our strategy in action
We operate an energy networks business and therefore have a significant physical asset base. We continue to invest in our networks
to maintain reliability, create new customer connections and ensure our networks have the flexibility and resilience necessary to meet
future challenges. Our business plan envisages these additional investments will be funded through a mixture of cash generated
from operations and the issue of new debt.
Property, plant and equipment is recorded at cost, less accumulated depreciation and any impairment losses.
Cost includes the purchase price of the asset, any payroll and finance costs incurred which are directly attributable to the construction
of property, plant and equipment as well as the cost of any associated asset retirement obligations.
Property, plant and equipment includes assets in which the Company’s interest comprises legally protected statutory or contractual
rights of use. Additions represent the purchase or construction of new assets, including capital expenditure for safety and
environmental assets, and extensions to, enhancements to, or replacement of existing assets.
Contributions received prior to 1 July 2009 towards the cost of property, plant and equipment are included in trade and other payables
as deferred income and credited on a straight-line basis to the income statement over the estimated useful economic lives of the assets
to which they relate.
Contributions received post 1 July 2009 are recognised in revenue immediately, except where the contributions are consideration for
a future service, in which case they are recognised initially as deferred income and revenue is subsequently recognised over the period
in which the service is provided.
No depreciation is provided on freehold land or assets in the course of construction.
Other items of property, plant and equipment are depreciated, on a straight-line basis, at rates estimated to write off their book values
over their estimated useful economic lives. In assessing estimated useful economic lives, consideration is given to any contractual
arrangements and operational requirements relating to particular assets. The assessments of estimated useful economic lives and
residual values of assets are performed annually. Unless otherwise determined by operational requirements, the depreciation periods
for the principal categories of property, plant and equipment are, in general, as shown in the table below:
Depreciation periods
Freehold and leasehold buildings
Plant and machinery
Electricity transmission plant
Electricity distribution plant
Electricity generation plant
Interconnector plant
Gas plant – mains, services and regulating equipment
Gas plant – storage
Gas plant – meters
Motor vehicles and office equipment
Years
up to 65
15 to 60
15 to 60
20 to 40
15 to 60
30 to 100
15 to 21
10 to 33
up to 10
Gains and losses on disposals are determined by comparing the proceeds with the carrying amount and are, depending on their
magnitude, recognised as an exceptional item within operating profit in the income statement.
Items within property, plant and equipment are tested for impairment only if there is some indication that the carrying value of the
assets may have been impaired.
Impairments of assets are calculated as the difference between the carrying value of the asset and the recoverable amount, if lower.
Where such an asset does not generate cash flows that are independent from other assets, the recoverable amount of the cash-
generating unit to which that asset belongs is estimated.
Material impairments are recognised in the income statement and are disclosed separately.
Any assets which suffered impairment in a previous period are reviewed for possible reversal of the impairment at each reporting date.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 123
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
Continued
10. Property, plant and equipment continued
Land and
buildings
£m
Plant and
machinery
£m
Assets
in the
course of
construction
£m
Motor
vehicles
and office
equipment
£m
Cost at 1 April 2011
Exchange adjustments
Additions
Disposals
Reclassified as held for sale
Reclassifications between categories
Cost at 31 March 2012
Exchange adjustments
Additions
Disposals
Reclassifications (i)
Cost at 31 March 2013
Accumulated depreciation at 1 April 2011
Exchange adjustments
Depreciation charge for the year (ii)
Impairment charge for the year (iii)
Disposals
Reclassified as held for sale
Reclassifications between categories
Accumulated depreciation at 31 March 2012
Exchange adjustments
Depreciation charge for the year (ii)
Disposals
Reclassifications (i)
Accumulated depreciation at 31 March 2013
Net book value at 31 March 2013
Net book value at 31 March 2012
1,758
5
161
(8)
(3)
100
2,013
55
141
(24)
140
40,898
66
757
(294)
11
1,261
42,699
803
704
(311)
1,471
2,325
45,366
(409)
(1)
(54)
–
8
–
20
(436)
(11)
(75)
23
–
(499)
1,826
1,577
(13,100)
(18)
(1,056)
(15)
257
18
110
(13,804)
(216)
(1,085)
299
–
(14,806)
30,560
28,895
2,417
2
2,170
(4)
–
(1,610)
2,975
45
2,584
(2)
(1,642)
3,960
(2)
–
–
–
–
–
–
(2)
–
–
2
–
–
3,960
2,973
(i) Represents amounts transferred between categories and from other intangible assets (see note 9).
(ii) Includes amounts in respect of capitalised depreciation of £21m (2012: £19m).
(iii) Relates to impairment of LNG assets.
Information in relation to property, plant and equipment
Capitalised interest included within cost
Net book value of assets held under finance leases (all relating to motor vehicles and office equipment)
Additions to assets held under finance leases (all relating to motor vehicles and office equipment)
Contributions to cost of property, plant and equipment included within:
Trade and other payables
Non-current liabilities
Total
£m
46,125
73
3,172
(918)
5
–
48,457
916
3,511
(467)
37
52,454
(14,169)
(19)
(1,212)
(15)
639
20
–
(14,756)
(236)
(1,281)
420
(9)
1,052
–
84
(612)
(3)
249
770
13
82
(130)
68
803
(658)
–
(102)
–
374
2
(130)
(514)
(9)
(121)
96
(9)
(557)
(15,862)
246
256
36,592
33,701
2013
£m
1,275
188
48
43
1,492
2012
£m
1,148
207
36
43
1,467
124
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 11. Other non-current assets
Other non-current assets includes assets that do not fall into any other non-current asset category (such as goodwill or property, plant
and equipment) and the benefit to be received from the asset is not due to be received until after 31 March 2014.
Commodity contract assets
Other receivables
Prepayments
2013
£m
47
51
6
104
2012
£m
36
54
5
95
There is no material difference between the fair value and the carrying value of other non-current assets.
12. Financial and other investments
Financial and other investments includes two main categories. Assets that are classified as available-for-sale typically represent
investments in short-term money funds and quoted investments in equities or bonds of other companies. The second category
is loans and receivables which includes cash balances that cannot be readily used in operations, principally collateral pledged
for certain borrowings and restricted cash balances relating to our UK pension schemes.
Financial assets, liabilities and equity instruments are classified according to the substance of the contractual arrangements entered
into, and recognised on trade date. Available-for-sale financial assets are non-derivatives that are either designated in this category or
not classified in any other categories.
Loans receivable and other receivables are initially recognised at fair value and subsequently held at amortised cost using the effective
interest method. Interest income, together with gains and losses when the loans and receivables are derecognised or impaired, are
recognised in the income statement.
Available-for-sale financial investments are recognised at fair value plus directly related incremental transaction costs, and are
subsequently carried at fair value in the statement of financial position. Changes in the fair value of available-for-sale investments are
recognised directly in equity, until the investment is disposed of or is determined to be impaired. At this time the cumulative gain or
loss previously recognised in equity is included in the income statement for the period. Investment income is recognised using the
effective interest method and taken through interest income in the income statement.
Subsequent to initial recognition, the fair values of financial instruments measured at fair value that are quoted in active markets are
based on bid prices for assets held and offer prices for issued liabilities. When independent prices are not available, fair values are
determined by using valuation techniques that are consistent with techniques commonly used by the relevant market. The techniques
use observable market data.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 125
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
Continued
12. Financial and other investments continued
Non-current
Available-for-sale investments
Current
Available-for-sale investments
Loans and receivables
Total financial and other investments
Financial and other investments include the following:
Investments in short-term money funds
Managed investments in equity and bonds (i)
Bank deposits (i)
Cash surrender value of life insurance policies
Other investments
Restricted cash balances (ii)
2013
£m
278
4,441
990
5,431
5,709
4,120
453
165
145
4
822
5,709
2012
£m
251
1,675
716
2,391
2,642
1,342
441
9
130
4
716
2,642
(i)
Includes £296m (2012: £286m) of current investments which are held by insurance captives and are therefore restricted.
(ii) Principally comprises collateral placed with counterparties with whom we have entered into a credit support annex to the ISDA Master Agreement £507m (2012: £461m),
and secured bank accounts with charges in favour of the UK pension schemes Trustees of £179m (2012: £146m).
Available-for-sale investments are recorded at fair value. Due to their short maturities the carrying value of loans and receivables
approximates their fair value. The maximum exposure to credit risk at the reporting date is the fair value of the financial investments.
For further information on our credit risk, refer to note 30(c). None of the financial investments are past due or impaired.
13. Investments in joint ventures and associates
Investments in joint ventures and associates represents businesses we do not control, but in which we have up to a 50% equity
holding and exercise joint control or significant influence.
A joint venture is an entity established to engage in economic activity, which the Company jointly controls with its fellow venturers.
An associate is an entity which is neither a subsidiary nor a joint venture, but over which the Company has significant influence.
Share of net assets at 1 April
Exchange adjustments
Additions
Share of retained profit for the year
Dividends received
Other movements
Share of net assets at 31 March
A list of principal joint ventures and associates is provided in note 33.
2013
£m
341
9
14
18
(21)
10
371
2012
£m
356
(15)
13
7
(26)
6
341
126
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 14. Derivative financial instruments
A derivative is a financial instrument used to manage the risk associated with fluctuations in the value of certain assets or liabilities.
In accordance with Board approved policies, we use derivatives to manage our exposure to fluctuations in interest rate and foreign
exchange rate on borrowings and other contractual cash flows.
Derivative financial instruments are initially recognised at fair value and subsequently remeasured at fair value at each reporting
date. Changes in fair values are recorded in either the income statement or other comprehensive income depending on the
applicable accounting standards.
Analysis of these derivatives and the various methods used to calculate their respective fair values is detailed below and in note 30.
Derivatives are financial instruments that derive their value from the price of an underlying item such as interest rates, foreign
exchange, credit spreads, commodities, equity or other indices. Derivatives enable their users to manage their exposure to these
market or credit risks. We use derivatives to manage the interest rate and foreign exchange risks from our financing portfolio and
this enables the optimisation of the overall cost of accessing debt capital markets. We also use derivatives to manage our operational
market risks from commodities. The commodity derivative contracts are detailed in note 31.
Derivative financial instruments are recorded at fair value through profit or loss. Where the fair value of a derivative is positive it is carried
as a derivative asset, and where negative as a derivative liability. Assets and liabilities on different transactions are only reported net if
the transactions are with the same counterparty, a legal right of set off exists and the cash flows are intended to be settled on a net
basis. Gains and losses arising from the changes in fair value are included in the income statement in the period they arise.
We calculate fair value of the financial derivatives by discounting all future cash flows by the market yield curve at the reporting date.
The market yield curve for each currency is obtained from external sources for interest and foreign exchange rates. In the case
of derivative instruments that include options, the Black’s variation of the Black-Scholes model is used to calculate fair value.
Where possible, derivatives held as hedging instruments are formally designated as hedges as defined in IAS 39. Derivatives may
qualify as hedges for accounting purposes if they are fair value hedges, cash flow hedges or net investment hedges.
Hedge accounting allows derivatives to be designated as a hedge of another (non-derivative) financial instrument, to mitigate the
impact of potential volatility in the income statement of changes in the fair value of the derivative instruments. To qualify for hedge
accounting, documentation is prepared specifying the hedging strategy, the component transactions and methodology used for
effectiveness measurement. National Grid uses three hedge accounting methods, which are described as follows:
Fair value hedges
Fair value hedges principally consist of interest rate and cross-currency swaps that are used to protect against changes in the fair
value of fixed-rate, long-term financial instruments due to movements in market interest rates. For qualifying fair value hedges, all
changes in the fair value of the derivative and changes in the fair value of the item in relation to the risk being hedged are recognised
in the income statement to the extent the fair value hedge is effective. Adjustments made to the carrying amount of the hedged item
for fair value hedges will be amortised over the remaining life, in line with the hedged item.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 127
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
Continued
14. Derivative financial instruments continued
Cash flow hedges
Exposure arises from the variability in future interest and currency cash flows on assets and liabilities which bear interest at variable
rates or are in a foreign currency. Interest rate and cross-currency swaps are maintained, and designated as cash flow hedges, where
they qualify, to manage this exposure. Fair value changes on designated cash flow hedges are initially recognised directly in the cash
flow hedge reserve, as gains or losses recognised in equity and any ineffective portion is recognised immediately in the income
statement. Amounts are transferred from equity and recognised in the income statement as the income or expense is recognised
on the hedged item.
Forward foreign currency contracts are used to hedge anticipated and committed future currency cash flows. Where these contracts
qualify for hedge accounting they are designated as cash flow hedges. On recognition of the underlying transaction in the financial
statements, the associated hedge gains and losses, deferred in equity, are transferred and included with the recognition of the
underlying transaction.
When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is transferred
to the income statement.
Where a non-financial asset or a non-financial liability results from a forecasted transaction or firm commitment being hedged, the
amounts deferred in equity are included in the initial measurement of that non-monetary asset or liability.
Net investment hedges
Borrowings, cross-currency swaps and forward currency contracts are used in the management of the foreign exchange exposure
arising from the investment in non-sterling denominated subsidiaries. Where these contracts qualify for hedge accounting they are
designated as net investment hedges.
The cross-currency swaps and forward foreign currency contracts are hedge accounted using the spot to spot method. The foreign
exchange gain or loss on retranslation of the borrowings and the spot to spot movements on the cross-currency swaps and forward
currency contracts are transferred to equity to offset gains or losses on translation of the net investment in the non-sterling denominated
subsidiaries, with any ineffective portion recognised immediately in the income statement.
Derivatives not in a formal hedge relationship
Our policy is not to use derivatives for trading purposes. However, due to the complex nature of hedge accounting under IAS 39 some
derivatives may not qualify for hedge accounting, or are specifically not designated as a hedge where natural offset is more appropriate.
Changes in the fair value of any derivative instruments that do not qualify for hedge accounting are recognised in remeasurements
within the income statement.
Discontinuation of hedge accounting
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, exercised or no longer qualifies for
hedge accounting. At that time, any cumulative gains or losses relating to cash flow hedges recognised in equity are initially retained
in equity and subsequently recognised in the income statement in the same periods in which the previously hedged item affects net
profit or loss. Amounts deferred in equity with respect to net investment hedges are subsequently recognised in the income statement
in the event of the disposal of the overseas operations concerned. For fair value hedges, the cumulative adjustment recorded to the
carrying value of the hedged item at the date hedge accounting is discontinued is amortised to the income statement using the
effective interest method.
Embedded derivatives
No adjustment is made with respect to derivative clauses embedded in financial instruments or other contracts that are defined
as closely related to those instruments or contracts. Consequently these embedded derivatives are not accounted for separately
from the debt instrument. Where there are embedded derivatives in host contracts not closely related, the embedded derivative
is separately accounted for as a derivative financial instrument.
128
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 14. Derivative financial instruments continued
Our use of derivatives may entail a derivative transaction qualifying for one or more hedge type designations under IAS 39. The fair
value amounts by designated hedge type can be analysed as follows:
Fair value hedges
Interest rate swaps
Cross-currency interest rate swaps
Cash flow hedges
Interest rate swaps
Cross-currency interest rate swaps
Foreign exchange forward contracts
Inflation linked swaps
Net investment hedges
Cross-currency interest rate swaps
Foreign exchange forward contracts
Derivatives not in a formal hedge relationship
Interest rate swaps
Cross-currency interest rate swaps
Foreign exchange forward contracts
Forward rate agreements
Inflation linked swaps
Hedge positions offset within derivative instruments
Assets
£m
2013
Liabilities
£m
390
349
739
–
361
3
4
368
141
8
149
887
33
4
–
44
968
2,224
21
–
(7)
(7)
(90)
(148)
(2)
(20)
(260)
(197)
(47)
(244)
(884)
(20)
(14)
(5)
(226)
(1,149)
(1,660)
(21)
Total
2,245
(1,681)
The maturity profile of derivative financial instruments is as follows:
Less than 1 year
Current
In 1-2 years
In 2-3 years
In 3-4 years
In 4-5 years
More than 5 years
Non-current
Assets
£m
273
273
42
75
119
84
1,652
1,972
2,245
2013
Liabilities
£m
(407)
(407)
(44)
(51)
(121)
(55)
(1,003)
(1,274)
(1,681)
For each class of derivative the notional contract* amounts are as follows:
Interest rate swaps
Cross-currency interest rate swaps
Foreign exchange forward contracts
Forward rate agreements
Inflation linked swaps
Total
Total
£m
390
342
732
(90)
213
1
(16)
108
(56)
(39)
(95)
3
13
(10)
(5)
(182)
(181)
564
–
564
Total
£m
(134)
(134)
(2)
24
(2)
29
649
698
564
Assets
£m
2012
Liabilities
£m
230
409
639
–
448
–
2
450
149
50
199
754
33
14
–
37
838
2,126
10
–
(12)
(12)
(87)
(57)
(5)
(18)
(167)
(214)
–
(214)
(710)
(16)
–
(5)
(297)
(1,028)
(1,421)
(10)
2,136
(1,431)
Assets
£m
317
317
109
92
84
116
1,418
1,819
2,136
2012
Liabilities
£m
(162)
(162)
(74)
(60)
(30)
(132)
(973)
(1,269)
(1,431)
Total
£m
230
397
627
(87)
391
(5)
(16)
283
(65)
50
(15)
44
17
14
(5)
(260)
(190)
705
–
705
Total
£m
155
155
35
32
54
(16)
445
550
705
2013
£m
(16,603)
(9,641)
(3,142)
(2,443)
(1,390)
2012
£m
(17,342)
(6,305)
(4,636)
(4,223)
(1,379)
(33,219)
(33,885)
*The notional contract amounts of derivatives indicate the gross nominal value of transactions outstanding at the reporting date
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 129
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
Continued
15. Inventories and current intangible assets
Inventories represent assets that we intend to use in order to generate revenue in future periods, either by selling the asset itself
(for example fuel stocks) or by using it to fulfil a service to a customer (consumables) or to maintain our network.
Inventories are stated at the lower of cost, calculated on a weighted average basis, and net realisable value.
Where applicable, cost comprises direct materials and direct labour costs as well as those overheads that have been incurred in bringing
the inventories to their present location and condition.
Emission allowances, principally relating to the emissions of carbon dioxide in the UK and sulphur and nitrous oxides in the US, are
recorded as intangible assets within current assets and are initially recorded at cost and subsequently at the lower of cost and net
realisable value. Where emission allowances are granted by relevant authorities, cost is deemed to be equal to the fair value at the
date of allocation. Receipts of such grants are treated as deferred income, which is recognised in the income statement as the related
charges for emissions are recognised or on impairment of the related intangible asset. A provision is recorded in respect of the obligation
to deliver emission allowances and emission charges are recognised in the income statement in the period in which emissions are made.
Fuel stocks
Raw materials and consumables
Work in progress
Current intangible assets – emission allowances
There is a provision for obsolescence of £27m against inventories as at 31 March 2013 (2012: £28m).
2013
£m
114
156
13
8
291
2012
£m
191
143
13
29
376
130
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 16. Trade and other receivables
Trade and other receivables are amounts which are due from our customers for services we have provided. Other receivables also
include prepayments made by us, for example, property lease rentals paid in advance.
Trade, loan and other receivables are initially recognised at fair value and subsequently measured at amortised cost, less any
appropriate allowances for estimated irrecoverable amounts. A provision is established for irrecoverable amounts when there
is objective evidence that amounts due under the original payment terms will not be collected.
Trade receivables
Prepayments and accrued income
Commodity contract assets
Other receivables
2013
£m
1,325
1,421
42
122
2,910
2012
£m
933
963
35
40
1,971
Trade receivables are non interest-bearing and generally have a 30-90 day term. Due to their short maturities, the fair value of trade
and other receivables approximates their book value. Commodity contract assets are recorded at fair value. All other receivables are
recorded at amortised cost.
Provision for impairment of receivables
At 1 April
Exchange adjustments
Charge for the year, net of recoveries
Uncollectible amounts written off against receivables
At 31 March
Trade receivables past due but not impaired
Up to 3 months past due
3 to 6 months past due
Over 6 months past due
2013
£m
270
13
75
(97)
261
2013
£m
242
45
4
291
2012
£m
283
1
103
(117)
270
2012
£m
171
53
4
228
For further information on our wholesale and retail credit risk, refer to note 30(c). For further information on our commodity risk, refer to
note 31.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 131
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
Continued
17. Cash and cash equivalents
Cash and cash equivalents includes cash balances, together with short-term investments with an original maturity of less than
three months that are readily convertible to cash.
Net cash and cash equivalents reflected in the cash flow statement are net of bank overdrafts, which are reported in borrowings.
The carrying amounts of cash and cash equivalents and bank overdrafts approximate their fair values.
Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for periods varying
between one day and three months, depending on the immediate cash requirements, and earn interest at the respective short-term
deposit rates.
Net cash and cash equivalents held in currencies other than sterling have been converted into sterling at year-end exchange rates.
For further information on currency exposures, refer to note 30(a)(i).
Cash at bank
Short-term deposits
Cash and cash equivalents excluding bank overdrafts
Bank overdrafts
Net cash and cash equivalents
2013
£m
99
572
671
(23)
648
2012
£m
60
272
332
(33)
299
At 31 March 2013, £21m (2012: £29m) of cash and cash equivalents were restricted. This primarily relates to cash held in captive
insurance companies.
132
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 18. Businesses classified as held for sale
When the Directors have taken the decision to dispose of a component of the business, but the sale has not been completed at the
year end, the assets and liabilities relating to that component are removed from individual lines in the statement of financial position
and grouped into assets held for sale and liabilities held for sale. This enables users of the financial statements to understand more
clearly what assets and liabilities the remaining business holds for continuing operations.
Assets and businesses classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.
No depreciation is charged on assets and businesses classified as held for sale.
Assets and businesses are classified as held for sale if their carrying amount will be recovered or settled principally through a sale
transaction rather than through continuing use. This condition is regarded as being met only when the sale is highly probable and the
assets or businesses are available for immediate sale in their present condition or the sale relates to a subsidiary acquired exclusively
with a view to resale. Management must be committed to the sale, which should be expected to qualify for recognition as a completed
sale within one year from the date of classification.
As at 31 March 2012, our EnergyNorth gas business and Granite State electricity business in New Hampshire were reclassified as
businesses held for sale. On 3 July 2012 we completed the sale of these businesses for net proceeds of £183m.
The results of these businesses were not separately disclosed from those of continuing operations as they did not constitute a
separate major line of business or geographical area of National Grid’s operations.
There were no assets or liabilities related to businesses held for sale at 31 March 2013.
Goodwill
Other intangible assets
Property, plant and equipment
Other receivables
Non-current assets
Inventories
Trade and other receivables
Financial investments
Current assets
Assets of businesses held for sale
Trade and other payables
Current liabilities
Borrowings
Other non-current liabilities
Deferred tax liabilities
Pensions and other post-retirement benefit obligations
Provisions
Non-current liabilities
Liabilities of businesses held for sale
2013
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2012
£m
34
1
192
3
230
7
25
2
34
264
(15)
(15)
(10)
(2)
(9)
(14)
(37)
(72)
(87)
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 133
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
Continued
19. Borrowings
We borrow money primarily in the form of bonds and bank loans. These are for a fixed term and may have fixed or floating interest
rates. As indicated in note 14, we use derivatives to manage risks associated with interest rates and foreign exchange.
Our strategy in action
Our price controls and rate plans require us to fund our networks within a certain ratio of debt to equity and as a result we have
issued a significant amount of debt. As we continue to invest in our networks, the value of debt is expected to increase over time.
To maintain a strong balance sheet and to allow us to access capital markets at commercially acceptable interest rates, we balance
the amount of debt we issue with the value of our assets, and take account of certain other metrics used by credit rating agencies.
Borrowings, which include interest-bearing and inflation linked debt and overdrafts are recorded at their initial fair value which normally
reflects the proceeds received, net of direct issue costs less any repayments. Subsequently these are stated at amortised cost, using
the effective interest method. Any difference between the proceeds after direct issue costs and the redemption value is recognised
over the term of the borrowing in the income statement using the effective interest method.
Current
Bank loans
Bonds
Commercial paper
Finance leases
Other loans
Bank overdrafts
Non-current
Bank loans
Bonds
Finance leases
Other loans
Total
Total borrowings are repayable as follows:
Less than 1 year
In 1-2 years
In 2-3 years
In 3-4 years
In 4-5 years
More than 5 years:
by instalments
other than by instalments
2013
£m
1,194
1,761
438
20
12
23
3,448
1,863
22,435
175
174
2012
£m
1,061
1,356
–
22
20
33
2,492
2,160
18,012
185
176
24,647
20,533
28,095
23,025
2013
£m
3,448
1,872
860
1,255
1,420
2012
£m
2,492
1,867
1,725
828
1,252
71
19,169
77
14,784
28,095
23,025
134
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 19. Borrowings continued
The fair value of borrowings at 31 March 2013 was £30,792m (2012: £25,217m). Market values, where available, have been used to
determine fair value. Where market values are not available, fair values have been calculated by discounting cash flows at prevailing
interest rates. The notional amount outstanding of the debt portfolio at 31 March 2013 was £27,391m (2012: £22,618m).
The assets of the Colonial Gas Company and the Niagara Mohawk Power Corporation and certain gas distribution assets of the
Narragansett Electric Company are subject to liens and other charges and are provided as collateral over borrowings totalling £512m
at 31 March 2013 (2012: £487m).
Collateral is placed with or received from any counterparty where we have entered into a credit support annex to the ISDA Master
Agreement once the current mark-to-market valuation of the trades between the parties exceeds an agreed threshold. Included
in current bank loans is £730m (2012: £655m) in respect of cash received under collateral agreements. For further details of our
borrowing facilities, refer to note 32. For further details of our bonds in issue, please refer to the debt investor section of our website.
Assets held under finance leases are recognised at their fair value or, if lower, the present value of the minimum lease payments on
inception. The corresponding liability is recognised as a finance lease obligation within borrowings. Rental payments are apportioned
between finance costs and reduction in the finance lease obligation, so as to achieve a constant rate of interest.
Assets held under finance leases are depreciated over the shorter of their useful life and the lease term.
Finance lease obligations
Gross finance lease liabilities are repayable as follows:
Less than 1 year
1-5 years
More than 5 years
Less: finance charges allocated to future periods
The present value of finance lease liabilities is as follows:
Less than 1 year
1-5 years
More than 5 years
20. Trade and other payables
2013
£m
20
109
101
230
(35)
195
20
96
79
195
2012
£m
22
125
100
247
(40)
207
22
109
76
207
Trade and other payables includes amounts owed to suppliers, tax authorities and other parties which are due to be settled within
12 months. The total also includes deferred income, which represents monies received from customers but for which we have not
yet completed the associated service. These amounts are recognised as revenue when the service is provided.
Trade payables are initially recognised at fair value and subsequently measured at amortised cost.
Trade payables
Deferred income
Commodity contract liabilities
Social security and other taxes
Other payables
2013
£m
2,033
155
69
131
663
3,051
2012
£m
1,530
305
149
107
594
2,685
Due to their short maturities, the fair value of trade and other payables approximates their book value. Commodity contract liabilities
are recorded at fair value. All other trade and other payables are recorded at amortised cost.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 135
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
Continued
21. Other non-current liabilities
Other non-current liabilities includes deferred income which will not be recognised as income until after 31 March 2014. It also
includes payables that are not due until after that date.
Deferred income
Commodity contract liabilities
Other payables
2013
£m
1,579
70
235
1,884
2012
£m
1,557
111
253
1,921
Commodity contract liabilities are recorded at fair value. All other non-current liabilities are recorded at amortised cost. There is no
material difference between the fair value and the carrying value of other non-current liabilities.
22. Pensions and other post-retirement benefits
Substantially all our employees are members of either defined benefit or defined contribution pension plans. The principal UK
schemes are the National Grid UK Pension Scheme and the National Grid Electricity Group of the Electricity Supply Pension Scheme.
In the US, we have a number of plans and also provide healthcare and life insurance benefits to eligible retired US employees.
The fair value of plan assets and present value of defined benefit obligations are updated annually. For further details of each
scheme/plan’s terms and the actuarial assumptions used to value the associated assets and obligations, see note 29.
Below we provide a more detailed analysis of the amounts recorded in the primary financial statements.
For defined contribution schemes, the Group pays contributions into a separate fund on behalf of the employee and has no further
obligations to employees. The risks associated with this type of scheme are assumed by the member.
For defined benefit retirement schemes, members receive benefits on retirement, the value of which is dependent on factors such
as salary and length of pensionable service. The Group underwrites both financial and demographic risks associated with this type
of scheme.
The cost of providing benefits in a defined benefit scheme is determined using the projected unit method, with actuarial valuations
being carried out at each reporting date.
The Group’s obligation in respect of defined benefit pension schemes is calculated separately for each scheme by estimating the
amount of future benefit that employees have earned for their pensionable service in the current and prior periods.
That benefit is discounted to determine its present value and the fair value of scheme assets and any unrecognised past service
cost is then deducted. The discount rate used is the yield at the valuation date on high quality corporate bonds.
The Group takes advice from independent actuaries relating to the appropriateness of the assumptions which include life expectancy
of members, expected salary and pension increases, inflation and the return on scheme assets. We note that comparatively small
changes in the assumptions used may have a significant effect on the income statement and statement of financial position.
The liabilities of the defined benefit schemes are measured by discounting the best estimate of future cash flows to be paid using
the projected unit method. This method is an accrued benefits valuation method that makes allowance for projected earnings.
These calculations are performed by a qualified actuary.
Actuarial gains and losses are recognised in full in the period in which they occur in the statement of other comprehensive income.
136
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 22. Pensions and other post-retirement benefits continued
Amounts recognised in the income statement and statement of other comprehensive income
Included within payroll costs
Defined contribution scheme costs
Defined benefit scheme costs:
Current service cost
Past service cost
Curtailment (gain)/loss on redundancies
Special termination benefits on redundancies
Curtailment cost – augmentations
Included within exceptional items
Net loss/(gain) on disposal of businesses
Included within finance income and costs
Interest cost
Expected return on plan assets
Included within other comprehensive income
Actuarial net (loss)/gain during the year
Exchange differences
Pensions
US other post-retirement benefits
2013
£m
16
177
1
(7)
20
2
209
2012
£m
13
159
2
13
19
2
208
2011
£m
11
165
28
(4)
6
2
208
3
(6)
2
1,020
(1,130)
(110)
1,063
(1,189)
(126)
1,084
(1,185)
(101)
(780)
(37)
(817)
(1,207)
2
(1,205)
483
38
521
2013
£m
2012
£m
2011
£m
–
43
6
–
–
–
49
1
133
(92)
41
(150)
(75)
(225)
–
37
6
23
–
–
66
–
140
(84)
56
(118)
6
(112)
–
37
3
(29)
–
–
11
–
147
(71)
76
88
87
175
Cumulative actuarial loss
(2,660)
(1,880)
(673)
(542)
(392)
(274)
Amounts recognised in the statement of financial position
Present value of funded obligations
Fair value of plan assets
Present value of unfunded obligations
Other post-employment liabilities
Unrecognised past service cost
Net liability in the statement of financial position
Liabilities
Assets
Net liability
Pensions
2012
£m
2013
£m
2011
£m
(23,410)
21,770
(21,143)
19,957
(19,255)
18,903
(1,640)
(1,186)
(266)
(3)
1
(1,908)
(2,103)
195
(1,908)
(243)
(5)
2
(1,432)
(1,587)
155
(1,432)
(352)
(225)
–
4
(573)
(1,129)
556
(573)
US other post-retirement benefits
2013
£m
(3,020)
1,515
(1,505)
–
(83)
(3)
(1,591)
(1,591)
–
(1,591)
2012
£m
(2,630)
1,192
(1,438)
–
(66)
3
(1,501)
(1,501)
–
(1,501)
2011
£m
(2,458)
1,066
(1,392)
–
(62)
9
(1,445)
(1,445)
–
(1,445)
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 137
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
Continued
22. Pensions and other post-retirement benefits continued
Pensions
2012
£m
2013
£m
US other post-retirement benefits
2011
£m
2013
£m
2012
£m
2011
£m
Changes in the present value of defined benefit obligations
(including unfunded obligations)
Opening defined benefit obligations
Current service cost
Interest cost
Actuarial (losses)/gains
Curtailment gain/(loss) on redundancies and settlements
Transfers in
Special termination benefits
Curtailment cost – augmentations
Plan amendments
Medicare subsidy received
Employee contributions
Benefits paid
Transferred to liabilities of businesses held for sale
Exchange adjustments
(21,386)
(177)
(1,020)
(1,930)
43
–
(20)
(2)
–
–
(3)
1,070
–
(251)
(19,480)
(159)
(1,063)
(1,673)
(13)
1
(13)
(2)
–
–
(3)
1,035
3
(19)
(19,598)
(165)
(1,084)
185
10
1
(17)
(2)
(28)
–
(3)
985
7
229
(2,630)
(43)
(133)
(176)
5
–
–
–
–
(19)
–
123
–
(147)
(2,458)
(37)
(140)
(83)
(23)
–
–
–
–
(6)
–
127
2
(12)
Closing defined benefit obligations
(23,676)
(21,386)
(19,480)
(3,020)
(2,630)
Changes in the fair value of plan assets
Opening fair value of plan assets
Expected return on plan assets
Actuarial gains/(losses)
Transfers out
Employer contributions
Employee contributions
Benefits paid
Assets distributed in settlements and transfers
Exchange adjustments
Closing fair value of plan assets
Actual return on plan assets
Expected contributions to plans in the following year
23. Provisions
19,957
1,130
1,150
–
425
3
(1,070)
(39)
214
18,903
1,189
466
(1)
415
3
(1,035)
–
17
18,186
1,185
298
(1)
408
3
(985)
–
(191)
21,770
19,957
18,903
2,280
364
1,655
353
1,483
353
1,192
92
26
–
262
–
(123)
(6)
72
1,515
118
196
1,066
84
(35)
–
198
–
(127)
–
6
1,192
49
248
(2,602)
(37)
(147)
28
29
–
–
–
14
(5)
–
117
2
143
(2,458)
950
71
60
–
158
–
(117)
–
(56)
1,066
131
200
We make provisions when an obligation exists, relating to events in the past and it is probable that cash will be paid to settle it,
but the amount of cash required can only be estimated.
The main estimates relate to environmental and decommissioning costs for various sites we own or have owned which require
restoration or remediation and other provisions, including lease contracts we have entered into that are now unprofitable.
Our strategy in action
We are committed to the protection and enhancement of the environment. However, we have acquired, owned and operated a
number of businesses which have, during the course of their operations, created an environmental impact. We have a provision
that reflects the expected cost to remediate these sites and it is uncommon that new sites with significant expected costs are
added to the provision as a result of current operations.
Provisions are recognised where a legal or constructive obligation exists at the reporting date, as a result of a past event, where
the amount of the obligation can be reliably estimated and where the outflow of economic benefit is probable.
Provision is made for decommissioning and environmental costs, based on future estimated expenditures, discounted to present
values. An initial estimate of decommissioning and environmental costs attributable to property, plant and equipment is recorded
as part of the original cost of the related property, plant and equipment.
138
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 23. Provisions continued
Changes in the provision arising from revised estimates or discount rates or changes in the expected timing of expenditures that
relate to property, plant and equipment are recorded as adjustments to their carrying value and depreciated prospectively over
their remaining estimated useful economic lives; otherwise such changes are recognised in the income statement.
The unwinding of the discount is included within the income statement as a financing charge.
At 1 April 2011
Exchange adjustments
Additions
Unused amounts reversed
Reclassified as held for sale
Unwinding of discount
Utilised
At 31 March 2012
Exchange adjustments
Additions
Unused amounts reversed
Unwinding of discount
Utilised
At 31 March 2013
Current
Non-current
Environ-
mental
£m
Decom-
missioning
£m
Restructuring
£m
Emissions
£m
1,150
4
58
(9)
3
53
(101)
1,158
45
92
(55)
59
(101)
1,198
120
1
1
–
–
1
(11)
112
5
–
(20)
–
(16)
81
128
–
39
(23)
–
–
(74)
70
–
31
(5)
–
(43)
53
24
–
7
(6)
–
–
(2)
23
1
1
(3)
–
(14)
8
Other
£m
392
1
14
(17)
–
18
(40)
368
14
83
(4)
16
(57)
420
2013
£m
308
1,452
1,760
Total
provisions
£m
1,814
6
119
(55)
3
72
(228)
1,731
65
207
(87)
75
(231)
1,760
2012
£m
282
1,449
1,731
Environmental provision
The environmental provision represents the estimated restoration and remediation costs relating to a number of sites owned and
managed by subsidiary undertakings, together with certain US sites that National Grid no longer owns. The environmental provision
is as follows:
UK sites (i)
US sites (ii)
2013
2012
Discounted
£m
Undiscounted
£m
Real
discount rate
Discounted
£m
Undiscounted
£m
Real
discount rate
302
896
1,198
397
1,014
1,411
2%
2%
306
852
1,158
423
960
1,383
2%
2%
(i)
The remediation expenditure in the UK relates to old gas manufacturing sites and also to electricity transmission sites. Cash flows are expected to be incurred between
2013 and 2062. A number of uncertainties affect the calculation of the provision, including the impact of regulation, accuracy of the site surveys, unexpected contaminants,
transportation costs, the impact of alternative technologies and changes in the discount rate. This provision incorporates our best estimate of the financial effect of these
uncertainties, but future material changes in any of the assumptions could materially impact the calculation of the provision. The undiscounted amount is the undiscounted
best estimate of the liability having regard to these uncertainties.
(ii) The remediation expenditure in the US is expected to be incurred between 2013 and 2058. The uncertainties regarding the calculation of this provision are similar to those
considered in respect of UK sites. However, unlike the UK, with the exception of immaterial amounts of such costs, this expenditure is expected to be largely recoverable
from ratepayers under the terms of various rate agreements in the US.
Decommissioning provision
The decommissioning provision primarily represents £69m (2012: £74m) of expenditure relating to asset retirement obligations
expected to be incurred until 2058. It also includes the net present value of the estimated expenditure (discounted at a real rate
of 2%) expected to be incurred until 2038 in respect of the decommissioning of certain nuclear generating units that National Grid
no longer owns.
Restructuring provision
The restructuring provision principally relates to business reorganisation costs in the UK and the US and is expected to be incurred
until 2014. At 31 March 2013, £5m of the total restructuring provision (2012: £8m) consisted of provisions for the disposal of surplus
leasehold interests and rates payable on surplus properties with expenditure expected to be incurred until 2018.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 139
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
Continued
23. Provisions continued
Emissions provision
The provision for emission costs is expected to be settled using emission allowances granted.
Other provisions
Included within other provisions at 31 March 2013 are amounts provided in respect of onerous lease commitments of £165m
(2012: £178m).
Other provisions also include £174m (2012: £141m) of estimated liabilities in respect of past events insured by insurance subsidiary
undertakings, including employer liability claims. In accordance with insurance industry practice, these estimates are based on
experience from previous years and there is, therefore, no identifiable payment date. It also includes £13m (2012: £13m) in respect
of obligations associated with investments in joint ventures.
24. Share capital
Ordinary share capital represents the total number of shares issued which are publicly traded. We also disclose the number of
treasury shares the Company holds, which are shares that the Company has bought itself, predominantly to satisfy employee
share option plan liabilities.
Share capital is accounted for as an equity instrument. An equity instrument is any contract that includes a residual interest in the
consolidated assets of the Company after deducting all its liabilities and is recorded at the proceeds received, net of direct issue
costs, with an amount equal to the nominal amount of the shares issued included in the share capital account and the balance
recorded in the share premium account.
Ordinary shares
At 1 April 2011
Issued during the year in lieu of dividends (i)
At 31 March 2012
Issued during the year in lieu of dividends (i)
At 31 March 2013
Allotted, called up
and fully paid
millions
3,648
53
3,701
94
3,795
£m
416
6
422
11
433
(i)
The issue of shares in lieu of dividends is considered to be a bonus issue under the terms of the Companies Act 2006 and the nominal value of the shares is charged
to the share premium account.
The share capital of the Company consists of ordinary shares of 1117⁄43 pence nominal value each including American Depositary
Shares. The ordinary and American Depositary Shares allow holders to receive dividends and vote at general meetings of the
Company. The Company holds treasury shares but may not exercise any rights over these shares including the entitlement to vote
or receive dividends. There are no restrictions on the transfer or sale of ordinary shares.
In line with the provisions of the Companies Act 2006, National Grid plc has amended its Articles of Association and ceased to have
authorised share capital.
Treasury shares
At 31 March 2013, the Company held 129m (2012: 135m) of its own shares. The market value of these shares as at 31 March 2013
was £989m (2012: £854m).
The maximum number of shares held during the year was 135m ordinary shares (2012: 140m) representing approximately 3.6%
(2012: 3.8%) of the ordinary shares in issue as at 31 March 2013 and having a nominal value of £15m (2012: £16m).
140
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 25. Other equity reserves
Other equity reserves are different categories of equity as required by accounting standards and represent the impact of a number
of our historical transactions.
Other equity reserves comprise the translation reserve (see accounting policy B), cash flow hedge reserve (see note 14), available-for-
sale reserve (see note 12), the capital redemption reserve and the merger reserve. The merger reserve arose as a result of the application
of merger accounting principles under the then prevailing UK GAAP, which under IFRS 1 was retained for mergers that occurred prior
to the IFRS transition date. Under merger accounting principles, the difference between the carrying amount of the capital structure
of the acquiring vehicle and that of the acquired business was treated as a merger difference and included within reserves.
As the amounts included in other equity reserves are not attributable to any of the other classes of equity presented, they have been
disclosed as a separate classification of equity.
At 1 April 2010
Exchange adjustments
Net gains taken to equity
Transferred to profit or loss
Rights issue (i)
Transferred to retained earnings (i)
Deferred tax
Share of other comprehensive loss of joint ventures
At 31 March 2011
Exchange adjustments
Net (losses)/gains taken to equity
Transferred to profit or loss
Deferred tax
At 31 March 2012
Exchange adjustments
Net (losses)/gains taken to equity
Transferred to profit or loss
Deferred tax
At 31 March 2013
Translation
£m
Cash flow
hedge
£m
Available-
for-sale
£m
Capital
redemption
£m
414
(95)
–
–
–
–
–
–
319
27
–
–
–
346
117
–
–
–
463
(97)
–
7
(7)
–
–
(2)
(4)
(103)
–
(18)
19
2
(100)
–
(31)
73
(13)
(71)
48
–
16
(3)
–
–
(1)
–
60
–
16
(9)
(2)
65
–
20
(10)
(2)
73
19
–
–
–
–
–
–
–
19
–
–
–
–
19
–
–
–
–
19
Merger
£m
(5,165)
–
–
–
3,101
(3,101)
–
–
(5,165)
–
–
–
–
(5,165)
–
–
–
–
Total
£m
(4,781)
(95)
23
(10)
3,101
(3,101)
(3)
(4)
(4,870)
27
(2)
10
–
(4,835)
117
(11)
63
(15)
(5,165)
(4,681)
(i)
During the year ended 31 March 2011, the Company raised £3.2bn (net of expenses of £105m) through a rights issue of 990m new ordinary shares at 335 pence each
on the basis of two new ordinary shares for every five existing ordinary shares. The issue price represented a discount of 44% to the closing ex-dividend share price on
20 May 2010, the announcement date of the rights issue. The structure of the rights issue initially gave rise to a merger reserve under section 612 of the Companies Act
2006, representing the net proceeds of the rights issue less the nominal value of the new shares issued. Following the receipt of the cash proceeds through the structure,
the excess of the net proceeds over the nominal value of the share capital issued was transferred from the merger reserve to retained earnings.
The merger reserve represents the difference between the carrying value of subsidiary undertaking investments and their respective
capital structures following the Lattice demerger from BG Group plc and the 1999 Lattice refinancing of £5,745m and merger
differences of £221m and £359m.
The cash flow hedge reserve on interest rate swap contracts will be continuously transferred to the income statement until the
borrowings are repaid. The amount due to be released from reserves to the income statement next year is £14m and the remainder
released with the same maturity profile as borrowings due after more than one year.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 141
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
Continued
26. Net debt
Net debt represents the amount of cash and financial investments held, less borrowings, overdrafts and related derivatives.
The movement in cash and cash equivalents is reconciled to movements in net debt.
(a) Reconciliation of net cash flow to movement in net debt
Increase/(decrease) in cash and cash equivalents
Increase/(decrease) in financial investments
(Increase)/decrease in borrowings and related derivatives
Net interest paid on the components of net debt
Change in net debt resulting from cash flows
Changes in fair value of financial assets and liabilities and exchange movements
Net interest charge on the components of net debt
Reclassified as held for sale
Other non-cash movements
Movement in net debt (net of related derivative financial instruments) in the year
Net debt (net of related derivative financial instruments) at start of year
Net debt (net of related derivative financial instruments) at end of year
(b) Analysis of changes in net debt
2013
£m
335
2,992
(4,304)
756
(221)
(536)
(1,017)
–
(58)
2012
£m
(43)
(553)
154
721
279
(87)
(1,042)
(2)
(14)
2011
£m
(346)
1,577
1,763
1,011
4,005
690
(1,228)
9
(68)
(1,832)
(19,597)
(866)
(18,731)
3,408
(22,139)
(21,429)
(19,597)
(18,731)
Cash
and cash
equivalents
£m
Bank
overdrafts
£m
Net cash
and cash
equivalents
£m
Financial
investments
£m
Borrowings
£m
Derivatives
£m
At 1 April 2010
Cash flow
Fair value gains and losses and exchange movements
Interest charges
Reclassified as held for sale
Other non-cash movements
At 31 March 2011
Cash flow
Fair value gains and losses and exchange movements
Interest charges
Reclassified as held for sale
Other non-cash movements
At 31 March 2012
Cash flow
Fair value gains and losses and exchange movements
Interest charges
Other non-cash movements
At 31 March 2013
Balances at 31 March 2013 comprise:
Non-current assets
Current assets
Current liabilities
Non-current liabilities
(i)
Includes accrued interest at 31 March 2013 of £250m (2012: £178m).
720
(333)
(3)
–
–
–
384
(52)
–
–
–
–
332
325
14
–
–
671
–
671
–
–
671
(29)
(13)
–
–
–
–
(42)
9
–
–
–
–
(33)
10
–
–
–
(23)
–
–
(23)
–
(23)
691
(346)
(3)
–
–
–
342
(43)
–
–
–
–
299
335
14
–
–
648
–
671
(23)
–
648
1,397
1,551
(34)
25
–
–
2,939
(577)
8
23
(2)
–
2,391
2,963
47
30
–
(25,095)
2,933
402
(1,337)
9
(68)
(23,156)
1,343
22
(1,187)
–
(14)
(22,992)
(3,433)
(452)
(1,137)
(58)
5,431
(28,072)
–
5,431
–
–
–
–
(3,425)
(24,647)
868
(133)
325
84
–
–
1,144
(444)
(117)
122
–
–
705
(86)
(145)
90
–
564
1,972
273
(407)
(1,274)
Total(i)
£m
(22,139)
4,005
690
(1,228)
9
(68)
(18,731)
279
(87)
(1,042)
(2)
(14)
(19,597)
(221)
(536)
(1,017)
(58)
(21,429)
1,972
6,375
(3,855)
(25,921)
5,431
(28,072)
564
(21,429)
142
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements Notes to the consolidated financial statements
– supplementary information
This section includes information that is important to enable a full understanding of our financial position,
particularly areas of potential risk that could affect us in the future.
We also include specific disclosures for British Transco Finance Inc., Niagara Mohawk Power Corporation
and National Grid Gas plc in accordance with various rules including Rule 3-10 of Regulation S-X, as they
have issued public debt securities which have been guaranteed by National Grid plc and one of its subsidiary
companies, National Grid Gas plc. Additional disclosures have also been included in respect of the two
guarantor companies. These disclosures are in lieu of publishing separate financial statements for these
companies. See note 35 for further information.
27. Commitments and contingencies
Commitments are those amounts that we are contractually required to pay in the future as long as the other party meets its
obligations. These commitments primarily relate to operating lease rentals, energy purchase agreements and contracts for the
repurchase of network assets which, in many cases, extend over a long period of time. We also disclose any contingencies,
which include guarantees that companies have given, where we pledge assets against current obligations that will remain for
a specific period.
Future capital expenditure
Contracted for but not provided
Operating lease commitments
Less than 1 year
In 1-2 years
In 2-3 years
In 3-4 years
In 4-5 years
More than 5 years
Energy purchase commitments (i)
Less than 1 year
In 1-2 years
In 2-3 years
In 3-4 years
In 4-5 years
More than 5 years
Guarantees and letters of credit
Guarantee of sublease for US property (expires 2040)
Guarantees of certain obligations of Grain LNG Import Terminal (expire up to 2028)
Guarantee of certain obligations for construction of HVDC West Coast Link (expected expiry 2016)
Other guarantees and letters of credit (various expiry dates)
2013
£m
2012
£m
3,011
2,728
109
84
74
72
70
333
742
1,094
535
394
306
263
1,403
3,995
293
159
618
262
81
96
89
66
63
311
706
1,073
511
403
357
276
1,554
4,174
304
161
691
188
1,332
1,344
(i)
Energy purchase commitments relate to contractual commitments to purchase electricity or gas that are used to satisfy physical delivery requirements to our customers
or for energy that we use ourselves (ie normal purchase, sale or usage) and hence are accounted for as ordinary purchase contracts. Details of commodity contracts that
do not meet the normal purchase, sale or usage criteria, and hence are accounted for as derivative contracts, are shown in note 31.
The total of future minimum sublease payments expected to be received under non-cancellable subleases is £23m (2012: £22m).
Through the ordinary course of our operations, we are party to various litigation, claims and investigations. We do not expect the
ultimate resolution of any of these proceedings to have a material adverse effect on our results of operations, cash flows or
financial position.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 143
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
– supplementary information
Continued
28. Related party transactions
A related party is a company or individual who has an interest in us, for example a company that provides a service to us with a
director who holds a controlling stake in that company and who is also a Director of National Grid plc. The related parties identified
include joint ventures, associated undertakings, investments and key management personnel.
The following significant transactions with related parties were in the normal course of business; amounts receivable from and payable
to related parties are due on normal commercial terms:
Sales: Goods and services supplied to a pension plan and joint ventures
Purchases: Goods and services received from joint ventures and associates (i)
Interest income: Interest receivable on loans with a joint venture
Receivable from a pension plan and joint ventures
Payable to joint ventures and associates
Dividends received from associates (ii)
2013
£m
10
133
–
3
6
21
2012
£m
10
95
–
2
6
26
2011
£m
11
84
2
2
8
9
(i)
During the year the Company received goods and services from a number of joint ventures and associates, including Iroquois Gas Transmission System, L.P. of £37m
(2012: £39m; 2011: £40m), Millennium Pipeline Company, LLC of £35m (2012: £32m; 2011: £28m) for the transportation of gas in the US and NGET/SPT Upgrades
Limited of £52m (2012: £14m; 2011: £6m) for the construction of a transmission link in the UK.
(ii) Dividends were received from Iroquois Gas Transmission System, L.P. of £12m (2012: £17m; 2011: £9m) and Millennium Pipeline Company, LLC of £9m (2012: £9m; 2011: £nil).
Details of investments in principal subsidiary undertakings, joint ventures and associates are disclosed in note 33 and information
relating to pension fund arrangements is disclosed in notes 22 and 29. For details of Directors’ and key management remuneration,
refer to note 2(c) and the audited section of the Remuneration Report.
29. Actuarial information on pensions and other post-retirement benefits
Further details of the defined benefit scheme/plan’s terms and the actuarial assumptions used to value the associated assets
and obligations are set out in this note.
When deciding on these assumptions we take independent actuarial advice. Comparatively small changes in the assumptions
used may have a significant effect on the overall deficit or surplus of a defined benefit scheme/plan.
UK pension schemes
National Grid’s defined benefit pension arrangements are funded with assets held in separate trustee administered funds. The
arrangements are subject to independent actuarial valuations at least every three years and following consultation and agreement
with us, the qualified actuary certifies the rate of employers’ contribution, which, together with the specified contributions payable
by the employees and proceeds from the schemes’ assets, are expected to be sufficient to fund the benefits payable under the
schemes. The last full actuarial valuations were carried out as at 31 March 2010. The 2013 valuation process has commenced.
The results of the 2010 valuations are shown below:
Latest full actuarial valuation
Actuary
Market value of scheme assets at latest valuation
Actuarial value of benefits due to members
Market value as percentage of benefits
Funding deficit
Funding deficit (net of tax)
NG UK Pension Scheme
NGEG of ESPS(i)
31 March 2010
Towers Watson
£13,399m
£(13,998)m
96%
£599m
£461m
31 March 2010
Aon Hewitt
£1,531m
£(2,038)m
75%
£507m
£390m
(i)
National Grid Electricity Group of the Electricity Supply Pension Scheme.
We have started discussions with our employees and our trade union partners to ensure our defined benefit pension schemes are
affordable and sustainable for the future.
144
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 29. Actuarial information on pensions and other post-retirement benefits continued
National Grid UK Pension Scheme
The 2010 actuarial valuation showed that, based on long-term financial assumptions, the contribution rate required to meet future
benefit accrual was 35% of pensionable earnings (32% employers and 3% employees). In addition, National Grid makes payments
to the scheme to cover administration costs and the Pension Protection Fund (PPF) levy. The employer contribution rate and
administration costs will be reviewed as part of the 2013 actuarial valuation.
Following the 2010 actuarial valuation, National Grid and the Trustees agreed a recovery plan which would see the funding deficit
repaid by 31 March 2027. Under the schedule of contributions, no deficit contributions were made in 2010/11 or 2011/12. Annual
payments of £47m, rising in line with the RPI from March 2010, commenced in 2012/13 and are due to continue until 2027.
As part of this agreement, National Grid has established a secured bank account with a charge in favour of the Trustees. The balance
of the bank account at 31 March 2013 was £170m. The funds in the bank account will be paid to the scheme in the event that National
Grid Gas plc is subject to an insolvency event, or is given notice of less than 12 months that Ofgem intends to revoke its licence under
the Gas Act 1986. The funds in the bank account will be released back to National Grid if the scheme moves into surplus.
This scheme ceased to allow new hires to join from 1 April 2002. A defined contribution arrangement was offered for employees joining
after this date. National Grid is currently reviewing the defined contribution arrangement it offers to employees and new hires in the UK.
National Grid Electricity Group of the Electricity Supply Pension Scheme
The 2010 actuarial valuation showed that, based on long-term financial assumptions, the contribution rate required to meet future
benefit accrual was 29.6% of pensionable earnings (23.7% employers and an average of 5.9% employees). The employer contribution
rate will be reviewed as part of the 2013 actuarial valuation.
Following the 2010 actuarial valuation, National Grid and the Trustees agreed a recovery plan that will see the funding deficit repaid
by 31 March 2027. Under the schedule of contributions, payments of £45m were made in 2010/11 and 2011/12 and a further payment
of £38m was made in 2012/13. Thereafter, an annual payment of £38m is due to be made, rising in line with RPI. As part of this
agreement, National Grid has established a secured bank account with a charge in favour of the Trustees. The balance of the bank
account at 31 March 2013 was £9m. The funds in the bank account will be paid to the scheme in the event that National Grid
Electricity Transmission plc (NGET) is subject to an insolvency event, or ceases to hold a licence granted under the Electricity Act
1989. The funds in the bank account will be released back to National Grid if the scheme moves into surplus.
National Grid has also agreed to make a payment in respect of the deficit up to a maximum of £220m should certain triggers be
breached; namely if NGET ceases to hold the licence granted under the Electricity Act 1989 or NGET’s credit rating by two out of
three specified agencies falls below certain agreed levels for a period of 40 days.
The scheme closed to new members from 1 April 2006. A defined contribution arrangement was offered to new hires from this date.
National Grid is currently reviewing the defined contribution arrangement it offers to employees and new hires in the UK.
US pension plans
National Grid’s defined benefit pension plans in the US provide annuity or lump sum payments for vested employees. Non-union
employees hired on or after 1 January 2011 are provided with a defined contribution plan. A defined contribution plan is also provided
to two groups of represented US employees. In addition, a matched defined contribution plan is offered to all eligible employees.
The assets of the plans are held in separate trustee administered funds.
Employees do not contribute to the defined benefit plans. Employer contributions are made in accordance with the rules set out by
the US Internal Revenue Code and can vary according to the funded status of the plans and the amounts that are tax deductible.
At present, there is some flexibility in the amount that is contributed on an annual basis. In general, the Company’s policy for funding
the US pension plans is to contribute amounts collected in rates. These contributions are expected to meet the requirements of the
Pension Protection Act of 2006.
US retiree healthcare and life insurance plans
National Grid provides healthcare and life insurance benefits to eligible retired US employees. Eligibility is based on certain age
and length of service requirements and in most cases retirees contribute to the cost of their healthcare coverage. In the US, there
is no governmental requirement to pre fund post-retirement health and welfare plans. However, in general, the Company’s policy
for funding the US retiree healthcare and life insurance plans is to contribute amounts collected in rates.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 145
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
– supplementary information
Continued
29. Actuarial information on pensions and other post-retirement benefits continued
Asset allocations
Equities (i)
Corporate bonds (ii)
Gilts
Property
Other
Total
UK pensions
US pensions
US other post-retirement benefits
2013
%
30.9
33.4
27.3
6.2
2.2
2012
%
33.3
33.1
24.3
7.2
2.1
2011
%
34.5
30.3
26.8
5.9
2.5
2013
%
47.2
43.2
–
4.0
5.6
2012
%
47.7
42.5
–
3.8
6.0
2011
%
51.5
40.7
–
2.0
5.8
2013
%
75.0
24.6
–
–
0.4
2012
%
76.6
22.7
–
–
0.7
2011
%
76.5
22.6
–
–
0.9
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
(i)
Included within equities at 31 March 2013 were ordinary shares of National Grid plc with a value of £16m (2012: £13m; 2011: £12m).
(ii) Included within corporate bonds at 31 March 2013 was an investment in a number of bonds issued by subsidiary undertakings with a value of £69m (2012: £50m; 2011: £39m).
Target asset allocations
Equities (i)
Bonds, property and other assets
Total
NGUK PS
%
31
69
100
ESPS
%
45
55
100
US
pensions
%
47
53
100
US
other
%
70
30
100
(i)
Included within equities are hedge fund and active currency investments.
Actuarial assumptions
For UK schemes, the expected long-term rate of return on assets has been set reflecting the price inflation expectation, the expected
real return on each major asset class and the long-term asset allocation strategy adopted for each scheme. The expected real returns
on specific asset classes reflect historical returns, investment yields on the measurement date and general future return expectations,
and have been set after taking advice from independent actuaries.
For US plans, the estimated rate of return for various passive asset classes is based both on analysis of historical rates of return and
forward-looking analysis of risk premiums and yields. Current market conditions, such as inflation and interest rates, are evaluated in
connection with the setting of our long-term assumptions. A small premium is added for active management of both equity and fixed
income. The rates of return for each asset class are then weighted in accordance with the actual asset allocation resulting in a
long-term return on asset rate for each plan.
Discount rate (i)
Expected return on plan assets
Rate of increase in salaries (ii)
Rate of increase in pensions
in payment
Rate of increase in pensions
in deferment
Rate of increase in RPI
(or equivalent)
Initial healthcare cost trend rate
Ultimate healthcare cost trend rate
UK pensions
US pensions
US other post-retirement benefits
2013
%
4.3
4.9
4.1
3.4
3.4
3.4
n/a
n/a
2012
%
4.8
5.5
4.0
3.2
3.2
3.2
n/a
n/a
2011
%
5.5
6.1
4.4
3.5
3.5
3.5
n/a
n/a
2013
%
4.7
6.4
3.5
–
–
2.4
n/a
n/a
2012
%
5.1
6.6
3.5
–
–
2.1
n/a
n/a
2011
%
5.9
7.2
3.5
–
–
2.2
n/a
n/a
2013
%
4.7
6.6
3.5
n/a
n/a
n/a
8.0
5.0
2012
%
5.1
6.8
3.5
n/a
n/a
n/a
8.0
5.0
2011
%
5.9
7.1
3.5
n/a
n/a
n/a
8.5
5.0
(i)
The discount rates for pension liabilities have been determined by reference to appropriate yields on high quality corporate bonds prevailing in the UK and US debt markets
at the reporting date.
(ii) A promotional scale has also been used where appropriate.
Assumed life expectations for a retiree at age 65
Today
Males
Females
In 20 years
Males
Females
2013
UK
years
US
years
2012
UK
years
22.7
25.2
25.0
27.6
19.5
21.4
21.0
22.2
22.5
25.0
24.9
27.5
US
years
19.4
21.3
20.9
22.2
2011
UK
years
22.4
24.9
24.7
27.4
US
years
18.8
20.8
18.8
20.8
146
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 29. Actuarial information on pensions and other post-retirement benefits continued
The history of the present value of obligations, the fair value of plan assets and of experience adjustments is as follows:
Present value of funded and unfunded obligations
Fair value of plan assets
Difference between the expected and actual return on plan assets
Experience gains/(losses) on plan liabilities
Actuarial (losses)/gains on plan liabilities
30. Financial risk
2013
£m
2012
£m
2011
£m
2010
£m
2009
£m
(26,696)
23,285
(24,016)
21,149
(21,938)
19,969
(22,200)
19,136
(18,299)
15,519
(3,411)
(2,867)
(1,969)
(3,064)
1,176
134
(2,106)
431
(54)
(1,756)
358
28
213
3,192
509
(3,923)
(2,780)
(3,952)
(125)
1,934
Our activities expose us to a variety of financial risks: market risk, including foreign exchange risk, fair value interest rate risk, cash
flow interest rate risk, commodity price risk; credit risk; and liquidity risk. Our overall risk management programme focuses on the
unpredictability of financial markets and seeks to minimise potential volatility of financial performance. We use financial instruments,
including derivative financial instruments, to manage risks of this type.
This note describes our approach to managing market risk, including an analysis of assets and liabilities by currency type and
an analysis of interest rate category for our net debt. We are required by accounting standards to also include a number of
specific disclosures (such as an analysis of contractual undiscounted cash flows by year falling due) and have included these
requirements below.
Risk management related to financing activities is carried out by a central treasury department under policies approved by the
Finance Committee of the Board. The objective of the treasury department is to manage funding and liquidity requirements, including
managing associated financial risks, to within acceptable boundaries. The Finance Committee provides written principles for overall
risk management, as well as written policies covering specific areas such as foreign exchange risk, interest rate risk, credit risk,
liquidity risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity.
(a) Market risk
(i) Foreign exchange risk
National Grid operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily
with respect to the dollar. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities, and
investments in foreign operations.
Our policy for managing foreign exchange transaction risk is to hedge contractually committed foreign currency cash flows over a
prescribed minimum size. Where foreign currency cash flow forecasts are less certain, our policy is to hedge a proportion of such
cash flows based on the probability of those cash flows occurring. Instruments used to manage foreign exchange transaction risk
include foreign exchange forward contracts and foreign exchange swaps.
Our policy for managing foreign exchange translation risk relating to our net investment in foreign operations is to maintain a
percentage of net debt and foreign exchange forwards so as to provide an economic offset of our cash flows arising in the foreign
currency. The primary managed foreign exchange exposure arises from the dollar denominated assets and liabilities held by our
US operations, with a further small euro exposure in respect of a joint venture investment.
During 2013 and 2012, derivative financial instruments were used to manage foreign currency risk as follows:
Sterling
£m
238
3,938
(12,573)
(8,397)
320
(8,077)
Euro
£m
1
124
(5,220)
(5,095)
5,368
2013
Dollar
£m
432
1,289
(8,678)
(6,957)
(6,684)
Other
£m
–
80
(1,624)
(1,544)
1,560
Total
£m
671
5,431
(28,095)
(21,993)
564
Sterling
£m
14
1,021
(11,034)
(9,999)
2,584
Euro
£m
1
84
(4,146)
(4,061)
3,845
2012
Dollar
£m
317
1,200
(7,284)
(5,767)
(6,206)
Other
£m
–
86
(561)
(475)
482
Total
£m
332
2,391
(23,025)
(20,302)
705
273
(13,641)
16
(21,429)
(7,415)
(216)
(11,973)
7
(19,597)
Cash and cash equivalents
Financial investments
Borrowings (i)
Pre-derivative position
Derivative effect
Net debt position
(i)
Includes bank overdrafts.
The overall exposure to dollars largely relates to our net investment hedge activities as described in note 14.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 147
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
– supplementary information
Continued
30. Financial risk continued
The currency exposure on other financial instruments is as follows:
Trade and other receivables
Trade and other payables*
Other non-current liabilities
Sterling
£m
151
(1,328)
(22)
Euro
£m
–
–
–
2013
Dollar
£m
1,338
(1,437)
(283)
Other
£m
–
–
–
Total
£m
1,489
(2,765)
(305)
Sterling
£m
112
(1,034)
(24)
Euro
£m
–
(1)
–
2012
Dollar
£m
896
(1,238)
(340)
Other
£m
–
–
–
Total
£m
1,008
(2,273)
(364)
*Comparatives have been reclassified to present items on a basis consistent with the current year classification
The carrying amounts of other financial instruments are denominated in the above currencies, which in most instances are the functional
currency of the respective subsidiaries. Our exposure to dollars is due to activities in our US subsidiaries. We do not have any other
significant exposure to currency risk on these balances.
(ii) Cash flow and fair value interest rate risk
National Grid’s interest rate risk arises from our long-term borrowings. Borrowings issued at variable rates expose National Grid to cash
flow interest rate risk, partially offset by cash held at variable rates. Borrowings issued at fixed rates expose National Grid to fair value
interest rate risk.
Our interest rate risk management policy is to seek to minimise total financing costs (being interest costs and changes in the market
value of debt) subject to constraints. We do this by using fixed- and floating-rate debt and derivative financial instruments including
interest rate swaps, swaptions and forward rate agreements.
We hold some borrowings on issue that are inflation linked. We believe that these provide a partial economic offset to the inflation risk
associated with our UK inflation linked revenues.
The table in note 19 (borrowings) sets out the carrying amount, by contractual maturity, of borrowings that are exposed to interest rate
risk before taking into account interest rate swaps.
During 2013 and 2012, net debt was managed using derivative instruments to hedge interest rate risk as follows:
Cash and cash equivalents
Financial investments
Borrowings (ii)
Pre-derivative position
Derivative effect (iii)
Net debt position
Fixed
rate
£m
577
540
(17,767)
(16,650)
1,555
(15,095)
Floating
rate
£m
94
4,843
(3,700)
1,237
(1,132)
2013
Inflation
linked
£m
–
–
(6,617)
(6,617)
141
105
(6,476)
Other(i)
£m
Total
£m
671
5,431
(28,095)
(21,993)
564
–
48
(11)
37
–
37
Fixed
rate
£m
289
742
(13,394)
(12,363)
1,220
Floating
rate
£m
43
1,523
(3,314)
(1,748)
(567)
2012
Inflation
linked
£m
–
–
(6,304)
(6,304)
52
(21,429)
(11,143)
(2,315)
(6,252)
Other(i)
£m
–
126
(13)
113
–
113
Total
£m
332
2,391
(23,025)
(20,302)
705
(19,597)
(i) Represents financial instruments which are not directly affected by interest rate risk, such as investments in equity or other similar financial instruments.
(ii) Includes bank overdrafts.
(iii) The impact of 2013/14 (2012: 2012/13) maturing short-dated interest rate derivatives is included.
148
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 30. Financial risk continued
(b) Fair value analysis
The financial instruments included on the statement of financial position are measured at fair value. These fair values can be categorised
into hierarchy levels that reflect the significance of the inputs used in measuring the fair value. The best evidence of fair value is a quoted
price in an actively traded market. In the event that the market for a financial instrument is not active, a valuation technique is used.
Assets
Available-for-sale investments
Derivative financial instruments (excluding
commodity contracts)
Commodity contracts
Liabilities
Derivative financial instruments (excluding
commodity contracts)
Commodity contracts
Total
2013
2012
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
4,510
209
–
4,719
1,741
185
–
1,926
–
–
4,510
2,197
26
2,432
–
–
–
(1,529)
(5)
(1,534)
4,510
898
48
63
111
(152)
(134)
(286)
(175)
2,245
89
7,053
(1,681)
(139)
(1,820)
5,233
–
–
1,741
–
–
–
1,741
2,078
13
2,276
(1,193)
(62)
(1,255)
1,021
58
58
116
(238)
(198)
(436)
(320)
2,136
71
4,133
(1,431)
(260)
(1,691)
2,442
Level 1: Financial instruments with quoted prices for identical instruments in active markets.
Level 2: Financial instruments with quoted prices for similar instruments in active markets or quoted prices for identical or similar
instruments in inactive markets and financial instruments valued using models where all significant inputs are based directly
or indirectly on observable market data.
Level 3: Financial instruments valued using valuation techniques where one or more significant inputs are based on unobservable
market data.
Our level 3 derivative financial instruments include cross-currency swaps with an embedded call option, currency swaps where the
currency forward curve is illiquid and inflation linked swaps where the inflation curve is illiquid. In valuing these instruments a third party
valuation is obtained to support each reported fair value.
Our level 3 commodity contracts primarily consist of our forward purchases of electricity and gas where pricing inputs are
unobservable, as well as other complex transactions. Complex transactions can introduce the need for internally developed models
based on reasonable assumptions. Industry standard valuation techniques such as the Black-Scholes pricing model and Monte Carlo
simulation are used for valuing such instruments. Level 3 is also applied in cases when optionality is present or where an extrapolated
forward curve is considered unobservable. All published forward curves are verified to market data; if forward curves differ from
market data by 5% or more they are considered unobservable.
The changes in value of our level 3 derivative financial instruments are as follows:
At 1 April
Net gains/(losses) for the year (i) (ii)
Purchases
Settlements
Reclassification out of level 3
At 31 March
Derivative
financial instruments
Commodity contracts
Total
2013
Level 3
valuation
£m
2012
Level 3
valuation
£m
2013
Level 3
valuation
£m
2012
Level 3
valuation
£m
2013
Level 3
valuation
£m
2012
Level 3
valuation
£m
(180)
79
–
(3)
–
(104)
54
(47)
(184)
(3)
–
(180)
(140)
45
(14)
39
(1)
(71)
(79)
(98)
(36)
73
–
(140)
(320)
124
(14)
36
(1)
(175)
(25)
(145)
(220)
70
–
(320)
(i)
Gains of £79m (2012: £47m loss) are attributable to derivative financial instruments held at the end of the reporting period.
(ii) Gains of £51m (2012: £96m loss) are attributable to commodity contract financial instruments held at the end of the reporting period.
In 2013 the transfers out of level 3 were driven by changes in the observability of extrapolated forward curves.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 149
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
– supplementary information
Continued
30. Financial risk continued
(b) Fair value analysis continued
The impacts on a post-tax basis of reasonably possible changes in significant level 3 assumptions are as follows:
10% increase in commodity prices (i)
10% decrease in commodity prices (i)
Volume forecast uplift (ii)
Volume forecast reduction (ii)
Forward curve extrapolation
+20 basis point change in LPI market curve (iii)
−20 basis point change in LPI market curve
Commodity contracts
Other derivative
financial instruments
2013
Income
statement
£m
2012
Income
statement
£m
2013
Income
statement
£m
2012
Income
statement
£m
40
(23)
(4)
4
–
–
–
28
(16)
(5)
6
(2)
–
–
–
–
–
–
–
(62)
60
–
–
–
–
–
(56)
52
(i) Level 3 commodity price sensitivity is included within the sensitivity analysis disclosed in note 34.
(ii) Volumes were flexed using maximum and minimum historical averages, or by ±10% where historical averages were not available.
(iii) A reasonably possible change in assumption of other level 3 derivative financial instruments is unlikely to result in a material change in fair values.
The impacts disclosed above were considered on a contract by contract basis with the most significant unobservable inputs identified.
(c) Credit risk
We are exposed to the risk of loss resulting from counterparties’ default on their commitments including failure to pay or make a
delivery on a contract. This risk is inherent in our commercial business activities. We are exposed to credit risk on our cash and cash
equivalents, derivative financial instruments, deposits with banks and financial institutions, as well as credit exposures to wholesale
and retail customers, including outstanding receivables and committed transactions.
Treasury credit risk
Counterparty risk arises from the investment of surplus funds and from the use of derivative instruments. As at 31 March 2013, the
following limits were in place for investments held with banks and financial institutions:
AAA rated G8 sovereign entities
Triple ‘A’ vehicles
Triple ‘A’ range institutions (AAA)
Double ‘A’ range institutions (AA)
Single ‘A’ range institutions (A)
Maximum limit
£m
Unlimited
301
1,027 to 1,549
613 to 772
211 to 301
Long-term limit
£m
Unlimited
255
517 to 811
312 to 386
108 to 154
As at 31 March 2012 and 2013, we had a number of exposures to individual counterparties. In accordance with our treasury policies,
counterparty credit exposure utilisations are monitored daily against the counterparty credit limits. Counterparty credit ratings and
market conditions are reviewed continually with limits being revised and utilisation adjusted, if appropriate. Management does not
expect any significant losses from non performance by these counterparties.
The counterparty exposure under derivative financial contracts as shown in note 14 was £2,245m (2012: £2,136m); after netting
agreements it was £1,337m (2012: £1,453m). This exposure is further reduced by collateral received as shown in note 19. Additional
information for commodity contract credit risk is in note 31.
Wholesale and retail credit risk
Our principal commercial exposure in the UK is governed by the credit rules within the regulated codes Uniform Network Code and
Connection and Use of System Code. These lay down the level of credit relative to the regulatory asset value (RAV) for each credit
rating. In the US, we are required to supply electricity and gas under state regulations. Our credit policies and practices are designed
to limit credit exposure by collecting security deposits prior to providing utility services, or after utility service has commenced if certain
applicable regulatory requirements are met. Collection activities are managed on a daily basis. Sales to retail customers are usually
settled in cash, cheques, electronic bank payments or by using major credit cards. We are committed to measuring, monitoring,
minimising and recording counterparty credit risk in our wholesale business. The utilisation of credit limits is regularly monitored
and collateral is collected against these accounts when necessary. Management does not expect any significant losses of receivables
that have not been provided for as shown in note 16.
150
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 30. Financial risk continued
(d) Liquidity analysis
Our policy is to determine our liquidity requirements by the use of both short- and long-term cash flow forecasts. These forecasts are
supplemented by a financial headroom analysis which is used to assess funding adequacy for at least a 24 month period.
We believe our contractual obligations, including those shown in commitments and contingencies in note 27 can be met from existing
cash and investments, operating cash flows and other financings that we reasonably expect to be able to secure in the future, together
with the use of committed facilities if required.
Our debt agreements and banking facilities contain covenants, including those relating to the periodic and timely provision of financial
information by the issuing entity and financial covenants such as restrictions on the level of subsidiary indebtedness. Failure to comply
with these covenants, or to obtain waivers of those requirements, could in some cases trigger a right, at the lender’s discretion, to
require repayment of some of our debt and may restrict our ability to draw upon our facilities or access the capital markets.
The following is an analysis of the contractual undiscounted cash flows payable under financial liabilities and derivative assets and
liabilities as at the reporting date:
At 31 March 2013
Non-derivative financial liabilities
Borrowings, excluding finance lease liabilities
Interest payments on borrowings (i)
Finance lease liabilities
Other non interest-bearing liabilities
Derivative financial liabilities
Derivative contracts – receipts
Derivative contracts – payments
Commodity contracts
Total
At 31 March 2012
Non-derivative financial liabilities
Borrowings, excluding finance lease liabilities
Interest payments on borrowings (i)
Finance lease liabilities
Other non interest-bearing liabilities
Derivative financial liabilities
Derivative contracts – receipts
Derivative contracts – payments
Commodity contracts
Total
Less
than
1 year
£m
(3,061)
(951)
(27)
(2,696)
1,388
(1,309)
(150)
1-2 years
£m
2-3 years
£m
More
than
3 years
£m
Total
£m
(1,836)
(861)
(26)
(235)
(790)
(842)
(26)
–
(21,704)
(15,775)
(151)
–
(27,391)
(18,429)
(230)
(2,931)
816
(469)
(41)
1,053
(969)
(35)
441
(569)
(25)
3,698
(3,316)
(251)
(6,806)
(2,652)
(1,609)
(37,783)
(48,850)
1-2 years
£m
2-3 years
£m
Less
than
1 year
£m
(2,157)
(819)
(22)
(2,124)
536
(336)
(257)
(1,822)
(749)
(44)
(253)
1,186
(992)
(54)
More
than
3 years
£m
(16,725)
(8,927)
(151)
–
Total
£m
(22,411)
(11,150)
(247)
(2,377)
(1,707)
(655)
(30)
–
600
(370)
(43)
1,004
(851)
(62)
3,326
(2,549)
(416)
(5,179)
(2,728)
(2,205)
(25,712)
(35,824)
(i)
The interest on borrowings is calculated based on borrowings held at 31 March without taking account of future issues. Floating-rate interest is estimated using a forward
interest rate curve as at 31 March. Payments are included on the basis of the earliest date on which the Company can be required to settle.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 151
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
– supplementary information
Continued
30. Financial risk continued
(e) Capital risk management
National Grid’s objectives when managing capital are: to safeguard our ability to continue as a going concern; to remain within regulatory
constraints of our regulated operating companies; and to maintain an efficient mix of debt and equity funding thus achieving an optimal
capital structure and cost of capital. We regularly review and maintain or adjust the capital structure as appropriate in order to achieve
these objectives.
Maintaining appropriate credit ratings for our regulated companies is an important aspect of our capital risk management strategy
and balance sheet efficiency. We monitor our balance sheet efficiency using several metrics including our interest cover. Interest cover
for the year ended 31 March 2013 was 3.9, consistent with the year ended 31 March 2012. Our long-term target range for interest
cover is between 3.0 and 3.5, which we believe is consistent with single A range long-term senior unsecured debt credit ratings within
our main UK operating companies, National Grid Electricity Transmission plc and National Grid Gas plc, based on guidance from the
rating agencies.
In addition, we monitor the regulatory asset value (RAV) gearing within each of National Grid Electricity Transmission plc and the
regulated transmission and distribution businesses within National Grid Gas plc. This is calculated as net debt expressed as a
percentage of RAV, and indicates the level of debt employed to fund our UK regulated businesses. It is compared with the level
of RAV gearing indicated by Ofgem as being appropriate for these businesses, at around 60%.
The majority of our regulated operating companies in the US and the UK (and one intermediate UK holding company), which are
all consolidated subsidiaries of National Grid, are subject to certain restrictions on the payment of dividends by administrative order
(by regulators relevant to the individual company), contract and/or licence. The types of restrictions that a company may have that
would prevent a dividend being declared or paid unless they are met include:
• dividends must be approved in advance by the relevant US state regulatory commission;
• the subsidiary must have at least two recognised rating agency credit ratings of at least investment grade;
• dividends must be limited to cumulative retained earnings, including pre-acquisition retained earnings;
• National Grid plc must maintain an investment grade credit rating and if that rating is the lowest investment grade bond rating
it cannot have a negative watch/review downgrade notice by a credit rating agency;
• the subsidiary must not carry on any activities other than those permitted by the licences;
• the subsidiary must not create any cross-default obligations or give or receive any intra-group cross-subsidies; and
• the percentage of equity compared with total capital of the subsidiary must remain above certain levels.
There is a further restriction relating only to the Narragansett Electric Company, which is required to maintain its consolidated
net worth above certain levels.
These restrictions are subject to alteration in the US as and when a new rate case or rate plan is agreed with the relevant regulatory
bodies for each operating company and in the UK through the normal licence review process.
As most of our business is regulated, at 31 March 2013 the majority of our net assets are subject to some of the restrictions noted
above. These restrictions are not considered to be significantly onerous, nor do we currently expect they will prevent the planned
payment of dividends in future in line with our dividend policy.
Some of our regulatory and bank loan agreements additionally impose lower limits for the long-term credit ratings that certain companies
within the Group must hold. All the above requirements are monitored on a regular basis in order to ensure compliance. The Company
has complied with all externally imposed capital requirements to which it is subject.
152
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 31. Commodity risk
We purchase electricity and gas to supply our customers in the US and to meet our own energy needs. Substantially all our costs
of purchasing electricity and gas for supply to customers are recoverable at an amount equal to cost. The timing of recovery of these
costs can vary between financial periods leading to an under- or over-recovery within any particular year, that can lead to large
fluctuations in the income statement. We follow approved policies to manage price and supply risks for our commodity activities.
Our energy procurement risk management policy and delegations of authority govern our US commodity trading activities for energy
transactions. The purpose of this policy is to ensure we transact within pre-defined risk parameters and only in the physical and financial
markets where we or our customers have a physical market requirement.
Commodity contracts that meet the definition of a derivative and which do not meet the exemption for normal sale, purchase or usage
are carried at fair value.
Energy purchase contracts for the forward purchase of electricity or gas that are used to satisfy physical delivery requirements to
customers or for energy that the Company uses itself meet the normal purchase, sale or usage exemption of IAS 39 ‘Financial Instruments:
Recognition and Measurement’. They are, therefore, not recognised in the financial statements. Disclosure of commitments under
such contracts is made in note 27.
We enter into forward contracts for the purchase of commodities, some of which do not meet the own use exemption for accounting
purposes and hence are accounted for as derivatives. We also enter into derivative financial instruments linked to commodity prices,
including index-linked swaps and futures contracts. These derivative financial instruments are used to manage market price volatility
and are carried at fair value on the statement of financial position, with the mark-to-market changes reflected through earnings.
Remeasurements of commodity contracts carried at fair value are recognised in the income statement, with changes due to movements
in commodity prices recorded in operating costs and changes relating to movements in interest rates recorded in finance costs.
Where contracts are traded on a recognised exchange and margin payments are made, the contract fair values are reported net of the
associated margin payments.
The credit policy for commodity transactions is owned and monitored by the energy procurement risk management committee, under
authority delegated by the Board and Executive Committee, and establishes controls and procedures to determine, monitor and
minimise the credit risk of counterparties.
The counterparty exposure for our commodity derivatives is £89m (2012: £71m), and after netting agreements it was £87m (2012: £58m).
The fair value of our commodity contracts by type can be analysed as follows:
Assets
£m
2013
Liabilities
£m
Total
£m
Assets
£m
2012
Liabilities
£m
Commodity purchase contracts accounted
for as derivative contracts
Forward purchases of electricity
Forward purchases/sales of gas
Derivative financial instruments linked to commodity prices
Electricity swaps
Electricity options
Gas swaps
Gas options
–
46
16
16
10
1
89
(89)
(45)
(1)
–
(4)
–
(89)
1
15
16
6
1
(139)
(50)
–
48
1
10
12
–
71
Total
£m
(119)
(29)
(24)
10
(27)
–
(119)
(77)
(25)
–
(39)
–
(260)
(189)
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 153
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
– supplementary information
Continued
31. Commodity risk continued
The maturity profile of commodity contracts is as follows:
Less than one year
Current
In 1-2 years
In 2-3 years
In 3-4 years
In 4-5 years
More than 5 years
Non-current
Total
Assets
£m
2013
Liabilities
£m
Total
£m
Assets
£m
2012
Liabilities
£m
42
42
13
10
14
2
8
47
89
(69)
(69)
(23)
(23)
(16)
(8)
–
(70)
(139)
(27)
(27)
(10)
(13)
(2)
(6)
8
(23)
(50)
35
35
9
5
6
11
5
36
71
(149)
(149)
(38)
(28)
(22)
(16)
(7)
(111)
(260)
Total
£m
(114)
(114)
(29)
(23)
(16)
(5)
(2)
(75)
(189)
For each class of commodity contract, our exposure based on the notional quantities is as follows:
Forward purchases of electricity (i)
Forward purchases/sales of gas (ii)
Electricity swaps
Electricity options
Gas swaps
Gas options
NYMEX gas futures (iii)
2013
2012
2,595 GWh
59m Dth
6,309 GWh
32,299 GWh
66m Dth
4m Dth
17m Dth
3,403 GWh
106m Dth
5,380 GWh
36,580 GWh
84m Dth
8m Dth
21m Dth
(i) Forward electricity purchases have terms up to four years. The contractual obligations under these contracts are £174m (2012: £206m).
(ii) Forward gas purchases have terms up to four years. The contractual obligations under these contracts are £119m (2012: £148m).
(iii) NYMEX gas futures have been offset with related margin accounts.
32. Borrowing facilities
To support our long-term liquidity requirements and provide backup to commercial paper and other borrowings, we agree loan
facilities with financial institutions over and above the value of borrowings that may be required. These facilities have never been
drawn, and our undrawn amounts are listed below.
At 31 March 2013, we had bilateral committed credit facilities of £2,009m (2012: £1,140m). In addition, we had committed credit
facilities from syndicates of banks of £877m at 31 March 2013 (2012: £844m). All committed credit facilities were undrawn in 2013
and 2012. An analysis of the maturity of these undrawn committed facilities is shown below:
Undrawn committed borrowing facilities expiring:
Less than 1 year
In 1-2 years
In 2-3 years
In 3-4 years
In 4-5 years
2013
£m
–
1,140
877
–
869
2,886
2012
£m
313
–
1,140
531
–
1,984
Subsequent to 31 March 2013, £1,140m of the facilities included above have been renegotiated to £1,165m for a further five years.
Of the unused facilities at 31 March 2013, £2,568m (2012: £1,671m) was held as backup to commercial paper and similar borrowings,
while £318m (2012: £313m) is available as backup to specific US borrowings.
Further information on our bonds can be found on the debt investor section of our website.
154
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 33. Subsidiary undertakings, joint ventures and associates
While we present consolidated results in these financial statements as if we were one company, our structure is such that there
are a number of different operating and holding companies that contribute to the overall result. Our structure has evolved through
acquisitions as well as regulatory requirements to have certain activities within separate legal entities.
Principal subsidiary undertakings
The principal subsidiary undertakings included in the consolidated financial statements at 31 March 2013 are listed below.
These undertakings are wholly-owned and, unless otherwise indicated, are incorporated in England and Wales.
National Grid Gas plc
National Grid Electricity Transmission plc
New England Power Company (i)
Massachusetts Electric Company (i)
The Narragansett Electric Company (i)
Niagara Mohawk Power Corporation (i)
National Grid Metering Limited
National Grid Grain LNG Limited
Boston Gas Company (i)
National Grid Generation LLC (i)
KeySpan Gas East Corporation (i)
The Brooklyn Union Gas Company (i)
NGG Finance plc
National Grid Property Holdings Limited
National Grid Holdings One plc
Lattice Group plc
National Grid USA (i)
Niagara Mohawk Holdings, Inc. (i)
National Grid Commercial Holdings Limited
National Grid Holdings Limited
KeySpan Corporation (i)
National Grid North America Inc. (formerly National Grid Holdings Inc.) (i)
British Transco Finance Inc. (i)
British Transco International Finance BV (incorporated in the Netherlands)
(i)
Incorporated in the US.
Principal activity
Transmission and distribution of gas
Transmission of electricity
Transmission of electricity
Distribution of electricity
Transmission and distribution of electricity
Transmission of electricity and distribution of electricity and gas
Metering services
LNG importation and storage
Distribution of gas
Generation of electricity
Distribution of gas
Distribution of gas
Financing
Property services
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Financing
Financing
Principal joint ventures and associates
The principal joint ventures and associated undertakings included in the financial statements at 31 March 2013 are listed below.
These undertakings are incorporated in England and Wales (unless otherwise indicated).
BritNed Development Limited
NGET/SPT Upgrades Limited
Millennium Pipeline Company, LLC (i)
Iroquois Gas Transmission System, L.P. (i)
(i)
Incorporated in the US.
% of ordinary
shares held
Principal activity
50
50
26.25
20.4
UK/Netherlands interconnector
England/Scotland interconnector
Transmission of gas
Transmission of gas
A full list of all subsidiary and associated undertakings is available from the Group General Counsel & Company Secretary.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 155
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
– supplementary information
Continued
34. Sensitivities on areas of estimation and uncertainty
In order to give a clearer picture of the impact that potential changes in estimates and assumptions could have on our results and
financial position, the following sensitivities are presented. These sensitivities are hypothetical only, as they are based on assumptions
and conditions prevailing at the year end, and should be used with caution. The effects provided are not necessarily indicative of
the actual effects that would be experienced because our actual exposures are constantly changing.
Revenue accruals
A 10% change in our estimate of unbilled revenues at 31 March 2013 would result in an increase or decrease in our recorded net
assets and profit for the year of approximately £77m (2012: £49m) net of tax.
Asset useful lives
An increase in the economic useful lives of assets of one year on average would reduce our annual depreciation charge on property,
plant and equipment by £68m (2012: £70m) (pre-tax) and our annual amortisation charge on intangible assets by £15m (2012: £11m)
(pre-tax).
Hedge accounting
If, using our derivative financial instruments, hedge accounting had not been achieved during the year ended 31 March 2013, the
profit after tax for the year would have been £184m lower (2012: £165m higher) and net assets would have been £106m higher
(2012: £163m higher).
Provisions
A 10% change in the estimates of future cash flows in respect of provisions for liabilities would result in an increase or decrease in
our provisions of approximately £176m (2012: £173m).
Assets carried at fair value
A 10% change in assets and liabilities carried at fair value would result in an increase or decrease in the carrying value of derivative
financial instruments and commodity contract liabilities of £56m (2012: £71m) and £5m (2012: £19m) respectively.
Pensions and other post-retirement benefits
The impact of increases in the discount rate, salary inflation and life expectancy is shown in the table below. The effect of a change
in the discount rate, driven by changes in corporate bond interest rates, would be expected to have a partial offset due to the related
effects on asset values.
Change in pensions and other
post-retirement benefit obligations
Change in annual pension and
other post-retirement benefits cost
Sensitivities (all other assumptions held constant):
0.1% change in discount rate
0.5% change in long-term rate of increase in salaries
Change of one year to life expectancy at age 60
2013
£m
396
178
815
2012
£m
346
158
686
2011
£m
304
162
653
Sensitivities to a 1% change in assumed healthcare cost trend rates:
Increase
Effect on the aggregate of the service costs and interest costs
Effect on defined benefit obligations
Decrease
Effect on the aggregate of the service costs and interest costs
Effect on defined benefit obligations
2013
£m
2012
£m
2011
£m
7
9
7
7
8
6
7
8
7
2013
£m
2012
£m
2011
£m
32
453
(26)
(378)
29
366
(25)
(310)
28
330
(23)
(282)
156
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 34. Sensitivities on areas of estimation and uncertainty continued
Financial risk
Our financial instruments are sensitive to changes in market variables, being UK and US interest rates, the UK RPI and the dollar
to sterling exchange rate. The changes in market variables impacts the valuation of our borrowings, deposits, derivative financial
instruments and commodity contracts. The following analysis illustrates the sensitivity of our financial instruments to the changes
in market variables.
The following main assumptions were made in calculating the sensitivity analysis:
• the amount of net debt, the ratio of fixed to floating interest rates of the debt and derivatives portfolio, and the proportion of
financial instruments in foreign currencies are all constant and on the basis of the hedge designations in place at 31 March 2013
and 2012 respectively;
• the statement of financial position sensitivity to interest rates relates only to derivative financial instruments and available-for-sale
investments, as debt and other deposits are carried at amortised cost and so their carrying value does not change as interest
rates move;
• the sensitivity of accrued interest to movements in interest rates is calculated on net floating rate exposures on debt, deposits
and derivative instruments;
• changes in the carrying value of derivatives from movements in interest rates of designated cash flow hedges are assumed
to be recorded fully within equity; and
• changes in the carrying value of derivative financial instruments designated as net investment hedges from movements in
interest rates are recorded in the income statement as they are designated using the spot rather than the forward translation
method. The impact of movements in the dollar to sterling exchange rate are recorded directly in equity.
Using the above assumptions, and a number of others which have a far smaller impact overall, the following table shows the illustrative
effect on the income statement and items that are recognised directly in equity that would result from reasonably probable movements
in the UK RPI, UK and US interest rates and in the dollar to sterling exchange rate, after the effects of tax.
UK RPI +/- 0.50%*
UK interest rates +/- 0.50%
US interest rates +/- 0.50%
US dollar exchange rate +/- 10%
Income
statement
2013
+/- £m
Other equity
reserves
2013
+/- £m
Income
statement
2012
+/- £m
Other equity
reserves
2012
+/- £m
25
98
87
65
–
90
16
600
24
38
23
39
–
54
11
571
*Excludes sensitivities to Limited Price Inflation index. Further details on sensitivities are provided in note 30(b)
The other equity reserves impact does not reflect the exchange translation in our US subsidiary net assets. It is estimated this would
change by £712m (2012: £691m) in the opposite direction if the dollar exchange rate changed by 10%.
Commodity risk
A sensitivity analysis has also been prepared on the basis that all commodity contracts are constant from the reporting date. Based
on this, an illustrative 10% movement in commodity prices would have the following impacts after the effects of tax:
10% increase in commodity prices
10% decrease in commodity prices
The income statement sensitivities would affect commodity remeasurements.
Income
statement
2013
£m
Income
statement
2012
£m
45
(34)
29
(23)
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 157
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
– supplementary information
Continued
35. Additional disclosures in respect of guaranteed securities
We have three debt issuances (including preferred shares) that are listed on a US national securities exchange and are guaranteed
by companies in the Group. These guarantors commit to honour any liabilities should the company issuing the debt have any financial
difficulties. In order to provide debt holders with information on the financial stability of the companies providing the guarantees,
we are required to disclose individual financial information for these companies. We have chosen to include this information in the
Group financial statements rather than submitting separate stand-alone financial statements.
The following condensed consolidating financial information, comprising statements of comprehensive income, statements of financial
position and cash flow statements, is given in respect of National Grid Gas plc (subsidiary guarantor), which became joint full and
unconditional guarantor on 11 May 2004 with National Grid plc (parent guarantor) of the 6.625% Guaranteed Notes due 2018 issued
in June 1998 by British Transco Finance Inc., then known as British Gas Finance Inc. (issuer of notes). Condensed consolidating
financial information is also provided in respect of Niagara Mohawk Power Corporation as a result of National Grid plc’s guarantee,
dated 29 October 2007, of Niagara Mohawk’s 3.6% and 3.9% issued preferred shares. National Grid Gas plc, British Transco Finance
Inc., and Niagara Mohawk Power Corporation are wholly-owned subsidiaries of National Grid plc.
The following financial information for National Grid plc, National Grid Gas plc, British Transco Finance Inc., and Niagara Mohawk
Power Corporation on a condensed consolidating basis is intended to provide investors with meaningful and comparable financial
information and is provided pursuant to various rules including Rule 3-10 of Regulation S-X in lieu of the separate financial statements
of each subsidiary issuer of public debt securities.
This financial information should be read in conjunction with the Company’s financial statements and footnotes presented in our
2012/13 Annual Report and Accounts.
Summary statements of comprehensive income are presented, on a consolidating basis, for the three years ended 31 March 2013.
Summary statements of comprehensive income of National Grid plc and National Grid Gas plc are presented under IFRS measurement
principles, as modified by the inclusion of the results of subsidiary undertakings on the basis of equity accounting principles.
The summary statements of financial position of National Grid plc and National Grid Gas plc include the investments in subsidiaries
recorded on the basis of equity accounting principles for the purposes of presenting condensed consolidating financial information
under IFRS. The summary statements of financial position present these investments within non-current financial and other investments.
The consolidation adjustments column includes the necessary amounts to eliminate the intercompany balances and transactions
between National Grid plc, National Grid Gas plc, British Transco Finance Inc., Niagara Mohawk Power Corporation and other subsidiaries.
158
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 35. Additional disclosures in respect of guaranteed securities continued
Summary statements of comprehensive income for the year ended 31 March 2013 – IFRS
Revenue
Operating costs
Depreciation and amortisation
Payroll costs
Purchases of electricity
Purchases of gas
Rates and property taxes
Balancing Service Incentive Scheme
Payments to other UK network owners
Other operating costs
Operating profit
Net finance costs
Dividends receivable
Interest in equity accounted affiliates
Profit before tax
Taxation
Profit for the year
Amounts recognised in other comprehensive income (ii)
Total comprehensive income for the year
Attributable to:
Equity shareholders
Non-controlling interests
Parent
guarantor
National
Grid plc
£m
–
–
–
–
–
–
–
–
–
–
–
(181)
–
2,437
2,256
39
2,295
(527)
1,768
1,768
–
1,768
Issuer of notes
Niagara
Mohawk
Power
Corporation
£m
2,129
(119)
(282)
(561)
(151)
(141)
–
–
(356)
(1,610)
519
(58)
–
–
461
(178)
283
(54)
229
229
–
229
British
Transco
Finance Inc.
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–(i)
–
–
–
–
–
Subsidiary
guarantor
National
Grid Gas
plc
£m
3,062
(511)
(238)
–
(128)
(235)
–
–
(573)
(1,685)
1,377
(280)
–
8
1,105
(174)
931
3
934
934
–
934
Other
subsidiaries
£m
Consolidation
adjustments
£m
National
Grid
consolidated
£m
9,345
(177)
14,359
(731)
(943)
(579)
(1,036)
(593)
(805)
(487)
(2,313)
(7,487)
1,858
(333)
1,900
18
3,443
(311)
3,132
(480)
–
–
–
–
–
–
–
177
177
–
–
(1,900)
(2,445)
(4,345)
–
(4,345)
531
2,652
(3,814)
2,651
1
2,652
(3,814)
–
(3,814)
(1,361)
(1,463)
(1,140)
(1,315)
(969)
(805)
(487)
(3,065)
(10,605)
3,754
(852)
–
18
2,920
(624)
2,296
(527)
1,769
1,768
1
1,769
(i) Profit for the year for British Transco Finance Inc. is £nil as interest payable to external bond holders is offset by interest receivable on loans to National Grid Gas plc.
(ii) Includes other comprehensive income relating to interest in equity accounted affiliates.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 159
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
– supplementary information
Continued
35. Additional disclosures in respect of guaranteed securities continued
Summary statements of comprehensive income for the year ended 31 March 2012 – IFRS
Revenue
Operating costs
Depreciation and amortisation
Payroll costs
Purchases of electricity
Purchases of gas
Rates and property taxes
Balancing Service Incentive Scheme
Payments to other UK network owners
Other operating costs
Operating profit
Net finance costs
Dividends receivable
Interest in equity accounted affiliates
Profit before tax
Taxation
Profit for the year
Amounts recognised in other comprehensive income (ii)
Total comprehensive income for the year
Attributable to:
Equity shareholders
Non-controlling interests
Parent
guarantor
National
Grid plc
£m
–
–
–
–
–
–
–
–
1
1
1
(133)
–
2,141
2,009
27
2,036
(887)
1,149
1,149
–
1,149
Issuer of notes
Niagara
Mohawk
Power
Corporation
£m
2,269
(115)
(273)
(530)
(169)
(137)
–
–
(501)
(1,725)
544
(71)
–
–
473
(195)
278
(50)
228
228
–
228
British
Transco
Finance Inc.
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–(i)
–
–
–
–
–
Subsidiary
guarantor
National
Grid Gas
plc
£m
2,909
(491)
(228)
–
(133)
(236)
–
–
(486)
(1,574)
1,335
(406)
–
5
934
(102)
832
9
841
841
–
841
Other
subsidiaries
£m
Consolidation
adjustments
£m
National
Grid
consolidated
£m
8,828
(174)
13,832
(666)
(970)
(915)
(1,221)
(582)
(818)
(407)
(1,590)
(7,169)
1,659
(377)
350
7
1,639
(251)
1,388
(880)
–
–
–
–
–
–
–
174
174
–
–
(350)
(2,146)
(2,496)
–
(2,496)
921
508
(1,575)
506
2
508
(1,575)
–
(1,575)
(1,272)
(1,471)
(1,445)
(1,523)
(955)
(818)
(407)
(2,402)
(10,293)
3,539
(987)
–
7
2,559
(521)
2,038
(887)
1,151
1,149
2
1,151
(i) Profit for the year for British Transco Finance Inc. is £nil as interest payable to external bond holders is offset by interest receivable on loans to National Grid Gas plc.
(ii) Includes other comprehensive income relating to interest in equity accounted affiliates.
160
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 35. Additional disclosures in respect of guaranteed securities continued
Summary statements of comprehensive income for the year ended 31 March 2011 – IFRS
Revenue
Operating costs
Depreciation and amortisation
Payroll costs
Purchases of electricity
Purchases of gas
Rates and property taxes
Balancing Service Incentive Scheme
Payments to other UK network owners
Other operating costs
Operating profit
Net finance costs
Dividends receivable
Interest in equity accounted affiliates
Profit before tax
Taxation
Profit for the year
Amounts recognised in other comprehensive income (ii)
Total comprehensive income for the year
Attributable to:
Equity shareholders
Non-controlling interests
Parent
guarantor
National
Grid plc
£m
–
–
–
–
–
–
–
–
–
–
–
(261)
–
2,356
2,095
64
2,159
301
2,460
2,460
–
2,460
Issuer of notes
Niagara
Mohawk
Power
Corporation
£m
2,606
(133)
(288)
(628)
(244)
(151)
–
–
(375)
(1,819)
787
(119)
–
–
668
(236)
432
49
481
481
–
481
British
Transco
Finance Inc.
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–(i)
–
–
–
–
–
Subsidiary
guarantor
National
Grid Gas
plc
£m
2,739
(455)
(236)
–
(141)
(239)
–
–
(489)
(1,560)
1,179
(395)
–
7
791
(97)
694
7
701
701
–
701
Other
subsidiaries
£m
Consolidation
adjustments
£m
National
Grid
consolidated
£m
9,174
(176)
14,343
(664)
(972)
(854)
(1,635)
(555)
(581)
(298)
(1,836)
(7,395)
1,779
(353)
400
7
1,833
(192)
1,641
351
1,992
1,988
4
1,992
–
–
–
–
–
–
–
176
176
–
–
(400)
(2,363)
(2,763)
–
(2,763)
(407)
(1,252)
(1,496)
(1,482)
(2,020)
(945)
(581)
(298)
(2,524)
(10,598)
3,745
(1,128)
–
7
2,624
(461)
2,163
301
(3,170)
2,464
(3,170)
–
(3,170)
2,460
4
2,464
(i) Profit for the year for British Transco Finance Inc. is £nil as interest payable to external bond holders is offset by interest receivable on loans to National Grid Gas plc.
(ii) Includes other comprehensive income relating to interest in equity accounted affiliates.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 161
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
– supplementary information
Continued
35. Additional disclosures in respect of guaranteed securities continued
Statements of financial position as at 31 March 2013 – IFRS
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Deferred tax assets
Other non-current assets
Amounts owed by subsidiary undertakings
Pension assets
Financial and other investments
Derivative financial assets
Total non-current assets
Current assets
Inventories and current intangible assets
Trade and other receivables
Amounts owed by subsidiary undertakings
Financial and other investments
Derivative financial assets
Cash and cash equivalents
Total current assets
Assets of businesses held for sale
Total assets
Current liabilities
Borrowings
Derivative financial liabilities
Trade and other payables
Amounts owed to subsidiary undertakings
Current tax liabilities
Provisions
Total current liabilities
Non-current liabilities
Borrowings
Derivative financial liabilities
Other non-current liabilities
Amounts owed to subsidiary undertakings
Deferred tax liabilities
Pensions and other post-retirement benefit obligations
Provisions
Parent
guarantor
National
Grid plc
£m
–
–
–
–
–
295
–
12,166
585
13,046
–
3
9,470
2,385
163
338
12,359
–
Issuer of notes
Niagara
Mohawk
Power
Corporation
£m
British
Transco
Finance Inc.
£m
737
–
4,441
–
21
–
195
21
–
5,415
28
428
18
32
–
9
515
–
–
–
–
–
–
–
–
–
–
–
–
–
202
–
–
–
202
–
Subsidiary
guarantor
National
Grid Gas
plc
£m
–
199
12,122
–
12
5,609
–
43
977
Other
subsidiaries
£m
Consolidation
adjustments
£m
National
Grid
consolidated
£m
4,291
390
20,029
–
71
2,043
–
9,896
410
–
–
–
–
–
(7,947)
–
(21,477)
–
5,028
589
36,592
–
104
–
195
649
1,972
18,962
37,130
(29,424)
45,129
22
380
202
854
119
20
241
2,099
12,250
2,160
60
304
–
–
(22,142)
–
(69)
–
1,597
17,114
(22,211)
–
–
–
291
2,910
–
5,431
273
671
9,576
–
25,405
5,930
202
20,559
54,244
(51,635)
54,705
(613)
(228)
(44)
(9,029)
–
–
(9,914)
(2,762)
(458)
–
(2,042)
(1)
–
–
(69)
–
(132)
(70)
(59)
–
(330)
(1,798)
–
(281)
–
(563)
(977)
(268)
(4)
–
–
–
–
–
(4)
(198)
–
–
–
–
–
–
(198)
–
(1,103)
(86)
(590)
(3,152)
(26)
(63)
(1,659)
(162)
(2,285)
(9,891)
(146)
(245)
–
69
–
22,142
–
–
(5,020)
(14,388)
22,211
(6,247)
(420)
(1,053)
–
(1,817)
–
(121)
(13,642)
(396)
(550)
(5,905)
(1,695)
(2,717)
(1,063)
(9,658)
(25,968)
–
–
–
–
–
7,947
–
–
–
7,947
–
(3,448)
(407)
(3,051)
–
(231)
(308)
(7,445)
(24,647)
(1,274)
(1,884)
–
(4,076)
(3,694)
(1,452)
(37,027)
–
Total non-current liabilities
Liabilities of businesses held for sale
(5,263)
(3,887)
–
–
Total liabilities
Net assets
Equity
Called up share capital
Share premium account
Retained earnings
Other equity reserves
Shareholders’ equity
Non-controlling interests
Total equity
(15,177)
(4,217)
(202)
(14,678)
(40,356)
30,158
(44,472)
10,228
1,713
433
1,344
13,132
(4,681)
10,228
–
123
1,930
(340)
–
1,713
–
10,228
1,713
–
–
–
–
–
–
–
–
5,881
13,888
(21,477)
10,233
45
204
4,325
1,307
182
7,426
6,468
(193)
(350)
(9,560)
(10,453)
(1,114)
433
1,344
13,132
(4,681)
5,881
13,883
(21,477)
10,228
–
5
–
5
5,881
13,888
(21,477)
10,233
162
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 35. Additional disclosures in respect of guaranteed securities continued
Statements of financial position as at 31 March 2012 – IFRS
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Deferred tax assets
Other non-current assets
Amounts owed by subsidiary undertakings
Pension assets
Financial and other investments
Derivative financial assets
Total non-current assets
Current assets
Inventories and current intangible assets
Trade and other receivables
Amounts owed by subsidiary undertakings
Financial and other investments
Derivative financial assets
Cash and cash equivalents
Total current assets
Assets of businesses held for sale
Total assets
Current liabilities
Borrowings
Derivative financial liabilities
Trade and other payables
Amounts owed to subsidiary undertakings
Current tax liabilities
Provisions
Total current liabilities
Non-current liabilities
Borrowings
Derivative financial liabilities
Other non-current liabilities
Amounts owed to subsidiary undertakings
Deferred tax liabilities
Pensions and other post-retirement benefit obligations
Provisions
Total non-current liabilities
Liabilities of businesses held for sale
Total liabilities
Net assets
Equity
Called up share capital
Share premium account
Retained earnings
Other equity reserves
Shareholders’ equity
Non-controlling interests
Total equity
www.nationalgrid.com
Issuer of notes
Niagara
Mohawk
Power
Corporation
£m
British
Transco
Finance Inc.
£m
Parent
guarantor
National
Grid plc
£m
–
–
–
1
–
537
–
10,811
624
11,973
–
4
9,346
830
207
26
10,413
–
701
9
4,038
–
2
–
155
22
–
4,927
36
405
32
22
–
1
496
–
22,386
5,423
(897)
(202)
(37)
(8,429)
–
–
(9,565)
(3,119)
(463)
–
–
–
–
–
(3,582)
–
(12)
–
(258)
(260)
(173)
(22)
(725)
(1,309)
–
(235)
–
(400)
(913)
(248)
(3,105)
–
Subsidiary
guarantor
National
Grid Gas
plc
£m
–
229
11,650
–
11
5,611
–
37
856
Other
subsidiaries
£m
Consolidation
adjustments
£m
National
Grid
consolidated
£m
4,075
308
18,013
–
82
–
–
9,838
339
–
–
–
(1)
–
(6,148)
–
(20,116)
–
4,776
546
33,701
–
95
–
155
592
1,819
18,394
32,655
(26,265)
41,684
25
282
173
432
85
–
997
–
315
1,280
9,740
1,107
135
305
–
–
(19,482)
–
(110)
–
12,882
(19,592)
264
–
376
1,971
–
2,391
317
332
5,387
264
19,391
45,801
(45,857)
47,335
(832)
(52)
(573)
(1,051)
(21)
(57)
(747)
(18)
(1,817)
(9,742)
(189)
(203)
–
110
–
19,482
–
–
(2,586)
(12,716)
19,592
(6,568)
(391)
(1,079)
–
(1,824)
–
(102)
(9,350)
(415)
(607)
(6,148)
(1,515)
(2,175)
(1,099)
(9,964)
(21,309)
–
(87)
–
–
–
6,148
1
–
–
6,149
–
(2,492)
(162)
(2,685)
–
(383)
(282)
(6,004)
(20,533)
(1,269)
(1,921)
–
(3,738)
(3,088)
(1,449)
(31,998)
(87)
–
–
–
–
–
–
–
–
–
–
–
–
191
–
–
–
191
–
191
(4)
–
–
–
–
–
(4)
(187)
–
–
–
–
–
–
(187)
–
(13,147)
(3,830)
(191)
(12,550)
(34,112)
25,741
(38,089)
9,239
1,593
422
1,355
12,297
(4,835)
9,239
–
117
1,835
(363)
4
1,593
–
9,239
1,593
–
–
–
–
–
–
–
–
6,841
11,689
(20,116)
9,246
45
204
5,287
1,305
6,841
–
182
7,426
4,303
(229)
(344)
(9,465)
(9,227)
(1,080)
422
1,355
12,297
(4,835)
11,682
(20,116)
9,239
7
–
7
6,841
11,689
(20,116)
9,246
Annual Report and Accounts 2012/13 National Grid plc 163
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the consolidated financial statements
– supplementary information
Continued
35. Additional disclosures in respect of guaranteed securities continued
Cash flow statements
Year ended 31 March 2013
Net cash flow from operating activities
Net cash flow from/(used in) investing activities
Net cash flow from/(used in) financing activities
Net increase/(decrease) in cash and
cash equivalents in the year
Year ended 31 March 2012
Net cash flow from operating activities
Net cash flow from/(used in) investing activities
Net cash flow from/(used in) financing activities
Net increase/(decrease) in cash and
cash equivalents in the year
Year ended 31 March 2011
Net cash flow from operating activities
Net cash flow from/(used in) investing activities
Net cash flow from/(used in) financing activities
Net increase/(decrease) in cash and
cash equivalents in the year
Parent
guarantor
National
Grid plc
£m
36
(979)
1,255
162
(286)
132
312
8
75
559
(808)
441
(287)
(155)
(174)
(1)
55
2,127
(2,180)
742
(377)
(365)
2
–
Issuer of notes
Niagara
Mohawk
Power
Corporation
£m
British
Transco
Finance Inc.
£m
Subsidiary
guarantor
National
Grid Gas
plc
£m
Other
subsidiaries
£m
Consolidation
adjustments
£m
National
Grid
consolidated
£m
–
–
–
–
–
–
–
–
–
–
–
–
1,608
(1,345)
(240)
1,944
(1,048)
(904)
–
(2,472)
2,472
3,750
(6,130)
2,715
23
(8)
–
335
1,596
(1,171)
(502)
2,116
(1,166)
(741)
–
(306)
306
4,228
(2,371)
(1,900)
(77)
209
–
(43)
1,596
(909)
(621)
2,465
(1,850)
(1,029)
–
(3,765)
3,765
4,858
(4,774)
(430)
66
(414)
–
(346)
Cash dividends were received by National Grid plc from subsidiary undertakings amounting to £570m during the year ended 31 March
2013 (2012: £200m; 2011: £150m).
Maturity analysis of parent Company borrowings
Total borrowings are repayable as follows:
Less than 1 year
In 1-2 years
In 2-3 years
In 3-4 years
In 4-5 years
More than 5 years, other than by instalments
2013
£m
613
835
51
642
–
1,234
3,375
2012
£m
897
373
826
48
654
1,218
4,016
164
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements Company accounting policies
We are required to include the stand-alone balance sheet
of our ultimate parent Company, National Grid plc, under the
Companies Act 2006. This is because the publicly traded
shares are actually those of National Grid plc (the Company)
and the following disclosures provide additional information
to shareholders.
A. Basis of preparation of individual financial
statements under UK GAAP
These individual financial statements of the Company have
been prepared in accordance with applicable UK accounting
and financial reporting standards and the Companies Act 2006.
They have been prepared on an historical cost basis, except
for the revaluation of financial instruments, and are presented
in pounds sterling, which is the currency of the primary
economic environment in which the Company operates.
The 2012 comparative financial information has also been
prepared on this basis.
These individual financial statements have been prepared on
a going concern basis following the assessment made by the
Directors as set out on page 57.
The Company has not presented its own profit and loss account
as permitted by section 408 of the Companies Act 2006.
The Company has taken advantage of the exemptions in FRS 8
‘Related Party Disclosures’ from disclosing transactions with
other members of the National Grid plc group of companies.
In accordance with exemptions under FRS 29 ‘Financial
Instruments: Disclosures’, the Company has not presented the
financial instruments disclosures required by the standard, as
disclosures which comply with the standard are included in the
consolidated financial statements.
B. Fixed asset investments
Investments held as fixed assets are stated at cost less
any provisions for impairment. Investments are reviewed for
impairment if events or changes in circumstances indicate
that the carrying amount may not be recoverable. Impairments
are calculated such that the carrying value of the fixed asset
investment is the lower of its cost or recoverable amount.
Recoverable amount is the higher of its net realisable value
and its value-in-use.
C. Taxation
Current tax for the current and prior periods is provided at the
amount expected to be paid or recovered using the tax rates and
tax laws that have been enacted or substantively enacted by the
balance sheet date.
Deferred tax is provided in full on timing differences which result
in an obligation at the balance sheet date to pay more tax, or
the right to pay less tax, at a future date, at tax rates expected
to apply when the timing differences reverse based on tax rates
and tax laws that have been enacted or substantively enacted
by the balance sheet date. Timing differences arise from the
inclusion of items of income and expenditure in taxation
computations in periods different from those in which they
are included in the financial statements.
Deferred tax assets are recognised to the extent that it is
regarded as more likely than not that they will be recovered.
Deferred tax assets and liabilities are not discounted.
D. Foreign currencies
Transactions in currencies other than the functional currency
of the Company are recorded at the rates of exchange prevailing
on the dates of the transactions. At each balance sheet date,
monetary assets and liabilities that are denominated in foreign
currencies are retranslated at closing exchange rates.
Gains and losses arising on retranslation of monetary assets
and liabilities are included in the profit and loss account.
E. Financial instruments
The Company’s accounting policies under UK GAAP, namely
FRS 25 ‘Financial Instruments: Presentation’, FRS 26 ‘Financial
Instruments: Measurement’ and FRS 29 ‘Financial Instruments:
Disclosures’, are the same as the Group’s accounting policies
under IFRS, namely IAS 32 ‘Financial Instruments: Presentation’,
IAS 39 ‘Financial Instruments: Recognition and Measurement’
and IFRS 7 ‘Financial Instruments: Disclosures’. The Company
applies these policies only in respect of the financial instruments
that it has, namely investments, derivative financial instruments,
debtors, cash at bank and in hand, borrowings and creditors.
The policies are set out in notes 12, 14, 16, 17, 19 and 20 to the
consolidated financial statements. The Company is taking the
exemption for financial instruments disclosures, because IFRS 7
disclosures are given in notes 30 and 34 to the consolidated
financial statements.
F. Hedge accounting
The Company applies the same accounting policy as the Group
in respect of fair value hedges and cash flow hedges. This policy
is set out in note 14 to the consolidated financial statements.
G. Parent Company guarantees
The Company has guaranteed the repayment of the principal
sum, any associated premium and interest on specific loans
due by certain subsidiary undertakings primarily to third parties.
In the event of default or non performance by the subsidiary, the
Company recognises such guarantees as insurance contracts,
at fair value with a corresponding increase in the carrying value
of the investment.
H. Share awards to employees of subsidiary
undertakings
The issuance by the Company to employees of its subsidiaries of
a grant over the Company’s options represents additional capital
contributions by the Company to its subsidiaries. An additional
investment in subsidiaries results in a corresponding increase in
shareholders’ equity. The additional capital contribution is based
on the fair value of the option at the date of grant, allocated over
the underlying grant’s vesting period. Where payments are
subsequently received from subsidiaries, these are accounted
for as a return of a capital contribution and credited against
the Company’s investments in subsidiaries. The Company
has no employees.
I. Dividends
Interim dividends are recognised when they are paid to the
Company’s shareholders. Final dividends are recognised when
they are approved by shareholders.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 165
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Company balance sheet
at 31 March
Fixed assets
Investments
Current assets
Debtors (amounts falling due within one year)
Debtors (amounts falling due after more than one year)
Investments
Cash at bank and in hand
Total current assets
Creditors (amounts falling due within one year)
Net current assets
Total assets less current liabilities
Creditors (amounts falling due after more than one year)
Net assets
Capital and reserves
Called up share capital
Share premium account
Cash flow hedge reserve
Other equity reserves
Profit and loss account
Total shareholders’ funds
Notes
2013
£m
2012
£m
1
2
2
5
3
3
7
8
8
8
8
9
8,177
8,157
9,636
880
2,723
–
9,557
1,162
855
1
13,239
11,575
(9,914)
(9,565)
3,325
2,010
11,502
10,167
(5,263)
(3,582)
6,239
6,585
433
1,344
12
240
4,210
6,239
422
1,355
9
220
4,579
6,585
The notes on pages 167 to 169 form part of the individual financial statements of the Company, which were approved by the Board
of Directors on 15 May 2013 and were signed on its behalf by:
Sir Peter Gershon Chairman
Andrew Bonfield Finance Director
166
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements Notes to the Company financial statements
1. Fixed asset investments
At 1 April 2011
Additions
At 31 March 2012
Additions
At 31 March 2013
Shares in
subsidiary
undertakings
£m
7,890
267
8,157
20
8,177
During the year there was a capital contribution of £20m (2012: £24m) which represents the fair value of equity instruments granted
to subsidiaries’ employees arising from equity-settled employee share schemes. During the year ended 31 March 2012, the Company
also acquired a further 69,242 ordinary shares of £1 each in National Grid (US) Holdings Limited for a total consideration of £243m.
The names of the principal subsidiary undertakings, joint ventures and associates are included in note 33 to the consolidated financial
statements. The Directors believe that the carrying value of the investments is supported by the fair value of their underlying net assets.
2. Debtors
Amounts falling due within one year:
Derivative financial instruments (note 4)
Amounts owed by subsidiary undertakings
Prepayments and accrued income
Amounts falling due after more than one year:
Derivative financial instruments (note 4)
Amounts owed by subsidiary undertakings
Deferred taxation
3. Creditors
Amounts falling due within one year:
Borrowings (note 6)
Derivative financial instruments (note 4)
Amounts owed to subsidiary undertakings
Other creditors
Amounts falling due after more than one year:
Borrowings (note 6)
Derivative financial instruments (note 4)
Amounts owed to a subsidiary undertaking
Deferred taxation
2013
£m
2012
£m
163
9,470
3
9,636
585
295
–
880
207
9,346
4
9,557
624
537
1
1,162
2013
£m
2012
£m
613
228
9,029
44
9,914
2,762
458
2,042
1
5,263
897
202
8,429
37
9,565
3,119
463
–
–
3,582
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 167
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Notes to the Company financial statements
Continued
4. Derivative financial instruments
The fair values of derivative financial instruments are:
Amounts falling due within one year
Amounts falling due after more than one year
Assets
£m
163
585
748
2013
Liabilities
£m
(228)
(458)
(686)
Total
£m
(65)
127
62
Assets
£m
207
624
831
2012
Liabilities
£m
(202)
(463)
(665)
Total
£m
5
161
166
For each class of derivative the notional contract* amounts are as follows:
Interest rate swaps
Cross-currency interest rate swaps
Foreign exchange forward contracts
Total
*The notional contract amounts of derivatives indicate the gross nominal value of transactions outstanding at the balance sheet date
5. Investments
The following table sets out the Company’s current asset investments:
Investments in short-term money funds
Short-term deposits
Restricted cash balances – collateral
6. Borrowings
The following table analyses the Company’s total borrowings:
Amounts falling due within one year:
Bank loans
Bonds
Amounts falling due after more than one year:
Bank loans
Bonds
Total borrowings
2013
£m
(8,015)
(5,376)
(9,080)
2012
£m
(8,624)
(3,829)
(9,801)
(22,471)
(22,254)
2013
£m
2,113
438
172
2,723
2013
£m
277
336
613
–
2,762
2,762
3,375
2012
£m
705
34
116
855
2012
£m
134
763
897
125
2,994
3,119
4,016
The maturity of total borrowings is disclosed in note 35 on page 164 to the consolidated financial statements. There are no differences
in the maturities as calculated under IFRS or UK GAAP.
The notional amount of borrowings outstanding as at 31 March 2013 was £3,250m (2012: £3,878m). Further information on significant
borrowings can be found on the debt investors section of our website.
7. Called up share capital
The called up share capital amounting to £433m (2012: £422m) consists of 3,794,575,998 (2012: 3,700,949,542) ordinary shares.
For further information on share capital, refer to note 24 to the consolidated financial statements.
168
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Financial Statements 8. Reserves
At 1 April 2011
Transferred from equity in respect of cash flow hedges (net of tax)
Shares issued in lieu of dividends
Issue of treasury shares
Purchase of own shares
Share awards to employees of subsidiary undertakings
Loss for the financial year
At 31 March 2012
Transferred from equity in respect of cash flow hedges (net of tax)
Shares issued in lieu of dividends
Issue of treasury shares
Purchase of own shares
Share awards to employees of subsidiary undertakings
Loss for the financial year
At 31 March 2013
Share
premium
account
£m
Cash flow
hedge
reserve
£m
Other equity
reserves
£m
Profit and
loss account
£m
1,361
–
(6)
–
–
–
–
1,355
–
(11)
–
–
–
–
1,344
2
7
–
–
–
–
–
9
3
–
–
–
–
–
12
196
–
–
–
–
24
–
220
–
–
–
–
20
–
240
5,471
–
–
13
(4)
–
(901)
4,579
–
–
19
(6)
–
(382)
4,210
There were no gains and losses, other than losses for the years stated above; therefore no separate statement of total recognised
gains and losses has been presented. At 31 March 2013, £86m (2012: £273m) of the profit and loss account reserve relating to gains
on intra-group transactions was not distributable to shareholders.
9. Reconciliation of movements in total shareholders’ funds
Profit for the financial year
Dividends (i)
Loss for the financial year
Issue of treasury shares
Purchase of own shares
Movement on cash flow hedge reserve (net of tax)
Share awards to employees of subsidiary undertakings
Net decrease in shareholders’ funds
Opening shareholders’ funds
Closing shareholders’ funds
2013
£m
428
(810)
(382)
19
(6)
3
20
(346)
6,585
6,239
2012
£m
105
(1,006)
(901)
13
(4)
7
24
(861)
7,446
6,585
(i) For further details of dividends paid and payable to shareholders, refer to note 7 to the consolidated financial statements.
10. Parent Company guarantees
The Company has guaranteed the repayment of the principal sum, any associated premium and interest on specific loans due
by certain subsidiary undertakings primarily to third parties. At 31 March 2013, the sterling equivalent amounted to £2,767m
(2012: £703m). The guarantees are for varying terms from less than one year to open-ended.
11. Audit fees
The audit fee in respect of the parent Company was £25,750 (2012: £25,000). Fees payable to PricewaterhouseCoopers LLP
for non-audit services to the Company are not required to be disclosed as they are included within note 2 to the consolidated
financial statements.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 169
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Additional information
Business information in detail
Contents
170 Business information in detail
170 UK regulation
172 US regulation
176 Risk factors
179 Internal control
179 Information assurance
179 Disclosure controls
179 Internal control over financial reporting
179 Changes to internal control over financial reporting
180 Directors’ Report disclosures
180 Articles of Association
180 Board biographies
182 Capital Gains Tax
182 Change of control provisions
182 Charitable donations
182 Conflicts of interest
183 Directors’ indemnity
183 Events after the reporting period
183 Material interests in shares
183 Policy and practice on payment of creditors
183 Political donations and expenditure
183 Research and development
183 Share capital
184 Other disclosures
184 Articles of Association
185 Code of Ethics
185 Corporate governance practices: differences from
New York Stock Exchange (NYSE) listing standards
185 Depositary payments to the Company
186 Description of securities other than equity securities:
depositary fees and charges
186 Documents on display
186 Employees
186 Exchange controls
186 Exchange rates
187 Key milestones
187 Material contracts
187 Property, plant and equipment
187 Shareholder analysis
187 Taxation
189 The offer and listing including price history
189 Unresolved SEC staff comments
UK regulation
Our licences, established under the Gas Act 1986 and Electricity
Act 1989, as amended (the Acts), require us to develop, maintain
and operate economic and efficient networks and to facilitate
competition in the supply of gas and electricity in Great Britain.
They also give us statutory powers, such as the right to bury
our pipes or cables under public highways and the ability to use
compulsory powers to purchase land to enable the conduct of
our business.
Our networks are regulated by Ofgem, which has established
price control mechanisms that set the amount of revenue that
can be earned by our regulated businesses. Price control
regulation is designed to ensure our interests, as a monopoly,
are balanced with those of our customers. Ofgem allows us to
charge reasonable, but not excessive, prices giving us a future
level of revenue sufficient to meet our statutory duties and
licence obligations, and also to make a reasonable return
on our investment.
The price control includes a number of mechanisms to
achieve its objectives, including financial incentives designed
to encourage us to: continuously improve the cost and
effectiveness of our services; manage and operate our networks
efficiently; deliver high quality services to our customers and wider
stakeholder community; and invest in the development of the
network in a manner that ensures long-term security of supply.
Our UK Transmission and UK Gas Distribution businesses
operate under eight separate price controls in the UK. These
comprise two for our UK electricity transmission operations, one
covering our role as transmission owner (TO) and the other for
our role as system operator (SO); two for our gas transmission
operations, again one as TO and one as SO; and one for each
of our four regional gas distribution networks. While each of the
eight price controls may have differing terms, they are based
on a consistent regulatory framework.
In addition to the eight price controls, our LNG storage business
has a price control covering some aspects of its operations.
There is also a tariff cap price control applied to certain elements
of domestic metering and daily meter reading activities
undertaken by National Grid Metering.
Price controls up to 31 March 2013
The previous price control mechanisms for our UK Transmission
and UK Gas Distribution businesses expired on 31 March 2013
and were consistent with the description provided on page 16.
2012/13 saw another good year of performance, outperforming
the allowed returns in each of the three main businesses:
As at 31 March 2013
RAV
Allowed
vanilla
return
Achieved
vanilla
return
Achieved
ROE
Electricity transmission
£10,145m
4.75%
Gas transmission
£5,340m
4.75%
Gas distribution
£8,330m
4.94%
Total
£23,815m
4.82%
5.4%
7.5%
6.0%
6.1%
11.8%
17.2%
13.5%
13.6%
170
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Additional Information RIIO price controls
Our UK regulator has introduced a new regulatory framework
called RIIO (revenue = incentives + innovation + outputs) that
became effective on 1 April 2013 and lasts for eight years. The
building blocks of the RIIO price control are broadly similar to the
historical price controls used in the UK, however there are some
significant differences in the mechanics of the calculations.
How is revenue calculated?
Under RIIO the outputs we deliver are clearly articulated and are
integrally linked to the calculation of our allowed revenue. These
outputs have been determined through an extensive consultation
process which has given stakeholders a greater opportunity to
input to these decisions. The clarity around outputs should lead
to greater transparency of our performance in delivering them.
The six key output categories are:
• Safety: ensuring the provision of a safe energy network
• Reliability (and availability): promoting networks capable
of delivering long-term reliability, as well as minimising the
number and duration of interruptions experienced over the
price control period, and ensuring adaptation to climate change
• Environmental impact: encouraging companies to play their
role in achieving broader environmental objectives –
specifically facilitating the reduction of carbon emissions – as
well as minimising their own carbon footprint
• Customer and stakeholder satisfaction: maintaining high levels
of customer satisfaction and stakeholder engagement, and
improving service levels
• Customer connections: encouraging networks to connect
customers quickly and efficiently
• Social obligations (Gas Distribution only): extending the gas
network to communities that are fuel poor where it is efficient
to do so and introducing measures to address carbon
monoxide poisoning incidents
Within each of these output categories are a number of primary
and secondary deliverables, reflecting what our stakeholders
want us to deliver over the coming price control period. The
nature and number of these deliverables varies according to the
output category, with some being linked directly to our allowed
revenue, some linked to legislation, and others having only a
reputational impact. Ofgem, using information submitted by us
along with independent assessments, determines the efficient
level of expected costs necessary to deliver them. Under RIIO
this is known as totex, short for total expenditure, and is similar
to the sum of controllable opex, capex and repex (for Gas
Distribution) under the previous price control.
A number of assumptions are necessary in setting these
outputs such as certain prices or the volumes of work that will
be needed. As a result, to protect us and our customers from
windfall gains and losses, there are a number of uncertainty
mechanisms within the RIIO framework that can result in
adjustments to totex if actual prices or volumes differ from
the assumptions.
Where we under- or over-spend the allowed totex for reasons
that are not covered by uncertainty mechanisms, there is a
sharing factor, ie the under- or over-spend is shared between
us and customers through an adjustment to allowed revenues
in a future year. This sharing factor provides an incentive for us
to provide the outputs efficiently as we are able to keep a portion
of the savings, with the remainder benefiting our customers.
This sharing factor is one of the ways that RIIO has given
innovation more prominence. Innovation includes traditional
areas such as new technologies, as well as the broader
challenge of finding new ways of working to deliver outputs
more efficiently. This broader challenge will have an impact
on everyone in our business and we have updated our strategy
to reflect this new way of thinking.
Totex is then split between fast and slow money, a new concept
under RIIO, based on a specified percentage. Fast money
represents the amount of totex that we are able to recover
in the current year. Slow money is added to our RAV.
In addition to fast money, in each year we are allowed to collect
a depreciation of and a return on our RAV. This operates in a
similar way to the previous price control, although there have
been changes to the asset life (electricity transmission) and
depreciation calculation (Gas Distribution) for some of our
businesses. We are also allowed to collect additional revenues
related to non-controllable costs and incentives.
The incentive mechanisms can increase or decrease our
allowed revenue and result from our performance against
various measures related to our outputs. RIIO has introduced
new incentive mechanisms as a way to provide further incentives
to align our objectives with those of our customers and other
stakeholders. For example, performance against our customer
satisfaction targets can have a positive or negative effect of up
to 1% of allowed annual revenues. Incentives will normally affect
our revenues two years after the year of performance.
RIIO regulatory building blocks
Totex
(capital invested
+ controllable
operating costs)
RAV
(slow money)
X
Allowed return
Depreciation
of RAV
Fast money
R
e
v
e
n
u
e
Other costs
eg tax
Performance
against incentives
Key financial metrics
Some of the key financial metrics are included below:
Transmission
Gas Distribution
Gas
Electricity
Cost of equity (post-tax real)
6.8%
7.0%
6.7%
Cost of debt (pre-tax real)
iBoxx 10 year simple trailing
average index (2.92% for 2013/14)
Notional gearing
Implied vanilla WACC*
62.5%
4.4%
60.0%
4.6%
65.0%
4.2%
* Implied vanilla WACC = cost of debt x gearing + cost of equity x (1 – gearing)
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 171
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information
Additional information
Business information in detail
Continued
Gas transmission
Electricity transmission
Gas Distribution
Transmission
Operator
System
Operator
Transmission
Operator
System
Operator
North
West
East of
England
West
Midlands
London
1 Fast
2 Slow
Baseline 35.6%
Uncertainty 10%
Baseline 64.4%
Uncertainty 90%
62.60%
15.00%
72.10%
37.40%
85.00%
27.90%
Repex: Stepped decline from 50% in 2013/14 to 0% in 2020/21
in seven equal instalments of 7.14% per annum
73.90%
73.37%
75.05%
76.53%
Repex: Stepped increase from 50% in 2013/14 to 100% in 2020/21
in seven equal instalments of 7.14% per annum
26.10%
26.63%
24.95%
23.47%
3 Sharing
44.36%
46.89%
63.04%
For more information on RIIO, including incentive mechanisms,
please see the relevant investor fact sheets on the Investor
Relations section of our website.
US regulation
Regulators
In the US, public utilities’ retail transactions are regulated by
state utility commissions, including the NYPSC, the MADPU
and the RIPUC.
Utility commissions serve as economic regulators in approving
cost recovery and authorised rates of return. The state
commissions establish the retail rates to recover the cost of
transmission and distribution services, and focus on services
and costs within their jurisdictions. FERC regulates the wholesale
transactions of public utilities, such as interstate transmission
and electricity generation, and provides for the cost recovery
of these services.
Utility commissions are also charged with serving the public
interest by ensuring utilities provide safe and reliable service at
just and reasonable prices. They establish service standards
and approve mergers and acquisitions of public utilities. FERC
also regulates public utility holding companies and centralised
service companies, including those of our US businesses.
All the states in which we operate have deregulated the
commodity or supply component of electricity and gas utility
services. Customers in deregulated states have the option to
purchase electricity or gas services from competitive suppliers.
Regulatory process
Utilities in the US submit a formal rate filing to the relevant state
regulatory body, requesting a revenue adjustment in a proceeding
known as a rate case.
The rate case process is conducted in a litigated setting and, in
the states in which we operate, it can take six to 13 months for
the commission to render a final decision. In all states, the utility
is required to prove that its requested rate change is prudent
and reasonable. The utility may request a rate plan that can
span multiple years. Unlike the state processes, the federal
regulator has no specified timeline for adjudicating a rate case,
but typically makes a final decision retroactive when the case
is completed.
During the rate case process, consumer advocates and other
intervening parties scrutinise and often file opposing positions
to the utility’s rate request. The rate case decision reflects a
weighing of the facts in light of the regulator’s policy objectives.
During a rate case, the utility, consumer advocates and intervening
parties may agree on the resolution of aspects of a case and file
a negotiated settlement with a commission for approval.
Gas and electricity rates are established from a revenue
requirement, or cost of service, representing the utility’s total
cost of providing distribution or delivery service to its customers.
It includes operating expenses, depreciation, taxes and a fair and
reasonable return on certain components of the utility’s regulated
asset base, typically referred to as its rate base.
The rate of return applied to the rate base is the utility’s weighted
average cost of capital. This represents its cost of debt and an
allowed ROE intended to provide the utility with an opportunity
to attract capital from investors and maintain its financial integrity.
The total cost of service is apportioned among different
customer classes and categories of service to establish the
rates, through a process called rate design, for these classes
of customers. The final cost of service and rate design are
ultimately approved in the rate case decision.
The revenue requirement is derived from a comprehensive study
of the utility’s total costs during a recent 12 month period of
operations, referred to as a test year.
Each commission has its own rules and standards for
adjustments to the test year. These are intended to arrive at the
total costs expected in the first year new rates will be in effect,
or the rate year, and may include forecast capital investments in
determining rate year rate base. Often, known and measurable
adjustments are made to test year data to reflect normal
operating conditions. In Massachusetts, only limited adjustments
to this test year are allowed, which are required to be both known
and measurable. New York and Rhode Island allow more
comprehensive adjustments to the test year. In summary, the US
regulatory regime is based on a building block approach intended
to allow the utility to recover its cost of service and earn a return
on its investments.
US regulatory building blocks
Capex and ROE
Cost of service
X allo
R
w
O
E
e
d
X cost
of d
e
bt
ROE
Interest
t
b
e
D
y
t
i
u
q
E
n
r
u
t
e
R
e
s
a
b
e
t
a
R
s
t
s
o
c
l
e
b
a
l
l
o
r
t
n
o
C
s
t
s
o
c
l
e
b
a
l
l
o
r
t
n
o
c
-
n
o
N
i
n
o
i
t
a
c
e
r
p
e
D
s
e
x
a
T
d
e
g
g
a
L
s
e
i
r
e
v
o
c
e
r
d
e
w
o
l
l
A
e
u
n
e
v
e
r
172
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Additional Information
Our rate plans
We have four sets of electricity rates and six sets of gas rates,
covering our electricity distribution operations in upstate New
York, Massachusetts, and Rhode Island, and our gas distribution
networks in upstate New York, New York City, Long Island,
Massachusetts, and Rhode Island. Distribution and transmission
electricity services in upstate New York continue to be subject
to a combined rate that is billed to end use customers. In New
England, retail transmission rates reflect the recovery from our
end use customers of wholesale transmission charges assessed
to our electricity distribution companies. Wholesale rates for our
electricity transmission network in New England and New York
and our Long Island generation rates are subject to FERC approval.
Our rate plans are designed to produce a specific allowed ROE,
by reference to an allowed operating expense level and rate
base. Some rate plans include earnings sharing mechanisms
that allow us to retain a proportion of the earnings above our
allowed ROE we achieve through improving efficiency, with the
balance benefiting customers.
In addition, our performance under certain rate plans is subject
to service performance targets. We may be subject to monetary
penalties in cases where we do not meet those targets.
Allowed ROE in context
One measure used to monitor the performance of our regulated
businesses is a comparison of achieved ROE to allowed ROE,
with a target that the achieved should be equal to or above the
allowed. This measure cannot be used in isolation, however, as
there are a number of factors that may prevent us from achieving
that target in any given year:
• Regulatory lag: in the years following the rate year, costs may
increase due to inflation or other factors. If the cost increases
cannot be offset by productivity gains, the total cost to deliver
will be higher as a proportion of revenue and therefore
achieved ROE will be lowered.
• Cost disallowances: a cost disallowance is a decision by the
regulator that a certain expense should not be recovered in
rates from customers. The regulator may do this for a variety
of reasons. We can respond to some disallowances by
choosing not to incur those costs; others may be unavoidable.
As a result, unless offsetting cost reductions can be found,
the achieved ROE will be lowered.
• Market conditions: if a utility files a new rate case, the new
allowed ROE may be below the current allowed ROE as
financial market conditions may have changed. As such,
a utility that appears to be underperforming the allowed
ROE and files a new rate case may not succeed in
increasing revenues.
We work to increase achieved ROEs through: productivity
improvements; positive performance against incentives or
earned savings mechanisms such as energy efficiency
programmes, where available; and, through filing a new rate case
when achieved returns are lower than that which the Company
could reasonably expect to attain through a new rate case.
Features of our rate plans
We are responsible for billing our customers for their use of
electricity and gas services. Customer bills typically comprise
a commodity charge, covering the cost of the electricity or gas
delivered, and charges covering our delivery service. Depending
on the state, delivery rates are either based upon actual sales
volumes and costs incurred in an historical test year, or on
estimates of sales volumes and costs, and in both cases may
differ from actual amounts. A substantial proportion of our costs,
in particular electricity and gas purchases for supply to
customers, are pass-through costs, meaning they are fully
recoverable from our customers. These pass-through costs
are recovered through separate charges to customers that
are designed to recover those costs with no profit. Rates are
adjusted from time to time to ensure any over- or under-recovery
of these costs is returned to, or recovered from, our customers.
There can be timing differences between costs being incurred
and rates being adjusted.
Revenue for our wholesale transmission businesses in New
England and New York is collected from wholesale transmission
customers, who are typically other utilities and include our
own New England electricity distribution businesses. With the
exception of upstate New York, which continues to combine
retail transmission and distribution rates to end use customers,
these wholesale transmission costs are incurred by distribution
utilities on behalf of their customers and are fully recovered as
a pass-through from end use customers as approved by each
state commission. Our Long Island generation plants sell
capacity to LIPA under a power supply agreement, approved
by FERC, which provides a similar economic effect to cost
of service rate regulation.
US regulatory filings
The objectives of our rate case filings are to ensure we have the
right cost of service with the ability to earn a fair and reasonable
rate of return, while providing a safe and reliable service to our
customers. In order to achieve these objectives and to reduce
regulatory lag, we have been requesting structural changes, such
as revenue decoupling mechanisms, capital trackers, commodity
related bad debt true ups, and pension and other post-
employment benefit (OPEB) true ups, separately from base rates.
These terms are explained below the table on page 175. The
following chart shows the progress we have made on these
regulatory principles. We continue to work towards implementing
these regulatory principles across our US business.
Revenue
decoupling
Capital
trackers
Pension
true up
Commodity bad
debt true up
December 2007*
14%
14%
66%
25%
March 2013*
100%
67%
100%
100%
% of rate plans, measured by rate base, with feature fully or partially in place
% of rate plans, measured by rate base, without feature
* Percentage figure relates to proportion of rate base (at 31 March 2013) affected
(excluding stranded costs)
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 173
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Additional information
Business information in detail
Continued
Although many of our rate plans feature revenue decoupling,
in some cases decoupling applies only to some classes of
customer. As a result, the proportion of revenues which is
decoupled is 92% for our electricity businesses and 64% for
our gas businesses for 2012/13. Transmission and generation
revenue is effectively decoupled.
On 2 October 2012, National Grid and LIPA agreed to amend
and restate their existing PSA for 15 years expiring on 30 April
2028 subject to LIPA’s option to terminate the agreement as early
as 30 April 2025 upon two years’ advance notice. The amended
and restated PSA was filed on 22 March 2013 with FERC,
commencing a 60 day waiting period.
Below we summarise significant developments in rate filings
during the year.
New York
Upstate New York 2012 rate plan filing
On 27 April 2012, we filed a rate plan filing for our upstate New
York electricity and gas businesses. On 31 October, the Company
filed a term sheet reflecting the provisions of a proposed three
year settlement agreement in respect of new rates. The
Commission issued the final written order on 15 March 2013.
The new rate plan provides an increase in electricity delivery
revenue of $43.4 million, $51.4 million, and $28.3 million for rate
years one to three respectively. For the gas operations, the rate
plan provides a decrease in delivery revenue of $3.3 million in
rate year one and an increase of $5.9 million and $6.3 million in
rate years two and three respectively. The revenue requirements
for Niagara Mohawk’s electricity and gas businesses are based
on a ROE of 9.3%, which includes a stay out premium for the
three year term, and a capital structure that includes a 48%
common equity component. The final agreement also includes
annual reconciliation mechanisms for certain non-controllable
costs. New rates became effective on 1 April 2013.
Downstate New York rate plan extension
In November 2012, The Brooklyn Union Gas Company (also
known as KeySpan Energy Delivery New York or KEDNY) and
the staff of the NYPSC entered into confidential discussions
around the potential for extending and updating aspects of the
five year rate agreement which ended on 31 December 2012.
National Grid and the Department of Public Service Staff filed
a term sheet with the Commission on 15 January 2013 and a
Joint Proposal formalising the settlement was filed on 22 February
2013. The proposed settlement is not expected to materially
affect customer bills or KEDNY’s revenues over the period of the
rate agreement. The proposed two year agreement for extending
and modifying elements of the original KEDNY five year rate plan
includes a 9.4% ROE in each of the two years 2013 and 2014,
with a 48% equity structure, which is financially equivalent to
the terms of the original five year rate plan (9.8% ROE and 45%
equity structure). Under the proposed agreement, 80% of any
earnings over 9.4% will be allocated to fund recovery of prior
environmental deferrals with the remaining 20% being retained
by KEDNY. The proposed agreement also includes an increase
in capital expenditure allowances to $320.1 million in 2013 and
$293.7 million in 2014 as compared with the original rate plan
capital allowances of $155.4 million per year. The agreement
also proposes updates to various customer service and other
performance metrics. Under the proposed agreement, there is
no impact on the delivery rates for customers.
Long Island
LIPA power supply agreement (PSA)
National Grid owns and manages a number of power plants on
Long Island, with a generation capacity of 3.8 GW. We have been
supplying electricity to communities and businesses across Long
Island under an agreement with LIPA that was set to expire in
May 2013.
The agreement contains a pricing formula similar to the current
PSA, at rates approved by FERC. The agreement resulted in a
rate decrease of $27.4 million annually compared with the 1998
PSA. The new agreement sets a ROE of 9.75% and a capital
structure with an equity component of 50%. The PSA continues
certain annual rate adjustments, such as pension and other post-
retirement benefit expenses, property tax true up, adjustments
for new plant in service, and certain inflationary increases. The
new PSA allows both parties a ROE reopener in contract years
four to six and National Grid a one time rate reopener after
contract year six.
The new agreement also gives National Grid and LIPA new
options for updating and modernising the power plants through
retiring, or repowering, existing facilities while reducing energy
costs and improving environmental performance.
Rhode Island
Rhode Island 2012 rate plan filing
On 27 April 2012, we filed a new rate plan for our Rhode Island
electricity and gas businesses, to take effect from 1 February
2013. At an open meeting on 20 December 2012, RIPUC
approved the rate case settlement.
The new rate plans include a 9.5% allowed ROE, a 49% equity
portion in the assumed capital structure, pension trackers and
increased operating cost allowances compared with the current
rate plans. The new rate plans provide for a revenue increase
of $20.9 million for electricity operations and $10.9 million for
gas operations. They also provide for an annual property tax
recovery mechanism included in the Company’s annual capital
programme that more closely aligns rate recovery and costs
related to property tax expenses. A written order was issued
by the Commission on 31 January 2013 and new rates became
effective on 1 February 2013.
Complaint on transmission allowed ROE
In September 2011 and December 2012 complaints were filed
with FERC against certain transmission owners, including our
New England transmission business, to lower the base ROE
from the FERC approved rate of 11.14% to 9.2% and 8.7%
respectively. The transmission owners, including National Grid,
have filed a response arguing that the complainants have not
proven that the existing rate is unjust and unreasonable and
that the 11.14% base ROE should be allowed to continue.
The matters are ongoing.
Overland audit
In January 2013, the NYPSC published the results of an audit of
National Grid’s New York state regulated business by Overland,
a consultancy commissioned by the NYPSC in 2010/11. The
report recommended a number of actions, many of which have
already been implemented as a result of the Liberty audit which
the Company commissioned at around the same time. National
Grid has presented a plan to the NYPSC to address the
outstanding recommendations and is analysing the audit findings
with the NYPSC to determine any potential impact on historical
customer bills.
174
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Additional Information Summary of US price controls and rate plans
0
1
0
2
1
1
0
2
2
1
0
2
3
1
0
2
4
1
0
2
5
1
0
2
New York
Public Service
Commission
Rate plan
Niagara Mohawk (i)
(upstate, electricity)
Niagara Mohawk
(upstate, gas)
)
3
1
0
2
r
a
M
1
3
(
e
s
a
b
e
t
a
R
o
t
y
t
i
u
q
E
o
i
t
a
r
t
b
e
d
n
r
u
t
e
r
d
e
w
o
l
l
A
y
t
i
u
q
e
n
o
n
r
u
t
e
r
d
e
v
e
h
c
A
i
)
2
1
0
2
c
e
D
1
3
(
y
t
i
u
q
e
n
o
†
g
n
i
l
p
u
o
c
e
d
e
u
n
e
v
e
R
$3,971m 48 : 52 9.30% 8.7%
$923m 48 : 52 9.30% 5.3%
✓
✓
KEDNY (downstate) (ii) (iii)
$2,132m 48 : 52 9.40% 11.0% P
KEDLI (downstate) (iv)
$1,902m 45 : 55 9.80% 7.2%
P
Massachusetts
Department of
Public Utilities
Rhode Island
Public Utilities
Commission
Federal Energy
Regulatory
Commission
Massachusetts Electric/
Nantucket Electric
Boston Gas
Essex Gas
Colonial Gas
Narragansett
Electric
Narragansett
Gas
Narragansett
Canadian
Interconnector
New England
Power
Long Island
Generation (iii)
$1,747m 50 : 50 10.35% 8.3%
✓
$1,119m 50 : 50 9.75% 11.6% ✓
$254m 50 : 50 9.75% 14.6% ✓
$552m 49 : 51 9.50% 6.4%
$411m 49 : 51 9.50% 5.1%
✓
✓
$527m 50 : 50 11.14% 11.6% N/A
$37m 40 : 60 13.00% 13.0% N/A
$1,006m 65 : 35 11.14% 11.6% N/A
$464m 50 : 50 9.75% 13.6% N/A
d
e
t
a
e
r
l
y
t
i
d
o
m
m
o
C
§
p
u
e
u
r
t
t
b
e
d
d
a
b
◊
p
u
e
u
r
t
B
E
P
O
i
/
n
o
s
n
e
P
P
P
P
P
✓
✓
✓
P
P
N/A
N/A
N/A
N/A
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
‡
r
e
k
c
a
r
t
l
a
t
i
p
a
C
✗
✗
P
P
P
P
P
✓
✓
✓
✓
✓
✓
(i) Both transmission and distribution, excluding stranded costs.
(ii) KeySpan Energy Delivery New York (The Brooklyn Union Gas Company).
(iii) KEDNY and Long Island Generation equity to debt ratio and allowed ROE
reflect proposed agreements detailed on page 174.
Rate filing made
New rates effective
Rate plan ends
✓ Feature in place
✗ Feature not in current rate plan
P Feature partially in place
(iv) KeySpan Energy Delivery Long Island (KeySpan Gas East Corporation).
Rates continue indefinitely
†Revenue decoupling
A mechanism that removes the link between a utility’s revenue
and sales volume so that the utility is indifferent to changes
in usage. Revenues are reconciled to a revenue target, with
differences billed or credited to customers. Allows the utility
to support energy efficiency.
‡Capital tracker
A mechanism that allows for the recovery of the revenue
requirement of incremental capital investment above that
embedded in base rates, including depreciation, property taxes
and a return on the incremental investment.
§Commodity related bad debt true up
A mechanism that allows a utility to reconcile commodity related
bad debt to either actual commodity related bad debt or to a
specified commodity related bad debt write-off percentage. For
electricity utilities, this mechanism also includes working capital.
◊Pension/OPEB true up
A mechanism that reconciles the actual non capitalised costs
of pension and OPEB and the actual amount recovered in base
rates. The difference may be amortised and recovered over
a period or deferred for a future rate case.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 175
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information
Additional information
Business information in detail
Continued
Risk factors
Our risk management process has identified the following risk factors that could have a material adverse effect on our business,
financial condition, results of operations and reputation, as well as the value and liquidity of our securities. Any investment decision
regarding our securities and any forward-looking statements made by us should be considered in the light of these risk factors and
the cautionary statement set out on the back cover.
Potentially harmful activities
Aspects of the work we do could potentially harm employees,
contractors, members of the public or the environment.
Potentially hazardous activities that arise in connection with our
business include the operation and maintenance of electricity
generation facilities, electricity lines and substations and the
storage, transmission and distribution of gas. We are subject
to laws and regulations in the UK and US governing health and
safety matters to protect the public and our employees, who
could potentially be harmed by these activities. Electricity and
gas utilities also typically use and generate hazardous and
potentially hazardous products and by-products. In addition,
there may be other aspects of our operations that are not
currently regarded or proved to have adverse effects but could
become so, such as the effects of electric and magnetic fields.
We are subject to laws and regulations relating to pollution,
the protection of the environment, and the use and disposal of
hazardous substances and waste materials. These expose us
to costs and liabilities relating to our operations and properties
whether current, including those inherited from predecessor
bodies, or formerly owned by us, and sites used for the disposal
of our waste. The cost of future environmental remediation
obligations is often inherently difficult to estimate and uncertainties
can include the extent of contamination, the appropriate
corrective actions and our share of the liability. We are
increasingly subject to regulation in relation to climate change
and are affected by requirements to reduce our own carbon
emissions as well as reduction in energy use by our customers.
Infrastructure and IT systems
We may suffer a major network failure or interruption, or may
not be able to carry out critical non network operations.
Operational performance could be materially adversely affected
by a failure to maintain the health of the system or network,
inadequate forecasting of demand, inadequate record keeping
or control of data or failure of information systems and
supporting technology. This could cause us to fail to meet
agreed standards of service, incentive and reliability targets,
or be in breach of a licence, approval, regulatory requirement
or contractual obligation. Even incidents that do not amount
to a breach could result in adverse regulatory and financial
consequences, as well as harming our reputation.
In addition to these risks, we may be affected by other potential
events that are largely outside our control such as the impact
of weather (including as a result of climate change and major
storms such as Superstorm Sandy), unlawful or unintentional
acts of third parties, insufficient or unreliable supply or force
majeure. Weather conditions can affect financial performance
and severe weather that causes outages or damages
infrastructure together with our actual or perceived response
will materially adversely affect operational and potentially
business performance and our reputation.
We commit significant expenditure to complying with these
laws and regulations and to meeting our obligations under
negotiated settlements. If more onerous requirements are
imposed or our ability to recover these costs under regulatory
frameworks changes, this could have a material adverse
impact on our businesses, reputation, results of operations
and financial position. Furthermore, any breach of our
regulatory or contractual obligations or our climate change
targets, or even incidents that do not amount to a breach,
could materially adversely affect our results of operations
and our reputation.
For more information about environmental, climate change
and health and safety matters relating to our businesses,
see the corporate responsibility section of our website.
Malicious attack, sabotage or other intentional acts,
including breaches of our cyber security, may also damage
our assets or otherwise significantly affect corporate activities
and, as a consequence, have a material adverse impact on
our business, results of operations and financial condition.
Unauthorised access to, or deliberate breaches of, our IT
systems may also seek to access and manipulate our
proprietary business data or customer information.
Unauthorised access to private customer information may
make us liable for a violation of data privacy regulations.
Even where we establish business continuity controls and
security against threats against our systems, these may not
be sufficient.
176
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Additional Information Law and regulation
Changes in law or regulation or decisions by governmental
bodies or regulators could materially adversely affect us.
Most of our businesses are utilities or networks subject to
regulation by governments and other authorities. Changes in
law or regulation or regulatory policy and precedent, including
decisions of governmental bodies or regulators, in the countries
or states in which we operate could materially adversely affect us.
Decisions or rulings concerning, for example:
(i) whether licences, approvals or agreements to operate or
supply are granted, amended or renewed, whether consents
for construction projects are granted in a timely manner or
whether there has been any breach of the terms of a licence,
approval or regulatory requirement; and
Business performance
(ii) timely recovery of incurred expenditure or obligations, the
ability to pass through commodity costs, a decoupling of
energy usage and revenue, and other decisions relating
to the impact of general economic conditions on us, our
markets and customers, implications of climate change,
whether aspects of our activities are contestable, the level
of permitted revenues and dividend distributions for
our businesses and in relation to proposed business
development activities, could have a material adverse
impact on our results of operations, cash flows, the financial
condition of our businesses and the ability to develop those
businesses in the future.
For further information see pages 170 to 175 which explain
our regulatory environment in detail.
Current and future business performance may not meet our
expectations or those of our shareholders.
Earnings maintenance and growth from our regulated gas and
electricity businesses will be affected by our ability to meet or
exceed efficiency targets and service quality standards set by,
or agreed with, our regulators. In addition, from time to time we
publish cost and efficiency savings targets for our businesses.
If we do not meet these targets and standards, or if we do not
implement the transformation projects we are carrying out as
envisaged (including the US foundation programme), or are not
able to shape our operating model to deliver success under
RIIO, we may not achieve the expected benefits, our business
may be materially adversely affected and our performance,
results of operations and reputation may be materially harmed
and we may be in breach of regulatory or contractual obligations.
Business development activity
New businesses or activities that we undertake alone or with
partners may not deliver target outcomes and may expose us to
additional operational and financial risk.
Business development activities, including acquisitions,
disposals, joint ventures and organic investment opportunities
(including organic investments made as a result of changes to
the energy mix), entail a number of risks, including that they may
be based on incorrect assumptions or conclusions, failure to
realise planned levels of synergy and efficiency savings, the
inability to integrate acquired businesses effectively and we
may suffer unanticipated costs and liabilities and other
unanticipated effects.
Cost escalation
We may also be liable for the past acts, omissions or liabilities
of companies or businesses we have acquired, which may
be unforeseen or greater than anticipated. In the case of joint
ventures, we may have limited control over operations and
our joint venture partners may have interests that diverge from
our own. The occurrence of any of these events could have
a material adverse impact on our results of operations or
financial condition, and could also impact our ability to enter
into other transactions.
Changes in foreign currency rates, interest rates or commodity
prices could materially impact earnings or our financial condition.
We have significant operations in the US and so are subject
to the exchange rate risks normally associated with non UK
operations, including the need to translate US assets and
liabilities, and income and expenses, into sterling, our primary
reporting currency. In addition, our results of operations and net
debt position may be affected because a significant proportion
of our borrowings, derivative financial instruments and
commodity contracts are affected by changes in interest rates,
commodity price indices and exchange rates, in particular the
dollar to sterling exchange rate.
Furthermore, our cash flow may be materially affected as
a result of settling hedging arrangements entered into to
manage our exchange rate, interest rate and commodity
price exposure, or by cash collateral movements relating to
derivative market values, which also depend on the sterling
exchange rate into euro and other currencies.
Operating costs may increase faster than revenues.
Income under our price controls in the UK is linked to the RPI.
Our operating costs may increase without a corresponding
increase in the RPI and therefore without a corresponding
increase in UK revenues. Our income under our rate plans
in the US is not typically linked to inflation.
In periods of inflation in the US, our operating costs may
increase by more than our revenues. In both the UK and US
such increased costs may materially adversely affect our
results of operations.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 177
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information
Additional information
Business information in detail
Continued
Cost escalation continued
We may be required to make significant contributions to fund
pension and other post-retirement benefits.
performance of the scheme assets, future long-term bond
yields, average life expectancies and relevant legal requirements.
We participate in a number of pension schemes that together
cover substantially all our employees. In both the UK and US,
the principal schemes are defined benefit schemes where the
scheme assets are held independently of our own financial
resources. In the US, we also have other post-retirement benefit
schemes. Estimates of the amount and timing of future funding
for the UK and US schemes are based on actuarial assumptions
and other factors including: the actual and projected market
Actual performance of scheme assets may be affected by
volatility in debt and equity markets, exacerbated by the
eurozone crisis. Changes in these assumptions or other
factors may require us to make additional contributions to
these pension schemes which, to the extent they are not
recoverable under our price controls or state rate plans,
could materially adversely affect our results of operations
and financial condition.
Financing and liquidity
An inability to access capital markets at commercially
acceptable interest rates could affect how we maintain and
grow our businesses.
Our businesses are financed through cash generated from
our ongoing operations, bank lending facilities and the capital
markets, particularly the long-term debt capital markets.
Some of the debt we issue is rated by credit rating agencies
and changes to these ratings may affect both our borrowing
capacity and borrowing costs. In addition, restrictions imposed
by regulators may also limit how we service the financial
requirements of our current businesses or the financing
of newly acquired or developing businesses.
Financial markets can be subject to periods of volatility and
shortages of liquidity, which may be exacerbated by the
eurozone crisis. If we were unable to access the capital markets
or other sources of finance at competitive rates for a prolonged
period, our cost of financing may increase, the discretionary
and uncommitted elements of our proposed capital investment
programme may need to be reconsidered and the manner in
which we implement our strategy may need to be reassessed.
Such events could have a material adverse impact on our
business, results of operations and prospects.
Some of our regulatory agreements impose lower limits for
the long-term senior unsecured debt credit ratings that
certain companies within the group must hold or the amount
of equity within their capital structures. One of the principal
limits requires National Grid plc to hold an investment grade
long-term senior unsecured debt credit rating. In addition,
some of our regulatory arrangements impose restrictions
on the way we can operate. These include regulatory
requirements for us to maintain adequate financial resources
within certain parts of our operating businesses and may
restrict the ability of National Grid plc and some of our
subsidiaries to engage in certain transactions, including
paying dividends, lending cash and levying charges. The
inability to meet such requirements or the occurrence of any
such restrictions may have a material adverse impact on our
business and financial condition.
Our debt agreements and banking facilities contain
covenants, including those relating to the periodic and timely
provision of financial information by the issuing entity and
financial covenants such as restrictions on the level of
subsidiary indebtedness. Failure to comply with these
covenants, or to obtain waivers of those requirements, could
in some cases trigger a right, at the lender’s discretion, to
require repayment of some of our debt and may restrict our
ability to draw upon our facilities or access the capital markets.
Customers and counterparties
Customers and counterparties may not perform their obligations.
Our operations are exposed to the risk that customers,
suppliers, financial institutions and others with whom we do
business will not satisfy their obligations, which could materially
adversely affect our financial position.
This risk is most significant where our subsidiaries have
concentrations of receivables from gas and electricity utilities
and their affiliates (such as the Long Island Power Authority),
as well as industrial customers and other purchasers, and may
also arise where customers are unable to pay us as a result of
increasing commodity prices or adverse economic conditions.
Employees and others
We may fail to attract, develop and retain employees with the
competencies, values and behaviours required to deliver our
strategy and vision and ensure they are engaged to act in our
best interests.
positions where availability of appropriately qualified personnel
may be limited), or if significant disputes arise with our employees.
As a result, there may be a material adverse effect on our
business, financial condition, results of operations and prospects.
Our ability to implement our strategy depends on the capabilities
and performance of our employees and leadership. Our ability to
implement our strategy and vision may be negatively affected by
the loss of key personnel or an inability to attract, develop or
retain appropriately qualified personnel (in particular for technical
There is a risk that an employee or someone acting on our behalf
may breach our internal controls or internal governance framework
or may contravene applicable laws and regulations. This could
have an impact on our results of operations, our reputation and
our relationship with our regulators and other stakeholders.
178
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Additional Information Management evaluation of the effectiveness of the Company’s
internal control over financial reporting was based on the
Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
Based on this evaluation, management concluded that our
internal control over financial reporting was effective as at
31 March 2013.
PricewaterhouseCoopers LLP, which has audited our
consolidated financial statements for the year ended 31 March
2013, has also audited the effectiveness of our internal control
over financial reporting. Their attestation report can be found
on page 95.
Changes to internal control over
financial reporting
During November and December 2012 our new US enterprise
resource planning system went live, implementing a new platform
to replace a number of legacy systems across our US businesses.
The primary reason for the systems change is to provide the
US businesses with an integrated platform that allows for process
and systems standardisation and efficiencies. The changes
were not undertaken in response to any actual or perceived
deficiencies in our internal control over financial reporting. The
implementation of the new platform, and associated changes
to many financial processes across our US businesses, has
resulted in material changes to our internal controls over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act).
We regularly review our internal controls over financial reporting
as well as our disclosure controls and procedures and make
changes, as necessary, to ensure the quality of our financial
reporting. Other than the changes related to the new system
there have been no changes in internal control over financial
reporting during the year that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting.
Additional information
Internal control
Information assurance
The Board considers that it is imperative to have accurate and
reliable information to enable informed and timely decisions to
be taken that further our objectives. Key elements in managing
information assurance risks include education, training
and awareness.
These initiatives emphasise the importance of information
security, the quality of data collection and the affirmation
process that supports our business transactions, evidencing
our decisions and actions. All communication channels,
including training for doing the right thing, make it clear that
the accurate and honest reporting of data and other information
must never be compromised. These initiatives are supported by
the letter of assurance process in which managers affirm, among
other things, they have control frameworks in place to assist in
the accurate reporting of data and other information. In line with
ongoing transformation initiatives, we continue to monitor and
evolve our control processes.
Disclosure controls
Working with management, including the Chief Executive and
Finance Director, we have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures
as at 31 March 2013. Our disclosure controls and procedures
are designed to provide reasonable assurance of achieving their
objectives, however the effectiveness of any system of disclosure
controls and procedures has limitations including the possibility
of human error and the circumvention or overriding of the
controls and procedures. Even effective disclosure controls
and procedures provide only reasonable assurance of achieving
their objectives. Based on the evaluation, the Chief Executive
and Finance Director concluded that the disclosure controls
and procedures are effective to provide reasonable assurance
that information required to be disclosed in the reports that
we file and submit under the Exchange Act is recorded,
processed, summarised and reported as and when required
and that such information is accumulated and communicated
to our management, including the Chief Executive and
Finance Director, as appropriate, to allow timely decisions
regarding disclosure.
Internal control over financial reporting
Our management, including the Chief Executive and Finance
Director, has carried out an evaluation of our internal control over
financial reporting pursuant to the Disclosure and Transparency
Rules and Section 404 of the Sarbanes-Oxley Act 2002. As
required by Section 404, management is responsible for
establishing and maintaining an adequate system of internal
control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act). Our internal control over
financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with
generally accepted accounting principles. Because of its inherent
limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to risk that controls
may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures
may deteriorate.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 179
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Additional information
Directors’ Report disclosures
Articles of Association
A summary of the material terms of our Articles of Association
(the Articles) and applicable English Law is set out on pages
184 and 185.
Board biographies
Sir Peter Gershon CBE FREng, Chairman
Appointment to the Board: August 2011 as Deputy Chairman,
Chairman with effect from January 2012
Committee membership: N (ch)
Previous appointments: Chairman of Premier Farnell plc, Chief
Executive of the Office of Government Commerce, Managing
Director of Marconi Electronic Systems and member of the UK
Defence Academy Advisory Board.
External appointments: Chairman of Tate & Lyle plc and
member of the HM Government Efficiency and Reform Board
and The Sutton Trust Board.
Experience:
• Chairman
• Engineer
• Government
• Partnering/JV/contract management
• City
• High tech industry
• US
• International
• General management
Steve Holliday FREng, Chief Executive
Appointment to the Board: October 2002, appointed to
National Grid Group plc 2001, Chief Executive with effect from
January 2007
Committee membership: F
Previous appointments: Executive Director of British Borneo Oil
and Gas; he also spent 19 years within the Exxon Group, where
he held senior positions in the international gas business and
managed major operational areas such as refining and shipping.
Most recently Chairman of UK Business Council for Sustainable
Energy and the Technician Council.
External appointments: Non-executive Director of Marks and
Spencer Group plc, Chairman of Crisis UK, the Prince’s National
Ambassador, Trustee Director for Business in the Community
and member of Infrastructure UK Advisory Council.
Experience:
• Chief Executive
• Engineer
• Government/regulatory
• Partnering/JV/contract management
• City
• Utilities – energy
• Customer
• Oil and gas
• US
• International
Philip Aiken, Non-executive Director
Appointment to the Board: May 2008
Committee membership: A, N, S (ch)
Previous appointments: Group President of BHP Billiton’s
Energy business, Executive Director of BTR plc, held senior roles
in BOC Group plc, senior advisor to Macquarie Capital (Europe)
Limited, Chairman of Robert Walters plc and Non-executive
Director of Miclyn Express Offshore Limited.
External appointments: Chairman of AVEVA Group plc,
Non-executive and Senior Independent Director of Kazakhmys
PLC and Essar Energy plc and Non-executive Director of Essar
Oil Limited and Newcrest Mining Limited.
Experience:
• Chairman
• Partnering/JV/contract management
• Emerging markets
• Natural resources
• International
Andrew Bonfield, Finance Director
Appointment to the Board: November 2010
Committee membership: F
Previous appointments: Chief Financial Officer at Cadbury plc
until March 2010; he also spent five years as Executive Vice
President & Chief Financial Officer of Bristol-Myers Squibb
Company and has previous experience in the energy sector
as Finance Director of BG Group plc.
External appointments: Non-executive Director of Kingfisher plc.
Experience:
• Finance Director
• Accountant
• Government/regulatory
• Partnering/JV/contract management
• City
• Utilities – energy
• Customer
• US
• International
Nora Mead Brownell, Non-executive Director
Appointment to the Board: 1 June 2012
Committee membership: N, R, S
Previous appointments: Commissioner of the Pennsylvania
Public Utility Commission from 1997 to 2001, Commissioner for
the Federal Energy Regulatory Commission from 2001 to 2006
and former President of the National Association of Regulatory
Utility Commissioners.
External appointments: Board member of Comverge, Inc.,
Spectra Energy Partners LP and ONCOR Electric Delivery Holding
Company LLC and partner in ESPY Energy Solutions, LLC.
Experience:
• US Government/regulatory
• US utilities – energy
• FERC
• Various non-executive directorships
• US
180
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Additional Information Jonathan Dawson, Non-executive Director
Appointment to the Board: 4 March 2013
Committee membership: F, N, R
Previous appointments: Various roles within the Ministry of
Defence before joining Lazard where he spent over 20 years.
Non-executive Director of Galliford Try plc 2004 to 2008,
National Australia Group Europe Limited 2005 to 2012 and
Standard Life Investments (Holdings) Limited 2010 to 2013.
External appointments: Non-executive and Senior Independent
Director of Next plc, Non-executive Director of Jardine Lloyd
Thompson Group plc and co-founding partner in Penfida
Partners LLP.
Experience:
• City
• Corporate finance
• Banking
• Pensions
Paul Golby CBE FREng, Non-executive Director
Appointment to the Board: February 2012
Committee membership: N, R, S
Previous appointments: Executive Director of Clayhithe plc
before joining East Midlands Electricity plc in 1998 as Managing
Director, Chief Executive of E.ON UK plc in 2002, and later
additionally as Chairman, stepping down from the E.ON board
in December 2011 and most recently Non-executive Chairman
of AEA Technology Group plc.
External appointments: Chairman of EngineeringUK, Chair
of the Engineering and Physical Sciences Research Council
and a member of the Council for Science and Technology.
Experience:
• Chairman and chief executive
• Engineer
• Government/regulatory
• City
• Utilities – energy
Ken Harvey CBE, Non-executive Director and Senior
Independent Director
Appointment to the Board: October 2002, appointed to Lattice
Group plc board in 2000, Senior Independent Director with
effect from October 2004
Committee membership: N, R (ch), S
Previous appointments: Engineering Director and then Deputy
Chairman of London Electricity and Chairman and Chief
Executive of NORWEB plc.
External appointments: Chairman of Pennon Group Plc.
Experience:
• Chairman and chief executive
• Engineer
• Government/regulatory
• City
• Utilities – power and water
Ruth Kelly, Non-executive Director
Appointment to the Board: October 2011
Committee membership: A, F, N
Previous appointments: Various senior roles in Government
from 2001 to 2008, including Secretary of State for Transport,
Secretary of State for Communities and Local Government,
Secretary of State for Education and Skills and Financial
Secretary to the Treasury.
External appointments: Managing Director at HSBC
and Governor for the National Institute of Economic and
Social Research.
Experience:
• Government/regulatory
• Partnering/JV/contract management
• Financial and economic
• Infrastructure projects
Tom King, Executive Director, US
Appointment to the Board: August 2007
Previous appointments: President of PG&E Corporation and
Chairman and CEO of Pacific Gas and Electric Company from
2003 to 2007, having held a number of senior positions within the
PG&E group since joining in 1998. Senior management positions
with Kinder Morgan Energy Partners and Enron Corporation.
Experience:
• Government/regulatory
• Partnering/JV/contract management
• Utilities – energy
• Customer
• FERC
• Generation
• US
Maria Richter, Non-executive Director
Appointment to the Board: October 2003
Committee membership: A, F (ch), N
Previous appointments: Morgan Stanley from 1993 to 2002,
latterly as Managing Director of its Corporate Finance Retail
Group. Vice President of Independent Power Group for Salomon
Brothers and Vice President of Prudential Capital Corporation
and Power Funding Associates. Most recently Non-executive
Director of The Pantry, Inc. and The Vitec Group plc.
External appointments: Non-executive Chairman of Pro Mujer
UK and Non-executive Director of The Bessemer Group, Inc.
Experience:
• City
• Financial services
• Emerging markets
• US
• International
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 181
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Additional information
Directors’ Report disclosures
Continued
George Rose, Non-executive Director
Appointment to the Board: October 2002, appointed to Lattice
Group plc board in 2000
Committee membership: A (ch), N, R
Previous appointments: Member of the Financial Reporting
Review Panel, Non-executive Director of Orange plc and Saab
AB and Finance Director of BAE Systems plc.
External appointments: Member of the UK Industrial
Development Advisory Board, Non-executive Director of Genel
Energy plc, Laing O’Rourke plc and Experian plc.
Experience:
• Finance director
• Accountant
• Government/regulatory
• Partnering/JV/contract management
• City
• Defence industry
• US
• International
Mark Williamson, Non-executive Director
Appointment to the Board: 3 September 2012
Committee membership: A, F, N
Previous appointments: Chief Accountant then Group Financial
Controller of Simon Group plc before joining International
Power plc as Group Financial Controller in 2000 and appointed
as Chief Financial Officer in 2003.
External appointments: Non-executive and Senior Independent
Director of Alent plc, Deputy Chairman and Senior Independent
Director of Imperial Tobacco Group PLC.
Experience:
• Finance director
• Accountant
• Government/regulatory
• City
• Utilities – energy
• International
Nick Winser FREng, Executive Director, UK
Appointment to the Board: April 2003
Previous appointments: Chief Operating Officer of the US
transmission business for National Grid Transco plc having joined
The National Grid Company plc in 1993, becoming Director of
Engineering in 2001. Prior to this, with Powergen since 1991 as
principal negotiator on commercial matters. Most recently
co-Chair of the Energy Research Partnership.
External appointments: Non-executive Director of Kier Group plc
and Chair of CIGRE UK.
Experience:
• Engineer
• Government/regulatory
• Partnering/JV/contract management
• City
• Utilities – energy
• Customer
• US
Key
A Audit Committee
F Finance Committee
N Nominations Committee
R Remuneration Committee
Safety, Environment and
S
Health Committee
(ch) chairman of Committee
Alison Kay, Group General Counsel & Company Secretary
Appointment as Company Secretary: 24 January 2013
Previous appointments: Various 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.
Capital Gains Tax (CGT)
CGT information relating to National Grid shares for UK resident
shareholders can be found on our website under Investors,
Shareholder Services. Share prices on specific dates can also
be found on our website.
Change of control provisions
No compensation would be paid for loss of office of Directors on
a change of control of the Company. As at 31 March 2013, the
Company had undrawn borrowing facilities with a number of its
banks of £1.7 billion available to it and a further £1.3 billion of
drawn bank loans which, on a change of control of the Company
following a takeover bid, may alter or terminate. All the Company’s
share plans contain provisions relating to a change of control.
Outstanding awards and options would normally vest and become
exercisable on a change of control, subject to the satisfaction
of any performance conditions at that time. In the event of a
change of control of the Company a number of governmental
and regulatory consents or approvals are likely to be required
arising from laws or regulations of the UK, US or the EU.
No other agreements that take effect, alter or terminate upon a
change of control of the Company following a takeover bid are
considered to be significant in terms of their potential impact
on the business as a whole.
Charitable donations
During 2012/13, approximately £15 million (2011/12: £16 million;
2010/11: £13 million) was invested in support of community
initiatives and relationships focusing on education and skills
(£5 million), environment and energy (£7 million) and community
development (£3 million). The London Benchmarking Group
model was used to assess this overall community investment.
Direct donations to charitable organisations amounted to
£2 million (2011/12: £4 million; 2010/11: £0.8 million), a proportion
of which was donated via our employee community grant
schemes which support and encourage employee fundraising
and volunteering. In addition to our donations, financial support
was provided for our affordable warmth programme, education
programme, university research and our young offenders
programme.
Conflicts of interest
The Board continues to monitor and note possible conflicts
of interest that each Director may have and Directors are
reminded of their continuing obligations in relation to conflicts
at each Board meeting. Potential conflicts are considered and,
if appropriate, approved and noted. During the year ended
31 March 2013, the Board has been advised by the Directors
of two situations in relation to which an actual conflict of interest
was identified. In both circumstances the Board duly considered
and authorised the conflicts in accordance with its powers as
set out in the Articles, with the conflicted Director not voting on
the matter or being counted in the quorum.
182
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Additional Information
Directors’ indemnity
The Company has arranged, in accordance with the Companies
Act 2006 and the Articles, qualifying third party indemnities
against financial exposure that Directors may incur in the course
of their professional duties. Equivalent qualifying third party
indemnities were, and remain, in force for the benefit of those
Directors who stood down from the Board during the year
ended 31 March 2013. Alongside these indemnities, the
Company places Directors’ and Officers’ liability insurance
cover for each Director.
Events after the reporting period
There have been no material events affecting the Company
since the year end.
Material interests in shares
As at 31 March 2013, National Grid had been notified of the
following holdings in voting rights of 3% or more in the issued
share capital of the Company:
Number of
ordinary shares
% of
voting rights*
The Capital Group Companies, Inc.
399,638,038
10.905
Black Rock, Inc.
Crescent Holding GmbH
Legal and General Group plc
182,630,798
149,414,285
138,503,443
5.21
4.18
3.99
* This number is calculated in relation to the issued share capital at the time the holding was
disclosed
On 5 April 2013, The Capital Group Companies, Inc. notified us of
a holding in voting rights of 11.02%, 404,063,006 ordinary shares
as at 3 April 2013.
As at 15 May 2013, no further notifications have been received.
The rights attached to ordinary shares are detailed below. All
ordinary shares carry the same voting rights.
Policy and practice on payment of creditors
It is National Grid’s policy to include in contracts or other
agreements terms of payment with suppliers. Once agreed,
National Grid aims to abide by these payment terms. The average
creditor payment period at 31 March 2013 for National Grid’s
principal operations in the UK was 25 days (22 days at 31 March
2012). National Grid is a signatory to the Prompt Payment Code,
which can be found at www.promptpaymentcode.org.uk.
Political donations and expenditure
National Grid made no political donations in the UK or EU during
the year, including such donations as defined for the purposes
of the Political Parties, Elections and Referendums Act 2000.
National Grid USA and certain of its subsidiaries made political
donations in the US of $73,400 (£46,800) (2011/12: $99,900;
2010/11: $151,000) during the year to affiliated Federal and New
York state political action committees (PACs). National Grid
USA’s affiliated Federal and New York PACs were funded wholly
by voluntary employee contributions.
Research and development
Expenditure on research and development during the year was
£15 million (2011/12: £15 million; 2010/11: £16 million). Examples
included development of new technologies for enhancing the
capacity of the electricity transmission network and research into
extending the life and reducing emissions from gas transmission
and distribution assets.
Share capital
The share capital of the Company consists of ordinary shares of
1117⁄43 pence nominal value each and ADSs, which represent five
ordinary shares.
Authority to purchase shares
Shareholder approval was given at the 2012 AGM to purchase
up to 10% of the Company’s share capital. The Directors intend
to seek shareholder approval to renew this authority at this
year’s AGM. In some circumstances, companies may find it
advantageous to purchase their own shares in the market.
Repurchased shares may be held as treasury shares by the
Company, and resold for cash, cancelled, either immediately
or at some point in the future, or used for the purposes of
employee share schemes. The Directors believe that it is
desirable for the Company to have such additional flexibility
in the management of its capital base. The Company will only
purchase shares where the Directors believe this would be in
the best interests of shareholders generally. The authority will
only be used after careful consideration, taking into account
market conditions prevailing at the time, other investment
opportunities, appropriate gearing levels and the overall
financial position of the Company. No shares were repurchased
during the year. Of the shares repurchased in prior years and
held as treasury shares, 4,515,807 have been transferred to
employees under the employee share plans leaving a balance
as at the date of this report of 127,142,880 ordinary shares held
as treasury shares.
Authority to allot shares
Shareholder approval was given at the 2012 AGM to allot shares
of up to 1⁄ 3 of the Company’s share capital and a further 1⁄ 3 in
connection with an offer by way of a rights issue. The Directors
intend to seek shareholder approval to renew this authority at
this year’s AGM. The Directors currently have no intention of
issuing new shares, or of granting rights to subscribe for or
convert any security into shares, except in relation to, or in
connection with, our scrip dividend scheme and the exercise of
options under our share plans. The Directors consider it desirable
to have the maximum flexibility permitted by investor guidelines
to respond to market developments. No issue of shares will
be made which would effectively alter control of the Company
without the sanction of shareholders in general meeting.
Rights attached to shares
Ordinary shareholders and ADS holders receive dividends and
can vote at general meetings. Treasury shares do not attract
a vote or dividends. There are no restrictions on the transfer
or sale of ordinary shares. Some of the Company’s employee
share plans, details of which are contained in the Remuneration
Report, include restrictions on the transfer of shares while the
shares are subject to the plan. Where, under an employee share
plan operated by the Company, participants are the beneficial
owners of the shares but not the registered owner, the voting
rights may be exercised by the registered owner at the direction
of the participant.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 183
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Additional information
Other disclosures
Articles of Association
The following description is a summary of the material terms of
our Articles and applicable English law. The following description
is a summary only and is qualified in its entirety by reference to
the Articles.
re-election annually. No person is disqualified from being a
Director or is required to vacate that office by reason of attaining
a maximum age.
A Director is not required to hold shares in National Grid in order
to qualify as a Director.
Summary
The Articles set out the internal regulations of the Company
and cover such matters as the rights of shareholders and the
conduct of the Board and general meetings. Copies are available
upon request and are displayed on the Company’s website.
Amendments to the Articles have to be approved by at least
75% of those voting in person or by proxy at a general meeting
of the Company. Subject to company law and the Articles, the
Directors may exercise all the powers of the Company, and may
delegate authorities to committees and day-to-day management
and decision-making to individual Executive Directors. The
committee structure is set out on pages 28 and 29.
General
The Company is incorporated under the name National Grid plc
and is registered in England and Wales with registered number
4031152. Under the Companies Act, the Company’s objects
are unrestricted.
Directors
Under the Articles, a Director must disclose any personal interest
in a matter and may not vote in respect of that matter, subject to
certain limited exceptions. As permitted under the Companies
Act, the Articles provide that the non conflicted Directors of the
Company may authorise a conflict or potential conflict for a
particular matter. In doing so, the non conflicted Directors must
act in a way they consider, in good faith, will be most likely to
promote the success of the Company for the benefit of the
shareholders as a whole.
The Directors (other than a Director acting in an executive
capacity) are paid fees for their services, which in total must
not exceed £2,000,000 a year or any higher sum as decided
by an ordinary resolution at a general meeting of shareholders.
In addition, special pay may be awarded to a Director who acts in
an executive capacity, serves on a committee, performs services
which the Directors consider to extend beyond the ordinary
duties of a Director, devotes special attention to the business of
National Grid or goes or lives abroad on the Company’s behalf.
Directors may also receive reimbursement for expenses properly
incurred, and may be awarded pensions and other benefits. The
compensation awarded to the Executive Directors is determined
by the Remuneration Committee and further details of Directors’
remuneration are set out in the Remuneration Report (see pages
68 to 90).
The Directors are empowered to exercise all the powers of
National Grid to borrow money, subject to the limitation that
the aggregate principal amount of all borrowings of its group
outstanding at any time must not exceed £35 billion or any other
amount approved by shareholders by an ordinary resolution at
a general meeting.
Directors can be appointed or removed by the Board or
shareholders in a general meeting. Directors must stand for
election at the first AGM following their appointment to the
Board. Each Director must retire at least every three years but
will be eligible for re-election. In accordance with best practice
introduced by the UK Corporate Governance Code, all Directors
wishing to continue in office currently offer themselves for
Rights, preferences and restrictions
(i) Dividend rights
National Grid may not pay any dividend otherwise than out of
profits available for distribution under the Companies Act and
other applicable provisions of English law. In addition, as a
public company, National Grid may only make a distribution if,
at the time of the distribution, the amount of its net assets is
not less than the aggregate of its called up share capital and
undistributable reserves (as defined in the Companies Act)
and to the extent that the distribution does not reduce the
amount of those assets to less than that aggregate. Subject
to the foregoing, shareholders may, by ordinary resolution,
declare dividends in accordance with the respective rights of the
shareholders, but not exceeding the amount recommended by
the Board. The Board may pay interim dividends if it considers
that National Grid’s financial position justifies the payment.
Except insofar as the rights attaching to any share otherwise
provide, all dividends will be apportioned and paid proportionately
to the amounts paid up (otherwise than in advance of calls) on
the shares. Any dividend or interest unclaimed for 12 years from
the date when it was declared or became due for payment will
be forfeited and revert to National Grid.
(ii) Voting rights
Subject to any rights or restrictions attached to any shares and
to any other provisions of the Articles, at any general meeting on
a show of hands, every shareholder who is present in person
will have one vote and on a poll, every shareholder will have one
vote for every share which they hold. On a show of hands or poll,
shareholders may cast votes either personally or by proxy and
a proxy need not be a shareholder. Under the Articles, all
substantive resolutions at a general meeting must be decided
on a poll, and resolutions of a procedural nature are decided by
a show of hands, unless a poll is demanded in accordance with
the Articles.
(iii) Liquidation rights
In a winding up, a liquidator may, in each case with the sanction
of a special resolution passed by the shareholders and any
other sanction required under English law, (a) divide among the
shareholders the whole or any part of National Grid’s assets
(whether the assets are of the same kind or not) and may, for this
purpose, value any assets and determine how the division should
be carried out as between shareholders or different classes of
shareholders, or (b) transfer any part of the assets to trustees
on trust for the benefit of the shareholders as the liquidator
determines, but in neither case will a shareholder be compelled
to accept assets upon which there is a liability.
Variation of rights
Subject to applicable provisions of English law, the rights
attached to any class of shares of National Grid may be varied
or cancelled with the written consent of the holders of three
quarters in nominal value of the issued shares of that class, or
with the sanction of a special resolution passed at a separate
meeting of the holders of the shares of that class.
184
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Additional Information General meetings
AGMs must be convened each year within six months of the
Company’s accounting reference date upon advance written
notice of 21 clear days. Any other general meeting may be
convened provided at least 14 clear days’ written notice is given,
subject to annual approval of shareholders. In certain limited
circumstances, the Company can convene a general meeting by
shorter notice. The notice must specify, among other things, the
nature of the business to be transacted, the place, the date and
the time of the meeting.
Rights of non residents
There are no restrictions under National Grid’s Articles that
would limit the rights of persons not resident in the UK to vote
in relation to ordinary shares.
Disclosure of interests
Under the Companies Act, National Grid may by written notice
require a person whom it has reasonable cause to believe to be
or to have been in the last three years interested in its shares
to provide additional information relating to that interest. Under
the Articles, failure to provide such information may result in a
shareholder losing their rights to attend, vote or exercise any
other right in relation to shareholders’ meetings.
Under the UK Disclosure and Transparency Rules, there is also an
obligation on a person who acquires or ceases to have a notifiable
interest in shares in National Grid to notify the Company of that
fact. The disclosure threshold is 3% and disclosure is required
each time the person’s direct and indirect holdings reach, exceed
or fall below each 1% threshold thereafter.
The UK City Code on Takeovers and Mergers imposes strict
disclosure requirements with regard to dealings in the securities
of an offeror or offeree company, and also on their respective
associates, during the course of an offer period. Other regulators
in the UK, US and elsewhere may have, or assert, notification
or approval rights over acquisitions or transfers of shares.
Code of Ethics
In accordance with US legal requirements, the Board has
adopted a Code of Ethics for senior financial professionals.
This code is available on our website (where any amendments
or waivers will also be posted). There were no amendments to,
or waivers of, our Code of Ethics during the year.
Corporate governance practices:
differences from New York Stock Exchange
(NYSE) listing standards
The Company is listed on the NYSE and is therefore required
to disclose differences in its corporate governance practices
adopted as a UK listed company, compared with those of a
US company.
The corporate governance practices of the Company are
primarily based on the requirements of the UK Corporate
Governance Code (the Code) but substantially conform to those
required of US companies listed on the NYSE. The following is
a summary of the significant ways in which the Company’s
corporate governance practices differ from those followed by
US companies under Section 303A Corporate Governance
Standards of the NYSE.
• The NYSE rules and the Code apply different tests for the
independence of Board members.
• The NYSE rules require a separate nominating/corporate
governance committee composed entirely of independent
directors. There is, however, no requirement for a separate
corporate governance committee in the UK. Under the
Company’s corporate governance policies, all Directors on
the Board discuss and decide upon governance issues and
the Nominations Committee makes recommendations to
the Board with regard to certain of the responsibilities of
a corporate governance committee.
• The NYSE rules require listed companies to adopt and disclose
corporate governance guidelines. While the Company reports
compliance with the Code in each Annual Report and
Accounts, the UK requirements do not require the Company to
adopt and disclose separate corporate governance guidelines.
• The NYSE rules require a separate audit committee composed
of at least three independent members. While the Company’s
Audit Committee exceeds the NYSE’s minimum independent
Non-executive Director membership requirements, it should be
noted that the quorum for a meeting of the Audit Committee,
of two independent Non-executive Directors, is less than the
minimum membership requirements under the NYSE rules.
• The NYSE rules require a compensation committee composed
entirely of independent directors, and prescribe criteria to
evaluate the independence of the committee’s members
and its ability to engage external compensation advisors.
While the Code prescribes different independence criteria,
the Non-executive Directors on the Remuneration Committee
have each been deemed independent by the Board under the
NYSE rules. Although the evaluation criteria for appointment
of external advisors differ under the Code, the Remuneration
Committee is solely responsible for appointment, retention and
termination of such advisors.
Depositary payments to the Company
The Depositary has agreed to reimburse the Company for
expenses it incurs that are related maintenance expenses of the
ADS programme. The Depositary has also agreed to pay the
standard out of pocket maintenance costs for the ADSs, which
consist of the expenses of postage and envelopes for mailing
annual and interim financial reports, printing and distributing
dividend cheques, electronic filing of US federal tax information,
mailing required tax forms, stationery, postage, facsimile and
telephone calls. It has also agreed to reimburse the Company
annually for certain investor relationship programmes or special
investor relations promotional activities. There are limits on the
amount of expenses for which the Depositary will reimburse the
Company, but the amount of reimbursement available to the
Company is not necessarily tied to the amount of fees the
Depositary collects from investors. For the period 1 April 2012 to
15 May 2013, the Company received $200,000 in reimbursements
from the Depositary. Going forward, fees that it is proposed be
charged on cash dividends, see page 186, will be apportioned
between the Depositary and the Company.
Any questions from ADS holders should be directed to The Bank
of New York Mellon:
The Bank of New York Mellon
Depositary Receipts
PO Box 43006
Providence, RI 02940-3006
Telephone: 1-800-466-7215 (International +1-201-680-6825)
Email: shrrelations@bnymellon.com
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 185
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Additional information
Other disclosures
Continued
Description of securities other than equity
securities: depositary fees and charges
The Bank of New York Mellon, as Depositary, collects its fees for
delivery and surrender of ADSs directly from investors depositing
shares or surrendering ADSs for the purpose of withdrawal or
from intermediaries acting for them. The Depositary collects
fees for making distributions to investors (including, it is expected
going forward, in respect of cash dividends) by deducting those
fees from the amounts distributed or by selling a portion of
distributable property to pay the fees. The Depositary may
generally refuse to provide fee attracting services until its fees
for those services are paid.
Persons depositing or
withdrawing shares must pay:
For:
Issuance of ADSs, including issuances
resulting from a distribution of shares
or rights or other property; cancellation
of ADSs for the purpose of withdrawal,
including if the deposit agreement
terminates; distribution of securities
distributed to holders of deposited
securities that are distributed by the
Depositary to ADS registered holders.
Transfer and registration of shares on
our share register to or from the name
of the Depositary or its agent when
they deposit or withdraw shares.
Cable, telex and facsimile transmissions
(when expressly provided in the deposit
agreement); converting foreign currency
to dollars.
As necessary.
$5.00 per 100 ADSs
(or portion of 100 ADSs)
Registration or transfer fees
Expenses of the Depositary
Taxes and other governmental
charges the Depositary or the
Custodian has to pay on any ADS
or share underlying an ADS, for
example, stock transfer taxes,
stamp duty or withholding taxes
The Company has agreed to amend the deposit agreement
under which the ADS representing its ordinary shares are issued
to allow a fee of up to $0.05 per ADS to be charged for any cash
distribution made to ADS holders, including cash dividends.
Subject to Form F-6 on which the amended deposit agreement
is filed being declared effective by the SEC, commencing with
the final dividend payment payable on 21 August 2013, ADS
holders who receive a cash dividend will be charged a fee, which
will be deducted by the Depositary from interim and final cash
dividends prior to distribution of the cash dividend. The payment
of the final dividend is subject to approval by shareholders at the
AGM taking place on 29 July 2013.
Documents on display
National Grid is subject to the filing requirements of the Exchange
Act, as amended. In accordance with these requirements, we
file reports and other information with the SEC. These materials,
including this document, may be inspected during normal
business hours at our registered office 1-3 Strand, London
WC2N 5EH or at the SEC’s Public Reference Room at 100 F
Street, NE, Washington, DC 20549. For further information
about the Public Reference Room, please call the SEC at
1-800-SEC-0330. Some of our filings are also available on
the SEC’s website at www.sec.gov.
Employees
We negotiate with recognised unions. It is our policy to maintain
well developed communications and consultation programmes
and there have been no material disruptions to our operations
from labour disputes during the past five years. National Grid
believes that it can conduct its relationships with trade unions
and employees in a satisfactory manner.
Exchange controls
There are currently no UK laws, decrees or regulations that restrict
the export or import of capital, including, but not limited to, foreign
exchange control restrictions, or that affect the remittance of
dividends, interest or other payments to non UK resident holders
of ordinary shares except as otherwise set out in Taxation below
and except in respect of the governments of and/or certain
citizens, residents or bodies of certain countries (described in
applicable Bank of England Notices or European Union Council
Regulations in force as at the date of this document).
Exchange rates
The following table shows the history of the exchange rates of
one pound sterling to dollars for the periods indicated.
Dollar equivalent of £1 sterling
April 2013
March 2013
February 2013
January 2013
December 2012
2012/13
2011/12
2010/11
2009/10
2008/09
High
1.5564
1.5239
1.5837
1.6284
1.627
Low
1.5128
1.4885
1.5109
1.5709
1.6021
Average*
1.57
1.60
1.57
1.58
1.54
* The average for each period is calculated by using the average of the exchange rates on
the last day of each month during the period
186
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Additional Information
Key milestones
Some of the key dates and actions in the corporate history
of National Grid are listed below. The full history goes back
much further.
1986
1990
1995
1997
1997
2000
2000
2002
2002
2004
2005
2006
2007
2007
2008
2010
British Gas (BG) privatisation
Electricity transmission network in England and Wales transferred
to National Grid on electricity privatisation
National Grid listed on the London Stock Exchange
Centrica demerged from BG
Energis demerged from National Grid
Lattice Group demerged from BG and listed separately
New England Electric System and Eastern Utilities Associates
acquired
Niagara Mohawk Power Corporation merged with National Grid in
US
National Grid and Lattice Group merged to form National Grid
Transco
UK wireless infrastructure network acquired from Crown Castle
International Corp
Four UK regional gas distribution networks sold and National Grid
adopted as our name
Rhode Island gas distribution network acquired
UK and US wireless infrastructure operations and the Basslink
electricity interconnector in Australia sold
KeySpan Corporation acquired
Ravenswood generation station sold
Rights issue raised £3.2 billion
2012
New Hampshire electricity and gas distribution businesses sold
Material contracts
Each of our Executive Directors has a service agreement and
each Non-executive Director has a letter of appointment. No
contract (other than contracts entered into in the ordinary course
of business) has been entered into by National Grid within the
two years immediately preceding the date of this report which is,
or may be, material; or which contains any provision under which
any member of National Grid has any obligation or entitlement
which is material to National Grid at the date of this report.
Property, plant and equipment
This information can be found under the heading note 10
property, plant and equipment on page 123, where we operate
on page 17 and principal operations on pages 18 to 25.
Shareholder analysis
The following table includes a brief analysis of shareholder
numbers and shareholdings as at 31 March 2013.
Size of shareholding
Number of
shareholders
% of
shareholders
Number of
shares
% of
shares
1–50
51–100
101–500
501–1,000
1,001–10,000
10,001–50,000
50,001–100,000
100,001–500,000
500,001–1,000,000
1,000,001+
Total
179,075
17.5557
5,231,323
0.1378
281,501
27.5972
19,954,907
0.5259
441,380
43.2711
92,384,691
2.4347
59,446
5.8278
41,546,450
1.0949
55,507
5.4417
136,335,171
3.5929
2,090
0.2049
37,264,660
0.9821
198
431
133
274
0.0194
14,264,142
0.3759
0.0423
102,310,714
2.6962
0.013
93,395,541
2.4613
0.0269 3,251,888,399
85.6983
1,020,035
100 3,794,575,998
100
Taxation
This section discusses certain US federal income tax and UK tax
consequences of the ownership of ADSs and ordinary shares
by certain beneficial holders thereof. This discussion applies to
holders who qualify for benefits under the income tax convention
between the US and the UK (the Tax Convention) and are a
resident of the US for the purposes of the Tax Convention and
are not resident or ordinarily resident in the UK for UK tax
purposes at any material time (a US Holder).
US Holders generally will be entitled to benefits under the Tax
Convention if they are:
• the beneficial owner of the ADSs or ordinary shares, as
applicable, and of any dividends that they receive;
• an individual resident or citizen of the US, a US corporation,
or a US partnership, estate, or trust (but only to the extent
the income of the partnership, estate, or trust is subject to
US taxation in the hands of a US resident person); and
• not also a resident of the UK for UK tax purposes.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 187
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Additional information
Other disclosures
Continued
If a US Holder holds ADSs or ordinary shares in connection with
the conduct of business or the performance of personal services
in the UK or otherwise in connection with a branch, agency or
permanent establishment in the UK, then the US Holder will not
be entitled to benefits under the Tax Convention. Special rules,
including a limitation of benefits provision, apply in limited
circumstances to ADSs or ordinary shares owned by an
investment or holding company. This section does not discuss
the treatment of holders described in the preceding two
sentences. This section does not purport to be a comprehensive
description of all of the tax considerations that may be relevant
to any particular investor. National Grid has assumed that
shareholders, including US Holders, are familiar with the tax rules
applicable to investments in securities generally and with any
special rules to which they may be subject. In particular, the
discussion deals only with investors that will beneficially hold
ADSs or ordinary shares as capital assets and does not address
the tax treatment of investors that are subject to special rules,
such as banks, insurance companies, dealers in securities
or currencies, partnerships or other entities classified as
partnerships for US federal income tax purposes, persons that
control (directly or indirectly) 10% or more of our voting stock,
persons that elect mark-to-market treatment, persons that hold
ADSs or ordinary shares as a position in a straddle, conversion
transaction, synthetic security, or other integrated financial
transaction, persons who are liable for the alternative minimum
tax, and persons whose functional currency is not the dollar.
The statements regarding US and UK tax laws and administrative
practices set forth below are based on laws, treaties, judicial
decisions and regulatory interpretations in effect on the date of
this document. These laws and practices are subject to change
without notice, possibly with retrospective effect. In addition, the
US statements set forth below are based on the representations
of The Bank of New York Mellon as depositary (the Depositary).
These statements assume that each obligation provided for in, or
otherwise contemplated by, the deposit agreement entered into
between National Grid Transco plc (now National Grid plc), the
Depositary and the registered holders of ADRs, pursuant to
which ADSs have been issued, dated as of 21 November 1995
and amended and restated as of 1 August 2005, and any related
agreement, will be performed in accordance with its terms.
Beneficial owners of ADSs who are residents or citizens of the
US will be treated as the owners of the underlying ordinary
shares for the purposes of the US Internal Revenue Code.
For the purposes of the Tax Convention, the Estate Tax
Convention and UK tax considerations, we have assumed that
a holder of ADRs will be treated as the owner of the ordinary
shares represented by those ADSs and this section is based
on that assumption. Despite a recent ruling by the First-Tier Tax
Tribunal in the UK that has cast doubt on this view, HM Revenue
& Customs have stated that they will continue to apply their
longstanding practice of treating such an ADR holder as
holding the beneficial interest in the underlying shares. As such,
this is an area of some uncertainty that may be subject to
further developments.
A US Holder should consult their own advisor as to the tax
consequences of the purchase, ownership and disposition of
ADSs or ordinary shares in light of their particular circumstances,
including the effect of any state, local or other national laws.
Taxation of dividends
Under the Tax Convention, the UK is allowed to impose a
15% withholding tax on dividends paid to US shareholders
controlling less than 10% of the voting capital of National Grid.
The UK does not, however, currently impose a withholding tax
on such dividends.
Cash distributions received by a US Holder with respect to their
ADSs or ordinary shares generally will be treated as foreign
source dividend income subject to US federal income taxation as
ordinary income, to the extent paid out of National Grid’s current
or accumulated earnings and profits, as determined under US
federal income tax principles. The dollar amount of dividends
received by certain non corporate US Holders with respect to
ADSs or ordinary shares will generally be subject to taxation at a
the special reduced rate normally applicable to long-term capital
gains, provided National Grid (i) is eligible for the benefits of the
Tax Convention and (ii) was not, in the year prior to the year in
which the dividend was paid, and is not, in the year in which the
dividend is paid, a passive foreign investment company (PFIC).
Based on National Grid’s audited financial statements and
relevant market and shareholder data, National Grid believes that
it was not treated as a PFIC for US federal income tax purposes
with respect to its taxable years ending 31 March 2012 and
2013. In addition, based on its current expectations regarding
the value and nature of its assets, the sources and nature of its
income, and relevant market and shareholder data, National Grid
does not anticipate becoming a PFIC in the foreseeable future.
Dividends paid by National Grid to corporate US Holders will not
be eligible for the dividends received deduction generally allowed
to corporations.
Taxation of capital gains
US Holders will not be liable for UK taxation on any capital gain
realised on the disposal of ADSs or ordinary shares.
Sales or other taxable dispositions of ADSs or ordinary shares
by a US Holder generally will give rise to US source capital gain
or loss equal to the difference between the dollar value of the
amount realised on the disposition and the US Holder’s dollar
basis in the shares or ADSs. Any such capital gain or loss
generally will be long-term capital gain or loss, currently subject
to taxation at reduced rates for non corporate taxpayers, if the
ordinary shares or ADSs were held for more than one year.
The deductibility of capital losses is subject to limitations.
UK stamp duty and stamp duty reserve tax (SDRT)
Transfers of ordinary shares – SDRT at the rate of 0.5% of the
amount of value of the consideration will generally be payable on
any agreement to transfer ordinary shares that is not completed
by the execution of a duly stamped instrument of transfer to the
transferee. Where an instrument of transfer is executed and duly
stamped before the expiry of the period of six years beginning
with the date on which the agreement is made, the SDRT liability
will be cancelled, and, if a claim is made within the specified
period, any SDRT which has been paid will be refunded. SDRT is
due whether or not the agreement or transfer of such chargeable
securities is made or carried out in the UK and whether or not
any party to that agreement or transfer is a UK resident.
Purchases of ordinary shares completed by execution of a stock
transfer form will generally give rise to a liability to UK stamp duty
at the rate of 0.5% (rounded up to the nearest $5) of the amount
or value of the consideration. Paperless transfers under the
188
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Additional Information The offer and listing
Price history
The following table shows the highest and lowest intraday
market prices for our ordinary shares and ADSs for the
periods indicated.
2012/13
2011/12
2010/11*
2009/10
2008/09
2012/13 Q4
Q3
Q2
Q1
2011/12 Q4
Q3
Q2
Q1
April 2013
March 2013
February 2013
January 2013
December 2012
Ordinary share
(pence)
ADS ($)
High
Low
High
Low
770.00
660.50
666.00
685.50
754.00
770.00
724.97
706.13
689.50
660.50
653.50
650.59
639.00
820.50
770.00
735.00
713.00
724.97
627.00
545.50
474.80
511.00
515.00
678.00
679.59
635.56
627.00
605.50
590.00
545.50
581.50
765.00
718.00
678.00
678.50
696.00
58.33
52.18
51.00
56.59
74.89
58.33
58.03
56.72
55.00
51.86
51.53
51.00
52.18
63.78
58.33
55.64
58.00
58.03
49.55
45.80
36.72
38.25
36.64
52.81
54.28
49.55
49.85
46.85
46.49
45.80
46.93
57.86
54.37
52.81
54.37
56.30
* On 20 May 2010, we announced a 2 for 5 rights issue of 990,439,017 ordinary shares
at 355 pence per share
Unresolved SEC staff comments
There are no unresolved staff comments required to be reported.
CREST paperless settlement system will generally be liable to
SDRT at the rate of 0.5%, and not stamp duty. SDRT is generally
the liability of the purchaser and UK stamp duty is usually paid by
the purchaser or transferee.
Transfers of ADSs – No UK stamp duty will be payable on the
acquisition or transfer of existing ADSs or beneficial ownership
of ADSs, provided that any instrument of transfer or written
agreement to transfer is executed outside the UK and remains
at all times outside the UK. An agreement for the transfer of
ADSs in the form of ADRs will not give rise to a liability for SDRT.
A charge to stamp duty or SDRT may arise on the transfer of
ordinary shares to the Depositary or The Bank of New York
Mellon as agent of the Depositary (the Custodian). The rate of
stamp duty or SDRT will generally be 1.5% of the value of the
consideration or, in some circumstances, the value of the
ordinary shares concerned. However, following a recent ruling
by the First-Tier Tax Tribunal in the UK, there is no 1.5% SDRT
charge on the issue of ordinary shares (or, where it is integral to
the raising of new capital, the transfer of ordinary shares) to the
Depositary or the Custodian. The Depositary will generally be
liable for the stamp duty or SDRT. In accordance with the terms
of the Depositary Agreement, the Depositary will charge any tax
payable by the Depositary or the Custodian (or their nominees)
on the deposit of ordinary shares to the party to whom the ADSs
are delivered against such deposits. If the stamp duty is not a
multiple of £5, the duty will be rounded up to the nearest multiple
of £5.
US information reporting and backup withholding
Dividend payments made to US Holders and proceeds paid from
the sale, exchange, redemption or disposal of ADSs or ordinary
shares to US Holders may be subject to information reporting to
the US Internal Revenue Service (IRS). Such payments may be
subject to backup withholding taxes unless the holder (i) is a
corporation or other exempt recipient or (ii) provides a taxpayer
identification number on a properly completed IRS Form W-9
and certifies that no loss of exemption from backup withholding
has occurred.
US Holders should consult their tax advisors regarding these
rules and any other reporting obligations that may apply to the
ownership or disposition of ADSs or ordinary shares, including
reporting requirements related to the holding of certain foreign
financial assets.
UK inheritance tax
An individual who is domiciled in the US for the purposes of the
Estate Tax Convention and who is not a national of the UK for
the purposes of the Estate Tax Convention will generally not be
subject to UK inheritance tax in respect of the ADSs or ordinary
shares on the individual’s death or on a gift of the ADSs or
ordinary shares during the individual’s lifetime, unless the ADSs
or ordinary shares are part of the business property of a
permanent establishment of the individual in the UK or pertain to
a fixed base in the UK of an individual who performs independent
personal services. Special rules apply to ADSs or ordinary
shares held in trust. In the exceptional case where the ADSs or
shares are subject both to UK inheritance tax and to US federal
gift or estate tax, the Estate Tax Convention generally provides
for the tax paid in the UK to be credited against tax paid in
the US.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 189
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Definitions and glossary of terms
Our aim is to use plain English in this Annual Report and Accounts.
However, where necessary, we do use a number of technical terms
and/or abbreviations and we summarise the principal ones below,
together with an explanation of their meanings. The descriptions
below are not formal legal definitions.
A
American Depositary Shares (ADSs)
Securities of National Grid listed on the New York Stock
Exchange, each of which represents five ordinary shares.
They are evidenced by American Depositary Receipts or ADRs.
Annual General Meeting (AGM)
Meeting of shareholders of the Company held each year to
consider ordinary and special business as provided in the Notice
of AGM.
B
Board
The Board of Directors of the Company (for more information
see pages 26 to 27 and 180 to 182).
bps
Basis point (bps) is a unit that is equal to 1/100th of 1% and is
typically used to denote the movement in a percentage based
metric such as interest rates or ROE. A 0.1% change in a
percentage represents 10 basis points.
BritNed
BritNed Development Limited.
C
called up share capital
Shares (common stock) that have been issued and have been
fully paid for.
carrying value
The amount at which an asset or a liability is recorded in the
Group’s statement of financial position and the Company’s
balance sheet.
CF3I
Trifluoroiodomethane (also referred to as trifluoromethyl iodide)
is a gas containing carbon, fluorine and iodine atoms which
is being investigated as a gaseous dielectric medium for high
voltage applications as a potential replacement for SF6, but
with very much lower global warming potential.
circuit
See route length.
the Company, the Group, National Grid, we, our or us
We use the terms ‘the Company’, ‘the Group’, ‘National Grid’, ‘we’,
‘our’ or ‘us’ to refer to either National Grid plc itself or to National
Grid plc and its subsidiaries collectively, depending on context.
consolidated financial statements
Financial statements that include the results and financial
position of the Company and its subsidiaries together as if they
were a single entity.
contingent liabilities
Possible obligations or potential liabilities arising from past events
for which no provision has been recorded, but for which disclosure
in the financial statements is made.
D
DECC
The Department of Energy & Climate Change, the UK Government
ministry responsible for energy and climate change.
decoupling
See revenue decoupling.
deferred tax
For most assets and liabilities, deferred tax is the amount of
tax that will be payable or receivable in respect of that asset or
liability in future tax returns as a result of a difference between
the carrying value for accounting purposes in the statement of
financial position or balance sheet and the value for tax purposes
of the same asset or liability.
Delivery Body
Under the Energy Bill currently being considered by the UK
Parliament, National Grid’s electricity system operator function
would provide independent evidence and analysis to the
UK Government to inform its decisions on the key rules and
parameters to achieve the Government’s policy objectives
under Electricity Market Reform. As proposed, National Grid
would administer the capacity mechanism, including running
the annual capacity auctions, managing the allocation of
contracts for difference to low carbon generators and reporting
to Government annually on performance against the
Government’s delivery plan. Detailed roles and responsibilities
for all market participants, including the Delivery Body, will be
finalised within secondary legislation enacted under the Energy
Act 2013, due to be in force from summer 2014.
derivative
A financial instrument or other contract where the value is linked
to an underlying index, such as exchange rates, interest rates
or commodity prices. In most cases, contracts for the sale or
purchase of commodities that are used to supply customers
or for our own needs are excluded from this definition.
Directors/Executive Directors/Non-executive Directors
The Directors/Executive Directors and Non-executive Directors
of the Company whose names are set out on pages 26 and 27
of this document.
dollars or $
Except as otherwise noted all references to dollars or $ in this
Annual Report and Accounts relate to the US currency.
190
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Additional Information E
earnings per share (EPS)
Profit for the year attributable to equity shareholders of the
parent allocated to each ordinary share.
Electricity Market Reform (EMR)
An energy policy initiative, introduced by the Energy Bill currently
being considered by the UK Parliament, designed to provide
greater financial certainty to investors in low carbon generation
by guaranteeing a price for electricity generated.
employee engagement
A key performance indicator, based on the percentage of
favourable responses to certain indicator questions repeated
in each employee survey, which provides a measure of how
employees think, feel and act in relation to National Grid.
Research shows that a highly engaged workforce leads to
increased productivity and employee retention, therefore we
use employee engagement as a measure of organisational
health in relation to business performance.
equity
In financial statements, the amount of net assets attributable
to shareholders.
Estate Tax Convention
The Estate Tax Convention is the convention between the US
and the UK for the avoidance of double taxation with respect
to estate and gift taxes.
EU
The European Union, being the economic and political union
of 27 member states located in Europe.
Exchange Act
The Securities Exchange Act 1934, as amended.
F
FERC
The US Federal Energy Regulatory Commission.
finance lease
A lease where the asset is treated as if it was owned for the
period of the lease and the obligation to pay future rentals is
treated as if they were borrowings. Also known as a capital lease.
financial year
For National Grid this is an accounting year ending on 31 March.
Also known as a fiscal year.
FRS
A UK Financial Reporting Standard as issued by the UK Financial
Reporting Council (FRC). These apply to the Company’s individual
financial statements on pages 165 to 169, which are prepared in
accordance with UK GAAP.
G
Grain LNG
National Grid Grain LNG Limited.
Great Britain
England, Wales and Scotland.
GW
Gigawatt, being an amount of power equal to 1 billion watts
(109 watts).
H
HMRC
HM Revenue & Customs. The UK tax authority.
HVDC
High voltage, direct current electric power transmission which
uses direct current for the bulk transmission of electrical power,
in contrast with the more common alternating current systems.
I
IAS or IFRS
An International Accounting Standard or International Financial
Reporting Standard, as issued by the International Accounting
Standards Board (IASB). IFRS is also used as the term to
describe international generally accepted accounting principles
as a whole.
individual financial statements
Financial statements of a company on its own, not including its
subsidiaries or joint ventures.
ISO 14001
Specifies the requirements for an environmental management
system and maps out a framework that an organisation can
follow to set up an effective environmental management system.
It can provide assurance to company management and
employees, as well as external stakeholders, that environmental
impact is being measured and improved.
ISO 31000
Published in 2009, it provides a comprehensive set of principles
and generic guidelines for the implementation of good practice
risk management that can be applied across any organisation.
It is not specific to any industry or sector.
J
joint venture
A company or other entity which is controlled jointly with other
parties.
K
KeySpan
KeySpan Corporation and its subsidiaries, acquired by National
Grid on 24 August 2007.
kV
Kilovolt, being an amount of electric force equal to 1,000 volts.
L
Large Combustion Plant Directive (LCPD 2001/80/EC)
An EU directive which requires member states of the EU to
control emissions of acidifying pollutants, particles and ozone
precursors from combustion plants with a rated thermal input
of 50 MW or greater.
Lifetime Allowance
The Lifetime Allowance is an overall ceiling on the amount of UK
tax privileged pension savings that any one individual can draw.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 191
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Definitions and glossary of terms
Continued
LIPA
The Long Island Power Authority.
LNG
Liquefied natural gas, being natural gas that has been
condensed into a liquid form, typically at temperatures at
or below -161°C (-258°F).
lost time injury
An incident arising out of National Grid’s operations which leads
to an injury where the employee or contractor normally has time
off the following day or shift following the incident. It relates
to one specific (acute) identifiable incident which arises as a
result of National Grid’s premises, plant or activities, which
was reported to the supervisor at the time and was subject
to appropriate investigation.
lost time injury frequency rate (IFR)
The number of lost time injuries per 100,000 hours worked in
a 12 month period.
M
MADPU
The Massachusetts Department of Public Utilities.
MW
Megawatt, being an amount of power equal to 1 million watts.
MWh
Megawatt hours, being an amount of energy equivalent to
delivering 1 million watts of power for a period of one hour.
N
National Grid Metering (NGM)
National Grid Metering Limited, National Grid’s UK regulated
metering business.
New England
The term refers to a region within the northeastern US that
includes the states of Connecticut, Maine, Massachusetts,
New Hampshire, Rhode Island and Vermont. National Grid’s
New England operations are primarily in the states of
Massachusetts and Rhode Island.
northeastern US
The northeastern region of the US, comprising the states of
Connecticut, Maine, Massachusetts, New Hampshire, New
Jersey, New York, Pennsylvania, Rhode Island and Vermont.
NYPSC
The New York Public Service Commission.
O
Ofgem
The UK Office of Gas and Electricity Markets, part of the UK
Gas and Electricity Markets Authority (GEMA), which regulates
the energy markets in the UK.
OnStream
Utility Metering Services Limited, an unregulated UK metering
business, sold by National Grid on 24 October 2011.
ordinary shares
Voting shares entitling the holder to part ownership of a
company. Also known as common stock. National Grid’s
ordinary shares have a nominal value of 1117∕43 pence.
P
Personal Lifetime Allowance
The lifetime allowance applicable to individuals who registered
their pre 6 April 2006 UK pension benefits for protection.
price control
The mechanism by which Ofgem sets restrictions on the
amounts of revenue we are allowed to collect from customers in
our UK businesses. The allowed revenues are intended to cover
efficiently incurred operational expenditure, capital expenditure
and financing costs, including a return on equity invested.
R
rate base
The base investment on which the utility is authorised to earn
a cash return. It includes the original cost of facilities, minus
depreciation, an allowance for working capital and other accounts.
rate plan
The term given to the mechanism by which a US utility regulator
sets terms and conditions for utility service including, in particular,
tariffs and rate schedules. The term can mean a multi-year plan
that is approved for a specified period, or an order approving
tariffs and rate schedules that remain in effect until changed as
a result of future regulatory proceedings. Such proceedings can
be commenced through a filing by the utility or on the regulator’s
own initiative.
regulated controllable operating costs
Total operating costs under IFRS less depreciation and certain
regulatory costs where, under our regulatory agreements,
mechanisms are in place to recover such costs in current or
future periods.
regulatory asset value (RAV)
The value ascribed by Ofgem to the capital employed in the
relevant licensed business. It is an estimate of the initial market
value of the regulated asset base at privatisation, plus
subsequent allowed additions at historical cost, less the
deduction of annual regulatory depreciation. Deductions are also
made to reflect the value realised from the disposal of certain
assets that formed part of the regulatory asset base. It is also
indexed to the RPI to allow for the effects of inflation.
return on capital employed (RoCE)
Financial metric expressing a measure of post-tax operating
profit as a percentage of capital (debt and equity) invested in
the business.
return on equity (ROE)
A performance metric measuring returns from the investment
of shareholders’ funds. It is a financial ratio of a measure of
earnings divided by an equity base.
revenue decoupling
Revenue decoupling is the term given to the elimination of the
dependency of a utility’s revenue on the volume of gas or
electricity transported. The purpose of decoupling is to eliminate
the disincentive a utility otherwise has to encourage energy
efficiency programmes.
RIIO
The revised regulatory framework issued by Ofgem which was
implemented in the eight year price controls which started on
1 April 2013.
192
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Additional Information RIPUC
The Rhode Island Public Utilities Commission.
route length
The route length of an electricity transmission line is the
geographical distance from the start tower to the end tower.
In most cases in the UK, and in many cases in the US, the
transmission line consists of a double circuit for additional
reliability. In such cases, the circuit length is twice the
route length.
RPI
The UK retail price index as published by the Office for
National Statistics.
S
Scope 1 emissions
Scope 1 emissions are direct greenhouse gas emissions
that occur from sources that are owned or controlled by the
Company, for example, emissions from combustion in owned
or controlled boilers, furnaces, vehicles, etc.
Scope 2 emissions
Scope 2 emissions are greenhouse gas emissions from the
generation of purchased electricity consumed by the Company.
Purchased electricity is defined as electricity that is purchased
or otherwise brought into the organisational boundary of the
Company. Scope 2 emissions physically occur at the facility
where electricity is generated.
SEC
The US Securities and Exchange Commission, the financial
regulator for companies with registered securities in the US,
including National Grid and certain of its subsidiaries.
SF6
Sulphur hexafluoride, an inorganic, colourless, odourless and
non-flammable greenhouse gas. SF6 is used in the electrical
industry as a gaseous dielectric medium for high voltage circuit
breakers, switchgear and other electrical equipment.
share premium
The difference between the amounts shares are issued for and
the nominal value of those shares.
standard cubic metre
A quantity of gas which at 15°C and atmospheric pressure
(1.013 bar) occupies the volume of 1m3.
stranded cost recoveries
The recovery of historical generation-related costs in the US,
related to generation assets that are no longer owned by us.
subsidiary
A company or other entity that is controlled by National Grid.
swaptions
A swaption gives the buyer, in exchange for an option premium,
the right, but not the obligation, to enter into an interest rate swap
at some specified date in the future. The terms of the swap are
specified on the trade date of the swaption.
T
taxes borne
Those taxes that represent a cost to the Company and which
are reflected in our results.
taxes collected
Those taxes that are generated by our operations but which do
not affect our results; we generate the commercial activity giving
rise to these taxes and then collect and administer them on
behalf of HMRC.
tonne
A unit of mass equal to 1,000 kilogrammes, equivalent to
approximately 2,205 pounds.
tonnes carbon dioxide equivalent (CO2e)
A measure of greenhouse gas emissions in terms of the
equivalent amount of carbon dioxide.
treasury shares
Shares that have been repurchased but not cancelled. These
shares can then be allotted to meet obligations under the
Company’s employee share schemes.
TWh
Terawatt hours, being an amount of energy equivalent to
delivering 1 billion watts of power for a period of 1,000 hours.
U
UK
The United Kingdom, comprising England, Wales, Scotland
and Northern Ireland.
UK Corporate Governance Code (the Code)
Guidance, issued by the Financial Reporting Council in 2010,
on how companies should be governed, applicable to UK listed
companies including National Grid. A new edition of the UK
Corporate Governance Code was published in September 2012
(the new Code).
UK GAAP
Generally accepted accounting principles in the UK. These differ
from IFRS and from US GAAP.
US
The United States of America, its territories and possessions,
any state of the United States and the District of Columbia.
US GAAP
Generally accepted accounting principles in the US. These differ
from IFRS and from UK GAAP.
US state regulators (state utility commissions)
In the US, public utilities’ retail transactions are regulated by state
utility commissions, including the New York Public Service
Commission (NYPSC), the Massachusetts Department of Public
Utilities (MADPU) and the Rhode Island Public Utilities
Commission (RIPUC).
V
vanilla return
Metric used by Ofgem to define the allowed rate of return within
the price control reviews for our UK regulated businesses. Our
calculation uses IFRS business performance operating profit
adjusted for various items to reflect the replacement of certain
IFRS-based accounting treatments with a regulatory-based
treatment. Primarily these items are depreciation, capital costs,
pensions and taxation. The adjusted IFRS operating profit is
divided by the regulatory asset value inflated to mid year to
generate a percentage rate of return.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 193
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Summary consolidated financial information
Financial summary (unaudited)
The financial summary set out below has been derived from the audited consolidated financial statements of National Grid for the
five financial years ended 31 March 2013. It should be read in conjunction with the consolidated financial statements and related
notes, together with the Strategic Review. The information presented below for the years ended 31 March 2009, 2010, 2011, 2012
and 2013 has been prepared under IFRS issued by the IASB and as adopted by the EU(i).
Summary income statement
Revenue (ii)
Operating profit
Before exceptional items, remeasurements and stranded cost recoveries
Exceptional items, remeasurements and stranded cost recoveries
Profit before tax
Before exceptional items, remeasurements and stranded cost recoveries
Exceptional items, remeasurements and stranded cost recoveries
Profit for the year from continuing operations
Profit for the year
Profit for the year attributable to equity shareholders
Before exceptional items, remeasurements and stranded cost recoveries
Exceptional items, remeasurements and stranded cost recoveries
Earnings per share
Basic – continuing operations (pence) (iii)
Diluted – continuing operations (pence) (iii)
Basic (pence) (iii)
Diluted (pence) (iii)
Number of shares – basic (millions) (iv)
Number of shares – diluted (millions) (iv)
Dividends per ordinary share
Paid during the year (pence)
Approved or proposed during the year (pence)
Paid during the year ($)
Approved or proposed during the year ($)
31 March
2013
£m
31 March
2012
£m
31 March
2011
£m
31 March
2010
£m
31 March
2009
£m
14,359
13,832
14,343
14,007
15,687
3,644
110
3,754
2,742
178
2,920
2,296
2,296
2,055
240
2,295
62.6
62.3
62.6
62.3
3,664
3,682
39.84
40.85
0.633
0.632
3,495
44
3,539
2,585
(26)
2,559
2,038
2,038
1,828
208
2,036
55.6
55.4
55.6
55.4
3,659
3,678
37.40
39.28
0.599
0.623
3,600
145
3,745
2,473
151
2,624
2,163
2,163
1,747
412
2,159
61.2
60.9
61.2
60.9
3,525
3,544
37.74
36.37
0.592
0.571
3,121
172
3,293
1,974
219
2,193
1,389
1,389
1,418
(32)
1,386
46.0
45.8
46.0
45.8
3,011
3,024
36.65
38.49
0.579
0.608
2,915
(292)
2,623
1,770
(376)
1,394
922
947
1,259
(315)
944
30.3
30.1
31.1
31.0
3,033
3,050
33.94
35.64
0.523
0.549
194
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Additional Information Summary statement of net assets
Non-current assets
Current assets
Assets of businesses held for sale
Total assets
Current liabilities
Non-current liabilities
Liabilities of businesses held for sale
Total liabilities
Net assets
31 March
2013
£m
31 March
2012
£m
31 March
2011
£m
31 March
2010
£m
31 March
2009
£m
45,129
9,576
–
41,684
5,387
264
39,787
6,323
290
38,488
5,065
–
37,712
6,755
–
54,705
47,335
46,400
43,553
44,467
(7,445)
(6,004)
(6,826)
(6,559)
(7,026)
(37,027)
(31,998)
(30,395)
(32,783)
(33,457)
–
(87)
(110)
–
–
(44,472)
(38,089)
(37,331)
(39,342)
(40,483)
10,233
9,246
9,069
4,211
3,984
Shareholders’ equity
10,228
9,239
9,060
4,199
3,970
Summary cash flow statement
Cash generated from operations
Continuing operations
Discontinued operations
Tax (paid)/received
Net cash inflow from operating activities
Net cash flows used in investing activities
Net cash flows from/(used in) financing activities
Net increase/(decrease) in cash and cash equivalents
4,037
4,487
4,854
4,372
3,564
–
4,037
(287)
3,750
(6,130)
2,715
335
–
4,487
(259)
4,228
(2,371)
(1,900)
(43)
–
4,854
4
4,858
(4,774)
(430)
(346)
–
4,372
144
4,516
(2,332)
(2,212)
(28)
(8)
3,556
(143)
3,413
(1,998)
(877)
538
(i)
Since the implementation of IFRS by the Company, there have been no significant changes in accounting standards, interpretations or policies that have a material
financial impact on the selected financial data.
(ii) Items previously reported for 2009-2010 separately as ‘other operating income’ have been included within revenue.
(iii) Items previously reported for 2009-2012 have been restated to reflect the impact of the bonus element of the rights issue and the additional shares issued as
scrip dividends.
(iv) Number of shares previously reported for 2009-2012 have been restated to reflect the impact of the additional shares issued as scrip dividends.
www.nationalgrid.com
Annual Report and Accounts 2012/13 National Grid plc 195
Strategic ReviewCorporate GovernanceFinancial StatementsAdditional Information Useful information
Financial calendar
The following dates have been announced or are indicative:
5 June 2013
7 June 2013
Ordinary shares go ex-dividend for 2012/13
Record date for 2012/13 final dividend
12 June 2013
Scrip reference price announced
24 July 2013
29 July 2013
21 August 2013
Scrip election date
2013 Annual General Meeting and interim
management statement
2012/13 final dividend paid to qualifying
shareholders
21 November 2013
2013/14 half year results
4 December 2013
Ordinary shares go ex-dividend
6 December 2013
Record date for 2013/14 interim dividend
22 January 2014
2013/14 interim dividend paid to qualifying
shareholders
January/February 2014
Interim management statement
May 2014
2013/14 preliminary results
Dividends
The Directors are recommending a final dividend of 26.36 pence
per ordinary share ($2.0088 per ADS) to be paid on 21 August
2013 to shareholders on the register as at 7 June 2013. Further
details in respect of dividend payments can be found on page
48. If you live outside the UK, you may be able to request that
your dividend payments be converted into your local currency.
Have your dividends paid directly into your bank or
building society account:
• Your dividend reaches your account on the payment day
• It is more secure – cheques do sometimes get lost in the post
• No more trips to the bank
Elect to receive your dividends as additional shares:
• Join our scrip dividend scheme
• No stamp duty or commission to pay
American Depositary Shares
The Company has agreed to amend the deposit agreement
under which the ADS representing its ordinary shares are issued
to allow a fee of up to $0.05 per ADS to be charged for any cash
distribution made to ADS holders, including cash dividends.
Subject to the Form F-6 on which the amended deposit
agreement is filed being declared effective by the SEC,
commencing with the final dividend payment payable on
21 August 2013, ADS holders who receive a cash dividend
will be charged a fee, which will be deducted by the Depositary
from interim and final cash dividends prior to distribution of the
cash dividend.
Electronic communications
To receive an email notifying you as soon as there is new
shareholder information for you to view online, sign up for
electronic communications via the National Grid Share Portal
www. nationalgridshareholders.com and follow the on screen
instructions on the ‘manage your account’ link to change your
communication preferences. It only takes a few minutes to
register, just have your 11 digit Investor Code (IVC)
to hand.
Want more information or help?
Please use the contact details set out on the back cover to find
out more information about your dividend options, for terms
and conditions of any of the services offered or for help with
any other queries.
The National Grid Share Portal is a secure online site where
you can:
• View your holdings and get an indicative value
• View your dividend payment history
• Get copies of your dividend tax vouchers
• Update your address details
• Buy and sell shares
• Register your AGM proxy votes
• Sign up for electronic communications
Share price
The share capital of the Company consists of ordinary shares of
1117⁄43 pence nominal value each and ADSs, which represent five
ordinary shares. The following graph represents the movement
of National Grid’s share price during 2012/13. A graph showing
the total shareholder return over the last five years is available on
page 44.
Share price
US$
70
65
60
55
50
45
40
35
pence
800
750
700
650
600
550
500
450
Apr 2012
Aug 2012
Dec 2012
Mar 2013
Ordinary share price ADS price
Source: Bloomberg
National Grid ordinary shares are listed on the London Stock
Exchange under the symbol NG and the ADSs are listed on the
New York Stock Exchange under the symbol NGG.
Share dealing
Capita Share Dealing Services offer our European Economic
Area resident shareholders a range of quick and easy share
dealing services:
• Buy more shares – £20 flat fee (plus stamp duty)
• Sell all your shares by post – 1 to 150 shares – 10p per share
(maximum £10); 151 shares or more – £15 flat fee
• Donate all your shares free of charge to ShareGift
Visit www.capitadeal.com/nationalgrid or call Capita Share Dealing free
on 0800 022 3374 for details and terms and conditions. This is not a
recommendation to take any action. High street banks may also offer share
dealing services. If you have any doubt as to what action you should take,
please contact an authorised financial advisor.
ShareGift: If you only have a small number of shares
which would cost more for you to sell than they are worth,
you may wish to consider donating them to the charity.
ShareGift is a registered charity (no. 1052686) which specialises
in accepting such shares as donations. For more information
visit www.sharegift.org.uk or contact Capita Registrars.
Individual Savings Accounts (ISAs): Corporate ISAs
for National Grid shares are available from Stocktrade.
For more information, call Stocktrade on 0131 240 0443,
email isa@stocktrade.co.uk or write to Stocktrade,
81 George Street, Edinburgh EH2 3ES.
National Grid plc was incorporated on 11 July 2000. The Company is
registered in England and Wales No. 4031152, with its registered office
at 1-3 Strand, London WC2N 5EH.
The Company’s agent in the United States is National Grid USA,
Attn: General Counsel, 40 Sylvan Road, Waltham, MA 02451.
196
National Grid plc Annual Report and Accounts 2012/13
www.nationalgrid.com
Additional Information Headlines
£3,644m +4%
£3,754m +6%
Adjusted operating profit† 2011/12: £3,495m
Operating profit 2011/12: £3,539m
56.1p +12%
62.6p +13%
Adjusted earnings per share† 2011/12: 50.0p (i)
Earnings per share 2011/12: 55.6p (i)
£23.8bn +7%
$15.0bn +4%
UK regulatory asset value 2011/12: £22.2bn
US rate base 2011/12: $14.5bn
40.85p +4%
11.2%
Ordinary dividends 2011/12: 39.28p
Group return on equity 2011/12: 10.9%
† Excludes the impact of exceptional items, remeasurements and stranded cost recoveries. See page 50 for more information
about these adjusted profit measures
(i) Comparative earnings per share data has been restated for the impact of the scrip dividend issues.
Our financial results are reported in sterling. The average exchange rate, as detailed on page 50 was $1.57 to £1 in 2012/13
compared with the average rate of $1.60 to £1 in 2011/12. Except as otherwise noted, the figures in this Report are stated
in sterling or US dollars. All references to dollars or $ are to the US currency.
Segmental reporting
The performance of our principal businesses
is reported by segment, reflecting the
management responsibilities and economic
characteristics of each activity.
Throughout this Report, the following colours
are used to indicate references to a particular
segment:
UK Transmission
UK Gas Distribution
US Regulated
Activities which do not fall within these
segments are reported separately and
are identified as:
Other activities
Discussion relating to the Company
as a whole is identified as:
Company activities
Important dates
5 June 2013
Ordinary shares go ex-dividend
for 2012/13
24 July 2013
Scrip election date
29 July 2013
Annual General Meeting and
interim management statement
21 August 2013
2012/13 final dividend paid to
qualifying shareholders
For a full search facility, please go to the pdf of our Annual Report and Accounts 2012/13
in the investor relations section of our website and use a word search.
www.nationalgrid.com
Designed and produced by
c o n r a n d e s i g n g r o u p
Printed on Amadeus 100% Recycled Offset paper.
The paper is independently certified according to
the rules of the Forestry Stewardship Council® (FSC).
The manufacturing mill holds the ISO 14001 environmental
certification and the EU Eco-label (EMAS).
Printed by Pureprint Group, ISO 14001, FSC® certified
and CarbonNeutral®.
Want more information or help?
Capita Registrars
For queries about ordinary shares:
The Bank of New York Mellon
For queries about American
Depositary Shares:
0871 402 3344
Calls cost 8p per minute plus
network extras. Lines are
open 8.30am to 5.30pm,
Monday to Friday.
If calling from outside the
UK: +44 (0)20 7098 1198
Textphone: 18001 0871 664 0532
1-800-466-7215
If calling from outside the US:
+1-201-680-6825
Visit the National Grid Share Portal
www.nationalgridshareholders.com
Email: nationalgrid@
capitaregistrars.com
www.mybnymdr.com
Email: shrrelations@
bnymellon.com
National Grid Share Register,
Capita Registrars, The Registry,
34 Beckenham Road,
Beckenham, Kent BR3 4TU
The Bank of New York Mellon,
Depositary Receipts,
PO Box 43006, Providence,
RI 02940-3006
Further information about National Grid
including share price and interactive
tools can be found on our website:
www.nationalgrid.com
Have you received unsolicited
investment advice?
Shareholders are advised to be wary
of any unsolicited advice or offers,
whether over the telephone, through
the post or by email. If you receive any
such unsolicited communication please
check the company or person
contacting you is properly authorised
by the FCA before getting involved.
You can check at www.fca.org.uk/
consumers/protect-yourself and can
report calls from unauthorised firms to
the FCA by calling 0800 111 6768.
A
n
n
u
a
l
R
e
p
o
r
t
a
n
d
A
c
c
o
u
n
t
s
2
0
1
2
/
1
3
Cautionary Statement
This document comprises the Annual
Report and Accounts for the year ending
31 March 2013 for National Grid and its
subsidiaries. It contains the Directors’
Report and Financial Statements,
together with the Independent Auditors’
Report thereon, as required by the
Companies Act 2006. The Directors’
Report, comprising pages 06 to 91
and 170 to 189, has been drawn up in
accordance with the requirements of
English law, and liability in respect thereof
is also governed by English law. In
particular, the liability of the Directors for
these reports is solely to National Grid.
This document contains certain
statements that are neither reported
financial results nor other historical
information. These statements are
forward-looking statements within the
meaning of Section 27A of the Securities
Act of 1933, as amended, and Section
21E of the Securities Exchange Act of
1934, as amended. These statements
include information with respect to
our financial condition, our results of
operations and businesses, strategy,
plans and objectives. Words such as
‘anticipates’, ‘expects’, ‘should’, ‘intends’,
‘plans’, ‘believes’, ‘outlook’, ‘seeks’,
‘estimates’, ‘targets’, ‘may’, ‘will’,
‘continue’, ‘project’ and similar
expressions, as well as statements in
the future tense, identify forward-looking
statements. These forward-looking
statements are not guarantees of our
future performance and are subject to
assumptions, risks and uncertainties that
could cause actual future results to differ
materially from those expressed in or
implied by such forward-looking
statements. Many of these assumptions,
risks and uncertainties relate to factors
that are beyond our ability to control or
estimate precisely, such as changes in
laws or regulations, announcements from
and decisions by governmental bodies or
regulators (including the timeliness of
consents for construction projects);
breaches of, or changes in,
environmental, climate change and health
and safety laws or regulations, including
breaches arising from the potentially
harmful nature of our activities; network
failure or interruption (and our actual or
perceived response thereto), the inability
to carry out critical non network
operations and damage to infrastructure,
due to adverse weather conditions
including the impact of Superstorm Sandy
and other major storms as well as the
results of climate change or due to
unauthorised access to or deliberate
breaches of our IT systems or otherwise;
performance against regulatory targets
and standards and against our peers with
the aim of delivering stakeholder
expectations regarding costs and
efficiency savings, including those related
to investment programmes and internal
transformation projects (including the US
foundation programme); and customers
and counterparties failing to perform their
obligations to the Company. Other factors
that could cause actual results to differ
materially from those described in this
document include fluctuations in
exchange rates, interest rates and
commodity price indices; restrictions and
conditions (including filing requirements)
in our borrowing and debt arrangements,
funding costs and access to financing;
regulatory requirements for us to maintain
financial resources in certain parts of our
business and restrictions on some
subsidiaries’ transactions such as paying
dividends, lending or levying charges;
inflation; the delayed timing of recoveries
and payments in our regulated
businesses and whether aspects of our
activities are contestable; the funding
requirements and performance of our
pension schemes and other post-
retirement benefit schemes; the loss
of key personnel or the ability to attract,
train or retain qualified personnel and
any significant disputes arising with
our employees or the breach of laws
or regulations by our employees; and
incorrect or unforeseen assumptions or
conclusions (including financial and tax
impacts and other unanticipated effects)
relating to business development activity,
including assumptions in connection with
joint ventures.
For further details regarding these and
other assumptions, risks and uncertainties
that may affect National Grid, please read
the Strategic Review section including the
‘Risk factors’ on pages 176 to 178 of this
document. In addition, new factors
emerge from time to time and we cannot
assess the potential impact of any such
factor on our activities or the extent to
which any factor, or combination of
factors, may cause actual future results
to differ materially from those contained
in any forward-looking statement. Except
as may be required by law or regulation,
the Company undertakes no obligation
to update any of its forward-looking
statements, which speak only as of the
date of this document.
The contents of any website references
in this document do not form part of
this document.
Annual Report and Accounts 2012/13
National Grid plc
Trusted to connect