National Grid Annual Report 2016

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FY2016 Annual Report · National Grid

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Annual Report
and Accounts 2015/16

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National Grid plc
1–3 Strand
London WC2N 5EH
United Kingdom

www.nationalgrid.com

Key highlights
2015/16

Information about our reporting
Our financial results are reported in sterling.
We convert our US business results at
the average exchange rate during the year,
which for 2015/16 was $1.47 to £1 (2014/15
$1.58 to £1).

We use adjusted profit measures which
exclude the impact of exceptional items
and remeasurements. These are used by
management to assess the underlying
performance of the business. Reconciliations
to statutory financial information are shown
on page 196.

Online report
The PDF of our Annual Report and Accounts
2015/16 includes a full search facility. You
can find the document by visiting the investor
relations section at www.nationalgrid.com
and using a word search.

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

Financial highlights

Adjusted operating profit

£4,096m
+6%

2014/15: £3,863m

Operating profit

£4,085m
+8%

2014/15: £3,780m

Operational highlights

Capital expenditure

£3,893m
+12%

2014/15: £3,470m

Greenhouse gas emissions
(million tonnes carbon dioxide equivalent)

7.3
+0%

2014/15: 7.3

Adjusted earnings per share

63.5p
+10%

2014/15: 57.6p*

Earnings per share

69.0p
+30%

2014/15: 53.2p*

Group safety performance

0.10 IFR
0.03 improvement

2014/15: 0.13 IFR

Employee engagement score

76%
+1%

2014/15: 75%

* Comparative earnings per share (EPS) data has been restated for

the impact of scrip dividend issues

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Contents

National Grid Annual Report and Accounts 2015/16

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

Engage our people

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

Stimulate innovation
Promote new ideas to work more
efficiently and effectively.

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

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

Drive growth
Grow our core businesses
and develop future new business
opportunities.

Strategic Report

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

Corporate Governance

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

Financial Statements

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

Additional Information

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

At a glance
Chairman’s statement
Chief Executive’s review
Our operating environment
What we do
Our business model
Our vision and strategy
Our KPIs
Financial review
Internal control and risk management
Viability statement
Principal operations
Our people

Corporate Governance contents
Directors’ Report and other disclosures
Directors’ Remuneration Report

Financial Statements contents
Introduction to the Financial Statements
Statement of Directors’ responsibilities
Independent auditors’ report
Report of Independent Registered
Public Accounting Firm

02
04
06
08
10
14
16
18
22
26
30
31
44

46
67
68

82
83
84
85

Additional Information contents
Definitions and glossary of terms
Want more information or help?
Cautionary statement

174
203
207
208

We use a number of technical terms
and abbreviations within this document.
For brevity, we do not define terms or provide
explanations every time they are used; please
refer to the glossary for this information
as well as an important notice in relation
to forward-looking statements with our
cautionary statement.

Contents

National Grid Annual Report and Accounts 2015/16

Adjusted Group operating proﬁt (%)

At a glance

1. UK Electricity Transmission
2. UK Gas Transmission
3. UK Gas Distribution
4. US Regulated
5. Other activities

29
12
21
29
9

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

UK Electricity Transmission
We own and operate the electricity
transmission network in England and Wales,
with day-to-day responsibility for balancing
supply and demand. We operate but do
not own the Scottish networks. Our networks
comprise approximately 7,200 kilometres
(4,470 miles) of overhead line, 1,500 kilometres
(932 miles) of underground cable and
338 substations.

UK Gas Transmission
We own and operate the gas national
transmission system in Great Britain, with
day-to-day responsibility for balancing
supply and demand. Our network comprises
approximately 7,660 kilometres (4,760 miles)
of high pressure pipe and 24 compressor
stations. In 2015/16, the gas throughput
across the system was more than 80 billion
cubic metres.

Adjusted operating profit

£4,096m

2014/15: £3,863m

Capital expenditure

£3,893m

2014/15: £3,470m

Adjusted operating profit

£1,173m

2014/15: £1,237m

Capital expenditure

£1,084m

2014/15: £1,074m

Adjusted operating profit

£486m

2014/15: £437m

Capital expenditure

£186m

2014/15: £184m

UK regulated return on equity (RoE) %

15/16

14/15

13/14

12/13

11/12

13.3
13.7

12.7

13.6

13.0

National Grid Annual Report and Accounts 2015/16

Strategic Report

UK Gas Distribution
We own and operate four gas distribution
networks comprising approximately 131,000
kilometres (81,400 miles) of pipeline. We
transport gas from the national transmission
system to around 10.9 million consumers
on behalf of 39 shippers.

Adjusted operating profit

£878m

2014/15: £826m

Capital expenditure

£549m

2014/15: £498m

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

Adjusted operating profit

£374m

2014/15: £199m

Capital expenditure

£218m

2014/15: £213m

US Regulated
Electricity: We jointly own and operate
transmission facilities across upstate New York,
Massachusetts, New Hampshire, Rhode Island
and Vermont. We own and operate electricity
distribution networks in upstate New York,
Massachusetts and Rhode Island. The assets
we operate include 174 kilometres (108 miles)
of underground cable, 491 transmission
substations and 688 distribution substations.

Gas: We own and operate gas distribution
networks across the northeastern US, located
in upstate New York, New York City, Long
Island, Massachusetts and Rhode Island.
We forecast, plan for and procure around
16 billion standard cubic metres of gas
each year.

Adjusted operating profit

£1,185m

2014/15: £1,164m

Capital expenditure

£1,856m

2014/15: £1,501m

US Regulated RoE
(calculated on a calendar year) %

15/16

14/15

13/14

12/13

11/12

8.0
8.4

9.0

9.2

8.8

At a glance

National Grid Annual Report and Accounts 2015/16Strategic ReportChairman’s statement

Balancing the three elements of the energy trilemma – security of supply,
the cost of energy and environmental sustainability – continues to contribute
towards a dynamic environment in the energy industry.

As we continue to invest in the future
performance of our business, we are striving
to meet the challenges of the energy trilemma.
For this year’s Annual Report, we have
described the challenge in more detail,
highlighting developments during 2015/16
and our response. You can read more about
this on pages 8–9.

As part of our response, we need a strong
leadership team that combines a deep
knowledge of the industry with fresh insight.
Over the past year we have had a number
of changes to the Company’s leadership,
which I believe have secured continuity, while
complementing the strong range of skills and
experience we need for the challenges and
opportunities ahead.

In November, we announced that Steve
Holliday had informed the Board that he
wished to retire as CEO and leave the
Company in 2016. Steve stepped down as
CEO at the end of March and was succeeded
by John Pettigrew, who was previously
Executive Director of our UK operations.

Steve, who will remain on the Board until
22 July to support John with the transition,
has made a significant contribution to the
energy sector and National Grid. Under
his leadership the Company has delivered
excellent returns for shareholders, helping
establish National Grid’s place as one of
the world’s leading utilities.

Throughout his tenure as CEO, Steve has
remained committed to our people, our
customers and the communities we serve.
This commitment has included leading the
drive for greater levels of safety, as well as
playing a leading role in the debate on creating
employment opportunities for young people
– championing the role businesses can play
in providing good careers advice and
encouraging the growth of STEM education
and engineering.

John’s appointment followed a very thorough
and rigorous selection process, carried out by
the Nominations Committee. The Committee,
and subsequently the Board, was unanimous
in its support for John, given his experience
covering our UK and US operations. He
was the architect of our strategy for delivery
and performance under the UK regulatory
regime, RIIO. He also played a pivotal role in
introducing improvements and demonstrating
strong leadership within both the US Electricity
Transmission and Distribution businesses.

“ Being responsible and
sustainable is central
to both what we do
and how we do it”

Responsible business
www.nationalgrid.com/responsibility

Our KPIs
pages 18–21

National Grid Annual Report and Accounts 2015/16

Strategic Report

In focus

The Board is proposing
a recommended full-year
dividend of

43.34p

Corporate Governance
pages 46–81

We will also be welcoming Nicola Shaw
onto the Board as Executive Director, UK
from 1 July 2016. Apart from the appointment
of Dean Seavers on 1 April 2015, as we
described in last year’s Annual Report and
Accounts, there have been no other changes
to the Board composition over the past year.

John and Nicola’s appointments highlight
the importance of succession planning and
this will remain an important area of focus for
the Nominations Committee and the Board.
Effective succession planning for both
Executive and Non-executive Director positions
helps make sure we have the right mix of
skills and experience to manage change
as the Company evolves.

Viability statement
During 2015/16 the Board reviewed and
approved the Company’s principal risks.
This played an important part in the Board’s
approval of the new viability statement
required by the 2014 UK Corporate
Governance Code. You can read more
about our viability statement on page 30.

Our UK Gas Distribution business
The Board regularly reviews the composition
and balance of the Company’s portfolio.
As part of this, we have begun a process
for the potential sale of a majority stake in
our UK Gas Distribution business.

We believe that the Company can deliver
best value to shareholders through
maintaining a portfolio of businesses with
strong operational performance, alongside
annual asset growth of around 5–7%, based
on a long-term assumption of 3% in respect
of UK RPI. The sale of a majority stake in our
UK Gas Distribution business is expected to
increase this growth rate towards the upper
end of the range.

Following completion of a sale, the Board
expects to return substantially all of the net
proceeds to shareholders. We also expect
to maintain the strong balance sheet that
allows the Group to continue to fund its
investment programme. The process is
likely to be completed in early 2017.

Dividend
Our dividend policy aims to grow the ordinary
dividend at least in line with the rate of RPI
inflation each year. Accordingly, the Board
has recommended an increase in the
final dividend to 28.34 pence per ordinary
share ($2.0445 per American Depositary

Share). If approved, this will bring the full-year
dividend to 43.34 pence per ordinary share
($3.1768 per American Depositary Share),
an increase of 1.1% over the 42.87 pence
per ordinary share in respect of the financial
year ended 31 March 2015.

Responsible business
At the start of 2016, the United Nation’s
17 goals to ‘transform our world’ officially
came into force. The Sustainable Development
Goals call on all countries to promote
prosperity while protecting the planet.
Business has an important role to play
in helping achieve these goals. By being
responsible and sustainable we can all
make a positive difference to people’s
lives and to our planet.

At National Grid, being responsible and
sustainable is central to both what we do
and how we do it. In the UK we are now an
accredited Living Wage employer. We have
come to the end of our two-year employee
chosen charity partnership with Macmillan
Cancer Support. I am very pleased to say
that our UK employees have raised more than
£600,000 and this money has been used
by Macmillan to provide fuel grants for more
than 3,000 people living with or recovering
from cancer. I am looking forward to seeing
which charity our employees choose next
for us to support.

In the US, our energy efficiency programmes
are making a real difference in helping our
customers reduce their energy use. The
American Council for an Energy-Efficient
Economy (ACEEE) scored all three states
in which we operate among the top 10 for
energy efficiency.

As you can read on page 18, we have added
new KPIs to our reporting, so we can more
fully reflect the issues that really matter to
the Company and our stakeholders. For our
2015/16 Annual Report, we have included
KPIs for our community engagement and for
the work we do in support of education and
skills. Both of these issues are important to us.
We want to see the communities in which
we operate thrive, and we want to see more
young people studying STEM subjects
because there are not enough young people
coming through into engineering.

You can find more information about our
approach to being a responsible business
on our website.

We know there are areas where we can
improve. As John describes in his CEO review,
we did not meet some of our customer
satisfaction targets, and we must continue
to build on our safety performance.

Looking ahead
We support the work that Ofgem is
undertaking to explore the introduction of
onshore competition. However, we believe
that competition should only be taken forward
where it is in the best interests of consumers.

As the energy market continues to evolve,
the role of the GB System Operator (SO) has
also been a matter of debate with both Ofgem
and DECC and we are currently in detailed
discussion on what greater independence
for the SO means in practice. We recognise
the need to continue strengthening the
management of potential conflicts of interest
between our Transmission Operator (TO)
and SO roles, but do not believe that creating
an independent SO is in the interests of
consumers, given the need to focus on
security of supply.

Due to the nature of our business, we recognise
that our critical national infrastructure systems
are a potential target for cyber threats. We
will continue to invest in strategies that aim to
protect our business in the UK and US, and
which keep pace with the increasing scale
and sophistication of threats.

We also need to continue raising awareness
of cyber security across the Company,
addressing our attitudes and behaviour
towards it as an issue, making security
breaches less likely to happen.

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

Sir Peter Gershon
Chairman

Chairman’s statement

National Grid Annual Report and Accounts 2015/16Strategic Report
Chief Executive’s review

It’s an exciting time to be part of the energy industry, and I’m looking forward
to working with my leadership team on the opportunities that lie ahead.

I firmly believe that through a high performance
culture we will continue to find better ways of
serving our customers – setting expectations,
being honest about what we can deliver,
then consistently delivering on our promises.
However, customer needs are evolving with
much greater engagement, awareness,
and a desire to manage their energy use.

That’s why we are developing the way we
think and work at National Grid – improving
our end-to-end processes, removing waste
and focusing on the things that create value
for our customers. We have done more
work during the year to develop this high
performance culture and it will remain
an important part of how we develop as
a Company.

Our employees continue to show their
commitment to the communities we serve.
Our UK and US businesses have delivered
over 18,000 interactions with young people,
encouraging the development of the skills
and capabilities needed to gain meaningful
employment. Overall, we invest time and
resources equivalent to a value over £14 million
each year in the communities where we work.

Our UK business
As Sir Peter describes, we have begun a
process for the potential sale of a majority
stake in our UK Gas Distribution business.
We have been working on how we separate
Gas Distribution from National Grid, so we can
create a stand-alone business that is ready for
sale. We want to make sure it has the people,
assets, systems and technology it needs to
be successful in the future.

In the UK, where there are continuing
concerns about electricity capacity margins,
we contracted additional balancing services
of 2.4 GW for the winter period to be available
to help manage periods of peak demand.

This includes 133 MW from demand side
balancing reserve arrangements, including
businesses that signed up for reducing
demand at peak periods if called on –
for example, by turning off air conditioning
for a period – in return for payment.

We have also launched the Power Responsive
programme, which is designed to help
growth in DSR. You can read more about
this on pages 34 and 35.

I’m delighted to have been asked by the Board
to take over as CEO of National Grid and
lead the Company into its next chapter.

I would like to thank Ian Galloway for his
tremendous support as UK Chief Operating
Officer while we were seeking to make an
appointment to the UK Executive Director role.

Having joined the Company 25 years ago,
as a graduate, I’ve been fortunate that the
opportunities and challenges I’ve had from
moving around all parts of the organisation,
in both the UK and US, have never failed to
motivate and inspire me – both personally
and professionally.

I’ve also been fortunate to have worked
closely with Steve Holliday over the past ten
years. Under Steve’s leadership, the Company
has transformed its performance and culture,
helping place National Grid at the heart of the
energy industry. He leaves a great legacy for
us to build on.

I now look forward to continuing the great
work we are doing with our customers,
shareholders, partners and employees to
meet the challenges and opportunities of
the changing UK and US energy landscapes.

On 1 July, Nicola Shaw joins National Grid
as Executive Director for our UK business.
Nicola joins us from High Speed 1, where
she was CEO for the last five years, managing
and maintaining the UK’s high-speed railway
infrastructure. I very much look forward to
working with her when she joins our business.

Our performance during 2015/16
Our business has delivered a strong
performance during 2015/16.

In the UK, we have had our safest year ever,
while in the US our performance continues to
improve – we have seen fewer injuries and had
fewer people taking time off due to an injury
than ever before. However, we want to build
on this performance and further reduce risks.
We will focus on the causes of incidents and
find more opportunities to learn from them
and share best practice.

Reliability across our networks has remained
very strong throughout the year. In the US, our
electricity distribution system delivered solid
performance with continued recognition of
our storm response processes. In the UK,
despite the ongoing concerns over tightening
electricity margins, our SO business has
managed the challenges extremely well.

Our commitment to our customers is
critical to our future success. In the UK, we
have exceeded our two electricity and gas
transmission customer satisfaction targets.
In the US, we did not meet our targets due
to customer concerns about higher than
normal winter bills.

National Grid Annual Report and Accounts 2015/16

Strategic Report

“ I look forward to continuing
the great work we are
doing with our customers,
shareholders, partners
and employees”

In focus

Employee
engagement score

76%

(2014/15: 75%)

Our KPIs
pages 18–21

Principal operations
pages 31–43

On 12 May 2016, Ofgem announced a
mid-term review. As expected, the scope of
this review is narrow with no changes to key
financial parameters. We welcome Ofgem’s
continued commitment to the clarity and
certainty offered by the eight-year RIIO
framework. Ofgem will run a consultation
process this summer, with any changes
to be implemented in April next year.

In addition, the Company has been working
with DECC and Ofgem to consider how to
evolve the current SO model, to make it more
independent, while remaining cost effective.
In doing so, it is vital that there is no disruption
to the pivotal role we play as SO in balancing
the network.

Our US business
America’s gas and electricity networks, most
of which were originally constructed during the
nation’s ambitious post-World War II building
boom, have served us well over the last
half-century.

But times have changed. We need to advance
the country’s natural gas and electricity
infrastructure beyond its 20th century
limitations, by creating a more customer-
centric, resilient, agile, efficient and
environmentally sound energy network.

We call our approach to this Connect21,
and you can read more about our work to
support it on pages 38–41. For example,
we’ve created our New Energy Solutions
team, which is looking at how we promote
cleaner energy, improving efficiency,
affordability, and choice for customers
by delivering state-mandated initiatives.

In order to continue investing in our networks
and improving our service to customers,
we filed three rate cases in 2015 – one
in Massachusetts and two in downstate
New York. These three proposals are
undergoing a thorough review process
by the regulators in each state.

Also during 2015/16, we backed the
Environmental Protection Agency’s (EPA)
proposed Carbon Pollution Standards for
New and Existing Power Plants (known
as the Clean Power Plan). As we and other
organisations have requested, the EPA’s
final Plan provides states with compliance
flexibility and makes sure that early emissions
reductions via investments in renewable
resources and energy efficiency strategies
are counted.

Our people
The initiatives and achievements I’ve
described are testament to the hard work
of our people. I believe that developing the
skills and capabilities of our employees is
crucial to our success, so I’m really pleased
that we delivered more than 154,000 days
of technical, safety, leadership and personal
effectiveness training across our global
workforce during 2015/16.

I was also delighted to see that in our most
recent employee engagement survey we
achieved an engagement score of 76% –
our highest since we started conducting
Group-wide surveys of our people.

I would like to thank all my colleagues at
National Grid for their contribution and
ongoing commitment to our business.

Priorities for the year ahead
Maximising value from our core businesses
and delivering safe, reliable networks will
continue to be our top priorities. In addition,
in 2016/17 we are focused on completing
the sale of a majority stake in our UK Gas
Distribution business and will continue to file
for new rates to support our US business.

Longer-term priorities
Customer first
We must be close to our customers, so we
can respond to their changing needs and
deliver an outstanding service. As customer
requirements evolve, so must National Grid.
This will bring further opportunities to grow
and drive value.

Performance optimisation
Everyone in our Company should see
performance optimisation as part of the day
job – constantly working efficiently and doing
things better. If we are to succeed, we must
maintain and further strengthen the Group’s
high performance culture.

Growth
We have strong growth potential and
see opportunities in all our regions and
businesses. We expect to sustain a high level
of investment in our regulated business in the
UK and US as well as exploring new business
opportunities over the medium term. We will,
however, only invest in projects that meet our
strict investment criteria and represent the
best value for shareholders.

Evolve for the future
With the growing rate of renewables, distributed
generation and, over time, energy storage, our
industry is changing. We need to make sure
we are at the forefront of this, continuing our
involvement in industry discussions so we can
keep abreast of the changes, and make sure
we evolve for the future.

John Pettigrew
Chief Executive

Chief Executive’s review

National Grid Annual Report and Accounts 2015/16Strategic ReportThe cost of energy
In Saratoga, New York, we have
supported customer Quad Graphics
with an energy efficiency incentive
offer of $1,095,000. Our support is
helping achieve significant energy
savings while boosting productivity.

Read more on page 36.

Our operating environment

Th e c o s t of ener
S y s t e m affordabilit

R
e
d
u

S
u

ur impa c t

bility

b
a
i
el

p
p
u

Ener g y s

u pply r
Se c u r it y of s

Our operating environment is shaped by the ‘trilemma’,
which has become the standard way to assess energy
systems, as it simply articulates the three distinct objectives
that need to be met in providing energy to consumers,
but which are often in tension.

Regulatory changes are a response to choices that
governments make in seeking to appropriately balance
these often conflicting objectives.

National Grid Annual Report and Accounts 2015/16

Strategic Report

Commentary

Developments

Our response

The cost of energy

Security of supply

Sustainability

The cost of the energy we use is an
issue for consumers, industry, energy
providers, regulators and governments.

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

The energy system is in a phase of
transition from high to low carbon.
Coal plants are closing down and
being replaced with nuclear,
renewables and gas.

During the transition, electricity
margins need to be monitored and
actively managed as we move to a
generation mix with greater volumes
of intermittent generation.

The UK Competition and Markets
Authority has concluded its
investigation into the energy market
and set out numerous remedies,
including proposals to address
locational pricing on the electricity
transmission network.

In May 2016, Ofgem stated that it
will undertake a mid-period review of
the RIIO outputs for our transmission
businesses.

In the US, consumers have
experienced rising costs for energy
over the past three winters. Regulators
are seeking to encourage investment
in infrastructure and new technology
to bring down costs and help
consumers manage their energy use.

UK response
We are investing up to £16 billion over
the eight years to 2021 to make sure
Britain’s energy system is fit and ready
to support a low-carbon economy.
Despite this significant increase in
investment, our network costs will
remain flat in real terms over the
coming years.

All network costs are heavily scrutinised
through the UK energy regulator
Ofgem and are the only part of
consumers’ bills that are regulated.
Ofgem’s incentives encourage
innovation, so if we are more efficient,
consumers share the benefits.

US response
Improving the customer experience
and helping ratepayers manage their
energy costs is a critical component
of our business operations. To help
reduce New England’s energy costs,
we are partnering with the developer
of one major proposed regional
pipeline expansion project to improve
transport capacity, upgrade existing
facilities, and enhance market area
storage assets.

Energy security is the UK
Government’s number one priority
on energy. It is reviewing the capacity
market and incentives so that market
arrangements bring forward new
generation of all technologies at the
right time – so that new generation
capacity is built. The Government
also signed an agreement for
a new nuclear power station at
Hinkley Point.

In the US, regulators are seeking
investment in infrastructure to
improve the security and resilience
of energy networks while also
decarbonising those networks.

UK response
We are supporting the UK
Government by providing analysis
through our role as delivery body
for Electricity Market Reform (EMR).

We have put in place new products
to ensure that the SO has the right
tools to maintain supplies over winter.
We are developing DSR products
that reduce reliance on traditional
generation sources.

We have also started construction
on two new interconnectors
(see page 43).

US response
In addition to supporting new
investments in gas and electricity
infrastructure projects, we have
submitted grid modernisation
proposals that aim to improve the
region’s reliability, sustainability
and affordability of its energy supply
and services. We have filed rate
cases in Massachusetts and
New York proposing to update
our distribution rates.

Evidence shows our climate is
changing because of the emission
of greenhouse gases resulting from
human activity. The bulk of emissions
derive from the demand for energy
for power, heating and transport.

Negotiations for a new international
agreement on climate change
concluded in Paris at the 21st session
of the Conference of Parties (COP21)
in December 2015. A commitment
to have clear goals and a system
of governance and review were
put in place.

The published advice of the Climate
Change Committee is that the UK’s
fifth carbon budget should be a target
of 57% reduction on 1990 levels
between 2028 and 2032. Legislation
is expected to be proposed in
summer 2016.

The US EPA’s Clean Power Plan sets
standards for power plants and
agrees state level targets for
reductions in carbon emissions.

Group response
Reducing greenhouse gas emissions
forms part of the Company’s KPIs
(see page 21).

UK response
We have facilitated the connection
of 4.5 GW of solar PV generation at
the distribution network level, working
with industry to remove barriers to
entry and find solutions to network
operability issues.

We have set out our vision for the
Future of Gas, exploring opportunities
to bring forward bio-substitute natural
gas and compressed natural gas
vehicle fuels.

US response
We continue to support the EPA’s
Clean Power Plan, the Northeast’s
cap-and-trade scheme of the
Regional Greenhouse Gas Initiative,
and other state-level initiatives. We
also support technological partners
and innovative tools, such as energy
storage, electric transportation and
distributed generation, which can
help meet sustainability and energy
diversity objectives.

Our operating environment

National Grid Annual Report and Accounts 2015/16Strategic ReportWhat we do

Electricity The electricity industry connects generation sources
to homes and businesses through transmission and distribution
networks. Companies that pay to use transmission networks
buy electricity from generators and sell it to consumers.

1
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
7.9 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.

2
Interconnectors
Transmission grids are often interconnected
so that energy can flow from one country
or region 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. We own part of
the interconnectors with France and the
Netherlands. We are also now entering the
construction phase for two new interconnectors,
between the UK and Belgium and the UK
and Norway. We are continuing to work on
developing additional interconnector projects,
which we believe will deliver significant benefits
to consumers. These include opportunities
for interconnection with Iceland, Denmark
and a further link with France.

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 interconnector
through wholesale markets and bilateral
contracts.

3
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.
We are also working in a joint venture with
Scottish Power Transmission to construct
an interconnector to reinforce the GB
transmission system between Scotland
and England and Wales.

In the US, we jointly own and operate
transmission facilities spanning upstate
New York, Massachusetts, New Hampshire,
Rhode Island and Vermont.

4
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 3.5 million customers in upstate
New York, Massachusetts and Rhode Island.

5
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 our customers in the US can select a
competitive supplier for the supply component
of electricity utility services. 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.

In focus

Our business model
pages 14–15

Real-time balancing
Through our Electricity Network
Control Centre we balance the UK’s
energy needs in real time. Read more
about this on pages 34–35.

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 are
SO 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 SO, 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.

In the US, similar services are
provided by independent system
operators.

National Grid Annual Report and Accounts 2015/16

Strategic Report

What we do – Electricity

3.8 GW
Generation
produced
in the US

260 km
Approximate
length of BritNed
interconnector

Interconnectors

Generation

99.999998%
Electricity transmission
reliability in England
and Wales

Transmission

27.5 TWh
Amount of electricity
we forecast, plan for and
procure annually across
three states in the US

Distribution

3.5 million
US electricity
customers

Supply

What we do – Electricity

National Grid Annual Report and Accounts 2015/16Strategic ReportWhat we do – Gas

7,660 km
of high pressure
pipeline in the
UK

Transmission

Supply

3.6 million
US gas customers

Distribution

24,341
New gas heating
customers in
the US
10.9 million
Customers
serviced in the UK

31%
Approximate
percentage of
UK gas from
LNG imports

Production and importation

National Grid Annual Report and Accounts 2015/16

Strategic Report

In focus

Our business model
pages 14–15

Biomethane milestone
We connected the UK’s first 100%
renewable biomethane HGV filling
station in Leyland, Lancashire
(see page 37).

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.

1
Production and importation
We do not produce gas in either the UK or
the US. Gas used in the UK is mainly sourced
from gas fields in the North and Irish seas,
piped from Europe and imported as LNG.

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. Importers bring LNG from the
Middle East, the Americas and other places.

Gas used in the US is produced mainly
in North America. We import LNG from
a number of countries.

In the UK, we own and operate Grain LNG,
an importation terminal and storage facility
at the Isle of Grain in Kent, which charges
customers under long-term contracts for
various services. These include access to
our importation terminal, storage facilities
and capacity rights.

In the US, we own and operate LNG storage
and vaporisation facilities, 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.

2
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 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 the Federal Energy
Regulatory Commission (FERC).

3
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 gas distribution
networks in the UK, four of which are owned
by National Grid. 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 networks deliver gas to 10.9 million
consumers in the UK and 3.6 million
customers in the US.

4
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 its transportation.
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.

What we do – Gas

System operator
As SO we are responsible for the
high pressure gas NTS in Great
Britain. We have responsibility for the
residual balancing activities on the
NTS and for keeping the physical
system within safe operating limits.

Our price control, set by Ofgem,
includes incentives that aim to
maintain and improve our daily
operational efficiency and are subject
to renegotiation at set intervals.

National Grid Annual Report and Accounts 2015/16Strategic ReportOur value proposition

We are a long-term, asset-based
business. Our operations are
regulated, which means we
create value for our stakeholders
through predictable revenue
streams and cash flows.

These cash flows are then
reinvested to provide future
growth, or returned to
shareholders.

Our business model

How we generate long-term value

Our business

Our strategy is to be a recognised leader
in the development and operation of safe,
reliable and sustainable energy infrastructure,
to meet the needs of our customers and
communities and to generate value for
our investors.

We own and operate gas and electricity
transmission and distribution infrastructure
in the UK and US. Our principal operations are:

• UK Electricity Transmission
• UK Gas Transmission
• UK Gas Distribution
• US Regulated
• Other activities (such as Grain LNG,
Interconnectors and Metering)

We aim to maintain a clear and consistent
strategy over the long term to provide stable
returns to our investors and consistent levels
of service to our customers and communities.

Our transmission and distribution businesses
operate as regulated monopolies. Regulators
safeguard customers’ interests by setting
the level of charges we are allowed to pass
on and the standards of performance we
must achieve.

In the UK, we have one regulator for our
businesses: Ofgem. In the US, for the areas
in which we operate, we are regulated by
the relevant state regulators and FERC.

The foundations of
our business model
Our people, being a responsible
business, and encouraging
innovation are at the heart of our
business model and are reflected
in our strategy.

Our people
Our business is built on our
people. We work hard to make
sure that we keep them as safe
as possible as well as providing
an inclusive culture and
encouraging development.

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

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

Principal operations
pages 31–43

National Grid Annual Report and Accounts 2015/16

Strategic Report

Cash flow

Our ability to convert revenue
to cash is an important factor
in the ongoing reinvestment in
our business. Securing low-cost
funding, carefully managing
our cash flows and efficient
development of our networks
are essential to maintaining
strong, sustainable returns for
our shareholders. Cash generation
is underpinned by agreeing
appropriate regulatory
arrangements.

Revenue

Most of our revenue is set in
accordance with our regulatory
agreements. This is referred to
as our ‘allowed revenue’ and is
calculated based on a number
of factors. These include:

investment in network assets;
•
• performance against incentives;
• return on equity and cost

of debt; and

• customer satisfaction scores.

You can find more information
about calculating our allowed
revenue under our UK and US
regulatory agreements on
pages 176 to 182.

Our allowed revenue gives us
a level of certainty over future
revenues if we continue to meet
safety and reliability targets,
as well as the efficiency and
innovation targets included in
the RIIO licence agreements
in our UK regulated businesses.

Investment

We invest efficiently in our networks to deliver strong, regulated
asset growth over the long term. This allows us to continue generating
revenue growth and growth in our regulated asset base. This in turn
generates additional cash flows and allows us to continue reinvesting in
our networks and providing sustainable dividends to our shareholders.

This approach is critical to the sustainability of our business. By
challenging our investment decisions, we continue to deliver reliable,
cost-effective networks that benefit our customers. The way in which
our investment is funded is also an important part of our business.
The long-term, sustainable nature of our assets and our credit ratings
help us secure efficient funding from a variety of sources.

Our stakeholders

Our stakeholders include customers,
the communities in which we operate,
shareholders, governments and regulators.

We create value for our customers
and communities by:
• operating safely, reliably and sustainably;
focusing on affordability to reduce the
•
impact on customer bills;

• delivering essential services that meet

the needs of our customers;

• providing emergency services; and
• aiming to improve customer satisfaction

at all times.

We create value for our shareholders by:
• making sure our regulatory frameworks

maintain an acceptable balance
between risk and return;

• operating within our regulatory

frameworks as efficiently as possible;

• maximising incentives to make the

most of our allowed returns;

• careful cash flow management and

securing low-cost funding;

• disciplined investment in our networks

and non-regulated assets; and

• protecting our reputation (including a
focus on compliance across all areas
of our business).

Using our knowledge and expertise, we
engage widely in the energy policy debate
to help guide future policy direction. We also
work with our regulators to help them develop
the frameworks within which we can meet the
changing energy needs of the communities
we serve.

Our business model

National Grid Annual Report and Accounts 2015/16Strategic Report

Our vision and strategy

Our vision is to connect you to your energy today,
trusted to meet your energy needs tomorrow.

Our strategy is 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.

Our strategic objectives set out what we believe we need
to do to achieve our vision and strategy. Further information
on all our KPIs is provided on pages 18–21.

Strategic objective

Deliver operational
excellence

Engage
our people

Stimulate
innovation

Description

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

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

Promote new ideas to
work more efficiently
and effectively.

How we deliver

Relevant KPIs

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.

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

Pursuing excellence in all our
operational processes will allow
us to manage our assets efficiently,
deliver network improvements quickly
and provide services that meet the
changing demands of our customers.

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 great place to work.

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

Embedding innovation and new
technology into our operations helps
us deliver continuous improvements
in the quality and cost of our services.

Network reliability
The reliability of our electricity
and gas networks.

Employee engagement index
A measure of how engaged
our employees feel, based on
the percentage of favourable
responses to certain indicator
questions repeated annually in
our employee engagement survey.

Workforce diversity
Percentage of women and ethnic
minorities in our workforce.

Employee injury frequency rate
Number of employee lost time injuries
per 100,000 hours worked in a
12 month period. Our ambition is
to achieve a world-class safety
performance of below 0.1.

Network reliability
The reliability of our electricity
and gas networks.

Customer satisfaction
A measure of customer satisfaction
across our segments and differing
customer groups.

Group return on equity
Measure of value generation for
our shareholders.

National Grid Annual Report and Accounts 2015/16

Strategic Report

Strategic objective

Engage
externally

Embed
sustainability

Drive
growth

Description

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

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

Grow our core businesses
and develop future new
business options.

How we deliver

Relevant KPIs

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

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

This culture allows us to make
decisions that balance affordability
with helping to 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
Scope 2 greenhouse gas emissions
by 2020 and 80% by 2050.

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

We review investment opportunities
carefully and will only invest where
we can reasonably expect to earn
acceptable returns.

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.

Climate change
A measure of our reduction of
Scope 1 and Scope 2 greenhouse
gas emissions of the six primary
Kyoto greenhouse gases (excluding
electricity transmission and distribution
line losses).

Regulated asset base growth
Maintaining efficient growth in
our regulated assets ensures
we are well positioned to provide
consistently high levels of service
to our customers and increases our
revenue allowances in future years.

Adjusted EPS
Adjusted earnings represent
profit for the year attributable
to equity shareholders. This
excludes exceptional items and
remeasurements (see page 111).

Adjusted earnings per share provides
a measure of shareholder return that
is comparable over time.

Our vision and strategy

National Grid Annual Report and Accounts 2015/16Strategic Report
Our KPIs

Delivering our strategy The Board uses a range of
financial and non-financial metrics, reported periodically,
against which we measure Group performance.

KPI and definition

Adjusted EPS

Group return
on equity (RoE)

Regulated asset
base growth

Adjusted earnings represent profit
for the year attributable to equity
shareholders. This excludes
exceptional items and remeasurements
(see page 111).

Adjusted earnings per share provides
a measure of shareholder return that
is comparable over time.

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

This calculation provides a measure
of the performance of the whole
Group compared with the amounts
invested by the Group in assets
attributable to equity shareholders.

Maintaining efficient growth
in our regulated assets ensures
we are well positioned to provide
consistently high levels of service
to our customers and increases our
revenue allowances in future years.

Our performance

Adjusted EPS pence1

Group return on equity %

50.4

53.1

45.1

63.5

57.6

10.9 11.3

11.7

11.2

11.4 11.4

11.8 11.8

12.3 12.3

Total regulated asset base and
regulated asset base growth £bn
X (X)

31.2

33.7

34.7

37.0

38.8

11/12

12/13

13/14

14/15

15/16

11/12

12/13

13/14

14/15

15/16

11/12

12/13

13/14

14/15

15/16

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

Including major storms
Excluding major storms

Regulated asset base growth

Commentary

Our UK regulated asset value
(RAV) and US rate base increased
by £1.8 billion (5%) to £38.8 billion.
This reflects the continued high levels
of investment in our networks in both
the UK and US, together with the
impact of the stronger US dollar.

For the year ended 31 March 2016,
adjusted earnings attributable to equity
shareholders increased by £197 million
to £2,386 million. This increase in
earnings resulted in an adjusted
earnings per share of 63.5p, an
increase of 10.2% on 2014/15.

The earnings increase was driven
by a £233 million increase in adjusted
operating profit. With the exception
of our UK Electricity Transmission
business, operating profit increased
in all of our business segments.

Overall adjusted net finance costs
were £20 million lower than 2014/15
at £1,013 million. The effective tax rate
for the year was 24.0%.

Group RoE has increased during the
year to 12.3%, from 11.8% in 2014/15.
During the year, the UK regulated
businesses delivered a solid return of
13.3% in aggregate (2014/15: 13.7%),
including an assumption of 3% long
run average RPI inflation. US returns
(calculated on a calendar year) of
8.0% were slightly down on last year,
reflecting high winter gas leak and
snow removal costs at the start of
2015, together with rate base growth.

Further details of how this is calculated
are on page 202.

Target

The adjusted EPS target set as
part of executive remuneration for
Annual Performance Plan (‘APP’)
was more than met with 100% of
maximum achieved (see page 76).

The Group RoE target set as part of
executive remuneration for APP was
more than met with 100% of maximum
achieved (see page 76).

No specific target. Our overall aim
is to achieve between 5% and 7%
of regulated asset base growth
each year.

The Group RoE is one of the
performance measures for the Long
Term Performance Plan, outturns
for which are calculated on a three
year basis.

National Grid Annual Report and Accounts 2015/16

Strategic Report

Value added

Employee lost time injury
frequency rate

Network reliability

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

Number of employee lost time injuries
per 100,000 hours worked in a 12-month
period. Our ambition is to achieve a
world-class safety performance of below 0.1.

Value added £bn

Employee lost time injury frequency rate
per 100,000 hours worked
X (X)

2.1

57.2

1.7

1.8

47.6

44.7

0.18

0.17

0.14

0.13

0.10

Not
measured

11/12

12/13

13/14

14/15

15/16

11/12

12/13

13/14

14/15

15/16

Value added per share (pence)

Value added in the year increased
by £0.1 billion to £1.8 billion.

Of the £1.8 billion value added in
2015/16, £1,337 million was paid to
shareholders as cash dividends and
£267 million as share repurchases
(offsetting the scrip issuance during
the year), with £183 million retained
in the business.

See page 23 for further details.

In the UK we improved our employee
safety performance during 2015/16, with
an employee injury frequency rate of 0.07.
Our US business improved its safety
performance, with an employee injury
frequency rate of 0.11.

Overall, our Company-wide employee
injury frequency rate has fallen to 0.10
and has been consistently around this
level throughout the year. In real terms,
this means 17 fewer employees had
a lost time injury this year than last.

The reliability of our electricity and gas networks.

Network reliability is measured separately for each of
our business areas. The table below is meant to provide
a simple visual representation of our performance across
all of our networks.

Detailed data for each of the prior four years is provided
on page 18 of our 2014/15 Annual Report and Accounts,
which you can find in the investors section of our
Company website.

Target/
base %

15/16

Prior four
years
(11/12–
14/15)

UK Electricity Transmission T 99.9999 99.999998

exceeded

UK Gas Transmission

UK Gas Distribution

100

99.999

US Electricity Transmission B

US Electricity Distribution B

99.9

100

99.999

99.972

99.995

achieved

no target

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

We aim to deliver reliability by: planning our capital
investments to meet challenging demand and supply
patterns; designing and building robust networks;
risk-based maintenance and replacement programmes;
and detailed and tested incident response plans. In the UK,
our networks performed well. Ahead of winter 2015/16, we
assessed the margin and procured additional electricity
system balancing tools on both supply and demand-side.
We successfully used our new demand side tool for the first
time and saw the market respond to market notifications. In
the US, despite numerous winter snow storms and summer
wind storms in parts of New England and New York, our
network resilience held up well. We invested millions of
dollars in our electricity infrastructure to improve resilience
and help reduce the impact of service interruptions.

See UK Principal operations: pages 31–37
and US Principal operations: pages 38–41

No specific target. Our overall aim
is to sustainably grow value added
over the long term while maintaining
performance of our other financial KPIs.

We have met our ambition of achieving
below 0.1 in the UK but not in the US.

We achieved our targets, which are set out in the table
for our UK networks, and are set individually for each
of our US jurisdictions.

Our KPIs

National Grid Annual Report and Accounts 2015/16Strategic Report

Our KPIs continued

Delivering our strategy The Board uses a range of
financial and non-financial metrics, reported periodically,
against which we measure Group performance.

KPI and definition

Skills and capabilities

Workforce diversity

Percentage of women and ethnic
minorities in our workforce.

We support developing the skills and
capabilities of young people through
skills-sharing employee volunteering,
especially in the STEM subjects,
because it supports our future talent
recruitment and our desire to see
young people gain meaningful
employment.

Community engagement
and investment in education

Working with our communities is
important in creating shared value
for us as a business and the people
we serve. We use the London
Benchmarking Group (LBG)
measurement framework to provide
an overall community investment
figure which includes education.

Our performance

Skills and capabilities

Workforce diversity %

Community engagement and
investment in education £
Community engagement (£)

18,408

21.8

22.7

23.1

23.6

23.5

14,554,440

13.4

13.8

13.9

14.1

14.5

Not
measured

11/12

12/13

13/14

14/15

15/16

11/12

12/13

13/14

14/15

15/16

11/12

12/13

13/14

14/15

15/16

Commentary

We measure quality (>1 hour)
interactions with young people on
STEM subjects. In the UK we have
had 9,733 interactions with young
people on STEM subjects, and
8,675 interactions in the US.

Women
Ethnic minority

We continue to closely track the
demographics of our employee
population in terms of gender
and ethnicity.

To find out more about how we
promote an inclusive and diverse
workforce go to page 44.

In the UK our community engagement
and investment in education is
£7,984,720, and in the US it is
£6,566,647 and £3,073 in other
countries. This is a financial
measurement of a number of
activities including the time our
employees give through volunteering,
the money our employees raise
through fundraising and also the
support we give to our charity
partners. Overall our Company-wide
investment is £14,554,440.

Target

No specific target. Our overall aim
is to encourage young people to
get involved in the STEM subjects.

No specific target. We aim to develop
and operate a business that has an
inclusive and diverse culture.

We do not have a specific target
on how much we invest in this area;
our overall aim is to make sure
we are creating shared value for
the communities that we serve
and work in.

National Grid Annual Report and Accounts 2015/16

Strategic Report

Climate change

Customer satisfaction

Employee
engagement index

A measure of how engaged our
employees feel, based on the percentage
of favourable responses to certain
indicator questions repeated annually
in our employee engagement survey.

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

Employee engagement index %

Greenhouse gas emissions
Million tonnes carbon dioxide equivalent

8.7

8.2

7.5

7.3

The table summarises how we measure customer
satisfaction:

Methodology

Measure

UK Use RIIO-related metrics agreed with Ofgem Score out of 10

US J.D. Power and Associates customer

Quartile ranking

satisfaction surveys

The table below focuses on the past two years. Detailed
data for the prior four years is provided on page 18
of our 2014/15 Annual Report and Accounts, which you
can find in the investors section of our Company website.

Performance

14/15

15/16

Target

UK Electricity Transmission

UK Gas Transmission

UK Gas Distribution

US Gas Distribution – Residential

US Gas Distribution – Commercial

US Electricity – Residential

US Electricity – Commercial

7.4

7.6

8.3

4th

3rd

2nd

7.5

7.6

– 2

4th

3rd

4th

6.91

8.31

To improve

11/12

12/13

13/14

14/15

15/16

11/12

12/13

13/14

14/15

15/16

1. Figures represent our baseline targets set by Ofgem for reward or penalty

We measure employee engagement
through our employee engagement
survey. The results of our 2016 survey,
which was completed by 87% of our
employees, have helped us identify
specific areas where we are performing
well and those areas we need to improve.
Our engagement index has risen one point
to 76% favourable. Managers receive
a 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.

We achieved our target of increasing
engagement compared with the
previous year.

Our Scope 1 greenhouse gas emissions
for 2015/16 equate to 7.0 million tonnes
carbon dioxide equivalent (2015: 7 million
tonnes) and our Scope 2 emissions
(excluding electricity transmission
and distribution line losses) equate
to 0.3 million tonnes (2015: 0.3 million
tonnes); combined this is a 62%
reduction against our 1990 baseline.
These are equivalent to an intensity
of around 496 tonnes per £million
of revenue (2015: 478). Our Scope 3
emissions for 2015/16 were 35.6 million
tonnes. We measure and report in
accordance with the World Resources
Institute and World Business Council on
Sustainable Development Greenhouse
Gas Protocol: Corporate Accounting and
Reporting Standard (Revised Edition) for
all six Kyoto gases, using the operational
approach for emissions accounting.
100% of our Scope 1 and 2 emissions
and 95% of our Scope 3 emissions
are independently assured against
ISO 14064-3 Greenhouse Gas
assurance protocol. This statement
is available on our Company website.

We forecast that we will continue to
significantly exceed (better) the 45% by
2020 reduction target. We expect the
2050 target to be extremely challenging.

under RIIO.

2. Our customer satisfaction results are now reported on an annual basis

with the results being published later this year.

Our customer satisfaction KPI comprises seven
components; Ofgem’s UK electricity and gas
transmission and distribution customer satisfaction
scores and four J.D. Power and Associates customer
satisfaction surveys in the US. We have exceeded
the two UK Electricity and Gas Transmission targets;
the outcome for the third UK Gas Distribution survey
will be published later this year.

In the US, we did not achieve our targets. Customers
were again concerned about higher-than-normal winter
bills as a result of electricity commodity price increases
and higher gas usage due to cold weather. In an effort
to rebuild trust and customer satisfaction, we put in place
a customer outreach and education programme similar
to last year that focused on energy-saving solutions and
bill management.

Our targets for each business area are set out
in the table above.

Our KPIs

National Grid Annual Report and Accounts 2015/16Strategic Report

Financial review

National Grid delivered another strong performance in 2015/16.
This included significant levels of investment in our gas and
electricity assets providing important services for millions
of customers in the UK and US.

Additional commentary
on financial KPIs

Adjusted operating profit
Adjusted operating profit for the year ended 31 March
2016 was £4,096 million, up £233 million (6%) compared
to last year. With the exception of our UK Electricity
Transmission business, operating profit increased in
all of our business segments.

Adjusted operating proﬁt by segment £m

-5%

1,173

+2%

1,185

+6%

878

+11%

486

+88%

374

UK Electricity
Transmission

UK Gas
Transmission

UK Gas
Distribution

US
Regulated

Other activities

For the year ended 31 March 2016, adjusted operating
profit in the UK Electricity Transmission segment decreased
by £64 million to £1,173 million. Revenue was £223 million
higher, mainly reflecting the recovery of higher pass-through
costs such as payments to other UK network owners and
system balancing costs. In addition, £43 million of legal
settlement revenue in 2014/15 was not repeated this year.
As mentioned above, pass-through costs were £209
million higher. Regulated controllable costs were £28
million higher due to inflation and salary growth, together
with legal cost recoveries in the prior year, higher tower
maintenance costs and transformation costs associated
with our System Operator business. Depreciation and
amortisation costs were £14 million higher, reflecting
the continued capital investment programme, and other
costs were £36 million higher than prior year including
additional asset impairments this year and lower scrap
and disposal proceeds.

UK Gas Transmission adjusted operating profit increased
by £49 million to £486 million. Revenue was £25 million
higher, including over-recovery of allowed revenues in the
year, partly offset by lower pass-through cost recoveries.
After deducting pass-through costs, net revenue was £46
million higher than prior year. Regulated controllable costs
were £10 million higher than last year, mainly as a result
of inflation, higher gas system service charges and
organisational change costs. Depreciation and amortisation
costs were £6 million higher, reflecting ongoing investment.
Other operating costs were £19 million lower than last year,
mostly reflecting additional costs in 2014/15 relating to
the closure of LNG facilities.

This section
provides additional
commentary on
our KPIs and other
performance metrics
we use to monitor our
business performance.
Analysis of our financial
performance and
position as at 31 March
2016, including detailed
commentary on the
performance of our
operating segments, is
located in the financial
statements. However,
this analysis still forms
part of our Strategic
Report financial review.

See pages 197 to 199
for commentary on our
financial performance
and position for the
year ended 31 March
2015 compared with
31 March 2014. We
have also included
analysis of our UK
regulated financial
performance by
segment on page 108.

In focus

Use of adjusted
profit measures
page 196

Commentary on the
consolidated income
statement
page 95

Commentary on
results of our
principal operations
by segment
pages 107–108

Further details
of how our
performance metrics
are calculated
page 202

UK Gas Distribution adjusted operating profit increased
by £52 million to £878 million. Revenue was £51 million
higher, principally reflecting increased regulatory revenue
allowances. In part, these allowances were increased
to compensate for expected increases in taxation costs
reflecting a change to the tax treatment of replacement
expenditure. Regulated controllable costs were £21 million
higher due to inflation, recruitment, property costs and
higher charges from strategic partners to cover connections
and flexible winter resourcing. Depreciation and amortisation
costs were £12 million higher reflecting the continued
capital investment programme. Pass-through costs charged
to customers were £11 million lower this year, and other
costs were £23 million lower than prioryear, which included
provisions for additional asset protection costs.

Within our US Regulated business, adjusted operating
profit increased by £21 million to £1,185 million. The effect
of the stronger dollar was to increase operating profit in the
year by £81 million. Excluding this impact from exchange
rate movements, revenue decreased by £1,051 million,
principally as a result of lower commodity costs passed
on to customers and unfavourable timing of recoveries
year on year, partly offset by higher increased revenue
allowances under the Niagara Mohawk three-year rate
plan and the benefit of capex trackers. The reduction in
revenue was mostly offset by a £1,027 million reduction
in pass-through costs (excluding the impact of foreign
exchange). Regulated controllable costs reduced by
£71 million at constant currency, partly as a result of lower
gas leak and compliance work this year and additional
costs incurred last year to improve data quality and bring
regulatory filings up to date. Depreciation and amortisation
costs were £51 million higher this year at constant
currency as a result of ongoing investment in our networks.
Pension costs were £15 million higher at constant
currency, while other operating costs were £41 million
higher at constant currency, including higher asset
removal costs.

Adjusted operating profit in Other activities was £175 million
higher at £374 million. In the US, adjusted operating profit
was £143 million higher, reflecting lower spend on upgrades
to our finance systems which were completed last year. In
addition, we benefited from a £49 million gain on disposal of
our investment in the Iroquois pipeline, and a reduction in the
costs associated with our investment in Clean Line. In the UK,
adjusted operating profit was £32 million higher mainly as a
result of strong auction revenues in our French interconnector
(IFA) business and higher property sales proceeds.

Adjusted earnings
For the year ended 31 March 2016, adjusted net finance
costs were £20 million lower than they were in 2014/15 at
£1,013 million, with lower UK RPI inflation, continued focus
on management of cash balances, and the benefit of last
year’s debt buybacks offsetting the impact of the stronger
US dollar and increasing net debt.

Our adjusted tax charge was £58 million higher than
it was in 2014/15. This was mainly due to higher profits
before tax. The effective tax rate for 2015/16 was 24.0%
(2014/15: 24.2%).

National Grid Annual Report and Accounts 2015/16

Strategic Report

In focus

Reconciliations
of adjusted profit
measures
page 196

Commentary
on statement of
financial position
page 99

The earnings performance described on the previous page
has translated into adjusted earnings of £2,386 million,
up £197 million on last year. This equates to adjusted
earnings per share (EPS) of 63.5 pence, up 5.9 pence
(10%) on 2014/15.

Regulated asset base growth
In total, our UK regulated asset value (RAV) and US
rate base increased by £1.8 billion (5%) to £38.8 billion.
This reflects the continued high levels of investment in
our networks in both the UK and US, together with the
impact of the stronger US dollar.

Scrip restatement
In accordance with IAS 33, all EPS and adjusted EPS
amounts for comparative periods have been restated
as a result of shares issued via scrip dividends.

Measurement of financial performance
We describe and explain our results principally on
an adjusted basis and explain the rationale for this
on page 196. We present results on an adjusted basis
before exceptional items and remeasurements. See page
196 for further details and reconciliations from the adjusted
profit measures to IFRS, under which we report our
financial results and position. A reconciliation between
reported operating profit and adjusted operating profit
is provided below. Further commentary on movements
in the income statement is provided on page 95.

£m
Total operating profit
Exceptional items

Remeasurements
– commodity contracts

Adjusted operating profit

Adjusted net finance costs

Share of post-tax results
of joint ventures

Adjusted taxation

Attributable to non-
controlling interests

Adjusted earnings

Adjusted EPS (pence)

Year ended 31 March

2016
4,085
22

(11)

4,096

(1,013)

(753)

(3)

2,386

63.5

2015
3,780
–

3,863

(1,033)

(695)

2,189

57.6

2014
3,735
(55)

(16)

3,664

(1,108)

(581)

2,015

53.1

Group return on equity (RoE)
We measure our performance in generating value for
our shareholders by dividing our annual return by our
equity base.

Group RoE has increased during the year to 12.3%,
from 11.8% in 2014/15. During the year, the UK regulated
businesses delivered a solid operational return of 13.3%
in aggregate (2014/15: 13.7%), including an assumption of
3% long run average RPI inflation. US operational returns
(calculated on a calendar year) of 8.0% were slightly down
on last year, reflecting high winter gas leak and snow
removal costs at the start of 2015, together with rate
base growth.

Overall, other activities in the Group delivered a good
performance, including an improved result from the French
and BritNed interconnectors, higher property sales, the
gain on sale of our interest in the Iroquois pipeline and
lower US other costs following the completion of our
financial system upgrade last year. Treasury performance
also helped the result, through lower RPI accretions on
the Group’s index linked debt, ongoing focus on effective
cash management and the benefit of last year’s debt
repurchases. Together, these helped to offset the
headwind from a lower cost of debt allowance under
the tracker within the UK price controls.

The UK RAV increased by £0.7 billion, reflecting significant
capital expenditure, together with inflation, although RPI
inflation at 1.6% (March to March), was below our 3% long
term expectation. UK RAV growth also included capitalised
efficiencies or ‘performance RAV’ of £115 million this year.

US rate base has increased by £1.1 billion this year.
Of this, £0.4 billion was due to foreign exchange
movements increasing the rate base reported in sterling.
Excluding foreign exchange, rate base increased by
£0.7 billion, reflecting a significant year of US investment.

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

Overall value added in the year was £1.8 billion or
47.6 pence per share as set out below:

£bn at constant currency
UK regulated assets1
US regulated assets1
Other invested capital

Total assets
Dividend paid

Share buyback

Movement in goodwill

Net debt

Value added

Value added per share

Year ended 31 March

2016
26.0

14.1

1.9

42.0

2015
25.5

13.9

1.5

40.9

(25.3)

(24.4)

Change
+0.5

+0.2

+0.4

+1.1
+1.3

+0.3

–

-0.9

+1.8

47.6p

1. Includes assets held outside RAV and rate base.

Value added in the year was higher than 2014/15 (£1.7 billion
or 44.7p per share), primarily as a result of higher inflation
on UK regulated assets (March 2016 RPI of 1.6%, prior
year 0.9%), together with the gain on disposal of our share
of the Iroquois pipeline. Of the £1.8 billion value added
in 2015/16, £1,337 million was paid to shareholders as
cash dividends and £267 million as share repurchases
(offsetting the scrip issuance during the year), with
£183 million retained in the business.

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

Financial review

National Grid Annual Report and Accounts 2015/16Strategic Report

In focus

Commentary on
the consolidated
cash flow statement
page 101

Commentary on
borrowings
page 131

Financial review continued

Other performance measures

UK regulated return on equity
UK RoE has decreased 40bps to 13.3%. This reduction
in RoE reflects a reduction in incentive performance year
on year, particularly as a result of the end of the gas permit
incentive scheme last year. Totex out-performance was
at a similar level to last year. This performance represents
320bps of outperformance over allowed returns.

UK return on equity %

13.0

13.6

12.7

13.7

13.3

11/12

12/13

13/14

14/15

15/16

US regulated return on equity
US RoE for calendar year 2015 decreased 40bps to 8.0%,
reflecting high winter gas leak and snow removal costs at
the start of 2015, together with rate base growth as a result
of record capital investment spend.

US return on equity1 %

8.8

9.2

9.0

8.4

8.0

2011

2012

2013

2014

2015

1. Calculated on a calendar year basis.

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

Return on capital employed %

8.6

6.8

8.0

7.1

6.4

8.6

8.1

6.0

5.7

11/12

12/13

13/14

14/15

15/16

The UK RoCE has decreased from 8.6% to 8.1% in
2015/16. This reduction reflects one-off benefits of legal
settlements last year in Electricity Transmission that did
not repeat and the reduction in gas permit and legacy
incentive revenues in our Gas Transmission business in the
year. Excluding these two items, operational performance,
incentives and returns are at similar levels to last year.

US RoCE has decreased by 30bps in the year to 5.7%.
Regulated financial performance was at a similar level to
last year, however the overall return has decreased as high
levels of capital investment have driven rate base growth.

Capital expenditure
For the year ended 31 March 2016, capital expenditure
of £3,893 million was £423 million higher than last year.
The Group also invested £63 million in the St William
Homes joint venture with Berkeley Group and £53 million
in other joint ventures including a new electricity
interconnector between the UK and Belgium.

Our US Regulated business continues to increase levels
of investment in both electricity and gas distribution
reinforcement. Capital expenditure in 2015/16 was
£355 million higher than last year, and reflected higher
spend on gas mains replacement, gas customer growth,
system reinforcement and initial spend on a solar project
in Massachusetts, together with the impact of a stronger
US dollar.

UK Gas Distribution capital expenditure was £51 million
higher than last year, reflecting an increased level of mains
replacement work, in line with our target to replace a
pre-determined length of main over the course of the
RIIO-GD1 period.

Capital expenditure £m

3,375

3,686

3,441

3,470

3,893

11/12

12/13

13/14

14/15

15/16

UK Electricity
Transmission

US Gas
Transmission

UK Gas
Distribution

US
Regulated

Other activities

Dividend growth
We remain committed to our dividend policy to grow the
dividend at least in line with the rate of average RPI inflation
each year for the foreseeable future.

During the year we generated £1.9 billion of business net
cash flow after our capital expenditure programmes. This
has enabled the growth of the dividend in line with average
RPI, being 1.1% (2014/15: 2.0%; 2013/14: 2.9%), taking into
account the recommended final dividend of 28.34 pence.

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

National Grid Annual Report and Accounts 2015/16

Strategic Report

In focus

UK regulation
pages 176–177

US regulation
pages 178–182

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

During 2015/16, net debt has increased by £1.4 billion.
This is driven by net business cash inflows (after capex)
of £1.9 billion, more than offset by outflows from interest,
dividends, tax and other financing flows of £2.6 billion,
with other non cash movements such as foreign exchange
and accretion increasing net debt by a further £0.7 billion.

A key measure we use to monitor financial discipline is
retained cash flow divided by adjusted net debt (RCF/net
debt). This is a measure of the operating cash flows we
generate, before capital investment but after dividends
paid to shareholders, compared with the level of debt
we hold. The principal adjustments made to net debt are
in respect of pension deficits and hybrid debt instruments.
RCF/net debt was 11.5% for the year (2014/15: 11.2%;
2013/14: 10.5%). For the current year, we have used this
measure to actively manage scrip uptake through buying
back shares when supported by sufficient headroom.
Deducting the costs of buying back these shares reduces
RCF/net debt to 10.5% for the year.

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

We additionally monitor interest cover, which is a measure of
the cash flows we generate compared with the net interest
cost of servicing our borrowings. Interest cover for the
year was 5.5 times (2014/15: 5.1 times; 2013/14: 4.1 times).

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

Regulatory financial performance

Timing and regulated revenue adjustments
As described on pages 176 to 182, our allowed revenues
are set in accordance with our regulatory price controls
or rate plans. We calculate the tariffs we charge our
customers based on the estimated volume of energy
we expect will be delivered during the coming period.
The actual volumes delivered will differ from the estimate.
Therefore, our total actual revenue will be different from
our total allowed revenue. These differences are commonly
referred to as timing differences.

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

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

Our operating profit for the year includes a total estimated
in-year over-collection of £25 million (2014/15: £64 million
under-collection). Our closing balance at 31 March 2016
was £48 million over-recovered. In the UK, there was
cumulative under-recovery of £87 million at 31 March 2016
(2015: under-recovery of £177 million). In the US, cumulative
timing over-recoveries at 31 March 2016 were £135 million
(2015: £150 million over-recovery). The majority of that
balance will be returned to customers next year.

In addition to the timing adjustments described above, as
part of the RIIO price controls in the UK, outperformance
against allowances as a result of the totex incentive
mechanism, together with changes in output-related
allowances included in the original price control, will almost
always be adjusted in future revenue recoveries, typically
starting in two years’ time.

Our current IFRS revenues and earnings include these
amounts that will need to be repaid or recovered in future
periods. Such adjustments will form an important part of
the continuing difference between reported IFRS results
and underlying economic performance based on our
regulatory obligations.

For our UK regulated businesses as a whole, regulated
revenue adjustments totalled £262 million in the year
(2014/15: £174 million). This is based on our estimates of:
work carried out in line with allowances; in expectation
of future allowances; or work avoided altogether – either
as a result of us finding innovative solutions or of the need
being permanently removed. In the US, accumulated
regulatory entitlements to future revenue net of over- or
under-recoveries amounted to £1,335 million at 31 March
2016 (2015: £1,528 million). These entitlements cover a
range of different areas, with the most significant being
environmental remediation and pension assets, as well
as deferred storm costs.

All regulatory entitlements are recoverable (or repayable)
over different periods, which are agreed with the regulators
to match the expected payment profile for the liabilities.
As at 31 March 2016, these extend until 2071.

Financial review

National Grid Annual Report and Accounts 2015/16Strategic ReportInternal control and risk management

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

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

The Board oversees risk management, and, as part of this
role, it sets and monitors the amount of risk the Company
is prepared to seek or accept at any given time in pursuing
our strategic objectives (our risk appetite). The Board also
regularly monitors and reviews our internal controls and
risk management processes. You can read more about
this on page 29.

This year we refined our risk management processes
as a result of changes implemented by the UK Corporate
Governance Code 2014 (the Code). Most notably, we
now specifically test the impact of our principal risks on a
reasonable worst case basis, alone and in clusters, over a
five-year assessment period. The aim of this is to establish
their impact on the Group’s ability to continue operating
and meet its liabilities over the assessment period. The
reason for selecting a five-year assessment period and
the results of this exercise are described in the viability
statement on page 30.

Risk management approach
Our Group-wide corporate risk management process
provides a framework through which we can consistently
identify, assess and prioritise, manage, monitor and report
risks, as shown in the diagram below. The process is
designed to support the delivery of our vision and strategy,
as described on pages 16–17.

and the actions being taken to manage and monitor them.
They assess each risk by considering the financial and
reputational impacts, and how likely the risk is to materialise.
The identified risks are collated in risk registers and
reported at functional and regional levels of the Group.
The risk registers also describe the adequacy of our
existing risk controls.

An important feature of our risk management process is
our three lines of defence model. Each business function
owns and is responsible for managing its own particular
risks (the first line of defence). A central risk management
team (the second line of defence) acts as an advisory
function and also provides independent challenge and
review. This team partners with the business functions
through nominated risk liaisons and collaborates with
assurance teams and specialists, such as safety and
compliance management. Our internal audit function
then audits selected controls and mitigation activities
(the third line of defence).

Regional senior management regularly reviews and
debates the outputs of the bottom-up risk management
process and agrees the prioritisation of the risks. The
main risks for the UK and US businesses are highlighted
in regional risk profiles and reported to the CEO.

Our main strategic uncertainties or ‘principal risks’ for
the Company are developed through discussing the Group
risk profile with the Executive leadership team and the
Board. These risks are reported and debated with the
Executive Committee and Board every six months.

Our process involves a continuous cycle of bottom-up
review and reporting and top-down review and feedback.

All our business functions participate in the bottom-up risk
management process. They identify the main risks to our
business model and to achieving their business objectives

The Board participates in risk workshops to make sure
that the principal risks remain closely aligned to our
strategic aims and that no important risks (or combination
of risks) are being overlooked. This year, several sessions
were conducted to discuss our principal risks and to
assess the potential of those risks to impact the Company’s

Risk management process

Feedback and reporting

Vision and
strategic
objectives

I d e n t ify risks

National Grid
National Grid
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Board

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and report

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s s & prioritis

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Audit
Audit
Committee
Committee

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Executive
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Corporate Risk
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Risk proﬁles
Risk reports

Business functions

National Grid Annual Report and Accounts 2015/16

Strategic Report

viability over the next five years. Through the testing and
review process we decided to adopt two new principal
risks in relation to emerging technology and the potential
impact of sustained inflation and deflation in the US and
UK respectively.

The outcomes from each level of the risk review process
are fed back to the relevant teams and incorporated as
appropriate into the next cycle of our ongoing process
as shown on page 26.

Our principal risks
Accepting that it is not possible to identify, anticipate
or eliminate every risk that may arise and that risk is an
inherent part of doing business, our risk management
process aims to provide reasonable assurance that we
understand, monitor and manage the main uncertainties
that we face in delivering our objectives.

This includes consideration of inherent risks, which exist
because of the nature of day-to-day operations in our
industry, and financial risks, which exist because of our
financing activities. The principal risks we face are provided
below. An overview of the key inherent risks we face are
provided on pages 183–186, as well as our key financial
risks, which are incorporated within the Notes to our
consolidated financial statements on pages 102 to 167.

Our corporate risk profile contains the principal risks that
the Board considers to be the main uncertainties currently
facing the Group as we endeavour to achieve our strategic
objectives. We have provided an overview of these risks
below, together with examples of the relevant controls and
current mitigating actions we are taking.

Strategic objective

Risk description

Example of mitigations

Drive growth

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

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

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

• We regularly monitor and analyse market conditions,

competitors and their potential strategies, the
advancement and proliferation of new energy
technologies, 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 reviewing and

approving investments in new businesses, disposals
of existing ones and organic growth investment
opportunities. These processes are reviewed regularly
to make sure our approach supports our short- and
long-term strategies. We undertake due diligence
exercises on investment or partnering opportunities
and carry out post-investment reviews to make sure
we learn lessons for the future.

Sustained deflation/inflation in the UK/US.

• The primary measures we have to manage this risk

Sustained deflation in the UK would result in a loss of
inflationary indexation of UK RIIO networks’ RAV. In the
US our asset base is not indexed by inflation, therefore
higher inflation erodes value even if our cost of service
is periodically updated through rate case filings.

Engage externally

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

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

Engage
our people

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

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

include our business planning process (five-year plan
approved each year by the Board), annual portfolio
review by the Board, financing strategies (including
hedging policies approved by the Finance Committee)
and regulatory strategies (e.g. US rate case
filing schedule).

•

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

• Strategic workforce planning allows us to effectively

inform our strategic resourcing plans.

• Our entry level talent development schemes (graduate
training and apprenticeships) are a potential source
of competitive advantage in the market place.

•

Improvements to our talent processes mean
that we are now much better at identifying talent
and accelerating development of future leaders
(e.g. our Accelerated Development Programme).

• The rigour of our succession planning and

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

• We are involved in a number of initiatives to help
secure the future engineering talent required
(see page 44).

• We continue to promote inclusion and diversity.

• We monitor employee engagement and formally

solicit employee opinions via a Group-wide employee
survey annually.

Internal control and risk management

National Grid Annual Report and Accounts 2015/16Strategic ReportInternal control and risk management continued

Strategic objective

Risk description

Example of mitigations

Deliver
operational
excellence

Failure to deliver appropriate information systems and
data integrity.

The Company is increasingly reliant on technology to
support and maintain our business-critical processes.
We must be able to rely on the performance of these
systems and the underlying data to demonstrate the
value of our business to our shareholders, meet our
obligations under our regulatory agreements, and comply
with agreements with bond holders and other providers
of finance.

We experience a catastrophic/major cyber security breach.

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

Catastrophic asset failure.

Safety is paramount. Some of the assets that we own
and operate are inherently hazardous and process
safety incidents, while extremely unlikely, may occur.

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

• Following the implementation of a new US enterprise

resource planning system at the end of 2012, we
undertook a significant effort to combat programme
difficulties. This system is now stabilised and
enhancements to drive business value have been
successfully implemented throughout 2015.

• Over the financial year we have implemented improved

project management practices for IS projects.

• We have taken action to bring back in-house

knowledge of critical systems, processes and data.

• We have rebuilt the US Program Delivery organisation,

to build back programme delivery skills.

• Globally, our Information Management Framework
is being rolled out to improve data management.

• Data and its effective management is also central to our
compliance action plan, which is being rolled out across
the Group.

• We use industry best practices as part of our cyber
security policies, processes and technologies.

• Our cyber security programme is a global programme
of work which started in 2010 and continues to be
modified and updated to this day. This programme
is intended to reduce the risk that a cyber threat could
adversely affect the Company’s business resilience.

• We continually invest in cyber strategies that are
commensurate with the changing nature of the
security landscape. This includes collaborative
working with DECC and the Centre for Protection of
National Infrastructure (CPNI) on key cyber risks and
development of an enhanced CNI security strategy
and our involvement in the US with developing the
National Institute of Standards and Technology
Cyberspace Security Framework.

• We continue to commit significant resources and
financial investment to maintain the integrity of our
assets and we strive to continuously improve our
key process safety controls.

• We continue to implement our Group-wide process
safety management system to ensure a robust and
consistent framework of risk management exists
across our higher hazard asset portfolio.

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

• We have relaunched our dedicated Group

Technology Team within the Strategy Function.

• We undertake biannual reviews and briefings

of emerging trends and developments and their
implications for the Company with the Board.

National Grid Annual Report and Accounts 2015/16

Strategic Report

Our internal control process
We have a number of processes to support our internal
control environment. These processes are managed by
dedicated specialist teams, including risk management,
ethics and compliance management, corporate audit
and internal controls, and safety, environment and health.
Oversight of these activities is provided through regular
review and reporting to the appropriate Board committees
as outlined in the Corporate Governance section on
pages 46–67.

Reviewing the effectiveness of our internal control
and risk management
Each year the Board reviews the effectiveness of
our internal control systems and risk management
processes covering all material systems, including
financial, operational and compliance controls, to make
sure they remain robust. The latest review covered the
financial year to 31 March 2016 and the period to the
approval of this Annual Report and Accounts. It included:

•

the Certificate of Assurance from the CEO to the Board
following consideration by the Audit Committee, which
provides overall assurance around the effectiveness
of our risk management and internal controls systems;

• where appropriate, assurance from our committees,

with particular reference to the reports received from the
Audit, and Safety, Environment and Health Committees
on reviews undertaken at their meetings; and

• assurances about the certifications required under
the Sarbanes-Oxley Act 2002 (Sarbanes-Oxley)
as a result of our US reporting obligations.

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

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

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 Company.

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

These reviews are supplemented by quarterly performance
reviews, attended by the CEO and Finance Director.
These reviews consider historical results and expected
future performance and involve senior management from
both operational and financial areas of the business.
Each month, the Finance Director presents a consolidated
financial report to the Board.

As part of our assessment of financial controls in previous
years, we identified a number of weaknesses in our US
financial control framework. We are making progress
in remediating these weaknesses. For more information,
including our opinion on internal control over financial
reporting, see page 183.

Internal control and risk management

National Grid Annual Report and Accounts 2015/16Strategic ReportViability statement

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

As part of National Grid’s risk appetite framework, each
year the Board reviews our target risk appetite levels and
reflects on whether our decision-making behaviours over
the past year have aligned with these targets. The Board
confirmed that the Company’s behaviours over the past
year had been in line with our target risk appetite.

We believe that five years is the most appropriate
timeframe over which the Board should assess the
long-term viability of the Company. The following factors
have been taken into account in making this decision:

1. We have reasonable clarity over a five-year period,

allowing an appropriate assessment of our principal
risks to be made;

2. The Board considered whether there are specific,

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

It matches our business planning cycle.

We have set out the details of the principal risks facing our
Company on pages 26 to 29, described in relation to our
ability to deliver our strategic objectives. We identify our
principal risks through a robust assessment that includes
a continuous cycle of bottom-up reporting and review,
and top-down feedback and horizon scanning. Through
this assessment, priorities are elevated appropriately and
transparently. This process is described in more detail
on pages 26 to 27.

Over the course of the year the Board has also considered
the following specific areas of our principal risks in detail:

The Board has considered the proposed sale of a majority
share in our UK Gas Distribution business and has
concluded that it will not have an adverse impact on the
viability of the Company. It will continue to assess the
strategic risks that the proposed sale presents when
considering the approval of the transaction.

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

The Board has also reviewed the stress testing of
the principal risks. The Board started by considering
our reputational and financial risk capacity. It then
considered how that capacity might be tested by the
principal risks. Each of the principal risks was tested for
its individual impact based on assessing reasonable worst
case scenarios over a five-year period, and considering
reputational impacts and financial impacts (to the nearest
£500m). The figure of £500m was selected because our
financial risk capacity is very substantial and the Board
was satisfied that this figure was appropriate in the context
of an exercise aimed at testing threats to viability.

In addition to testing individual principal risks, the Board
also considered the impact of a cluster of the principal
risks materialising over the assessment period. They
focused on the effect these could have on our reputation
and stakeholder trust and how that could impact
our business.

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

Each Director was satisfied that they had sufficient
information to judge the viability of the Company. Based
on the assessment described above and on page 27, the
Directors have a reasonable expectation that the Company
will be able to continue operating and meet its liabilities
over the period to May 2021.

Principal risk

Matters considered by the Board

Securing satisfactory regulatory outcomes and influencing future
energy policy.

Updates and reviews of:
•

the regulatory situation in the US (including the position
with our rate case filings);
the impact of the UK General Election on our business;

•
• our regulatory position in the UK, including our RIIO mid-period

review strategy;
the impact of the introduction of onshore competition in the UK;
the future of our System Operator and Transmission Owner roles;
the possible impact of greater European integration of energy
markets; and
the potential impact of Brexit on our business.

•
•
•

•

Failure to deliver appropriate information systems and reliable data.

An update on our global IS systems.

We experience a catastrophic/major cyber breach.

An update on cyber security risks and a review of critical questions
to be addressed.

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

A Board review of our US business and consideration of potential
investment opportunities. Two Board strategy sessions to consider
our growth strategy and looking at emerging technology and other
industry developments.

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

National Grid Annual Report and Accounts 2015/16

Strategic Report

Principal operations

Introduction to
our UK operations
by Ian Galloway

In focus

Safety performance

7,700+

employees and contractors
completed a driver safety
programme on the risk of
distractions while driving

Our networks
We continue to invest in new
infrastructure and update our
existing networks to deliver energy
safely and reliably to our customers.

KPIs pages 18–21

Electricity Transmission
page 32
Gas Transmission
page 33
Gas Distribution
page 37

Innovation
We secured over

£22m

of funding for three major innovative
projects. Read more about how this
will be invested on pages 32–37

When I look at the different aspects of the
UK’s energy landscape, it seems that one
factor is a constant. Whether it’s the sources
of energy, or regulatory and government policy
developments, or the expectations of customers
and industry stakeholders, the common factor
that emerges is change.

For us at National Grid, a large part of our
success depends on our ability to keep pace
with it and adapt to it.

This year we’ve seen significant regulatory
developments. Ofgem launched a consultation
on extending competition in electricity
transmission. We support this work and
recognise that introducing competition
is a good way to deliver value for consumers,
if the right conditions are met. We outlined
this in our response and will continue to use
our experience to make sure a thorough
assessment is undertaken before any change
is finalised.

We have also been working alongside DECC
and Ofgem to consider how to evolve the
current SO model, to make it more flexible
and more independent while remaining cost
effective. In doing so, it is vital that there is no
disruption to the pivotal role National Grid plays
as SO in keeping the energy market working.

In May 2016, Ofgem announced a mid-period
review of the RIIO-T1 price control looking at
three specific output measures in gas and
electricity transmission. The scope of this review
is narrow with no changes to key financial
parameters. Ofgem will now run a consultation
process this summer, with any changes to be
implemented in April 2017.

We’ve seen significant change inside
the Company too. In November 2015 we
announced our plans to commence a process
to sell a majority stake in our Gas Distribution
business. Since then we have been working on
how we separate Gas Distribution from National
Grid and create a stand-alone business ready
for sale; making sure it has the right people,
assets, systems and technology it needs to
be successful in the future.

Set against all these developments, I’m
delighted that our UK businesses have
continued to perform well during the last year
with continued world class safety levels and
network reliability, as well as further developing
our interconnector businesses with two new
projects. You can read more about our UK
operating highlights over the next six pages.

We can’t be complacent though. If we are
to be trusted to provide a safe and reliable
service today, to deliver a clean and sustainable
future for energy, and to deliver on our
promises to customers, we need to improve
our performance.

This is why performance has been such
an important area of focus for our UK
businesses during 2015/16 – and it remains
a priority for the year ahead, as you can
read below.

Looking ahead to 2016/17
The coming year promises to be a challenge as
we continue to respond and adapt to change
across our businesses. Our priorities are very
clear. We will create and subsequently sell a
majority stake in a stand-alone Gas Distribution
business and continue to work externally to
influence future regulatory changes, while
meeting the ever-changing needs of our
stakeholders.

It’s important for us to be prepared for
the possible introduction of competition
in electricity transmission, that our people
understand its implications, and that we are
ready to review and respond to the mid-period
review consultation. I am confident that as a
business we will be ready for these changes.

At the same time we will continue our drive
to improve performance, and make sure
we develop a high performance culture to
serve our customers as best we can.

Principal operations

National Grid Annual Report and Accounts 2015/16Strategic Report
Principal operations

Electricity Transmission We own and manage the
electricity transmission system in England and Wales.
Our networks comprise approximately 7,200 kilometres
(4,470 miles) of overhead line, 1,500 kilometres (932 miles)
of underground cable and 338 substations.

Market context
Although demand for electricity is generally
increasing around the world, in the UK it is
expected to remain broadly flat over the next
five to 10 years.

Changes in the sources and characteristics
of generation connecting to our network,
such as wind and nuclear generation, mean
we need to respond by developing the way
we balance and operate our network to
accommodate these sources.

Over the last two years, some generators have
delayed their connection dates to the network
and this means our future investment profile
for electricity transmission is flatter than in
previous years. However, we are ready to
respond to connection dates when we need
to. We will continue to renew our network to
deliver the network reliability our customers
require as efficiently as possible.

What we’ve achieved in 2015/16
The overall reliability of supply for our
transmission system in 2015/16 was
99.999998%.

We have delivered an excellent safety
performance; our safest year on record.
Our lost time injury rate reduced by over
60% and our high potential incident rate fell
by nearly 10%. We have focused on our key
risk areas, such as safe driving and working
at height and continue to work with our
contractors to share best practice in
safety management.

Following a seven year period of consultation,
community engagement and planning
applications we received a development
consent order (DCO) for the construction of a
new transmission circuit to connect the nuclear
power station at Hinkley Point. To connect
the power station to the network we will be
removing existing pylons and constructing
new overhead lines, undergrounding and
using the award-winning T-Pylon.

We were granted a £12 million award from
this year’s Network Innovation Competition
(NIC) which will be used to convert
a substation at Deeside into an off-grid
research facility. This will replicate a live
substation and allow us to test the effects
of future low-carbon generation on the
network with no risk to security of supply.
Once complete this will be the first facility
of its kind in Europe.

In focus

Electricity transmitted across
our network

253,981

(GWh)

Circuit breaker replacement
programme
We have piloted a new approach to
circuit breakers aiming to halve the
time and cost of our replacements
over the RIIO-T1 period. Completing
additional condition assessments
and interface engineering allows
our new high voltage circuit breakers
to be installed on top of existing
structures, saving more than four
weeks of time. We expect this new
innovative approach to reduce our
RIIO-T1 costs by more than £100m.

Working with the stakeholder advisory group
we have identified and recommended four
projects to receive funding from the Visual
Impact Provision project. These projects are
in National Parks and Areas of Outstanding
Natural Beauty across England and Wales
and we have now started feasibility studies to
review the existing overhead lines and develop
proposals that will help further enhance
these areas.

The North West Coast Connection
Project continues to progress and maintain
engagement with a broad range of
stakeholders. This includes holding community
information events along the preferred route
corridor and meeting government officials, local
authorities and focus groups to build support
for the statutory formal consultation.

We have developed a mobile application
which allows our operations teams to provide
instant feedback on supplier performance.
This is designed to save time, improve supplier
performance and reduce costs in our supply
chain, helping to deliver further value for
consumers.

Priorities for the year ahead
Change: prepare for the potential challenge
of increased competition in the transmission
market, making sure we can deliver for
our customers in both competitive and
monopoly markets.
Programme delivery: increase the amount
of work we can deliver, and reduce our costs
through improving processes.
Operational efficiency: continue our drive
for efficiency so we can improve productivity.
Project delivery: complete delivery of key
projects such as the London Power Tunnels.
Safety: maintain our world class safety
performance.

“ We are ready to respond
to connection dates
when we need to”

National Grid Annual Report and Accounts 2015/16

Strategic Report

Gas Transmission We own and manage the gas national
transmission system in Great Britain, with day-to-day
responsibility to maintain a safe, reliable, and available
operation. Our network comprises approximately
7,660 kilometres (4,760 miles) of high pressure pipe and
24 compressor stations. In 2015/16 the gas throughput
across the system was more than 80 billion cubic metres.

What we’ve achieved in 2015/16
We have increased our annual network
investment by a further £18 million and
maintained excellent levels of network
availability throughout the year.

We are committed to safety and are working to
improve the fall protection equipment on all our
trailers following our first lost time injury in more
than two and a half years, when a contractor
sustained a minor injury unloading a lorry in
December 2015.

We have undertaken a detailed review of our
end-to-end processes, focusing on removing
waste and increasing value for our customers.
One result from this efficiency work has been
our ability to increase the volume of in-house
maintenance work we deliver. We have
also reduced the time we expect to take
in connecting customers to the NTS as
a result of these process improvements.

We received a further £4.8 million from
Ofgem’s NIC to support our customer
low-cost connections project. This project
will introduce new technology that changes
the connections process for customers,
making it easier and reducing the cost for
new customers to connect to the NTS.

We are investing in our Aylesbury, Huntingdon
and Peterborough compressor stations
to make sure they comply with the stricter
environmental limits set out in the Industrial
Emissions Directive (IED). We plan to complete
the necessary upgrade works to all our sites
affected by this legislation by 2023.

Priorities for the year ahead
Safety: build on, and further improve our
safety culture and statistics through a review
of our risk management approach.
Reliability: increase the amount of maintenance
and replacement work on our assets, in line with
our RIIO commitments and develop an improved
asset health risk methodology.
Efficiency: improve the quality of data on our
assets to enable better decisions on investments
and to drive efficiencies in our project work.
In response to customer feedback, work to
reduce the time taken to connect customers
to our network.
Innovation: continue to create value for
customers and the wider industry through
innovation, development and implementation.
Emissions compliance projects:
meet the IED requirements by delivering
our agreed asset enhancement and
replacement programme.

Principal operations

In focus

X20,000

The gas throughput across the system
in 2015/16 was more than 80 billion
cubic metres, enough to fill Wembley
Stadium more than 20,000 times.

Efficient robotics
Our pioneering robotics will
negotiate complex pipework,
withstanding extreme pressures.
By avoiding unnecessary excavations,
this technology has the potential to
save almost £60 million in 20 years
and generate carbon savings of over
2,000 tonnes.

Market context
The UK’s gas market and sources of gas are
changing. Domestic demand has fallen over
the last five years and a significant increase
is not expected in future years. The UK
continental shelf (UKCS) now makes up
less than half our total gas supply, with the
remainder coming from Norway, continental
Europe, or further afield via shipped imports
of LNG.

Overall, supply capacity now exceeds peak
demand by more than 30%, giving our
customers significant flexibility over which
sources of gas they choose to meet demand.
Flexible sources of supply, such as LNG
importation terminals, interconnectors and
storage sites, can respond to demand more
quickly than traditional UKCS supplies.
Therefore, our network needs to be able to
respond to changing day-to-day and within-day
supply and demand patterns.

We also need to prepare for an uncertain
energy landscape in the long term. UK reliance
on imported gas supplies will vary depending
on the level of gas supply from the UKCS and
the development of indigenous gas sources.

We are working closely with our customers
and stakeholders to meet these operational
challenges. We are focused on continuing to
develop our network and services to meet
their needs safely, reliably and efficiently.

National Grid Annual Report and Accounts 2015/16Strategic ReportCase study

Security of supply

Claire Spedding
National Grid, Contingency Balancing
Reserve Manager

“ Are we prepared
for tighter winter
margins?”

Security of supply
Britain’s energy landscape
continues to change at an
unprecedented rate, which
creates challenges for the
industry. We’re acutely aware
of these challenges, which
have implications for how
we operate the system.

When we assessed the
margin for the winter of
2015/16, we procured
additional commercial tools
that raised the margin to a
tight but manageable 5.1%.

On 4 November wind

generation was low and there

was a series of unexpected

As System Operator, our job

generation plant breakdowns.

is to keep the energy flowing

We issued a notice to market

so it’s there when homes and

participants, informing them

businesses need it. It’s crucial

of the forecasted position and

for us to make sure we have

requesting more capacity

robust contingency plans and

to be made available for the

a variety of commercial tools

tea time peak in electricity

in place to help balance

demand. We used our new

supply and demand.

demand side tool for the

We use our expertise,

knowledge and engagement

with industry stakeholders

first time and the market

responded, helping meet

peak demand.

to make sure we are well

We can’t be complacent

prepared. And that’s been

though. We will continue to

the case for one of the

work with DECC and Ofgem

changes we’ve seen –

to make sure we have the

tighter winter margins.

right tools in place to balance

the system in the future.

National Grid Annual Report and Accounts 2015/16

Strategic Report

Power Responsive
In June 2015, we launched the
Power Responsive programme,
designed to help drive demand
side response (DSR) growth
through greater customer awareness
and clear participation policies.
We believe DSR will play an
increasingly vital role in building
a secure, affordable, sustainable
electricity system by providing
greater flexibility.

Power Responsive offers a means
for suppliers, businesses and
policy makers to collaborate, build
awareness and deliver improved
DSR solutions, helping to reduce
total energy costs. The goal is
to achieve 30–50% of balancing
capability from the demand side
by 2020.

You can find out more about the
programme and case studies from
customers signed up to DSR at
www.powerresponsive.com

“ We play a leading role in
helping develop the UK’s
future energy strategy”

System Operator

As System Operator (SO) we are responsible
for making sure Britain’s gas and electricity is
transported safely and efficiently from where
it is produced to where it is consumed, when
it is needed. We make sure that supply and
demand are balanced in real time and we
facilitate the connection of assets to the
transmission system.

Market context
Sources of energy are changing. In electricity,
an increase in renewable generation such
as wind, solar and tidal power, together with
a decrease in more conventional generation
such as coal and gas, is leading to greater
variability and uncertainty. In gas, the
changing location of gas being input into the
transmission system will drive greater need
for flexibility as the traditional north-south
flow diminishes.

This makes our role in matching supply and
demand more challenging, so we work with
the market to make sure we have appropriate
tools in place to balance the transmission
system. We work with our customers and
stakeholders to shape the future of the energy
market, providing analysis and insight into the
changing nature of energy. We also facilitate
changes to the market frameworks to
accommodate new technologies and ways
of working, while considering how the role
of the SO should evolve over time.

The SO is at the forefront of this debate helping
to find solutions with industry.

What we have delivered in 2015/16
We continue to play a leading role in helping
develop the UK’s future energy strategy,
and that of Europe. Our approach includes
working with customers and stakeholders
on initiatives such as the translation of new EU
code requirements for gas, the development
of new demand side services in the form
of the Power Responsive programme, the
harmonisation of gas trading arrangements
across Europe, our Future Energy Scenarios
reports, and System Operability Framework
workshops and webinars.

Building on customer and stakeholder
feedback, we have reviewed our operations
and restructured our organisation to deliver
what our customers need. Our customer
survey process has been improved, so we
can better understand our performance and
develop action plans to improve the services
we deliver.

We continue to balance the UK’s energy
needs in real time. We contracted additional
balancing services of 2.4 GW for the 2015/16
winter period to be available to help manage
periods of peak demand. This includes
133 MW from demand side balancing
reserve arrangements.

In our role as Electricity Market Reform
delivery body we facilitated the market
capacity auction, which secured over
46 GW of capacity at a final clearing price
of £18 per kW per year. It was also the first
time that interconnectors participated.

Priorities for the year ahead
We will continue to find better ways to provide
timely, cost effective and innovative solutions
to balance supply and demand for gas
and electricity.

Market developments
We will continue to work with Ofgem
and DECC as they develop proposals
to help meet the energy challenges of the
future, including options for greater SO
independence and ensuring there is no
disruption to the vital role of the SO. We
will work closely with our stakeholders as
proposals for roles and responsibilities of
the SO become clearer.

Customers and stakeholders
We will continue to develop our longer-term
strategy to understand the issues that will affect
our customers and stakeholders in the future,
and plan how we will best support them.

Delivering energy
We will continue to support the evolution of
market frameworks in the UK and Europe to
enable new types of generation and demand
to come forward in response as the energy
landscape changes.

Principal operations

National Grid Annual Report and Accounts 2015/16Strategic ReportCase study

Sustainability

David Parkin
National Grid, Network Strategy Director

“ How can innovation
help us reduce
emissions?”

Cleaner gas
Around a third of the UK’s
greenhouse gas emissions
are associated with heat, the
majority of which is provided
by natural gas.

and sewage waste, which
is cleaned and processed.

We are working with the

developers who own and

operate these plants to reduce

the cost and timescales

Decarbonising domestic

of their connections to

heat remains one of the

our networks.

major challenges in society’s

energy trilemma, so our

Gas Distribution business

is developing sources of

renewable gas that can be

transported through our

existing networks. This

approach means we can

deliver low carbon heat

directly to people’s homes

without the need for costly

new infrastructure.

In 2015/16 we connected

12 new anaerobic digestion

plants to our network. These

plants generate renewable

gas from a range of organic

feedstock, including

agricultural by-products

Other innovative ways of

reducing costs include our

first high pressure plastic

pipeline. We are also working
with a range of parties to

develop bio-substitute natural

gas (BioSNG), which will

enable us to generate

renewable gas from a broader

range of feedstock, including

black bag domestic waste.

We are at the forefront of

‘greening the gas grid’, and

foresee a lot more progress
in this sector through the

RIIO period.

National Grid Annual Report and Accounts 2015/16

Strategic Report

Gas Distribution We own and operate four of the
eight regional gas distribution networks in Great Britain.
Our networks comprise approximately 131,000 kilometres
(81,400 miles) of gas distribution pipeline and we transport
gas from the national transmission system to around
10.9 million consumers on behalf of 39 gas shippers.

In focus

263TWh

Gas consumption in our networks

We manage the National Gas
Emergency number (0800 111 999)
on behalf of all gas distribution
networks.

We handled nearly 2.3 million
calls during 2015/16, across
the emergency number, enquiry
lines, appliance repair helpline
and meter enquiry service.

Improving customer
communications
To provide our customers with a
safe and secure supply of gas we
continue to invest in the network
by replacing the existing metal gas
mains pipes, which supply around
150,000 homes every year, with
new hard-wearing plastic pipes.

A trial of a new suite of customer
communication materials resulted
in a 51% reduction in the number
of complaints and enquiries in the
trial areas. We will introduce these
communication materials across all
our networks in 2016/17 with the aim
of improving our overall customer
satisfaction performance, which
is not yet at the level we would like.

Market context
We manage our networks to keep our
customers safe and warm. We are incentivised
through RIIO to operate efficiently and
deliver services that our customers and
stakeholders value.

Ofgem is able to make comparisons across
all eight networks. It establishes outputs they
are expected to deliver so we all maintain
a safe and reliable network; make a positive
contribution to sustainability and protect the
environment; provide connections to supply
new consumers and support new gas
entry points into the network; meet their
social obligations; and provide an agreed
standard of service to consumers and
other stakeholders.

We collaborate with the industry on issues,
such as innovation, safety and the future
of networks to deliver outcomes that
customers value.

Gas remains an important part of the current
and future energy mix and we are working
with our customers and stakeholders to
develop our networks to accommodate gas
from new sources, such as biomethane.

What we’ve achieved in 2015/16
We remain committed to our ambition to be
the best gas distribution business in Britain
and continue to focus on delivering a safe
and reliable service for our customers.

This year we were prosecuted for incidents
at Scunthorpe and Dugdale and, after
pleading guilty, accepted fines of £3m.
We acknowledged that we did not do our
job properly on these occasions and have
since changed the way certain activities
are carried out.

We have worked on improving the services
we provide for our customers that make
us a more efficient business. Responding
to feedback from our employees and
stakeholders, we have been improving the
mobile technology used by our workforce
and reducing the number and size of the holes
we dig in the roads. These initiatives improve
customer satisfaction and will also help us
to continue delivering our RIIO outputs.

We have continued to connect different
sources of gas to our network, particularly
biomethane. Since the first connection in
October 2013, we have now completed
22 biomethane connections in our networks.

The most innovative during 2015/16 was
Raynham Farms, Norfolk, which saw the
first plastic pipe local transmission system
connection in the UK.

We also connected the UK’s first HGV filling
station to the high pressure local transmission
system. This new facility in Leyland, Lancashire,
supplies 100% renewable biomethane and
will therefore play an important part in the
UK’s rapidly growing renewable refuelling
infrastructure. Our industry-leading work on
the future of the gas network will ensure the
gas distribution business features heavily in
the nation’s energy infrastructure for many
years to come.

We have been preparing our business for the
introduction of domestic smart meters, which,
following a UK Government coordinated
rollout, we expect will be standard across
the country by the end of 2020.

We have invested further in technology
for our strategic partners. The Tier One
Replacement System (TORS) enables us to
replace the pipes beneath our feet without
the need for excavations. TORS promises
a revolution in working practices and less
disruption for our customers. Following trials,
we are looking to use this technology in
2016/17 and further improve safety, network
efficiency and customer satisfaction.

Priorities for the year ahead
Maintain a stable and strong business
throughout the process for the potential sale,
to maximise shareholder value and continue
to deliver a safe and reliable network.

Create a truly customer-focused
business by removing inconsistencies in
service delivery, reducing the number and
size of excavations, and introducing the
new customer communication materials.

Optimise our processes and work
more collaboratively to continue to
operate an efficient network for employees
and customers.

Create further value in the business
to improve financial stability and customer
satisfaction, and increase operational
efficiency.

We will also strive to have our safest year yet,
and continue to work with the UK Government
on the future role of gas and increase the use
of new technologies.

Principal operations

National Grid Annual Report and Accounts 2015/16Strategic ReportPrincipal operations continued

Overview of our
US Regulated business
by Dean Seavers

In focus

3.5m

electricity consumers in New
England and upstate New York.

174km

(108 miles) of underground cable,
491 transmission substations and
668 distribution substations we
operate in New England and
upstate New York.

15 year

Our Power Supply Agreement
(PSA) with LIPA is for 3,634 MW
of capacity, comprising eight
dual fuel (gas/oil-fired) steam
units at three sites, 11 dual fuel
combustion turbine units,
and 27 oil-fired combustion
turbine/diesel units.

27.5TWh

of electricity we forecast, plan
for and procure annually across
three states.

3.6m

consumers received services
from our gas distribution networks
including 24,341 new gas heating
customers in 2015/16.

I believe there’s something special about
living, working, and playing in the communities
we serve. We have approximately 15,000
employees serving the energy needs of more
than seven million customers in our service
territories in Massachusetts, New York and
Rhode Island.

Our shared sense of community has
taught us that today’s customer is savvy,
forward-thinking, and deeply mindful of the
environment. We all want the same thing –
to keep our communities healthy and
prosperous. Together we can do it by working
to solve what I believe is the greatest challenge
of our time – climate change – while delivering
innovation and economic development.

This makes our next steps as an energy
provider straightforward: we need to make
sure our energy becomes cleaner, more
efficient, resilient and reliable, and with more
customer choices.

We’ve promised to meet the energy needs of
our customers in New England and New York.
Let me tell you how we’ve done that over
the past year, and what we have planned
for the future.

A balanced approach
Our energy is becoming cleaner. All three of
the states we serve have established goals of
80% reductions in emissions economy-wide
versus 1990 levels by 2050. These states have
already made progress toward their targets,
but almost all emission reductions have come
from cleaning up power generation.

We are also committed to working towards
a decarbonised energy network by 2050.
It’s why we advocate for a balanced solution
that includes renewables, energy efficiency,
and increasing gas transmission.

We are taking the lead on innovating ways
to make solar connections easier and more
affordable. We support the Deepwater Wind
project off the coast of Block Island, the first
offshore wind project in the US. We are also
proponents of the Maine Green Line, which
would use a submarine cable to transmit wind
power from northern Maine to Massachusetts,
supplemented by imports of hydropower
from Canada.

In both New England and New York, we are
planning for new or expanded gas pipelines.
You can read about what we’re doing in
each of our service territories in our regulated
business section, pages 39 to 41.

In 2015, we received a number of accolades:
ACEEE scored all three states in which we
operate in the top 10 in energy efficiency;
we are number five in the nation for solar
megawatts installed per customer (according
to the Solar Electric Power Association);
and we were named the number one green
utility in the US according to Newsweek’s
‘Top Green Companies in the World 2015’.

Looking forward
Connect21 remains our strategy to build and
operate a better energy distribution network
for the 21st century digital economy. Also
gas forms a bridge that will help take us to
a decarbonised future. It supports our intent
to bring on more intermittent renewable
energy generation until reliable large-scale
energy storage technologies become available.

While aggressive, our strategy establishes
a platform for a decarbonised energy supply
chain without economic disruption in local
communities.

National Grid Annual Report and Accounts 2015/16

Strategic Report

US Regulated business

“ We filed three rate
cases in 2015 – one in
Massachusetts and two
in downstate New York”

What we do and where we do it
Electricity
We jointly own and operate transmission
facilities across upstate New York,
Massachusetts, New Hampshire, Rhode
Island and Vermont. We own and operate
electricity distribution networks in upstate
New York, Massachusetts and Rhode Island.

Gas
We own and operate gas distribution
networks across the northeastern US, located
in upstate New York, New York City, Long
Island, Massachusetts and Rhode Island.

What we’ve achieved during 2015/16
Safety
Our safety performance continues to improve.
Through to March 2016 we’ve seen a 9%
reduction in the number of injuries requiring
medical attention and a 26% reduction in the
number of injuries requiring employees to be
out of work. We believe these improvements
are the result of our safety plans, aimed at
reducing key risks and preventing incidents,
along with enhanced and targeted
communications on lessons learned
and intended to prevent reoccurrence.

During 2016/17, we will continue to build on
safety plans with a significant focus on the
prevention of soft tissue injuries, slips/trips/
falls, and road traffic collisions.

Rate cases
We filed three rate cases in 2015 – one in
Massachusetts and two in downstate New York.

In Massachusetts, we proposed to set new
electricity distribution rates that will allow us to
continue investing in our electricity infrastructure
and improving service to our 1.3 million
electricity customers. This submission covers
only the distribution rates, found in the delivery
portion of National Grid’s electricity bills.
This is the cost of delivering electricity to our
customers and includes costs such as poles,
wires, utility trucks, customer computer
systems and taxes – all the costs to operate
our business.

In New York, we proposed to update and
reset our gas delivery rates that will allow us to
continue investing in our natural gas networks
and improving service to our 1.8 million gas
customers in Brooklyn, Queens and Staten
Island and Long Island/Rockaway Peninsula.

These proposals will let us:

• modernise and enhance the safety,
reliability and resilience of our gas
infrastructure;

• upgrade our gas network to deliver

economic and environmental benefits;
• extend our gas expansion programme and
add more gas heating customers each year;
•
improve customer service capabilities; and
• deliver economic development funding and
promote STEM education programmes.

These three proposals are undergoing a
thorough review process by our regulators in
each state. If approved, new charges will take
effect from 1 October 2016 in Massachusetts
and 1 January 2017 in New York.

Additionally, the New York Public Service
Commission (PSC) will soon decide on two
important items related to Niagara Mohawk.
In December 2015, we filed a capex petition
for Niagara Mohawk, which builds upon
similar successful interim capex filings done
for KEDNY and KEDLI in the past, and seeks
to provide funding for $1.4bn of capex across
FY17 and FY18. This ‘extension filing’ should
allow us to use deferral account money, so
that customer rates do not increase until we
make our next full rate filing. Secondly, we
are also waiting for approval for our Niagara
Mohawk’s financing plans, which will enable
us to fund future construction and meet the
mandatory redemptions. The petitions also
afforded us with an opportunity to replace
higher cost debt when economic to do so.

New Energy Solutions
In July, we announced the creation of our
New Energy Solutions (NES) team. This
team is focusing on driving cleaner energy,
improving efficiency, affordability, and choice
for customers. The goal of NES is to deliver
state-mandated initiatives such as New York
State’s Reforming the Energy Vision (REV)
and Grid Modernization (GridMod) in
Massachusetts. It is also driving other
innovative energy initiatives, like large-scale
solar, electric vehicles, and battery storage.

Our jurisdictions
Each of our jurisdictions has projects
under way to develop economic and
environmental health in three ways:
by driving economic growth; providing
cleaner energy; and advancing innovative
technologies. The following highlights some
of our 2015/16 achievments.

Massachusetts
Year one of a two-year smart energy solutions
smart grid pilot achieved a 98% retention
rate from the original 15,000 customers
who started in the pilot, a 72% customer
satisfaction rate, and for active participants,
an average energy saving of $100 or more.

Earlier this year, we submitted a proposal
for a two-pipeline solution to address natural
gas constraints in New England that included
contracts with Access Northeast and the
Northeast Energy Direct gas pipeline project.
MADPU began a review of those proposals.

In April, Kinder Morgan decided not to
move forward with Northeast Energy Direct.
We have begun work to identify alternative
solutions that can help meet the needs of
our current and future gas customers.

The project was part of a two-pipeline solution
intended to provide additional gas delivery
capacity into the region for electricity
generators. So, to stabilise electricity supply
prices for our customers, Spectra’s proposed
Access Northeast project now becomes
increasingly critical for the region.

Customers have been subjected to billions of
dollars in electricity price increases over the
last three winters. Supply prices are market-
driven and are largely due to the increased
demand for natural gas. An increase in supply
capacity will help meet demand and lower
prices for our customers.

We installed 28 miles of new gas mains,
replaced 150 miles of gas mains, and added
more than 6,900 new natural gas customers.

New York
In December 2015, we energised the Five Mile
Road substation in rural Cattaraugus County,
south of Buffalo. The $51.7 million project
was several years in the making, and brings
increased reliability and capability to the
Company’s bulk power transmission network
across the southwest portion of New York
state. It also involved upgrades to existing
transmission circuits in the region.

We opened a new gas control centre on
Long Island. This monitors and controls the
gas system in our downstate and upstate
regions. It also houses the Academy, a centre
for technical and management training. High
school students are welcome here through

Principal operations

National Grid Annual Report and Accounts 2015/16Strategic ReportPrincipal operations continued

US Regulated business

our Engineering Pipeline Program, to explore
engineering safety, natural gas operations,
electric power systems and smart grid
technologies.

We awarded our two largest energy efficiency
grants since our energy efficiency incentive
programme began in 2009. With a $1.8 million
incentive, Finch Paper in Glens Falls, New
York purchased new equipment to remove
bark and chip wood, reduce its energy use,
yield more fibre, and secure a long-term
supply of eight-foot logs, the company’s
primary raw material. Quad Graphics
in Saratoga Springs, New York used a
$1.1 million grant to install a more efficient
printing press that has increased production
by more than 60%.

We continue to invest more in replacing
gas mains. The NYPSC approved $414 million
gas infrastructure investment in Long Island
to speed up the replacement of ageing
pipe and extend the use of natural gas
to more customers. We added more than
15,600 new gas customers.

Rhode Island
As part of our sea2shore project, we’ve begun
installing an underwater 34.5 kV cable in
preparation for Deepwater Wind, the nation’s
first offshore wind farm. The approximate
20-mile underwater cable will link Deepwater’s
five turbine project off Block Island to the
mainland power grid.

The 30 MW wind farm has the capacity to
generate enough power for 17,000 homes
and will also include a fibreoptic line, bringing
high-speed internet service to Block Island for
the first time. The wind farm is expected to
start operating this autumn.

We added seven miles of new gas mains,
replaced 50 miles of gas mains, and added
more than 1,800 new natural gas customers.

FERC
Partnering with Eversource, we completed
the interstate reliability project, completing the
New England East West Solution – a suite of
projects designed to strengthen the reliability
of the regional power grid.

Our costs for the project, $267.6 million,
include station upgrades and the installation of
a 75-mile, 345 kV transmission line along
rights-of-way in Connecticut, Massachusetts
and Rhode Island.

Along with three other leading energy
companies, we announced in January 2016,
a proposal – The Wind and Hydro Response
– to deliver 400 MW of reliable, cost-effective
clean energy to New England. The Wind
and Hydro Response is our answer to a
request for clean energy solutions that was
issued jointly by state agencies and electricity
distribution companies (including National
Grid) in Massachusetts, Rhode Island
and Connecticut.

Priorities for the year ahead
Our Connect21 journey continues to
evolve with these three priorities for
2016/17: Performance excellence, customer
value, and future customer expectations.

Performance excellence: Continue our
safety compliance and performance excellence
journey. Drive new ways of working, including
performance excellence, compliance
improvement programmes, and safety plans.

Customer value: Maximise and communicate
customer value. Deliver tangible value to
customers as identified and measured by
our service-level agreements.

Future customer expectations: Anticipate
future customer needs and transform our
customer experience. Leverage jurisdictional
model, digital customer experience,
Connect21 platform, New Energy Solutions,
and REV/Grid Mod filings.

Solar initiative in Massachusetts
Our Solar Phase II initiative installs
large solar systems on sites we
believe will bring the most benefit
to the electric distribution system,
regardless of the construction
challenges it may pose.

Approved by MADPU in 2014, the
initiative allows us to install up to
20 MW of utility-owned solar capacity.

During 2015/16 we partnered
with local solar developers and
municipalities to secure 18 sites
in 12 municipalities across
Massachusetts for projects
ranging from 650 kW to 1 MW.
So far, we have constructed and
connected four sites, providing
3.3 MW of solar capacity to the grid.

In focus

Connect21

Connect21 is our strategy to advance
America’s natural gas and electricity
infrastructure beyond its 20th century
limitations, and create a more
customer-centric, resilient, agile,
efficient and environmentally sound
energy network.

16.5bn

standard cubic metres of gas
that we forecast, plan for and
procure annually.

National Grid Annual Report and Accounts 2015/16

Strategic Report

Case study

Cost

Khaled Halabi
National Grid,
Commercial Energy Efficiency
Senior Sales Representative

“ How are we helping
customers with
energy efficiency?”

With the new press in place,
Quad Graphics will save
4.3 million kilowatts
of electricity each year,
achieving annual savings
of around $380,000, while
productivity is set to increase
by more than 60%. The
company was also expecting
to take on 50 additional
employees.

Quad Graphics
In Saratoga, New York, we
have supported customer
Quad Graphics with an energy
efficiency incentive offer of
$1,095,000. Our support is
helping achieve significant
energy savings while boosting
productivity.

Quad Graphics, a print

company, planned to invest

in a new printing press that

would increase its production

output and help grow the

business. Our energy

efficiency consultant Khaled

Halabi worked alongside the

company, studying its printing

process, determining that the

proposed new press would

use substantially less energy

than the existing one.

Principal operations

National Grid Annual Report and Accounts 2015/16Strategic ReportCase study

Growth

Nick Sides
National Grid,
Head of Interconnectors

“ How can
interconnectors
play a vital role in
our energy future?”

Interconnectors
Electricity interconnectors
are an absolutely vital part
of the UK’s energy mix. They
physically link the UK to other
European energy systems,
giving the country access to a
much larger and more diverse
supply of power. This provides
significant benefits for both
UK energy consumers and for
National Grid. Interconnectors
provide a flexible supply of
power in times of system
stress and are an efficient way

of transporting energy from

where there is excess supply

to where it’s needed most.

We’re currently operating
two electricity interconnectors
– IFA to France and BritNed
to the Netherlands. We’re
constructing NEMO to
Belgium and NSL to Norway,
which will be the world’s
longest subsea interconnector
when completed. We’re also
developing a number of
new interconnector projects,
including IFA2 to France
and Viking Link to Denmark.

There are challenges of

course. We need to manage

an increasingly complex

regulatory environment, while

providing the highest levels

of technical excellence.

We’re constantly looking to

create value for our customers.

National Grid Annual Report and Accounts 2015/16

Strategic Report

Principal operations continued

Other activities

In focus

31%

Approximate percentage of UK
gas from LNG imports, up from 27%
in 2014.

LNG ship reloading
During 2015/16, we completed our
first LNG ship reload where more
than 157,000m3 of LNG, at around
-158°C, was transferred onto another
ship for onward transport. The reload
process, coupled with the storage
capability available at Grain, provides
greater flexibility for customers.

Creating potential for new homes
In April 2015 we sold our site at
Leeside Road, Tottenham to the
London Borough of Enfield. The
17 acre site has potential for 840
homes. We dismantled two gas
holders before the sale, using clay
from the London Power Tunnels
project to fill in the holder bases.

In the same month we sold our
90 acre site at Ebbsfleet Green
to Redrow homes. The site has
potential for 950 homes and forms
part of the wider garden city
proposal championed by Chancellor
of the Exchequer George Osborne.

“ We sold two sites this year,
creating the potential for
more than 1,750 new
homes in London”

Interconnectors
The England-France interconnector (IFA) is a
2,000 MW HVDC link between the French and
British transmission systems with ownership
shared between National Grid and Réseau
de Transport d’Electricité. Average availability
for 2015/16 was 92.94%, up from 90.46% in
2014/15. A substantial proportion of the flow
continues to be in the import direction, from
France to Great Britain.

In July 2015, we launched a new process
that gives customers vital information before
an outage, meaning they are more able to
accurately react and adjust their market
position – improving the service they receive
from IFA.

BritNed is a joint venture between National
Grid and TenneT, the Dutch transmission
system operator. It owns and operates a
1,000 MW HVDC link between England and
the Netherlands. As with IFA, a substantial
proportion of the flow is in the import direction
from the Netherlands to Great Britain.

Following Board approval for the Belgium
(Nemo Link) and Norway (North Sea Link)
interconnectors in 2015, construction is
now under way for both projects.

Nemo Link, developed between National
Grid Interconnector Holdings Ltd and Elia,
the Belgium transmission system operator,
will connect Richborough in the UK and
Herdersbrug in Belgium. The subsea cable
will be 130 kilometres in length and have the
capacity of 1 GW. Nemo Link is due to be
operational in 2019.

North Sea Link (NSL) will connect Blyth
in the UK and Kvilldal in Norway. Developed
between National Grid and Statnett, the
Norwegian transmission system operator,
at 720 kilometres, NSL will be the world’s
longest subsea cable and will have a capacity
of 1.4 GW. NSL is expected to be operational
in 2021.

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

Our road tanker loading facility was
commissioned in November 2015. The new
loading hub offers a more environmentally-
friendly alternative fuel and allows road tanker
operators to load and transport LNG in bulk.

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 13.4 million domestic, industrial and
commercial meters.

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

We continue to evaluate the opportunity of
participating directly in the smart metering
market by providing an end-to-end, dual-fuel
smart metering offering to energy suppliers.

UK Property
National Grid Property is responsible for
the management, clean-up and disposal
of surplus sites in the UK, most of which
are former gas works.

During 2015/16, we sold two sites and
exchanged contracts on several high-profile land
disposals with our joint venture partners under
St William Homes LLP. Our estate management,
gas holder dismantling and contaminated land
clean-up programmes continue to reduce
operational risk across our portfolio. In April
2016 BNP Paribas Real Estate took on our
new real estate management services.

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. Xoserve celebrated its 10 year
anniversary as a company on 1 May 2015.

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

Corporate activities
Corporate activities comprise central
overheads, Group insurance and expenditure
incurred on business development.

Principal operations

National Grid Annual Report and Accounts 2015/16Strategic ReportOur people

If we are to achieve our strategic objectives, we need to make sure
our employees have the right skills and capabilities.

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

In the UK, engineering companies are
projected to need 182,000 people with
engineering skills each year until 2022,
according to the 2016 Engineering UK Report
– yet the estimated shortfall is 69,000 annually.

A particular concern has been the low number
of young women interested in engineering.
Our initiatives include our residential work
experience week, which in 2015 extended to
around 100 young people, balanced 50/50
between girls and boys. 99% of the students
said that the experience increased their
interest in engineering, while 69% of the
female students said that it persuaded them
to follow a career in the energy industry.

We are helping schools, parents and children
see engineering as a modern, dynamic,
desirable career with a great future. Our
employees act as education ambassadors
who volunteer their time for a range of
activities in the classroom and at science
and engineering fairs, most notably on STEM
enrichment, careers education and our work
experience programmes.

In the US, we completed the sixth year of our
National Grid Engineering Pipeline Program,
designed to inspire high school students to
pursue an engineering education and career.
To date, 258 promising students have
participated in the programme.

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

We have begun a partnership with the State
University of New York to develop a Natural
Gas Technician Certificate Program,
designed to address future hiring needs
for our gas operations.

We are continuing our partnership with the
Center for Energy Workforce Development
on its ‘energy industry fundamentals’.

Our US work experience opportunities include
summer internships. Some interns start their
journey into the energy industry through our
Engineering Our Future programme and go
on to join our Company through our graduate
development programme.

We also offer summer internships in the UK,
as well as 12 month industrial placements to
undergraduates in their penultimate year. These
programmes offer students the opportunity to
experience our Company before deciding to
join the organisation as graduates.

Building skills and expertise
Providing high-quality development
opportunities for our employees is essential
for us to construct, maintain and operate
our electricity and gas networks safely and
reliably. This year, our Academy has delivered
154,025 days of technical, safety, leadership
and personal effectiveness training across
our global workforce.

In January 2016, we inducted 75 high-potential
employees onto our accelerated development
programme; designed to enhance our
leadership succession planning.

We have also developed our performance
leadership programme, designed to help
strengthen our performance leadership
capability for leaders who manage functions
or organisations.

Promoting an inclusive and
diverse workforce
Our inclusion and diversity activities include
attraction and recruitment, development,
leadership, role modelling and cultural change.

A number of UK leaders were paired with
mentors representing a range of diverse
characteristics, allowing them to increase
their knowledge of a particular area of diversity.
Feedback was very positive and a further
wave of the programme is planned.

In the US, we have continued to promote
inclusiveness through programmes designed
to raise awareness of unconscious bias and
disability employment. Senior leaders have
also shared personal experiences about
inclusion through a series of videos.

We support 10 employee resource groups
in the US, and six in the UK, that encompass
inclusion and diversity. These groups are
chaired by senior business leaders, so they
can shape change within the business and
the communities we serve, while providing
professional development to the members.

In addition to our well-established Springboard
and Spring Forward programmes for women,
we are introducing a programme targeted
at other under-represented groups – mainly
ethnic minorities. We are also piloting a new
online professional development platform
for women and an initiative in the US is
introducing more women into our field force.

Externally, we continue to be recognised as
an employer of choice and work in partnership
with a number of organisations that promote
inclusion and diversity.

National Grid employees were named as the
EY Young Energy Professional of the year
2015; a finalist in the Black British business
awards; and one of six women profiled in the
EY Women in Power and Energy Index 2015.

At the end of 2015, we were one of the first FTSE
organisations to publish UK gender pay data.

In the UK, we have signed up to the Living
Wage Foundation. We have committed to
making sure our employees and those of
our new suppliers are paid at least the Living
Wage and have also pledged to take this
further than the accreditation requires,
including a commitment that our apprentices,
interns and graduates at National Grid are
also paid at least the Living Wage.

National Grid Annual Report and Accounts 2015/16

Strategic Report

In focus

1.8m

Number of engineers, technicians
and crafts people needed in the
UK over the period 2012–2022.

Number of US local community
colleges with whom we partner
to deliver utility technology training
programmes.

KPIs
pages 18–21

Board diversity
page 62

EmployAbility
In the UK, the EmployAbility
programme targeted at young
people with special needs is a
notable example of the work done
by our employee resource groups.
The programme has now expanded
to offer work experience internships
at a number of our sites, and has
garnered public recognition for
its innovation and impact. Our US
business has now launched its own
pilot of the EmployAbility programme.

Troops to energy jobs
We work with veterans through
the US troops to energy jobs
programme, designed to help
veterans make the transition from
military service to the energy
industry. Through our role with
the US Joining Forces initiative,
launched by the White House, we
are aiming for 10% of our new hires
to come from veterans over the
next 10 years.

“ Our UK employees raised
over £600,000 in support
of Macmillan, our chosen
charity partner”

In the US, our focus on soft tissue injury
prevention included a sports therapy initiative.
Our educational programmes focused on
diseases such as diabetes and cancer.

Our employee engagement survey results
continue to show that employees have a good
awareness of our wellbeing programmes.

Volunteering
Our employees continue to share their
skills, time and expertise through skills-based
volunteering and fundraising activities.

In the UK, employees provided more than
14,000 hours of support to community
projects. They participated in a number of
fundraising activities to help our employee
chosen charity partnership with Macmillan
Cancer Support reach its fundraising target.
Their efforts helped us exceed our target,
raising more than £600,000, which provided
3,121 emergency fuel grants to people
affected by cancer. We also raised more
than £17,000 for Special Olympics Great
Britain by organising a summer games event
and supported the organisation’s Athletes
Leadership Programme.

In the US, our Power to Serve employee
volunteering programme supports our
stewardship and safety principles. It seeks
to acknowledge existing community service,
as well as to create new volunteer opportunities
for employees.

Human rights
National Grid does not have a specific policy
relating to human rights, but respect for human
rights is incorporated into our employment
practices and our values, which include
respecting others and valuing diversity.
See page 194 for more information.

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

Financial year ended 31 March 2016

Male Female

Total

Male
%

Female
%

Our Board

72.7

27.3

Senior
management

Whole
Company*

189

252

19,177

5,891 25,068

76.5

23.5

* This measure is also one of our Company KPIs. See page

20 for more information.

Health and wellbeing
During 2015/16 we have continued to raise
awareness of mental wellbeing across our
UK business.

We have a leading role in the Business
in the Community Workwell campaign
that is focusing on mental wellbeing in the
workplace, and also an alumni network
supporting the Time to Change campaign.

More than 670 of our employees have pledged
to support this campaign, and others have
shared their personal stories, encouraging
colleagues to talk about mental health.
During 2015/16, we have trained more than
250 employees on mental health first aid.

Initiatives designed to improve employees’
understanding of good nutrition have included
a nutritional challenge. Our wellbeing kiosks
were used more than 16,000 times by our
employees during 2015/16, recording data
such as blood pressure and weight.

Our people

National Grid Annual Report and Accounts 2015/16Strategic ReportLetter from the Chairman and
Corporate Governance contents

Sir Peter Gershon
Chairman

Corporate Governance contents

Letter from the Chairman
Our Board
Corporate Governance
– Board composition

– Our Board and its committees

– Board focus

– Directors’ induction programme

– Director development and training

– Investor engagement

– Board and committee membership

and attendance

Board and committee evaluation
Audit Committee
Finance Committee
Safety, Environment and Health Committee
Nominations Committee
– Board diversity and the Davies Review
Management committees
Statement of compliance with the
UK Corporate Governance Code
Index to Directors’ Report and
other disclosures
Directors’ Remuneration Report

46
47
49
49

52
54
59
60
61
62
63

67
68

Dear Shareholders,
This has been an interesting and exciting year for the
Company and the Board, with the Board agenda focusing
on some significant topics. External influences on the Board
agenda included cyber security, the future of the System
Operator, political developments and how the referendum
on continued UK membership of the EU will affect the
Company. The Board has also been spending time on the
Company’s strategy for the short and long term, the Group’s
principal risks and risk appetite, US rate case filings and the
proposed sale of our UK Gas Distribution business, all of
which are referenced in more detail later in this report.

Changes to the UK Corporate Governance Code 2014
(the Code)
Following the changes introduced in the Code and
the Financial Reporting Council’s (FRC) guidance on
risk management, the risk team and Audit Committee
reviewed our risk processes to make sure we have
effective systems and processes in place to meet
the new requirements. You can read more about our
processes on pages 26 and 27.

The Board also reviewed and approved the Company’s
principal risks. This has been a very valuable process for
the Board and played an important part in its approval
of the viability statement required by the Code. You can

National Grid Annual Report and Accounts 2015/16

Corporate Governance

read our new viability statement on page 30. After many
recent changes to the Code, including the final draft of
the UK Corporate Governance Code 2016, I welcome the
FRC’s commitment to avoid further updates to the Code
until at least 2019, which will allow the UK governance
landscape to settle and establish itself.

External Board evaluation
This year we appointed Independent Audit to undertake
a formal and rigorous externally facilitated Board and
committee evaluation. With the recent changes to the
Code we thought it would be appropriate for the evaluation
to focus on risk. Independent Audit concluded that the
Board was working well and that it benefits from a good
mix of experience from both the UK and US. They noted
there was a good balance between strategic, operational
and regulatory matters, with good engagement supported
by thorough work by management. They made a number
of recommendations in relation to risk, principally focused
on cascading risk management further down the business.
The results of the evaluation were presented to the Board
in April, and a number of recommendations to take forward
were considered by the Board in May. We will be monitoring
the outcome during the year and will report on progress
in next year’s Annual Report and Accounts. You can find
more information about the evaluation on pages 52 and 53.

Cyber security
During the year, the Board considered the threats we face
and the effectiveness of our cyber security strategy to
mitigate the inherent risks. In June 2015, the Board received
an in-depth presentation so it could gain a comprehensive
overview of the Company’s long-term strategy on this issue.
The focus was on establishing guiding principles for cyber
security, deciding what questions the Board should be
asking of the cyber security team and the development
of a new cyber programme. This will improve the existing
programme and help enhance the level of security to protect
the business and to keep pace with the increasing scale and
sophistication of threats. The Board will be receiving cyber
security training and additional updates later in the year.

Board changes
As previously announced, Steve Holliday retired as Chief
Executive on 31 March 2016, and will step down from
the Board on 22 July 2016. He was succeeded as Chief
Executive by John Pettigrew. Steve will leave National Grid
after nearly a decade as Chief Executive and 15 years
on the Board. Following John’s appointment, we will also
welcome Nicola Shaw on to the Board as Executive
Director, UK from 1 July 2016.

In my role as Chairman, I am responsible for making sure
the Board operates effectively, by promoting effective
relationships and open communication between Directors.
This is particularly important as the membership of
the Board changes and new relationships are formed.
Maintaining and promoting a culture of openness and
debate and making sure the Board work together as
a team are also important aspects considered during
an appointment process.

The Nominations Committee oversaw the rigorous
selection process in the search for Steve’s successor
and for our new Executive Director, UK. You can read
more about this on page 61. These appointments were
key to the Board and the fit with the current membership
and how the individuals combine to add value was an
important consideration in the decision-making process.

Sir Peter Gershon
Chairman

Our Board

Key
A Audit Committee

F Finance Committee

N Nominations
Committee

R Remuneration
Committee

S Safety, Environment
and Health Committee

(ch) Chairman
of committee

^ Including National
Grid Group plc

Tenure as at
31 March 2016

Charts and committee
membership are
as at 18 May 2016

Sir Peter Gershon CBE FREng (69)
Chairman N (ch)

John Pettigrew FEI, FIET (47)
Chief Executive F

Steve Holliday FREng (59)
Executive Director

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

Tenure: 4 years

Career: Sir Peter is a Fellow of the Royal
Academy of Engineering and has held a
number of senior positions across multiple
industries. His previous appointments include
Chief Executive of the Office of Government
Commerce, Managing Director of Marconi
Electronic Systems and a member of the UK
Defence Academy Advisory Board. Sir Peter
is currently Chairman of Tate & Lyle plc and
a Non-executive Chairman of the Aircraft
Carrier Alliance Management Board and
most recently a Trustee of The Sutton
Trust Board.

Skills and experience: Sir Peter has
significant board level experience gained
across multiple industries, with considerable
experience in Government through previous
roles. He also has significant experience
of general management both in the city
and internationally and brings to the Board
an in-depth understanding of the high-
tech industry.

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

Tenure: 2 years

Career: A Fellow of the Energy Institute
and of the Institution of Energy and
Technology, John joined the Company in
1991 and has over 25 years of experience
at National Grid in a variety of senior
management roles. John’s previous
appointments include Director of
Engineering from 2003, Chief Operating
Officer and Executive Vice President for
the US Electricity Distribution & Generation
business between 2007 and 2010, Chief
Operating Officer for UK Gas Distribution
between 2010 and 2012, and UK Chief
Operating Officer from 2012 to 2014. John
was appointed to the role of Chief Executive
on 1 April 2016.

Skills and experience: Through his
wide variety of roles in the UK and US
businesses John has extensive knowledge
of the Company as well as the engineering
and utilities industries as a whole. He
has an in-depth understanding of the
Government and regulatory landscape.

Appointed: National Grid Group plc
on 30 March 2001, to the Board in
October 2002 and as Chief Executive from
January 2007 through to 31 March 2016

Tenure: 15 years^

Career: A Fellow of the Royal Academy
of Engineering, Steve was an Executive
Director at British Borneo Oil and Gas
before joining National Grid in 2001. Most
recently Steve was Chairman of the UK
Business Council for Sustainable Energy,
a Prince’s National Ambassador and
Non-executive Director of Marks and
Spencer Group plc. Steve is currently
Chairman of Crisis UK and of the Energy,
and Efficiency Industrial Partnership, Vice
Chairman for Business in the Community
and of The Careers and Enterprise
Company and Lead Non-executive Director
and Board member for the Department for
Energy, Food and Rural Affairs (DEFRA).

Skills and experience: Steve has
significant knowledge and experience
of the energy and utilities industries
in the UK and internationally. He has
considerable board level, Government
and regulatory experience.

Andrew Bonfield (53)
Finance Director F, S

Dean Seavers (55)
Executive Director, US

Appointed: 1 November 2010

Appointed: 1 April 2015

Tenure: 5 years

Tenure: 1 year

Career: Andrew is a chartered accountant
with significant financial experience having
previously been 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. As well as this, Andrew
also has previous experience in the energy
sector as Finance Director of BG Group plc
and is currently a Non-executive Director
of Kingfisher plc.

Skills and experience: Andrew brings
significant finance experience to the
Board and has extensive knowledge
of international industries. Through his
appointments in senior positions across
several industries, Andrew has an in-depth
knowledge of the energy and utilities
industries both in the UK and internationally,
in particular the US energy market.

Career: Dean began his career at the
Ford Motor Company and held various
senior management positions at Tyco
International Ltd. before joining General
Electric Company/United Technologies
Corporation. He was President and
Chief Executive Officer of General Electric
Security and then President, Global
Services of United Technologies Fire
& Security. Dean was also a member
of the Board of Directors of the National
Fire Protection Association from 2010
to 2014 and lead network member
at City Light Capital from 2011 to 2015
and President and Chief Executive at
Red Hawk Fire & Security, LLC from 2012
to 2014. Dean is currently a Board member
of Red Hawk Fire & Security, LLC.

Skills and experience: Dean has a wide
range of financial and customer experience.
He has significant general management
experience with a particular focus on
change and performance improvement
programmes. Dean also has extensive
knowledge of international markets, the city,
corporate finance and financial services.

Alison Kay (52)
Group General Counsel
& Company Secretary

Appointed: 24 January 2013

Career: Alison has undertaken several
roles since joining National Grid in
1996 including UK General Counsel
and Company Secretary from 2000
to 2008 and Commercial Director,
UK Transmission from 2008 to 2012.
Before joining National Grid she was
a corporate/commercial solicitor in
private practice.

Skills and experience: Alison is an
experienced commercial lawyer bringing
a wealth of practical advice and guidance
to her current role. She has developed
expertise in regulatory and contractual
law and legal risk management through
her experience at National Grid. She
also brings rigour around corporate
governance and reporting to the Board,
gained partly through her current
role and also in her previous role as
Secretary to the boards of the subsidiary
companies, National Grid Gas plc and
National Grid Electricity Transmission plc.

Our Board

National Grid Annual Report and Accounts 2015/16Corporate GovernanceKey
A Audit Committee

F Finance Committee

N Nominations
Committee

R Remuneration
Committee

S Safety, Environment
and Health Committee

(ch) Chairman of
committee

^ Including National
Grid Group plc

Tenure as at
31 March 2016

Charts and Committee
membership are as at
18 May 2016

Board gender

Women

Men

Executive and
Non-executive
Directors

Executive

Non-executive
(includes Chairman)

Non-executive
Director tenure

0–3 years
3+ years
(includes Chairman)

Nora Mead Brownell (69)
Non-executive Director N, R, S

Independent

Jonathan Dawson (64)
Non-executive Director F, N, R, (ch)

Therese Esperdy (55)
Non-executive Director A, F, (ch), N

Independent

Appointed: 1 June 2012

Appointed: 4 March 2013

Tenure: 3 years

Career: A key individual in the US energy
industry, Nora has significant experience
gained in a variety of roles including
Commissioner of the Pennsylvania Public
Utility Commission and the Federal Energy
Regulatory Commission (FERC) and former
President of the National Association of
Regulatory Utility Commissioners. Most
recently, Nora sat on the Boards of ONCOR
Electric Delivery Holding Company LLC and
Comverge, Inc. Nora is currently a member
of the Board of Spectra Energy Partners LP,
Direct Energy Advisory Board and the
Advisory Board of Morgan Stanley
Infrastructure Partners as well as a
partner in ESPY Energy Solutions, LLC.

Skills and experience: Through her
Non-executive directorships, Nora brings
extensive experience in US Government and
regulation and has significant expertise in the
US utilities industry in particular through her
role as a Commissioner with FERC.

Career: Jonathan started his career
in the Ministry of Defence before moving
to Lazard where he spent more than 20
years. He was a Non-executive Director
of Galliford Try plc, National Australia
Group Europe Limited and Standard Life
Investments (Holdings) Limited. Most
recently he was Chairman of the
Remuneration Committee, Non-executive
and Senior Independent Director of Next
plc until May 2015. Jonathan is currently
a Non-executive Director of Jardine Lloyd
Thompson Group plc and Chairman and
a founding partner of Penfida Limited.

Skills and experience: Jonathan has
a wide range of city experience with a
significant and in-depth understanding
of the corporate finance, pensions and
banking industries.

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

Tenure: 2 years

Career: Having started her banking career
at Lehman Brothers, Therese joined Chase
Securities in 1997 and then held a variety
of senior roles at JP Morgan Chase & Co.
These included appointments as Head
of US Debt Capital Markets and Global
Head of Debt Capital Markets, co-head of
Banking, Asia Pacific and Global Chairman
of the Financial Institutions Group.

Skills and experience: Therese has
significant experience in city, corporate
finance and banking through her previous
appointments. She also has a wide range
of international experience having worked
in a number of international markets.

Paul Golby CBE FREng (65)
Non-executive Director A, N, R, S, (ch)

Independent

Ruth Kelly (48)
Non-executive Director A, F, N

Independent

Appointed: 1 February 2012

Appointed: 1 October 2011

Tenure: 4 years

Career: A fellow of the Royal Academy of
Engineering, Paul has held a variety of roles
within the energy and utilities industries.
Paul was an Executive Director of Clayhithe
plc, before later joining E.ON UK plc where
he was Chief Executive and later Chairman.
He was also a Non-executive Chairman of
AEA Technology Group plc. Paul is currently
the Chairman of EngineeringUK, the UK
National Air Traffic System, the Engineering
and Physical Sciences Research Council
and a member of the Council for Science
and Technology. Most recently, Paul was
appointed as Chairman of Costain Group
plc on 5 May 2016.

Skills and experience: Paul has
experience in energy utilities, Government
and regulatory industries. Paul also has
a wide range of board level experience
gained through his Chief Executive and
Chairman appointments.

Career: Ruth began her career in
Government where she held various senior
roles, including Secretary of State for
Transport, for Communities and Local
Government, for Education and Skills as
well as Financial Secretary to the Treasury.
She was also a senior executive at HSBC
until August 2015. Ruth is currently
appointed as Governor for the National
Institute of Economic and Social Research
and Pro Vice Chancellor at St Mary’s
University; she has also been a Non-
executive Director on the Financial Conduct
Authority Board since April 2016.

Skills and experience: Ruth brings
in-depth knowledge of Government and
regulatory practice; she also has experience
in banking and corporate finance.

Mark Williamson (58)
Non-executive Director and Senior
Independent Director A, (ch), N, R

Independent

Appointed: 3 September 2012

Tenure: 3 years

Career: A qualified accountant with
significant financial experience, Mark was
Chief Accountant and then Group Financial
Controller of Simon Group plc before joining
International Power plc as Group Financial
Controller and later as Chief Financial
Officer. Mark was a Non-executive Director
at Alent plc where he was Chairman of the
Audit Committee and Senior Independent
Director. Mark is currently the Chairman
of Imperial Brands PLC.

Skills and experience: Mark has extensive
city, international accounting and finance
experience in addition to senior and board
level experience across multiple industries.
Mark’s experience in energy utilities
amongst other industries has provided a
good understanding of Government and
regulatory matters.

National Grid Annual Report and Accounts 2015/16

Corporate Governance

Corporate Governance continuedKey
Lines of reporting

Board/Board
committees

Executive Committee
to Board/Board
committees

Management
committees to
Executive Committee/
Board committees

Lines of
communication

Corporate Governance

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

While traditional diversity criteria such as gender and
ethnicity are important, we also value diversity of skills,
experience, knowledge and thinking styles. You can
read about our Board diversity policy in the Nominations
Committee report on page 61.

This year we said goodbye to Steve Holliday as Chief
Executive and welcomed John Pettigrew as his successor.
We will also be welcoming Nicola Shaw onto the Board
as Executive Director, UK, from 1 July 2016. Apart from
the appointment of Dean Seavers on 1 April 2015, as noted
in last year’s Annual Report and Accounts, there have been
no other changes to the Board composition that have come
into effect during the financial year. We continue to look
forward, with succession planning being an important focus
for the Nominations Committee and the Board.

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

Board and committee interactions

Board

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

In addition to the vertical lines of reporting, the committees
communicate and work together where required. For
example, during the appointment process for John
Pettigrew the Remuneration Committee worked closely
with the Nominations Committee.

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

Below the Board committees are a number of
management committees, including the Executive
Committee. You can read more about some of the
management committees, including the membership
and operation of the Executive Committee, on page 63.

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

Board
committees

Remuneration
Committee

responsible for
recommending
to the Board the
remuneration policy
for the Executive
Directors, other
members of the
Executive Committee
and for the Chairman;
and for implementing
this policy.

Nominations
Committee

considers the
structure, size
and composition
of the Board
and committees
and succession
planning. It identifies
and proposes
individuals to be
Directors and
executive
management,
and establishes
the criteria for any
new position.

Safety,
Environment
and Health
Committee

reviews the
strategies, policies,
initiatives, risk
exposure, targets
and performance
of the Company and,
where appropriate,
of its suppliers
and contractors
in relation to safety,
environment
and health.

Audit
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.

Finance
Committee

sets policy, approves
strategy and grants
authority for financing
decisions (including
treasury, tax and
pensions), credit
exposure, hedging
and foreign exchange
transactions,
guarantees and
indemnities.

Management
committees

Executive
Committee

Share-schemes
Sub-Committee

Investment
Committee

Global
Security and
Resilience
Committee

Group
Ethics and
Compliance
Committee

Disclosure
Committee

Global
Retirement Plan
Committee

Corporate Governance

National Grid Annual Report and Accounts 2015/16Corporate Governance
Looking back. Examples of Board focus during the year included:

Areas of focus

Commentary

Cyber security

The Board is responsible for overseeing cyber security,
and this year the Board has seen an increase in their focus
on this issue. As mentioned in the Chairman’s letter, the
cyber security team provided the Board with a detailed
overview in relation to cyber security, so that the Board
had increased visibility and understanding of the
Company’s long-term strategy on cyber security.

The focus was on the guiding principles and on
determining what questions the Board should be asking
of the cyber security team. The Board’s discussions
concluded that they needed to have greater visibility
of cyber security and there should be training for the
Board members in dealing with cyber security risks.

Proposed majority
sale of the UK
Gas Distribution
business

The Board regularly reviews the composition of the
Company’s portfolio. As part of this review the Board
received a strategy briefing in September, outlining
the proposed commencement of a process for
the potential sale of a majority stake in the UK Gas
Distribution business.

The discussion included: various transaction options;
detailed financial impacts; significant challenges to be
addressed; the communication strategy; return of
proceeds to shareholders and the future dividend policy;
and the transaction timeline. Following discussion and
challenge on a number of issues, the Board unanimously
agreed to the commencement of the sale process.
The Board has been kept up to date on progress.

Principal risks
and viability

US regulatory rate
case filings

European energy
and the politics
of energy

The future of the
System Operator

UK onshore
competition

The risk team provided updates on the UK Corporate
Governance Code 2014 requirement for the Company
to produce a viability statement. Discussions at Board
meetings included: a review of the Company’s principal
risks; the viability statement period; the management and

mitigation of the principal risks; and how we would test
the impact of the risks on the Company, including through
the use of scenario planning. In May 2016, the Audit
Committee recommended the viability statement to the
Board which was approved.

In April 2015, the Board received an update on work
being undertaken by the US finance and regulatory groups
for the preparation of the Company’s first rate case filings
since 2012. During the year the Board received regular
progress reports on the rate case filings for our downstate
New York gas companies, KEDNY and KEDLI, and also
Massachusetts Electric. An overview of each filing was
received by the Board before they were submitted,

including a term sheet outlining the key metrics of each
submission. An extension request for the rate case filing in
Niagara Mohawk was also seen by the Board before filing.
This extension proposed electricity and natural gas delivery
prices for customers being frozen at current levels through
to March 2018 while allowing the Company to increase
investments to enhance its gas and electricity systems.

The Board received an update on important UK and EU
political developments prior to the UK General Election
in May 2015. Following the General Election, the Board
received a paper on the potential implications for the
Company and an engagement plan. The Board was also

kept up to date on the referendum on the continued UK
membership of the EU and the potential effects of exiting
Europe, including on the development of interconnector
projects and on our continuing involvement and benefits
of being in the Integrated Energy Market.

The future of the SO has been considered previously
by the Board and was reviewed again in detail in
September 2015. In particular, Ofgem’s Integrated
Transmission Planning and Regulation (ITPR) project
and emerging DECC thinking on the possible creation

of a ‘super System Operator’ were developments the
Board considered. Additional updates on progress were
provided in January, March and April 2016 when the Board
received updates on future option modelling following
discussions with Government.

In addition to defining our role on the future of the
SO, the Board has recently discussed the Company’s
position on where consenting activity to support
competitively tendered onshore transmission should
be undertaken. In conclusion, the Company’s view was
that competition should only be taken forward where
it was in the interests of consumers.

In March 2016, the Board discussed specific questions
posed by Ofgem in relation to the Company’s position on
onshore competition and discussed working with Ofgem
to explore an enduring consenting solution, taking into
account shareholder and consumer benefits.

Strategy sessions

In addition to time allocated during the year at Board
meetings, the Board participated in two interactive strategy
sessions involving a combination of a full Board discussion
and breakout groups. The Board’s focus was on the

state of the market in the UK and US, future opportunities
for the Company including business development, merger
and acquisition opportunities, and how the Company’s
core capabilities could be used to best effect.

Site visits

In January 2016, the Non-executive Directors visited the
Company’s UK cyber security operations centre, which
provided an insight into its day-to-day operations and
highlighted awareness of the direct security threats to
the Company as they occur and are analysed 24 hours a
day. Other visits by the Directors included safety site visits,
including a visit to Power Plant Operations to celebrate
over 10 years of no accidents, a field visit in Brooklyn to
one of our LNG trucking provider locations to see facilities

and meet management, and a site tour in Eakring.
Another visit was to the Western Link project to review
the Scotland/England interconnector and new sub-station.
In September 2016, the Board members will be visiting
our Buffalo, New York office which will include a site
tour. These visits provide the opportunity for Directors
to meet local management teams, discuss aspects
of the business with employees, and gain insight into
our day-to-day business.

National Grid Annual Report and Accounts 2015/16

Corporate Governance

Corporate Governance continuedLooking forward. The Board’s focus for next year
is expected to include:

regular reviews of safety activities;

•
• updates on the UK Gas Distribution sale process;
• European energy update following the outcome

of the UK’s EU referendum;

the outcome of US rate case filings;
implications of the ITPR project on our activities;
future options for the SO;

• UK and US operational business overviews;
• continued detailed review of strategy and financing;
•
•
•
• cyber security updates and training;
•
•

innovation;
results and follow up on the action planning from
the external Board and committee evaluation;
the 2016 UK Winter Outlook; and
results of the 2016 employee engagement survey.

•
•

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

John Pettigrew has been a Board member since
April 2014. Following his succession to the role of Chief
Executive he has been meeting external and internal
stakeholders and external advisors and brokers as
necessary. From 1 April 2016 John became a member
of the Finance Committee and he will receive training
and development as appropriate. He will also attend
other committee meetings where appropriate. A tailored
induction programme will be created for Nicola Shaw
and monitored accordingly.

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

To strengthen the Directors’ knowledge and understanding
of the Company, Board meetings regularly include
updates and briefings on specific aspects of the
Company’s activities, such as the development of our
new cyber security programme and updates on the UK’s
EU referendum. Updates on corporate governance and
regulatory matters are also provided at Board meetings
and there are training and development opportunities
available for our Directors. Additionally, the Non-executive
Directors are expected to visit at least one operational
site annually.

In focus

346

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

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

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

Further detail on
www.investors.
nationalgrid.com

This includes:

• meetings, presentations and webinars;
• attendance at investor conferences across the world;
• holding road shows in major investor centres,
mainly in the UK, Europe and the US; and

• offering the opportunity for individual stewardship

meetings.

In the last year, our engagement programme has focused
on clarifying our Group growth expectations. This included
communicating the rationale behind our decision to
commence the proposed sale of the majority stake in
our UK Gas Distribution business, and explaining to
investors how we expect the Company to continue to
perform against its regulatory contracts in both the UK
and US businesses.

In November, we arranged a meeting in London to
provide institutional investors and research analysts with
an opportunity to meet our US leadership team, led by
Dean Seavers, and to understand more about the current
performance of our US business and its outlook. A copy
of the presentation and associated materials are available
in the Investors section of our website.

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

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

Debt investors
Over the last year senior group treasury representatives
have met debt investors in Europe, Canada and the US
to discuss various topics such as our full-year results and
upcoming US rate case filings.

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

Individual shareholders
Engagement with individual shareholders, who represent
more than 95% of the total number of shareholders on
our share register, is led by the Group General Counsel
& Company Secretary.

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

For information on the 2016 Annual General Meeting,
please see page 66.

Corporate Governance

National Grid Annual Report and Accounts 2015/16Corporate GovernanceBoard and committee membership and attendance
The table below sets out the Board and committee
attendance during the year to 31 March 2016. Attendance
is shown as the number of meetings attended out of the
total number of meetings for the individual Director during
the year.

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

precluded from attending the ad hoc Board meeting in
November as it related to CEO succession and they were
therefore both conflicted from attending. Dean Seavers
was unable to attend a Board meeting due to personal
reasons. Non-attendance at the Committee meeting
was due to the short notice of the Nominations and
Remuneration Committees ad hoc meetings and members
having prior commitments, and also for personal reasons.

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

Director
Sir Peter Gershon

Board Meetings
10 of 10

Audit
–

Steve Holliday1

John Pettigrew2

Andrew Bonfield

Dean Seavers

Nora Mead Brownell

Jonathan Dawson

Therese Esperdy

Paul Golby

Ruth Kelly

Mark Williamson

9 of 10

10 of 10

9 of 10

10 of 10

–

5 of 5

Finance
–

3 of 4

–

4 of 4

–

4 of 4

–

4 of 4

–

Nominations
7 of 7

Remuneration
–

Safety,
Environment

& Health
–

–

7 of 7

6 of 7

7 of 7

–

6 of 6

–

5 of 6

–

6 of 6

–

4 of 4

–

4 of 4

–

4 of 4

–

Attendance notes
1. Steve Holliday stepped down as Chief Executive with effect from 31 March 2016.
2. John Pettigrew became Chief Executive with effect from 1 April 2016.

Board and committee evaluation
We are back to the first year of the Company’s three-year
performance evaluation cycle. The last externally facilitated
evaluation took place in 2012/13. In line with the Code,
for the year 2015/16 we have undertaken a formal and
rigorous externally facilitated Board effectiveness review.
We appointed Independent Audit to undertake the
evaluation. Independent Audit, which has no other
connection to the Company, considered the Board and
committees’ performance with a particular focus on risk.

The evaluation was conducted between November 2015
and April 2016 and included:

• an initial planning meeting with the Chairman,

Group General Counsel & Company Secretary
and Independent Audit to agree the approach
and expectations of the evaluation;

• one-to-one interviews based on the same set of

•

questions conducted by Independent Audit with the
Board members, Group General Counsel & Company
Secretary, Head of Secretariat and other members
of senior management who regularly interact with
the Board and its committees;
Independent Audit attending the Board meeting
in January to observe behaviours and interactions;
• a review of the 2015 Board and committee papers
and minutes, and a selection of other relevant
governance documents to form a view of the
effectiveness of the Board and its committees;
the preparation of a report by Independent Audit
which was initially shared with the Chairman and
Group General Counsel & Company Secretary; and
the presentation of results presented for discussion at
the Board in April with the proposed recommendations
presented in May.

•

The effectiveness of each of the Board committees
was taken into account in the evaluation. All committees
received an update on the external evaluation and
discussed any recommended actions. The evaluation
identified a number of specific recommendations to
take forward for the Audit and Nominations Committees.
Independent Audit concluded that the Board was working
well even though it had seen changes in membership over
the past few years and thought the Board now benefitted
from a good mix of experience in both the UK and US. The
Board agenda demonstrated there was balance between
strategic, operational and regulatory matters, with good
engagement of the Board members supported by thorough
work by management. They also made a number of
recommendations in relation to risk, principally focused
on cascading risk management further down the business.

Actions for 2016/17
Independent Audit concluded there were six main
recommendations for further development. In May
the Board discussed and agreed the following actions:

•

to give a renewed push to improve Board and
committee papers, including the enforcement
of standards of papers and timely submissions;
to bring out strategic themes more clearly in the Board
papers, pre-read papers and the Chief Executive’s report;
the Chairman will discuss with the Non-executive
Directors the strategy items on the draft agenda for
the next following meeting and articulate the views
from the Non-executive Directors as to what is required
at the Board meeting including any questions that
need answering;
integrate risk more effectively into strategy development
and planning;

• continue to consider the skills and capabilities needed
on the Board for executing the Company’s future
strategy; and
to review whether there is enough focus on people
on the Board agenda.

•

National Grid Annual Report and Accounts 2015/16

Corporate Governance

Corporate Governance continuedBoard and
committee
evaluation cycle

Year 2
2016/17

Internal
review

Year 3
2017/18

Internal
review

Year 1
2015/16

Externally
facilitated
evaluation

conducted
by independent
consultants

Individual performance
As part of our annual evaluation process, Mark Williamson,
as Senior Independent Director, led a review of the
Chairman’s performance. The Non-executive Directors,
with input from the Executive Directors, assessed his
ability to fulfill his role as Chairman. It was concluded that
the Chairman continued to show effective leadership of

the Board and his actions continued to influence the Board
and the wider organisation. Mark Williamson discussed
the feedback and development opportunities with
the Chairman.

Progress against actions from 2014/15
Progress against the actions from last year’s internally
facilitated evaluation have been monitored by the Group
General Counsel & Company Secretary and the Chairman
throughout the year and an update on progress was
provided at the April Board meeting. A commentary
against each action from last year’s review is set out below.

Last year an evaluation of committee performance was
also conducted by the Chairman of each of the Board
committees, following a similar process to that conducted
by the Board. Where relevant, action plans were prepared
for the committees and progress against the actions was
monitored throughout the year.

Update on actions from last year

Area

Actions

Commentary

Environment

Board discussions

Optimise the boardroom layout to
create a more inclusive environment
for members and presenters.

Responsibility: Board members/
Group General Counsel &
Company Secretary

Continue to create a more open
boardroom atmosphere and culture.

Responsibility: Chairman/
Board members

Maximise the effectiveness of
Board discussions.

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

Board discussions

Use a diversity of thinking styles.

Responsibility: Chairman/
Board members

Board focus

Continue to manage the
strategy agenda.

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

For all meetings the Group General Counsel & Company Secretary makes sure
the boardroom layout is appropriate to enable open discussion and promote
an effective meeting. The Group General Counsel & Company Secretary also
highlights any new presenters to the Board in the Chairman’s briefing material
and the relevant Executive Director introduces the presenter to the meeting.

The Chairman manages the boardroom environment throughout meetings,
encouraging open discussion on all matters and making sure all Board
members are involved. A definite upward trend of contribution by all Board
members has been seen. The Group General Counsel & Company Secretary
makes sure there is appropriate time allocated to all agenda items and makes
arrangements to foster an open atmosphere and culture.

The information going to the Board is reviewed every six months through
meetings between the Chairman, the Chief Executive and the Group General
Counsel & Company Secretary. The new reporting framework delivered
by external specialists last year has continued to provide the Board and
committees with clearer, more concise papers. This has helped improve
Board discussions and decision making. At the December 2015 Executive
Committee meeting the Group General Counsel & Company Secretary updated
the Executive members on the role they play in drafting the papers. We will
continue to review and make sure only relevant information is provided to the
Board. A further refresh of the Board paper process will commence this year.

After large discussion items, the Chairman summarises the key points from the
discussion. He also confirms what is expected next, if anything, and if there are
any actions for relevant Board members.

The Board members have become more flexible with their questioning taking
into account their thinking styles, which varies according to the topic. At the post
meetings with the Non-executive Directors, the Chairman makes sure they
provide feedback on behaviours displayed during the meeting.

Significant time has been scheduled for strategy on the Board meeting agendas.
In addition, we usually hold two half-day strategy sessions during the year which
take place on a separate day to the Board meeting, to make sure the strategy
discussions are productive and stimulating. In July 2016 there will be a full
strategy away day.

Additionally, the Chief Executive has developed a detailed schedule of Board
strategy updates for the forthcoming year and has recently circulated to the
Board the material to be covered at the July strategy day.

Board evaluation

National Grid Annual Report and Accounts 2015/16Corporate GovernanceUK business review
While the US financial controls environment has remained
an area of focus for the Committee, during the year we have
also received regular updates of the overall Group control
environment, including a presentation from the UK finance
team on the status of the UK finance change programme.

Following the introduction of RIIO, the UK business has
undergone significant change, which in turn demanded
a different level of support from the UK finance team. The
change programme is intended to improve the capability
and capacity of the function to better support the business
in a RIIO environment. The Committee challenged
management on the status of the change programme
and the revised processes and controls.

Audit tender
Overseeing the competitive tender process for the
external audit was a significant undertaking for the
Committee and management. You can read more about
the process on page 56. I kept the Board up to date
on our progress and in November recommended to
the Board, for its consideration, that Deloitte LLP be
appointed as our new external auditors. Our current
auditors, PricewaterhouseCoopers LLP, will continue
in their role and undertake the audit for the year ending
31 March 2017, subject to reappointment by shareholders
at the 2016 AGM. The appointment of Deloitte will be
recommended to our shareholders for consideration at
the 2017 AGM. We look forward to working with Deloitte
in the future.

Looking forward, we will continue to receive updates on
the UK Gas Distribution sale and will support the Board
as appropriate in relation to this potential transaction.

Mark Williamson
Committee chairman

Audit Committee

Review of the year
This report aims to provide an insight into the work of the
Audit Committee over the year in relation to the UK and
US businesses, the external auditors, and our role within
the Company’s internal assurance functions, as well
as the significant issues debated by the Committee
during the year.

US business review
Last year, I reported on the work undertaken and progress
made in relation to the US financial controls environment.
This has remained a focus for the Committee this year
and we expect the strengthened US leadership team to
substantially complete the US finance transformation plan
by 31 March 2017.

In September, the US finance senior leadership team joined
the Committee meeting to give an in-depth update on the
initiatives underpinning the US finance team transformation
plan with each senior leader presenting on their area of
responsibility. This provided us with an opportunity to hear
directly from members of the team, raise questions and
challenge as necessary.

I also took the opportunity in September to visit the Service
Delivery Centre in Syracuse, New York to meet the US
Shared Services and Finance teams. The visit highlighted
the credit and collections process, a critical component
of the larger revenue recognition process employed by the
Company. I received presentations highlighting the work
performed by each team, accomplishments, and areas
of focus, together with an in-depth review of the credit
and collections activities.

Additionally, in February I joined a video conference
with the Finance Director and US finance leadership
team for a progress update and to discuss the sustainable
improvements being made to the overall US financial
controls environment. The Finance Director and the
US Chief Financial Officer have continued to keep
the Committee up to date on progress with regular
reports throughout the year on priorities and proposed
improvements to support the transformation plan.

National Grid Annual Report and Accounts 2015/16

Corporate Governance

Corporate Governance continuedExamples of Committee focus during the year included:

Areas of focus

Commentary

Risk management

The Committee has been delegated responsibility by the
Board for monitoring and assessing the effectiveness of
our risk management processes. During the year, the risk
team undertook a review of our risk processes to make
sure we have effective systems and processes in place
to meet the requirements of the 2014 UK Corporate
Governance Code and the FRC guidance on Risk
Management, Internal Control and Related Financial
and Business Reporting. Going forwards, the Committee
will also receive reports to be considered by the Board
on risk process developments to enable the Committee
to keep fully appraised of changes in the risk profile of
the Company and to allow it to monitor the management
of risk throughout the year.

The Committee continues to monitor the effectiveness
of the risk management and internal control processes
during the year and reports to the Board on the outcome
of its annual review which covers all material controls,
including financial, operational and compliance controls.

You can read more about our risk management process
and the review of effectiveness on pages 26 to 29. Details
of our internal control systems, including those relating
to the financial reporting process, can be found on pages
29 and 183.

Viability statement

Following the new requirement in the Code, the Annual
Report and Accounts must now include a viability
statement, which you can find on page 30.

risk processes and proposed improvements to make
sure there were effective systems and processes in place
to support the Board in making this statement.

The viability statement requires the Board to confirm that
it has assessed the Company’s principal risks and viability.
At its meeting in September, the Committee considered
the outcome of a review of the Company’s

At the Committee meeting in May, it considered the
viability statement and recommended the statement
to the Board for approval at its May meeting.

Going concern
statement

In addition, the Committee considered the Group’s
short-term liquidity and capital and considered it
appropriate to adopt the going concern basis in the
financial statements. The Board considered and

approved the Committee’s recommendation at its
May meeting. The Company’s going concern statement
is set out on page 102, note 1A.

Fair, balanced and
understandable

The Committee considered the requirement of the Code
to ensure that the Annual Report and Accounts, taken as
a whole, is fair, balanced and understandable in the

context of the applicable accounting standards and
confirmed this view to the Board.

Financial reporting

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

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

year-on-year basis and across the Company. In this
respect, the Committee also considers the estimates
and judgements made by management when accounting
for non-standard transactions, including the treatment
of exceptional items. See page 57 for further details.

Disclosure
Committee reports

When reviewing the half and full-year announcements, the
Committee considers reports of the Disclosure Committee.
The Disclosure Committee also reports the results of its
evaluation of the effectiveness of the Company’s

disclosure controls to the Audit Committee. See page 63
for more information on the role of the Disclosure
Committee.

Sarbanes-Oxley Act
2002 testing and
attestations

The Committee receives regular updates on the status of
testing and considers the impact of deficiencies reported
in the past year.

See page 29 for the Company’s statement on the
effectiveness of internal control over financial reporting.

Cyber security
risk management

Responsibility for reviewing the governance processes
in relation to cyber security has been delegated to the
Committee by the Board. An update on the status of our

cyber security risk management process and cyber
security strategy was presented to the Committee
in September.

Compliance
management

Compliance management is part of the Global Assurance
function, which incorporates ethics, risk management, licence
management and records management. Biannual reports
to the Committee focus on compliance with external legal
obligations and regulatory commitments. Additional detail has
been added to the reports this year, providing information on
trends, root cause of incidents, and action tracking to help
prioritise and prevent recurrence.

The Committee also received an update on the compliance
improvement programme in September. The objective of
the programme is to make sure the Company understands
its external compliance obligations, that effective control
frameworks are in place, and that compliance issues are
managed with the right level of priority. The paper also set
out the steps to help further embed compliance activities
within the business. Strengthening existing control
frameworks will be an important part of progressing
compliance performance improvements in the business.

Audit Committee

National Grid Annual Report and Accounts 2015/16Corporate GovernanceAreas of focus

Commentary

Confidential
reporting procedures
and whistleblowing

The Committee reviews these procedures annually to make
sure that complaints are treated confidentially and that
a proportionate, independent investigation is carried out
in all cases.

The Committee also receives annual reports on the
Company’s anti-bribery procedures and reviewed
their adequacy. It noted that no material instances
of non-compliance had been identified.

Internal audit
charter

In accordance with best practice, the Corporate Audit
Charter was reviewed against the Institute of Internal
Auditors (IIA) international standards and the IIA
model charter.

This review assessed the purpose, authority and
responsibility, as defined in the charter, to make sure
they are sufficient to enable the Corporate Audit function
to complete its objectives. Minor changes to the charter
were approved by the Committee in November.

Performance review The 2015/16 Board and committee evaluation was

conducted externally by Independent Audit and
included a high level review of the Board committees.

The recommended actions for the Audit Committee
were considered by the Committee in May and an
action plan agreed.

The Committee in action – audit tender
PwC have been the Company’s external auditors since
the merger with Lattice Group plc in 2002, and were the
incumbent external auditors of both the merging parties.
Their performance has been reviewed annually by the
Committee since that time.

As described in last year’s Annual Report and Accounts,
it was decided to tender the audit this year having
considered the Competition and Market Authority Order
requiring FTSE 350 companies to hold an audit tender
every 10 years as well as the final European Commission
(EC) regulations, which came into EU legislation in June
2014. Based on the EC transitional arrangements, the
final year in which PwC could have been appointed as
the Group’s auditors would have been for the year ending
31 March 2020. As such PwC were not invited to be
part of the tender process.

The following tender process was undertaken:

• a pre-qualification questionnaire was issued

•

to interested parties;
the submissions were scored by the finance and
procurement teams against a detailed scoring
mechanism focusing on areas such as audit quality,
relevant industry experience and understanding
of our business;
the scores were presented to the Committee in
July together with a proposed short list of firms; and

• at its July meeting, the Committee discussed and
agreed the short list of firms and approved the
issue of a formal Request for Proposal (RFP) to
the short-listed firms.

The key stages of the RFP were as follows:

• meetings were held between the potential firms and
members of the Board and senior finance team to set
out the requirements for the audit and provide a better
understanding of the expectations of key stakeholders
and our business;

• references for the proposed key team members

of each firm were sought;

• technology workshops were held with finance team
members to give the potential firms the opportunity
to demonstrate their audit technology tools and their
relevance to the Company; and

• written tender documents were submitted by each
firm covering specific areas including audit approach,
risk identification, audit scope, independence and
the proposed audit fee.

Throughout the process, we were mindful of the need
to preserve the independence of the external audit.
Each potential firm was required to disclose all existing
relationships with the Company and explain their proposals
to make sure these relationships would not cause any
conflict of interest in line with SEC and proposed EU
rules on auditor independence.

In early November, each potential firm presented to a
panel (comprising the Committee, other members of
the Board and senior finance team members and chaired
by the Chairman of the Committee) setting out why
they should be selected to be our external auditors.
These sessions provided the panel with the opportunity
to question each firm and follow up on queries from
their written submissions.

The Committee discussed the outcome of the
presentations and views of other members of the panel
at its November meeting and recommended that Deloitte
LLP was the most suitable firm to be our next auditors
based on the principal evaluation criteria of audit quality,
team experience and cultural fit. This recommendation
from the Committee was subsequently approved by
the Board at its November meeting.

Deloitte’s appointment, subject to approval at the 2017
AGM, will be effective for the year ending 31 March 2018.
The timing of the change in auditors will help ensure
both an orderly transition and compliance with external
regulations on the provision of non-audit services.

PwC, National Grid’s current external auditor, will continue
in their role until Deloitte’s appointment. They have
expressed their willingness to continue as auditors of
the Company for the year ending 31 March 2017 and the
Committee has therefore recommended to the Board
that a resolution proposing the re-appointment of PwC as
external auditors be put to shareholders at the 2016 AGM.
There are no contractual obligations restricting our choice
of external auditors and we have not entered into any
auditor liability agreement.

The Statutory Audit Services for Large Companies
Market Investigation (Mandatory Use of
Competitive Tender Processes and Audit Committee
Responsibilities) Order 2014 – statement of
compliance. The Company confirms that it complied
with the provisions of the Competition and Markets
Authority’s Order for the financial year under review.

National Grid Annual Report and Accounts 2015/16

Corporate Governance

Corporate Governance continuedExternal audit
The Committee is responsible for overseeing relations with
the external auditors, including the proposed external audit
plan, the approval of fees, and makes recommendations to
the Board on their appointment or reappointment. Details
of total remuneration paid to auditors for the year, including
audit services, audit-related services and other non-audit
services, can be found in note 3(e) of the consolidated
financial statements on page 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 a
number of control measures, including:

•

limiting the nature and value of non-audit services
performed by the external auditors;

• ensuring that employees of the external auditors

who have worked on the audit in the past two years
are not appointed to senior financial positions within
the Company in line with our internal code;

• monitoring the changes in legislation related to auditor
objectivity and independence to help ensure we
remain compliant;

• providing a business conduct helpline that employees

can use to report any concerns, including those relating
to the relationships between Company personnel and
the external auditor;
the rotation of the lead engagement partner at least
every five years (a new lead engagement partner
was appointed for the 2015/16 financial year);

•

• PwC’s internal independence rules and processes,
which have been designed to exceed professional
standards and focus on both personal independence
and scope of services;
independent reporting lines from PwC to the
Committee and the opportunity to meet with the
Committee independently; and

•

• an annual review by the Committee of the structures,
policies and practices in place to make sure the
external auditors’ objectivity and independence
is maintained.

Audit quality
To maintain audit quality and provide comfort on the
integrity of financial reporting, the Committee reviews and
challenges the proposed external audit plan, including its
scope and materiality prior to approval, to make sure that
PwC has identified all key risks and developed robust audit
procedures and communication plans.

The Committee also considers PwC’s response to
accounting, financial control and audit issues as they
arise, and meets with them at least annually without
management present, providing the external auditors
with the opportunity to raise any matters in confidence.

Significant issues
The most significant issue the Committee considered
in relation to the financial statements during the year was
the US financial control environment and in particular these
related to property, plant and equipment. The Committee
also considered a paper presented by management
highlighting the Company’s policy for presenting items
as exceptional and the immediate accounting implications
of the proposed sale of a majority stake in our UK Gas
Distribution business.

The independent auditors’ report (pages 85 to 92) also
includes some other areas of focus, including the accuracy
and valuation of treasury derivative transactions, accounting
for net pension obligations, revenue recognition, and
valuation of environmental provisions which were not
considered in detail by the Committee during the year,
as nothing significant arose that warranted extensive
Committee attention.

US financial control environment
The Committee has continued to devote a significant
amount of time to reviewing the actions management are
taking to improve the US financial controls environment.
The two main areas of focus and challenge by the
Committee on this issue were:

• progress made by management against the measures
taken to remediate the US financial control deficiencies.
In particular the Committee asked management
to produce a clear timetable for clearing the control
deficiencies; and
the status of the US finance organisational design
programme, in particular, understanding the structure
of the new US finance senior leadership team and
management’s plans to fill key vacancies.

•

Presentation of exceptional items
There were two specific items that the Committee
considered this year in respect of exceptional items:

• as part of the half-year results announcement, the
Committee considered the treatment of the £49m
gain recognised when National Grid exchanged its
share of the Iroquois pipeline joint venture for shares
in Dominion Midstream Partners, LP. The Committee
was satisfied that this item should not be recognised
as exceptional based on the size of the transaction; and

• at year end, the Committee considered the treatment

of the costs incurred in preparation for the UK
Gas Distribution sale. The Committee agreed
with management’s proposal that these be treated
as exceptional to reflect the nature of the costs.
This presentation would be consistent with the
treatment of the overall profit on the sale when the
transaction completes.

Potential sale of majority stake in the UK Gas
Distribution business
The Committee considered the immediate accounting
implications following the announcement of the sale
plans in November. In particular, the Committee was
satisfied with the conclusion reached that, based on the
separation work remaining and the overall status of the
transaction, the assets and liabilities did not need to be
classified as held for sale at 31 March 2016. The Committee
will continue to monitor this during 2016/17 as the potential
transaction progresses.

Audit Committee

National Grid Annual Report and Accounts 2015/16Corporate GovernanceAuditor appointment
An annual review is conducted by the Committee of the
level and makeup of the external audit and non-audit fees
and the effectiveness, independence and objectivity of the
external auditors.

Non-audit services provided by the
external auditors
In accordance with our policy, non-audit services
provided by the external auditors above a threshold of
£50,000 require approval in advance by the Committee.

The annual review includes consideration of:

•

• audit quality and the external audit process globally;
the auditors’ performance and delivery against the
•
audit plan;
the expertise of the firm and our relationship with
them including the level of challenge; and
the initial results of online questionnaires completed
by the Chairman, Committee members, Executive
Directors and senior representatives from the finance
team. The questions focused on: the quality of service;
sufficiency of resources; planning and execution
of the audit; communication and interaction; and
overall satisfaction.

Following this year’s annual review, the Committee
was satisfied with the effectiveness, independence and
objectivity of the external auditors, and recommended
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 2016 AGM.

Internal (corporate) audit
The corporate audit function provides independent,
objective assurance to the Audit, Safety, Environment
and Health and Executive Committees on whether our
existing control and governance frameworks are operating
effectively in order to meet our strategic objectives.
Assurance work is conducted and managed in accordance
with the IIA international standards for the Professional
Practice of Internal Auditing and Code of Ethics.

To keep the Committee informed of trends identified from
the assurance work and to update on progress against the
corporate audit plan, the Head of Corporate Audit reports
to the Committee at least twice each year. These reports
present information on specific audits, as appropriate,
summarise common control themes arising from the work
of the team and update on progress with implementing
management actions. Where control issues are identified,
senior leaders may be invited to attend Committee
meetings to provide commentary on the actions they
are taking to improve the control environment within their
area of responsibility.

In order to meet the objectives set out in the Corporate
Audit Charter, audits of varying types and scopes are
conducted as part of the annual corporate audit plan.
The audit plan is based on a combination of risk-based
and cyclical reviews, together with a small amount of
work that is mandated, typically by US regulators.

Inputs to the audit plan include risk registers, corporate
priorities, external research of emerging risks and trends,
and discussions with senior management to make sure
the plan aligns with the Committee and Company’s view
of risk. The audit plan is considered and approved by
the Committee annually and progress against the plan
is monitored throughout the year.

The Committee is responsible for the appointment and
removal of the Head of Corporate Audit. The Committee
met privately with the Head of Corporate Audit during
the year.

Below this threshold, all requests must be approved
in advance by the Finance Director but do not require
Committee pre-approval. This reduces the administrative
burden on the Committee. A full list of all Committee
and Finance Director approved non-audit work requests
is presented to the Committee annually to ensure the
Committee is aware of all non-audit services provided.

Additionally, the Committee receives quarterly reports
from management on non-audit services and other
consultants’ fees to monitor the types of services being
provided and fees incurred.

Approval for the provision of non-audit services
is given on the basis the service will not compromise
independence and is a natural extension of the audit,
or if there are overriding business or efficiency reasons
making the external auditors most suited to provide
the service. Certain services are prohibited from being
performed by the external auditors, as required under
the Sarbanes-Oxley Act 2002.

Total non-audit services provided by PwC during the year
ended 31 March 2016 were £8.9 million (2015: £0.9 million),
representing 63% (2015: 7%) of total audit and audit-
related fees (see note 3(e)). The increase in the year
relates to two significant projects: vendor due diligence
and separation support in respect of the potential UK
Gas Distribution transaction and ‘data scrub’ work on
financial information prior to inclusion in US rate case
filings. For both of these projects it was concluded that
the work would be most efficiently performed by the
external auditor based on their understanding of our
businesses and that most of the information used was
derived from audited financial statements. Both projects
were discussed by the Committee and pre approved
by the Chairman of the Audit Committee prior to
work commencing.

Total audit and audit-related fees include the statutory
fee and fees paid to PwC for other services that the
external auditors are required to perform, such as
regulatory audits and Sarbanes-Oxley Act attestation.
Non-audit fees represent all other services provided
by PwC not included in the above.

Non-audit services provided by PwC in the year included
tax compliance services in territories other than the US
(£0.5 million), the significant majority of which related to
the UK.

The Committee considered that tax compliance services
were most efficiently provided by the external auditors, as
much of the information used in preparing computations
and returns was derived from audited financial information.
In order to maintain the external auditors’ independence
and objectivity, management reviewed and considered
PwC’s findings and PwC did not make any decisions on
behalf of management.

National Grid Annual Report and Accounts 2015/16

Corporate Governance

Corporate Governance continuedTherese Esperdy
Committee chairman

Finance Committee

Review of the year
This was my first full year as Committee chairman, during
which we have focused on our funding programme taking
into account international market conditions, as well as
overseeing the early stages of the treasury and other
finance related aspects of the proposed sale of a majority
stake in our UK Gas Distribution business.

At the end of the year, we said farewell to Steve Holliday
as a member of the Committee as he stepped down
from his Chief Executive role, and from the start of April
we welcomed John Pettigrew to the Committee as he
transitioned into that role. I would like to thank Steve for
his contribution to this Committee as part of his wider
leadership of National Grid over many years.

2015/16 has also seen changes within the treasury team,
with a new Group Tax and Treasury Director taking on the
role in early 2016. With accompanying changes in the UK
and US treasury teams I look forward to working with the
new management team to build on the strong base they
have inherited.

The Committee has met with management and employees
across the treasury, tax, pensions and insurance functions
in both the UK and US through the course of our routine
meetings. In addition, all members of the Committee met
separately with the new Group Tax and Treasury Director
as part of his induction into the role.

As part of our continuous review of counterparty risk,
in June we received a presentation from external advisors
on the banking market initiatives designed to improve
the capital position of banks. Following the Committee’s
approval to simplify our liquidity policies last year,
the revised policy was successfully implemented
and we reviewed performance during the year.

The Committee approved the issuance of a non-dilutive
convertible bond in September. This innovative
funding transaction demonstrates our focus on funding
diversification and cost effectiveness, and was recognised
with the Deal of the Year Award for 2015 by the Association
of Corporate Treasurers.

During the year, the Committee received an update on
the activities and performance of our captive insurance
companies, which highlighted the cost savings generated
by these arrangements. We also reviewed the future
strategy for the insurance function, our outsource
arrangements, and the ongoing plans for the captive
insurance companies.

In the second half of the year, the Committee spent time
on the financing related aspects of the proposed sale
of a majority stake in our UK Gas Distribution business.
This included reviewing the pension and tax aspects
of the proposed transaction, together with planning our
approach to the associated liability management exercise.
This will continue to be a major focus for the Committee
in the year ahead.

In April 2016, the Committee received an external
update on the potential impact of the forthcoming
referendum on the UK’s membership of the European
Union. We assessed the treasury and other issues that
might arise, together with their potential impact on
the Company.

We will also continue to review our ongoing funding needs,
liquidity management, pension funding and our future
insurance strategy.

Examples of key matters the Committee
considered during the year included:
•

funding requirements and financing for the
business plan;

treasury performance updates;

• setting and reviewing treasury policies;
•
• UK and US tax updates;
• update on US energy procurement activities and
electricity and gas trading activities in the UK;
foreign exchange policy and interest rate
risk management;
the draft going concern statement for the half- and
full-year results prior to consideration by the Board;
• update on pension and post-retirement healthcare

•

arrangements; and
insurance renewal programme and overall
insurance strategy.

The Committee in action –
rebalancing our debt portfolio
The Committee has had oversight of management’s
plans to rebalance our debt portfolio relating to the
potential sale of a majority stake in our UK Gas
Distribution business.

We initially reviewed and challenged management’s
overall strategy for the restructuring programme, and
subsequently received presentations over multiple
meetings on the proposed methodology and risks
associated with delivering it.

Various options were considered and we concurred
with management’s proposed approach on this
important issue. We will continue to oversee progress
in the coming year.

Therese Esperdy
Committee chairman

Finance Committee

National Grid Annual Report and Accounts 2015/16Corporate GovernancePaul Golby
Committee chairman

the necessary reductions in GHG emissions to meet our
2050 target will be a greater challenge. Following the UN
Climate Change Conference in Paris in December 2015
(COP21), the Committee met to consider the outcomes
of the conference and how these affect the Company.

Further work is planned for 2016/17, as the impact on
national legislation is expected to become clearer and
we review our emissions reduction strategy and our ability
to meet our 2050 GHG reduction targets.

We also considered the Company’s health and wellbeing
strategy and the work being undertaken to improve data
management, implement better line management awareness
training and provide support and guidance to employees.

Examples of other matters the Committee
reviewed during the year included:
• ongoing monitoring of safety performance and

significant incidents in the UK and US;

• update on lessons learnt and steps taken following
a fatality of a member of the public in the UK in
April 2014, for which the Company was fined £2m
in December 2015;

• compliance and risk reporting for safety, environment

•

and health;
the introduction and application by the Company of
the accounting for sustainability (A4S) methodology
for new projects;

• programmes for musculo-skeletal injury prevention

•

and mental well-being in the UK; and
the impact that the so called ‘Obama Care’ laws
may have on the provision of health care plans for
our US employees.

The Committee in action – US gas pipeline
safety management
Following several years of very significant pipeline
incidents, the US Congress and regulators have changed
their approach to enforcing gas pipeline safety legislation,
becoming impatient with companies that are not showing
continuous improvement in compliance-related matters.
This is demonstrated by a recent series of compliance
orders in New York State, record-setting penalties
nationwide and further demands for compliance
improvement plans.

The Company’s response has been to heighten its focus
on compliance and investment in people, training and
systems to meet these requirements through new gas
enablement initiatives and the setting up of a gas pipeline
safety monitoring system. This will involve using the
Company’s process safety management system and
expanding its approach to gas distribution assets. The US
business has reviewed its standards and procedures and
has worked to build a consistent and integrated approach
to gas pipeline safety compliance across the Company.

Over the past couple of years, the Committee has
monitored the progress of these measures, stressing
the importance of compliance with legislation rather
than tolerance of fines. It has encouraged the Company
to improve communications with regulators in order
to help shape solutions to evolving regulatory issues.
These include recent changes to New York State’s
definition of service lines, affecting where jurisdictional
piping responsibility ends and therefore where the
Company’s responsibility for gas pipeline safety
commences and ends.

Paul Golby
Committee chairman

Safety, Environment and
Health Committee

Review of the year
Over the year the Safety, Environment and Health
Committee has seen the Company make further
progress in process safety management and the safety
performance of both the UK and US businesses. The
US has closed the gap on the UK in terms of combined
employee and contractor Lost Time Injuries and the
Company overall now has an injury frequency rate of 0.10.

Road traffic collisions remain higher than we would like in
both the UK and the US. Starting in the UK, the Company
has therefore required many of its employees to attend safe
driver training with the aim of reducing incidents. We have
also benchmarked our approach to safe driving externally
and ascertained that it represents good industry practice.

The Committee receives reports from the Engineering
Assurance Committee (EAC) every six months. In
particular, we considered work being done by the EAC
in succession planning for the Company’s engineering
employee population. Following recommendations from
the Committee, the collection and analysis of data on the
Company’s engineers was accelerated to facilitate the
development of a strategy for recruitment and retention
of employees, which recognises the value of engineering
qualifications particularly in relation to safety critical roles.

We have continued to focus on process safety and
establishing a safety management system across both
UK and US businesses. We also received reports on the
measures being introduced at key US LNG plants located
close to areas that have pockets of relatively dense
population. This includes the installation of automatic
shutdown mechanisms and, for four plants, dike
remodelling to improve the containment of LNG in
the low probability event of an incident.

We continued to monitor the Company’s approach to
compliance with US gas safety regulations (see the
‘Committee in action’ box opposite). The Committee
spent time reviewing how the Company benchmarks
its performance against that of other bodies, both in
the utilities’ sector and elsewhere in the fields of safety,
environment and health. It also considered other areas in
which it may be beneficial to extend such benchmarking.

In terms of the environment, we have continued to monitor
our strategy and approach to sustainability. In particular,
we have looked at how we are working with governments
and bodies to influence regulations that directly affect
our business.

Our performance to date in reducing greenhouse gas
(GHG) emissions has been successful and we expect to
exceed our 2020 reduction target significantly. However,

National Grid Annual Report and Accounts 2015/16

Corporate Governance

Corporate Governance continued

Sir Peter Gershon
Committee chairman

The Committee in action – Chief Executive
succession search and appointment process
A formal process was undertaken by the Committee over
a three year period in order to find an appropriate
successor to Steve Holliday as Chief Executive. Luke
Meynell, an external advisor, initially of Russell Reynolds
Associates and subsequently of The Zygos Partnership,
supported the Committee to make sure there was rigour
and challenge to our process which was as follows:

• a Chief Executive role profile was prepared and

•

agreed by the Committee;
the external advisor conducted initial searches
and assessed a long list of internal and external
candidates against the agreed profile to produce
a shortlist of potential candidates;

• shortlisted internal candidates were considered

•

and interviews and assessments were undertaken;
the Chairman and some of the Non-executive
Directors met the potential external candidates;
following a review of the ratings from all the interviews
and assessments the Committee agreed its preferred
internal candidate;
the preferred candidate was benchmarked against
external candidates;
following discussion of the impact of the proposed
appointment on the succession plans of the
Company, the Committee confirmed its preferred
candidate and recommended John Pettigrew
for appointment as Chief Executive to the Board;
the Board approved the appointment as
recommended.

Search and appointment process
Executive Director, UK
A formal recruitment process was also undertaken for
the replacement of John Pettigrew as Executive Director,
UK, as follows.

The Nominations Committee appointed Korn Ferry as
the search consultancy. With input from the Committee
members a role and person specification was agreed.

Korn Ferry conducted initial searches for potential external
candidates, with eight candidates being put forward for the
role. Following this, a series of interviews were undertaken
by the Chairman and members of the Board and Executive
Committee. The Committee considered the outcomes
from the interviews and selected two candidates for
further consideration.

Final interviews with the two candidates were carried
out by Steve Holliday, John Pettigrew, Ruth Kelly, Mark
Williamson and members of the Executive Committee.
Additionally, the two shortlisted candidates were externally
assessed by YSC, a business management consultancy
that undertakes executive director profiling assessments.

Following discussion, the Nominations Committee
recommended Nicola Shaw as its preferred candidate
for appointment to the Board. The Board approved the
appointment as recommended and Nicola will join the
Board on 1 July 2016.

In addition to providing external search consultancy
services to the Company, Korn Ferry also provide
HR consultancy services.

Sir Peter Gershon
Chairman

Nominations Committee

Review of the year
During the year, succession planning has been the main
area of focus for the Committee. The process of building
a strong and effective Board requires a good balance
of continuity and refreshment and the Committee has
borne this in mind in its deliberations.

Appointment of new Chief Executive
As described in my foreword to the Corporate Governance
report, during the year we have undertaken a rigorous
recruitment process to appoint a successor to Steve
Holliday, which resulted in the appointment of John
Pettigrew as our new Chief Executive. You can read
more about the Chief Executive succession search
and appointment process in the ‘Committee in action’
box opposite.

Succession planning
The Committee also spent time considering succession
planning over the long term, for both Executive and
Non-executive Director positions, to make sure we
have the right mix of skills and experience for the future.
The main focus of these discussions was to take account
of the recruitment process for the Chief Executive role
and subsequently the appointment of our new Executive
Director, UK, following John’s appointment as Chief
Executive. Following a thorough and rigorous appointment
process, Nicola Shaw was appointed to the role of
Executive Director, UK and we will be welcoming Nicola
on to the Board from 1 July 2016; see opposite for more
details on this search and appointment process.

Diversity
Balance and fit with current Board members are important
considerations in recruitment to the Board. Therefore part
of the selection process for Board appointments is for the
Committee to review the existing skills and experience of
the Board and to also undertake external benchmarking
and a review of potential external candidates. The Board
also takes into account the need to make sure there is
appropriate diversity, including diversity in thinking styles.
Further details on the Company’s approach to diversity
are set out overleaf.

Board and Committee membership
Following the changes in Board membership, the
composition of the committees was also reviewed. As a
result of his appointment as Chief Executive, John Pettigrew
joined the Finance Committee with effect from 1 April 2016.

Examples of other matters the Committee
considered during the year included:
• Executive succession planning focusing on the

identification, development and readiness of successors
to the Executive Committee in particular; and
• a review of the Chairman’s performance, led by

Mark Williamson, the Senior Independent Director.

National Grid Annual Report and Accounts 2015/16Corporate Governance
Board diversity and the Davies Review
At National Grid, we believe that creating an inclusive and
diverse culture supports the attraction and retention of
talented people, improves effectiveness, delivers superior
performance and enhances the success of the Company.

Our Board diversity policy promotes this culture and
reaffirms our aspiration to meet and exceed the target
of 25% of Board positions being held by women by 2015,
as set out by Lord Davies. In October 2015, Lord Davies
published his final report on women in the boardroom and
recommended a new voluntary target of 33% of board
positions to be held by women by 2020. In April 2016, the
Nominations Committee discussed progress made against
our Board diversity policy and noted the new target.

We currently have 27% women on our Board and
22% women on our Executive Committee. The number
of women in senior management positions and throughout
the organisation is set out on page 45 along with examples
of the initiatives to promote and support inclusion and
diversity throughout our Company.

In February 2014, the Nominations Committee set out eight
measurable objectives to support our Board diversity policy.
During the year, the Committee reviewed the Board diversity
policy and progress made against the objectives which
support the implementation of the policy as set out below.

Objectives

Progress

The Board aspired to exceed the target of 25%
of Board positions to be held by women by 2015.

Objective met. We currently have 27% women on our
Board, which will increase to 33% when Nicola Shaw joins
in July 2016. Lord Davies recommended in his final report
that the target be increased to a voluntary 33% target by
2020. The Board has noted this new target.

All Board appointments will be made on merit,
in the context of the skills and experience that
are needed for the Board to be effective.

Objective met. The appointment of John Pettigrew as
Chief Executive and Nicola Shaw as Executive Director,
UK were made on merit.

3 We will only engage executive search firms who

have signed up to the Voluntary Code of Conduct
on Gender Diversity.

Objective met. Korn Ferry, Russell Reynolds Associates
and The Zygos Partnership are signed up to the Voluntary
Code of Conduct on Gender Diversity.

4 Where appropriate, we will assist with the

Objective met. See page 44 for further details.

development and support of initiatives that
promote gender and other forms of diversity
among our Board, Executive Committee and
other senior management.

5 Where appropriate, we will continue to adopt

best practice in response to the Davies Review.

Ongoing – as appropriate. The Nominations Committee
reviewed and noted the recommendations of the Lord
Davies report published in October 2015 and best practice
will be adopted as appropriate and reported on next year.

6 We will review our progress against the

Objective met. Ongoing.

Board diversity policy annually.

7 We will report on our progress against the

Objective met. Ongoing.

policy and our objectives in the Annual Report
and Accounts along with details of initiatives
to promote gender and other forms of diversity
among our Board, Executive Committee and
other senior management.

8 We will continue to make key diversity data,

Objective met. Ongoing.

both about the Board and our wider employee
population, available in the Annual Report
and Accounts.

Progress against the objectives, the policy and the new targets will continue to be reviewed annually and reported
in the Annual Report and Accounts.

National Grid Annual Report and Accounts 2015/16

Corporate Governance

Corporate Governance continuedExecutive Committee
membership key

1 John Pettigrew
Chief Executive and
Committee chairman

2 Andrew Bonfield
Finance Director

3 Stephanie Hazell
Group Strategy
& Corporate
Development Director

4 Alison Kay Group
General Counsel &
Company Secretary

5 Richard Adduci
Chief Information Officer

6 George Mayhew
Group Corporate
Affairs Director

7 Dean Seavers
Executive Director, US

8 Mike Westcott
Group Human
Resources Director

9 Steve Holliday
Executive Director

Management committees

To help make sure we allocate time and expertise
appropriately, the Company has a number of management
committees, which include the Executive Committee,
Disclosure Committee, Investment Committee, Group
Ethics and Compliance Committee, Global Retirement
Plan Committee and Group Security, and Resilience
Committee. These committees provide reports, where
relevant, to the appointing committee in line with our
governance framework on the responsibilities they have
been delegated. See page 49 for management committee
reporting lines.

Executive Committee
Led by the Chief Executive, the Executive Committee
oversees the safety, operational and financial performance
of the Company. It is responsible for making day-to-day
management and operational decisions it considers
necessary to safeguard the interests of the Company
and to further the strategy, business objectives and targets
established by the Board. It approves expenditure and
other financial commitments within its authority levels and
discusses, formulates and approves proposals to be
considered by the Board.

The Committee in action – rate case filings
During the year, the Committee reviewed and discussed
our proposed rate case filings for both Massachusetts
electricity operations (MECO) and our downstate New
York gas companies (KEDNY/KEDLI). These filings aim
to increase our allowed revenue in line with increased
operating costs since base rates were reset after the last
full rate review for each company (2010 for MECO, 2008 for
KEDNY/KEDLI) and also to fund future investment needed
to meet our customers’ requirements and improve reliability.

A key focus of the Committee discussions was
on understanding the impact of the requested rate
increases on our customers, and considering stakeholder
perspectives. Following discussion, the proposals were
approved for filing at the October meeting for MECO
and at the January meeting for KEDNY/KEDLI.

There are currently nine Committee members, with
Steve Holliday remaining a member of the Committee
until he leaves the Company in July 2016. As previously
announced, Nicola Shaw will become a member of the
Committee with effect from 1 July 2016, on joining the
Company as Executive Director, UK. The Committee
members have a broad range of skills and expertise,
which are updated through training and development.
Some members also hold external non-executive
directorships, giving them valuable board experience.
The Committee officially met 12 times this year, but the
members interact much more regularly. Those members
of the Committee who are not Directors regularly attend
Board and committee meetings for specific agenda items.
This means that knowledge is shared and all members are
kept up to date with business activities and developments.

Disclosure Committee
The role of the Disclosure Committee is to assist the
Chief Executive and the Finance Director in fulfilling their
responsibility for overseeing the accuracy and timeliness
of the disclosures made – whether in connection with our
presentations to analysts, financial reporting obligations,
or other material stock exchange announcements,
including the disclosure of price sensitive information.

This year the Committee met to consider the announcements
of the full- and half-year results and reported on relevant
matters to the Audit Committee. In doing so it spent time
considering the Company’s disclosure obligations relating
to the announcement of the proposed UK Gas Distribution
sale process and the expected impact this would have on
the Company’s growth rate.

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 Tax and Treasury Director, the Global
Financial Controller, the Director of Investor Relations, the
Head of Corporate Audit and the Deputy Group General
Counsel, with other attendees as appropriate.

Management committees

National Grid Annual Report and Accounts 2015/16Corporate GovernanceA.4 Role of the Non-executive Directors
Our Senior Independent Director acts as a
sounding board for the Chairman and serves
as an intermediary for the other Directors,
as well as shareholders when required.

Independent of management, our Non-
executive Directors bring diverse skills and
experience, vital to constructive challenge
and debate. Exclusively, they form the
Audit, Nominations and Remuneration
Committees, and their views are actively
sought when developing proposals
on strategy.

Around the Board meetings, the
Chairman holds meetings with the Non-
executive Directors without the Executive
Directors present.

Statement of compliance with the UK
Corporate Governance Code

The UK Listing Rules require that listed
companies must include in their annual report
a statement of whether the Company has
complied with all the relevant provisions of
the UK Corporate Governance Code. The UK
Corporate Governance Code was published
in September 2014 (the Code), available in full
at www.frc.org.uk.

For the year ended 31 March 2016, the Board
considers that it has complied in full with the
provisions of the Code. Our statement of
compliance opposite explains the main aspects
of the Company’s governance structure to give
a greater understanding of how the Company
has applied the principles and complied with
the provisions in the Code. The main report
also explains compliance with the Disclosure
Rules and Transparency Rules. The index
on page 67 sets out where to find each of the
disclosures required in the Directors’ Report
in respect of Listing Rule 9.8.4, together with
the Board’s sign-off on the report.

A. Leadership

A.1 The role of the Board
Our Board is collectively responsible for
the effective oversight of the Company
and its businesses. It also determines the
strategic direction, business plan, objectives,
principal risks, viability of the Company and
governance structure that will help achieve
the long-term success of the Company and
deliver sustainable shareholder value.

The Board sets the risk appetite and principal
risks for the Company and takes the lead in
areas such as safeguarding the reputation of
the Company and its financial policy, as well
as making sure we maintain a sound system
of internal control and risk management
(see pages 26 to 29).

There is a clear schedule of matters reserved
for the Board and a schedule of delegation,
which were both updated in January 2016.
The schedule of matters reserved for the
Board is available on our website, together
with other governance documentation.

A.2 A clear division of responsibilities
The Board supports the separation of the
roles of the Chairman and Chief Executive.
The key responsibilities are clearly
documented and reviewed when appropriate.
The Chairman manages and leads the
Board. The Chief Executive is responsible
for the executive leadership and day-to-day
management of the Company and the
Group’s businesses, to ensure the delivery
of the strategy agreed by the Board.

A.3 Role of the Chairman
The Chairman, who was independent on
appointment, is responsible for the leadership
and management of the Board and its
governance. He makes sure the Board is
effective in its role by promoting a culture of
openness and debate, facilitating the effective
contribution of all Directors and helping
to maintain constructive relations between
Executive and Non-executive Directors.
The Chairman sets the Board’s agenda
making sure consideration is given to the
main challenges and opportunities facing the
Company, and adequate time is available to
discuss all items, including strategic issues.

National Grid Annual Report and Accounts 2015/16

Corporate Governance

B. Effectiveness

B.1 The composition of the Board

With the agreement of the Board, Executive

B.6 Evaluation

The Board believes it operates effectively

Directors gain experience of other companies’

See pages 52 and 53 for more information

with an appropriate balance of independent

operations, governance frameworks and

on our externally facilitated Board evaluation,

Non-executive and Executive Directors who

boardroom dynamics through non-executive

undertaken by Independent Audit Limited.

have the right balance of skills, experience,

appointments. The fees for these positions

independence and knowledge of the Company.

are retained by the individual.

During the year, the Chairman met

each Director individually to discuss their

contribution, performance over the year and

Details of our Board, their individual

For further details about the Directors’

biographies and Committee membership

service contracts and letters of appointment,

training and development needs. Following

are set out on pages 47 and 48. Board

see page 74 of the Directors’ Remuneration

these meetings, Sir Peter confirmed to the

and Committee attendance during the year

Report.

to 31 March 2016 is set out on page 52.

B.4 Development

Nominations Committee that he considered

that each Director demonstrated commitment

to the role and their performance continued

The independence of the Non-executive

All new Directors are provided with a full

to be effective.

Directors is considered at least annually along

induction programme when they are appointed

with their character, judgement, commitment

to the Board. Details of Director induction

At a private meeting of the Non-executive

and performance on the Board and relevant

and development can be found on page 51.

Directors, Mark Williamson, as Senior

committees. The Board took into consideration

the Code and indicators of potential non-

independence, including length of service.

The Board considered Paul Golby’s

independence separately following the

announcement of his appointment as

Chairman of Costain Group plc (a major

supplier to the Company). The situational

conflict was authorised (including putting

in place protective measures to ensure

the conflict is appropriately managed)

and his independence was confirmed.

B.5 Information and support

The Group General Counsel & Company

Secretary makes sure that appropriate and

timely information is provided to the Board

and its Committees and is responsible for

advising and supporting the Chairman

and the Board on all governance matters.

All Directors have access to the Group

General Counsel & Company Secretary and

may take independent professional advice

at the Company’s expense in conducting

their duties.

At year end, all of the Non-executive

To support discussion and decision making,

Directors, with the exception of the Chairman,

Board and committee members receive

who’s independence is only determined

on appointment, have been determined

by the Board to be independent.

papers sufficiently in advance of meetings

so that they can prepare for and consider

agenda items. Additionally, the Chairman

Independent Director, led a review of the

Chairman’s performance. The Non-executive

Directors, with input from the Executive

Directors, assessed his ability to fulfil his role

as Chairman and considered the arrangements

he has in place, given he is also chairman of

a FTSE 250 company and the Aircraft Carrier

Alliance Management Board and a Trustee

of The Sutton Trust Board. They concluded

that Sir Peter’s performance continued to

be effective.

B.7 Election/re-election

Each Director is subject to election at

the first AGM following their appointment,

and re-election at each subsequent AGM.

Following recommendations from the

Nominations Committee the Board considers

all Directors continue to be effective,

holds a short meeting with the Non-executive

committed to their roles and have sufficient

Directors before each Board meeting to

discuss the focus of the upcoming meeting

as well as afterwards to share feedback from

the meeting. Similarly, the Chief Executive

holds a short meeting with the Executive

Directors and the Group General Counsel

& Company Secretary after each meeting

time available to perform their duties.

Therefore, in accordance with the Code,

Nicola Shaw will seek election and

all other Directors will seek re-election at the

2016 AGM as set out in the Notice of Meeting,

with the exception of Steve Holliday who is

retiring from the Company with effect from

and shares the feedback from these meetings

22 July 2016.

B.2 Appointments to the Board

The Nominations Committee, which comprises

the Chairman and Non-executive Directors

leads the process for Board appointments

and makes recommendations to the Board.

The process for the appointment of John

Pettigrew as Chief Executive and Nicola Shaw

as Executive Director, UK were formal, rigorous

and transparent. Further details of each

appointment process, succession planning

and the role of the Nominations Committee

can be found on page 61.

B.3 Time commitment

Non-executive Directors are advised of the

time commitment expected from them on

appointment. External commitments, which

may impact existing time commitments,

must be agreed with the Chairman. Details

of external appointments are set out in

the biographies on pages 47 and 48.

As part of the evaluation of the Chairman,

the Non-executive Directors, with input from

the Executive Directors, assessed his ability

to fulfill his role as Chairman, taking into

account other significant appointments.

with the Chairman.

Last year we engaged external specialists

to review our current papers and develop a

new reporting framework for the Board and

its Committees. This has continued to result

in clearer more concise reporting, allowing

more time for quality discussions and

questions. A clear set of guidelines are in

place to assist the Executive Directors and

management on the content and presentation

of papers to the Board and committees.

A further refresh of the Board paper process

will commence this year.

Corporate Governance continued
A. Leadership

B. Effectiveness

A.1 The role of the Board

Our Board is collectively responsible for

the effective oversight of the Company

and its businesses. It also determines the

A.4 Role of the Non-executive Directors

Our Senior Independent Director acts as a

sounding board for the Chairman and serves

as an intermediary for the other Directors,

strategic direction, business plan, objectives,

as well as shareholders when required.

principal risks, viability of the Company and

governance structure that will help achieve

the long-term success of the Company and

deliver sustainable shareholder value.

Independent of management, our Non-

executive Directors bring diverse skills and

experience, vital to constructive challenge

and debate. Exclusively, they form the

The Board sets the risk appetite and principal

Audit, Nominations and Remuneration

risks for the Company and takes the lead in

Committees, and their views are actively

areas such as safeguarding the reputation of

sought when developing proposals

the Company and its financial policy, as well

on strategy.

There is a clear schedule of matters reserved

Directors present.

Around the Board meetings, the

Chairman holds meetings with the Non-

executive Directors without the Executive

as making sure we maintain a sound system

of internal control and risk management

(see pages 26 to 29).

for the Board and a schedule of delegation,

which were both updated in January 2016.

The schedule of matters reserved for the

Board is available on our website, together

with other governance documentation.

A.2 A clear division of responsibilities

The Board supports the separation of the

roles of the Chairman and Chief Executive.

The key responsibilities are clearly

documented and reviewed when appropriate.

The Chairman manages and leads the

Board. The Chief Executive is responsible

for the executive leadership and day-to-day

management of the Company and the

Group’s businesses, to ensure the delivery

of the strategy agreed by the Board.

A.3 Role of the Chairman

The Chairman, who was independent on

appointment, is responsible for the leadership

and management of the Board and its

governance. He makes sure the Board is

effective in its role by promoting a culture of

openness and debate, facilitating the effective

contribution of all Directors and helping

to maintain constructive relations between

Executive and Non-executive Directors.

The Chairman sets the Board’s agenda

making sure consideration is given to the

main challenges and opportunities facing the

Company, and adequate time is available to

discuss all items, including strategic issues.

B.6 Evaluation
See pages 52 and 53 for more information
on our externally facilitated Board evaluation,
undertaken by Independent Audit Limited.

During the year, the Chairman met
each Director individually to discuss their
contribution, performance over the year and
training and development needs. Following
these meetings, Sir Peter confirmed to the
Nominations Committee that he considered
that each Director demonstrated commitment
to the role and their performance continued
to be effective.

At a private meeting of the Non-executive
Directors, Mark Williamson, as Senior
Independent Director, led a review of the
Chairman’s performance. The Non-executive
Directors, with input from the Executive
Directors, assessed his ability to fulfil his role
as Chairman and considered the arrangements
he has in place, given he is also chairman of
a FTSE 250 company and the Aircraft Carrier
Alliance Management Board and a Trustee
of The Sutton Trust Board. They concluded
that Sir Peter’s performance continued to
be effective.

B.7 Election/re-election
Each Director is subject to election at
the first AGM following their appointment,
and re-election at each subsequent AGM.
Following recommendations from the
Nominations Committee the Board considers
all Directors continue to be effective,
committed to their roles and have sufficient
time available to perform their duties.
Therefore, in accordance with the Code,
Nicola Shaw will seek election and
all other Directors will seek re-election at the
2016 AGM as set out in the Notice of Meeting,
with the exception of Steve Holliday who is
retiring from the Company with effect from
22 July 2016.

B.1 The composition of the Board
The Board believes it operates effectively
with an appropriate balance of independent
Non-executive and Executive Directors who
have the right balance of skills, experience,
independence and knowledge of the Company.

With the agreement of the Board, Executive
Directors gain experience of other companies’
operations, governance frameworks and
boardroom dynamics through non-executive
appointments. The fees for these positions
are retained by the individual.

Details of our Board, their individual
biographies and Committee membership
are set out on pages 47 and 48. Board
and Committee attendance during the year
to 31 March 2016 is set out on page 52.

The independence of the Non-executive
Directors is considered at least annually along
with their character, judgement, commitment
and performance on the Board and relevant
committees. The Board took into consideration
the Code and indicators of potential non-
independence, including length of service.

The Board considered Paul Golby’s
independence separately following the
announcement of his appointment as
Chairman of Costain Group plc (a major
supplier to the Company). The situational
conflict was authorised (including putting
in place protective measures to ensure
the conflict is appropriately managed)
and his independence was confirmed.

At year end, all of the Non-executive
Directors, with the exception of the Chairman,
who’s independence is only determined
on appointment, have been determined
by the Board to be independent.

B.2 Appointments to the Board
The Nominations Committee, which comprises
the Chairman and Non-executive Directors
leads the process for Board appointments
and makes recommendations to the Board.
The process for the appointment of John
Pettigrew as Chief Executive and Nicola Shaw
as Executive Director, UK were formal, rigorous
and transparent. Further details of each
appointment process, succession planning
and the role of the Nominations Committee
can be found on page 61.

B.3 Time commitment
Non-executive Directors are advised of the
time commitment expected from them on
appointment. External commitments, which
may impact existing time commitments,
must be agreed with the Chairman. Details
of external appointments are set out in
the biographies on pages 47 and 48.

As part of the evaluation of the Chairman,
the Non-executive Directors, with input from
the Executive Directors, assessed his ability
to fulfill his role as Chairman, taking into
account other significant appointments.

For further details about the Directors’
service contracts and letters of appointment,
see page 74 of the Directors’ Remuneration
Report.

B.4 Development
All new Directors are provided with a full
induction programme when they are appointed
to the Board. Details of Director induction
and development can be found on page 51.

B.5 Information and support
The Group General Counsel & Company
Secretary makes sure that appropriate and
timely information is provided to the Board
and its Committees and is responsible for
advising and supporting the Chairman
and the Board on all governance matters.
All Directors have access to the Group
General Counsel & Company Secretary and
may take independent professional advice
at the Company’s expense in conducting
their duties.

To support discussion and decision making,
Board and committee members receive
papers sufficiently in advance of meetings
so that they can prepare for and consider
agenda items. Additionally, the Chairman
holds a short meeting with the Non-executive
Directors before each Board meeting to
discuss the focus of the upcoming meeting
as well as afterwards to share feedback from
the meeting. Similarly, the Chief Executive
holds a short meeting with the Executive
Directors and the Group General Counsel
& Company Secretary after each meeting
and shares the feedback from these meetings
with the Chairman.

Last year we engaged external specialists
to review our current papers and develop a
new reporting framework for the Board and
its Committees. This has continued to result
in clearer more concise reporting, allowing
more time for quality discussions and
questions. A clear set of guidelines are in
place to assist the Executive Directors and
management on the content and presentation
of papers to the Board and committees.
A further refresh of the Board paper process
will commence this year.

Statement of compliance with the
UK Corporate Governance Code

National Grid Annual Report and Accounts 2015/16Corporate GovernanceE. Relations with
shareholders

E.1 Dialogue with shareholders
The Board as a whole is responsible for
making sure that satisfactory dialogue with
shareholders takes place. We believe that
effective channels of communication with
the Company’s debt and equity institutional
investors and individual shareholders are
very important. More information about
our approach to relations with shareholders
can be found on page 51.

E.2 Constructive use of
General Meetings
The AGM provides a key opportunity for
the Board to communicate with and meet
shareholders. Shareholders are able to learn
more about the Company through exhibits
and can ask questions directly of the Board.
Company representatives and our Registrar
are also on hand to answer any questions
shareholders might have.

Our AGM will be held on Monday 25 July 2016
at The International Convention Centre in
Birmingham and broadcast via our website.
The Notice of Meeting for the 2016 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.

Statement of compliance with the UK
Corporate Governance Code continued

C. Accountability

D. Remuneration

D.1 The level and components
of remuneration
The Remuneration Committee is responsible
for recommending to the Board the
remuneration policy for Executive Directors
and other members of the Executive
Committee and for the Chairman, and for
implementing this policy. The aim is to align
remuneration policy to Company strategy
and key business objectives and make sure
it reflects our shareholders’, customers’
and regulators’ interests.

The Remuneration Report on pages 68
to 81 outlines the activities of the Committee
during the year and sets out excerpts of
the Directors’ remuneration policy table as
approved by shareholders at the 2014 AGM.

D.2 Procedure
For further information on the work of the
Remuneration Committee and Directors’
remuneration packages see the Directors’
Remuneration Report on pages 68 to 81.
The Committee’s terms of reference are
available on our website.

C.1 Financial and business reporting
The requirement for Directors to state
that they consider the Annual Report
and Accounts, taken as a whole, is fair,
balanced and understandable remains a
key consideration in the drafting and review
process. The coordination and review of the
Annual Report is conducted in parallel with
the formal audit process undertaken by the
external auditors and the review by the Board
and its committees (of relevant sections).

The drafting and assurance process
supports the Audit Committee’s and Board’s
assessment of the overall fairness, balance
and clarity of the Annual Report and the
statement of Directors’ responsibilities
as set out on page 84. The independent
auditor’s report is on pages 85 to 92 and
the Company’s business model is on
pages 14 and 15.

C.2 Risk management and
internal control
The Board has carried out a robust
assessment of the principal risks facing the
Company including those that would threaten
the business model, future performance,
solvency or liquidity. Further details can be
found on pages 27 and 28.

The Board also sets the Company’s
risk appetite, internal controls and risk
management processes. The Board
undertakes a review of their effectiveness
annually. Further details are set out on
pages 26–29.

The activities of the Audit Committee, which
assists the Board with its responsibilities in
relation to risk and assurance, are set out
on pages 54 to 58.

C.3 Audit Committee and auditors
The Audit Committee report on pages 54
to 58 sets out details of how the Committee
has discharged its duties during the year,
matters reviewed by the Committee and
how it ensures the auditor’s objectivity,
effectiveness and continued independence.
The Audit Committee report also explains the
audit tender process that was undertaken
during the year.

National Grid Annual Report and Accounts 2015/16

Corporate Governance

Corporate Governance continuedCorporate Governance

Index to Directors’ Report
and other disclosures
(starting on page indicated)

AGM
Articles of Association
Audit information
Board of Directors
Business model
Change of control provisions
Code of Ethics
Conflicts of interest
Contractual and other arrangements
Directors’ indemnity
Directors’ share interests
Directors’ service contracts and
letters of appointment
Diversity
Dividends
Events after the reporting period
Financial instruments
Future developments
Greenhouse gas emissions
Human Rights
Important events affecting the
Company during the year
Internal control
Internal control over financial reporting
Listing Rule 9.8.4 R cross reference table
Material interests in shares
People
Political donations and expenditure
Research and development
Risk management
Share capital

66
187
84
47
14
193
193
193
176
194
79

74
44
05
188
126
08
21
194

06
26
29
194
189
44
194
194
26
189

Index to Directors’ Report
and other disclosures

National Grid Annual Report and Accounts 2015/16Corporate GovernanceDirectors’ Remuneration Report

Jonathan Dawson
Committee chairman

Annual statement from the
Remuneration Committee chairman

Overview
At the Company’s AGM in 2015 more than 97% of votes
cast were to approve the Remuneration Report for that
year. As with last year we are not proposing any changes
to the formal remuneration policy for National Grid and
so this year there is only a vote on the implementation
of this policy.

The key elements of our policy are:

• significant weighting towards long-term incentives

•

versus short-term incentives;
the bulk of senior executive remuneration to be paid
in National Grid shares, with all of the Long Term
Performance Plan (LTPP) paid only in shares, and half
of the Annual Performance Plan (APP) paid in shares;
• very high levels of personal shareholding required to
be held by senior executives – 500% of pre-tax salary
for the CEO and 400% for other Executive Directors;
three-year performance period for measuring potential
awards under the LTPP coupled with a holding
period of a further two years irrespective of whether
the mandatory personal shareholding target has
been attained; and

•

• performance metrics for the LTPP are RoE (measuring

management’s performance in generating profit
from the business) and Value Growth (measuring
management’s longer term performance in creating
shareholder value).

We believe that our policy ensures that the rewards paid
to senior executives are closely matched with shareholders’
experience. In particular, we regard it as very important
that senior executives see their annual remuneration in
the context of a long-term build-up of their investment
in National Grid and that the growth in value of their
shareholding and the dividends paid on those shares
represent a material personal financial exposure to the
success of the Company. As a result we think that the
overall remuneration structure illustrates a high level of
alignment with shareholders, and promotes an appropriate
focus on long-term value within the Company.

Performance for the year
APP
National Grid has had another successful year overall.
Record capital investment of £3.9 billion has been
undertaken, split equally between the UK and US, and a
programme of critical rate case filings has been successfully
initiated in the US. As in prior years, the EPS figure used
for APP purposes, 62.3 pence, differs slightly from the
reported figure of 63.5 pence as it is adjusted for the impact
of timing, scrip dividend uptake and exchange rate effects.
It has also been reduced to take account of the absence of
an increase in the UK corporate tax rate originally included

National Grid Annual Report and Accounts 2015/16

Corporate Governance

in the Group budget. The overall impact of these
adjustments was a decrease of 1.2 pence. Similarly, the
Group RoE figure used for the APP calculation, 12.0%, has
been reduced by 0.3 percentage points to take account
of the absence of the increase in the UK corporate tax
rate referred to above. Notwithstanding this, the EPS of
62.3 pence and Group RoE of 12.0% both met or exceeded
the stretch performance levels set by the Committee at
the start of the year, benefitting from realised gains
achieved from the exchange of National Grid USA’s share
in the Iroquois pipeline joint venture and strong results
from our Other businesses led by the performance of the
French interconnector. In the UK, the regulated businesses
delivered good returns of 13.3%. Regulated US RoE was
8.0%, which reflected steady performance though was
down on last year due to continued cost pressures as
the business awaits outcomes of rate case filings. This
figure, however, does not capture the gains achieved from
the exchange of National Grid USA’s share in the Iroquois
pipeline joint venture referred to above, and therefore
has been adjusted by the Committee to reflect half of this
gain for US participants in the APP, which the Committee
believes properly reflects performance.

As a result, in respect of the financial measures for the APP
(representing 70% of the value of the APP) the Committee
made awards to Executive Directors ranging from 75% to
100% of the maximum potential for financial performance.
The balance of the award (30% by value) is represented
by individual executives’ assessed performance against
specific objectives set by the Committee at the start of
the year, resulting in awards ranging from 80% to 86%
of the maximum potential for individual performance.
In aggregate, therefore, Executive Directors’ APP awards
fall in the range of 95% to 119% of salary. This compares
with last year’s APP awards where the range was 65%
to 119% of salary.

Because of commercial sensitivity we retrospectively
disclose annual targets for the APP, which are set out
on page 76. This year, we have sought to enhance our
disclosure, including the retrospective disclosure of
threshold and stretch performance levels for EPS and
Group RoE, which now sits alongside the disclosure
of our LTPP threshold and stretch performance levels.
Target performance levels for both EPS and Group RoE
were higher than for 2014/15; however, the target
performance levels for UK RoE and US RoE were reduced,
due to the expected returns under the RIIO framework
in the UK and the impact of the timing of rate plan filings
in the US. We have decided to maintain the same
performance metrics for the 2016/17 APP awards and
we will repeat our retrospective disclosure of performance
levels in next year’s remuneration report.

LTPP
The LTPP that vested in 2015/16 was that awarded
in 2012. Vesting outcomes ranged from 63% to 76%
of maximum. Before making its final determination of
executives’ annual and long-term awards, the Committee
gives careful consideration to a number of important
non-financial measures including our safety performance,
reliability and levels of customer satisfaction in both the
UK and the US, and considers whether a downward
adjustment should be made to any executive’s award.
This year the Committee concluded that there was no
reason to make any adjustment. As our Executive Director,
US, Dean Seavers, only joined the Board at the beginning
of 2015/16, he has not received any vested LTPP for this
year, and will not do so until 2017.

The award made in 2015 is the second award in respect
of the LTPP granted under the new remuneration policy
in 2014. This is a three-year plan with a maximum award
of 350% of salary for the CEO and 300% for the other
Executive Directors. Its outcome will only be known

following the results for the year ending March 2017. I
reported last year that, at the end of the first performance
year, Group RoE and Value Growth were on target in
relation to the parameters set by the Committee, with UK
RoE around stretch and US RoE below threshold. For this
year the position is broadly comparable in respect of both
the 2014 and 2015 LTPP grants. Taking account of
performance to date of the 2014 and 2015 LTPP awards,
the Committee has decided to make no changes to the
performance metrics and targets for the 2016 LTPP award.

Executive Director shareholdings
Two years ago, we introduced high levels of shareholding
requirements for our Executive Directors, in order to further
align them to our shareholders. At 31 March 2016, both
Andrew Bonfield and Steve Holliday have exceeded these
shareholding requirements. As John Pettigrew and Dean
Seavers were appointed to the Board relatively recently,
neither of them has yet met their shareholding requirements
and will therefore not be given permission to sell shares
until they have done so, other than to pay tax on receipt
of the vested shares or in exceptional circumstances.

Changes to the Board
Following the announcement of Steve Holliday’s retirement
as CEO, John Pettigrew was promoted to CEO with
effect from 1 April 2016. John’s salary has been set at
£825,000. His APP opportunity remains at 125% of salary,
and his LTPP opportunity has increased to 350% of salary
from 2016 onwards. Steve stepped down as CEO on
31 March 2016 but will remain on the Board until 22 July
to facilitate a successful transition. In March, we announced
that Nicola Shaw will join the Board as our new UK
Executive Director on 1 July 2016, succeeding John.
Nicola’s salary has been set at £450,000. Her APP
opportunity is 125% of salary and her LTPP opportunity
is 300% of salary. Nicola will be eligible to receive a 2016
LTPP award. In addition, she will receive a cash payment
of up to £485,000 to compensate her for incentive cash
awards that were due to vest in June 2016 that she has
foregone on leaving her former employer. Subject to their
individual performance, the Committee intends to increase
each of John’s and Nicola’s salaries towards market level
by way of future phased increases from 2017 in excess of
those awarded to other Company employees. All of these
arrangements are in line with the approved policy on
recruitment remuneration and have already
been announced.

salary was not increased in 2015. John Pettigrew’s salary
was increased by 7% to move his salary closer towards
market as Executive Director, UK in 2015. In line with
regional managerial pay budgets in 2016, salary
increases in 2016 are 2% for Andrew Bonfield and
2.5% for Dean Seavers.

Impact of the expected sale of a majority
interest in the UK Gas Distribution business
Ahead of the expected sale of a majority interest in the
Gas Distribution business in 2016/17, the Committee is
considering the impact on inflight LTPP and APP awards,
and will make appropriate adjustments to relevant metrics
within both the parameters and the spirit of the remuneration
policy following any such sale. We will report this to you
in next year’s remuneration report.

Conclusion
As I reported last year, remuneration continues to be
in a transitional phase since the APP maximum has been
lowered to 125% of salary from 150% while the LTPP
represents previous bases of measurements, timescales
and policy limits. This transition will continue for a further
year when the final element of the 2013 LTPP vests in 2017
and the 2014 LTPP (the first awarded under the current
remuneration policy) matures.

As with last year, we are not seeking any changes to the
current remuneration policy, which will expire at the 2017
AGM. The Committee has begun to address whether the
current policy should be proposed without any material
changes or whether some modification may be required
to reflect changes in the market and the evolution of the
Company. I will report on the outcome of this review next
year when we will seek your authority for a new three-year
policy mandate.

Regarding the 2015/16 year, the Committee believes
that it has correctly implemented the approved policy and
that the remuneration earned last year by senior executives
properly reflects the performance of the Company and the
value generated for shareholders. Accordingly, I commend
this remuneration report to you on behalf of the Committee,
and ask for your support for the resolution to approve the
report at the AGM.

Annual salary review
Steve Holliday’s and Andrew Bonfield’s annual salaries
were increased by approximately 1% in 2015. In line with
the US managerial pay budget, Dean Seavers’ annual

Jonathan Dawson
Committee chairman

At a glance

Performance
A comparison of the total 2015/16 single total figure of remuneration to the maximum remuneration if variable pay
had vested in full is set out below.

Total remuneration

Executive Director
Andrew Bonfield

Steve Holliday

John Pettigrew

Dean Seavers

Maximum
remuneration

2015/16 single figure
remuneration

£’000
4,077

6,478

1,815

1,883

£’000
3,228

5,151

1,569

1,684

13%

28%

13%

28%

27%

24%

32%

35%

39%

61%

17%

32%

42%

Andrew
Bonfield

Steve
Holliday

John
Pettigrew

Dean
Seavers

Key

LTPP – share appreciation
and dividend equivalents
LTPP – face value
APP
Fixed

At a glance

National Grid Annual Report and Accounts 2015/16Corporate Governance

At a glance continued

Base salary

Annual Performance
Plan (APP)

Long Term
Performance Plan
(LTPP)

Pension and
other benefits

Key features of policy

• Targeted broadly at mid-market against
FTSE 11-40 for UK Executive Directors
and general industry and energy services
companies with similar revenue for US
Executive Directors

• Maximum opportunity is 125% of salary
• 50% paid in cash, 50% paid in shares,
which must be retained until later of
two years and meeting shareholding
requirement

• Subject to both clawback and malus

• Maximum award level is 350% of
salary for CEO and 300% for other
Executive Directors

• Vesting subject to long-term performance
conditions. Shares must be retained
until later of two years from vesting and
meeting shareholding requirement
• Subject to both clawback and malus

Annual report on remuneration
for 2015/16

• Salary increases of 0–7% for 2015
• Salary increases of 2–2.5% for 2016
• Hired Nicola Shaw as new Executive

Director, UK on an annual base salary
of £450,000

• Appointed John Pettigrew as CEO

on an annual base salary of £825,000

• 70% based on financial metrics

(35% EPS, 35% RoE), 30% based
on individual objectives

• Group RoE for CEO and Finance Director;

•

UK RoE for Executive Director, UK;
US RoE for Executive Director, US
Individual objectives cover: safety and
compliance; Group and financial strategy;
business growth; operational excellence;
customer experience; employee
engagement; capability development;
and stakeholder relations

• 50% value growth, 50% RoE
• Group RoE for CEO and Finance Director;

even split of Group and UK RoE for
Executive Director, UK; even split of Group
and US RoE for Executive Director, US

• Three-year performance period

• External appointees participate in

Defined Contribution (DC) plan or cash
in lieu of pension; internal appointees
retain current benefits, subject to capping
of pensionable pay increases for Defined
Benefit (DB) plans

• UK DB (Steve Holliday, John Pettigrew):
maximum of two-thirds final capped
pensionable pay or (Steve Holliday)
one thirtieth accrual

• UK cash allowance (Andrew Bonfield):

30% of salary

• Pensionable pay is salary only in UK

• US DC (Dean Seavers): 9% of

and salary and APP in US in alignment
with the market

• Other benefits as appropriate

Share ownership
guidelines

• 500% of salary for CEO
• 400% of salary for other

Executive Directors

pensionable pay with additional match
of up to 4%

• Other benefits include private medical
insurance, life assurance, and, for
UK Executive Directors, either a fully
expensed car or a cash alternative to a
car and the use of a driver when required

• Steve Holliday and Andrew Bonfield
have both met their shareholding
requirements

• John Pettigrew and Dean Seavers were

appointed to the Board relatively recently,
and therefore have not yet met their
shareholding requirements

National Grid Annual Report and Accounts 2015/16

Corporate Governance

Corporate Governance continuedDirectors’ remuneration policy – approved by shareholders in 2014

Key aspects of the Directors’ remuneration policy, along with elements particularly applicable to the 2015/16 financial year are shown on pages
71–74 for ease of reference only. This policy was approved for three years from the date of the 2014 AGM held on 28 July 2014. A shareholder
vote on the remuneration policy is not required in 2016. Please note that the information shown has been updated to take account of the fact
that the policy is now approved and current rather than proposed. A copy of the full remuneration policy is available on the Company website
at www.investors.nationalgrid.com/reports/2013-14.

There may be circumstances from time to time when the Committee will consider it appropriate to apply some judgement and exercise discretion
in respect of the approved policy. This ability to apply discretion is highlighted where relevant in the policy, and the use of discretion will always
be in the spirit of the approved policy.

Our peer group
The Committee benchmarks its remuneration policy against appropriate peer groups annually to make sure we remain competitive in the
relevant markets. The primary focus for reward benchmarking is the FTSE 11-40 for UK-based Executive Directors and general industry and
energy services companies with similar levels of revenue for US-based Executive Directors. These peer groups are considered appropriate
for a large, complex, international and predominantly regulated business.

Approved policy table – Executive Directors

Salary

Purpose and link to strategy: to attract, motivate and retain high-calibre individuals, while not overpaying.

Operation

Salaries are targeted broadly at mid-market level.

They are generally reviewed annually. Salary reviews take
into account:

• business and individual contribution;
•
the individual’s skills and experience;
• scope of the role, including any changes in responsibility; and
• market data in the relevant comparator group.

Maximum levels

No prescribed maximum
annual increase.

Any increases are generally aligned
to salary increases received by other
Company employees and to market
movement. Increases in excess of
this may be made at the Committee’s
discretion in circumstances such as
a significant change in responsibility;
progression in the role; and alignment
to market level.

Performance metrics, weighting
and time period applicable

Not applicable.

Benefits

Purpose and link to strategy: to provide competitive and cost-effective benefits to attract and retain
high-calibre individuals.

Performance metrics, weighting
and time period applicable

Not applicable.

Maximum levels

Benefits have no predetermined
maximum, as the cost of providing
these varies from year to year.

Participation in tax-approved
all-employee share plans is subject
to limits set by the relevant tax
authorities from time to time.

Operation

Benefits provided include:

• company car or a cash alternative (UK only);
• use of a driver when required;
• private medical insurance;
•
• personal accident insurance;
• opportunity to purchase additional benefits under

life assurance;

flexible benefits schemes available to all employees; and
• opportunity to participate in the following HM Revenue &

Customs (UK) or Internal Revenue Service (US) tax-
advantaged all-employee share plans:

Sharesave: UK employees may make monthly contributions
from net salary for a period of three or five years. The savings
can be used to purchase shares at a discounted price, set
at the launch of each plan period.

Share Incentive Plan (SIP): UK employees may use gross
salary to purchase shares. These shares are placed in trust.

Incentive Thrift Plans (401(k) plans): US employees may
participate in these tax-advantaged savings plans. They are
DC pension plans in which employees can invest their own
and Company contributions.

Employee Stock Purchase Plan (ESPP) (423(b) plan): eligible
US employees may purchase ADSs on a monthly basis at
a discounted price.

Other benefits may be offered at the discretion of the Committee.

Directors’ remuneration policy –
approved by shareholders in 2014

National Grid Annual Report and Accounts 2015/16Corporate GovernanceDirectors’ remuneration policy – approved by shareholders in 2014 continued

Pension

Purpose and link to strategy: to reward sustained contribution and assist attraction and retention.

Performance metrics, weighting
and time period applicable

Not applicable.

Operation

Pension for a new Executive Director will reflect whether they are
internally promoted or externally appointed.

If internally promoted:

•

retention of existing DB benefits without enhancement,
except for capping of pensionable pay increases following
promotion to Board; or
retention of existing UK DC benefits or equivalent cash in lieu;
or
retention of existing US DC benefits plus 401(k) plan match,
provided through 401(k) plan and non-qualified plans.

If externally appointed:

• UK DC benefits or equivalent cash in lieu; or
• US DC benefits plus 401(k) plan match.

Andrew Bonfield, John Pettigrew and Dean Seavers are
treated in line with the above policy.

Steve Holliday is provided with final salary pension benefits.
For service prior to 1 April 2013, pensionable pay is normally
the base salary in the 12 months prior to leaving the Company.
For service from 1 April 2013 increases to pensionable pay are
capped at the lower of 3% or the increase in inflation. The pension
scheme rules allow for indexed prior salaries to be used for all
members. He participates in the unfunded scheme in respect
of benefits in excess of the Lifetime Allowance.

In line with market practice, pensionable pay for UK-based
Executive Directors includes salary only and for US-based
Executive Directors it includes salary and APP award.

Maximum levels

UK DB a maximum pension on
retirement, at age 60, of two thirds
final capped pensionable pay or up
to one thirtieth accrual. On death
in service, a lump sum of four times
pensionable pay and a two thirds
dependant’s pension is provided.

UK DC annual contributions
of 30% of salary. Life assurance
provision of four times pensionable
salary and a spouse’s pension equal
to one third of the Director’s salary
are provided on death in service.

US DB an Executive Supplemental
Retirement Plan provides for an
unreduced pension benefit at
age 62. For retirements at age 62
with 35 years of service, the pension
benefit would be approximately two
thirds of pensionable pay. Upon
death in service, the spouse would
receive 50% of the pension benefit
(100% if the participant died
while an active employee after
the age of 55).

US DC 9% of base salary plus
APP with additional 401(k) plan
match of up to 4%.

Annual Performance Plan

Purpose and link to strategy: to incentivise and reward the achievement of annual financial and strategic
business targets and the delivery of annual individual objectives.

Maximum levels

The maximum award is 125%
of salary.

Operation

Performance metrics and targets are agreed at the start of each
financial year. Performance metrics are aligned with strategic
business priorities. Targets are set with reference to the budget.
Awards are paid in June.

For APP awards made in 2013/14, 50% of any award was deferred
into shares in the Deferred Share Plan (DSP). The DSP has no
performance conditions and vests after three years, subject to
continued employment. These shares are subject to forfeiture
for leavers in certain circumstances.

The DSP was discontinued for APP awards made in respect of
years from 2014/15. Instead, 50% of awards are paid in shares,
which (after any sales to pay tax) must be retained until the
shareholding requirement is met, and in any event for two years
after receipt.

Awards are subject to clawback and malus provisions.

Performance metrics, weighting
and time period applicable

A significant majority of the APP
is based on performance against
corporate financial measures, with
the remainder based on performance
against individual objectives.
Individual objectives are role-specific.

The Committee may use its
discretion to set measures that
it considers appropriate in each
financial year and reduce the amount
payable, taking account of significant
safety or customer service standard
incidents, environmental and
governance issues.

The payout levels at threshold, target
and stretch performance levels are
0%, 50% and 100% respectively.

National Grid Annual Report and Accounts 2015/16

Corporate Governance

Corporate Governance continued
Long Term Performance Plan

Purpose and link to strategy: to drive long-term performance, aligning Executive Director incentives
to key strategic objectives and shareholder interests.

Maximum levels

The maximum award for the CEO
is 350% of salary and it is 300%
of salary for the other Executive
Directors.

For awards made between 2011 and
2013, the maximum award for the
CEO was 225% of salary and 200%
for the other Executive Directors.

Operation

Awards of shares may be granted each year, with vesting
subject to long-term performance conditions.

The performance metrics have been chosen as the Committee
believes they reflect the creation of long-term value within
the business. Targets are set each year with reference to
the business plan.

Awards are subject to clawback and malus provisions.
Notwithstanding the level of award achieved against the
performance conditions, the Committee may use its
discretion to reduce the amount vesting, and in particular
will take account of compliance with the dividend policy.

For awards granted from 2014, participants must retain
vested shares (after any sales to pay tax) until the shareholding
requirement is met, and in any event for a further two years
after vesting.

Performance metrics, weighting
and time period applicable

For awards between 2011 and 2013
the performance measures and
weightings were:

• adjusted EPS (50%) measured

over three years;

• TSR relative to the FTSE 100

(25%) measured over three years;
and

• UK or US RoE relative to

allowed regulatory returns
(25%) measured over four years.

From 2014, the performance
measures are:

• value growth and Group RoE
(for the CEO and Finance
Director); and

• value growth, Group RoE and

UK or US RoE (for the UK and US
Executive Directors respectively).

All are measured over a three-year
period.

The weightings of these measures
may vary year to year, but would
always remain such that the value
growth metric would never fall below
a 25% weighting and never rise
above a 75% weighting.

Between 2011 and 2013, 25% of the
award vested at threshold and 100%
at stretch, with straight-line vesting
in between. From 2014, only 20%
of the award vests at threshold.

Approved policy table – Non-executive Directors (NEDs)

Fees for NEDs

Purpose and link to strategy: to attract NEDs who have a broad range of experience and skills
to oversee the implementation of our strategy.

Operation

Maximum levels

Performance metrics, weighting
and time period applicable

There are no maximum fee levels.

Not applicable.

The benefits provided to the
Chairman are not subject to a
predetermined maximum cost,
as the cost of providing these
varies from year to year.

NED fees (excluding those of the Chairman) are set by the
Executive Committee in conjunction with the Chairman;
the Chairman’s fees are set by the Committee.

Fee structure:

• Chairman fee;
• basic fee, which differs for UK- and US-based NEDs;
• committee membership fee;
• committee chair fee; and
• Senior Independent Director fee.

Fees are reviewed every year and are benchmarked against
those in companies of similar scale and complexity.

NEDs do not participate in incentive or pension plans and, with
the exception of the Chairman, are not eligible to receive benefits.
The Chairman is covered by the Company’s private medical
and personal accident insurance plans and receives a fully
expensed car or cash alternative to a car, with the use of a driver,
when required.

There is no provision for termination payments.

Directors’ remuneration policy –
approved by shareholders in 2014

National Grid Annual Report and Accounts 2015/16Corporate GovernanceDirectors’ remuneration policy – approved by shareholders in 2014 continued

Shareholding requirement
The requirement of Executive Directors to build up and hold a relatively high value of National Grid shares ensures they share a significant
level of risk with shareholders and their interests are aligned.

From 2014/15, Executive Directors are required to build up and retain shares in the Company. The level of holding required is 500% of salary
for the CEO and 400% of salary for the other Executive Directors.

Unless the shareholding requirement is met, Executive Directors will not be permitted to sell shares, other than to pay tax or in
exceptional circumstances.

Policy on recruitment remuneration
Salaries for new Executive Directors appointed to the Board will be set in accordance with the terms of the approved remuneration policy
in force at the time of appointment, and in particular will take account of the appointee’s skills and experience as well as the scope and market
rate for the role.

Where appropriate, salaries may be set below market level initially, with the Committee retaining discretion to award increases in salary in excess
of those of the wider workforce and inflation to bring salary to a market level over time, where this is justified by individual and Company
performance.

Benefits consistent with those offered to other Executive Directors under the approved remuneration policy in force at the time of appointment will
be offered, taking account of local market practice. The Committee may also agree that the Company will meet certain costs associated with the
recruitment, for example legal fees, and the Committee may agree to meet certain relocation expenses or provide tax equalisation as appropriate.

Pensions for new Executive Directors appointed to the Board will be set in accordance with the terms of the approved remuneration policy in force
at the time of appointment.

Ongoing incentive pay (APP and LTPP) for new Executive Directors will be in accordance with the approved remuneration policy in force at the
time of appointment. This means the maximum APP award in any year would be 125% of salary and the maximum LTPP award would be 300%
of salary (350% of salary for a new CEO).

For an externally appointed Executive Director, the Company may offer additional cash or share-based payments that it considers necessary
to buy out current entitlements from the former employer that will be lost on recruitment to National Grid. Any such arrangements would reflect
the delivery mechanisms, time horizons and levels of conditionality of the remuneration lost.

In order to facilitate buy-out arrangements as described above, existing incentive arrangements will be used to the extent possible, although
awards may also be granted outside of these shareholder-approved schemes if necessary and as permitted under the Listing Rules.

For an internally appointed Executive Director, any outstanding variable pay element awarded in respect of the prior role will continue on
its original terms.

Fees for a new Chairman or Non-executive Director will be set in line with the approved policy in force at the time of appointment.

Policy on payment for loss of office
In line with our policy, all Executive Directors have service contracts which are terminable by either party with 12 months’ notice.

The contracts contain provisions for payment in lieu of notice, at the sole and absolute discretion of the Company. Such payments are limited
to payment of salary only for the remainder of the notice period. In the UK such payments would be phased on a monthly basis, over a period
no greater than 12 months, and the Executive Director would be expected to mitigate any losses where employment is taken up during the notice
period. In the US, for tax purposes the policy is to make any payment in lieu of notice as soon as reasonably practicable, and in any event within
two and a half months of the later of 31 December and 31 March immediately following the notice date.

In the event of a UK Director being made redundant, statutory compensation would apply and the relevant pension plan rules may result in the
early payment of an unreduced pension.

On termination of employment, no APP award would generally be payable and any DSP awards would generally lapse. However, the Committee
has the discretion to deem an individual to be a ‘good leaver’, in which case an APP award would be payable on the termination date, based on
performance during the financial year up to termination, and DSP awards would vest on the termination date. Examples of circumstances in which
a Director would be treated as a ‘good leaver’ include redundancy, retirement, illness, injury, disability and death. Any APP award would be
prorated and would be subject to performance achieved against the objectives for that year.

On termination of employment, outstanding awards under the share plans will be treated in accordance with the relevant plan rules approved by
shareholders. Share awards would normally lapse. ‘Good leaver’ provisions apply at the Committee’s discretion and in specified circumstances,
including redundancy, retirement, illness, injury, disability and death, where awards will be released to the departing Executive Director or, in the
case of death, to their estate. Long-term share plan awards held by ‘good leavers’ may vest subject to performance measured at the normal
vesting date and are prorated. Such awards would vest at the same time as for other participants.

The Chairman’s appointment is subject to six months’ notice by either party; for the other Non-executive Directors, notice is one month.
No compensation is payable to Non-executive Directors if required to stand down.

National Grid Annual Report and Accounts 2015/16

Corporate Governance

Corporate Governance continued
Annual report on remuneration
Statement of implementation of remuneration policy in 2015/16

Role of Remuneration Committee
The Committee is responsible for recommending to the Board the remuneration policy for Executive Directors and the other members of the
Executive Committee and for the Chairman, and for implementing this policy. The aim is to align remuneration policy to Company strategy and key
business objectives and ensure it reflects our shareholders’, customers’ and regulators’ interests. The members of the Remuneration Committee
in 2015/16 were Nora Mead Brownell, Jonathan Dawson (chair), Paul Golby and Mark Williamson.

The Committee activities during the year

Meeting

April

May

October

November

March

Main areas of discussion

2014/15 individual objectives scoring for Executive Committee
Discussion of 2015/16 objectives for Executive Committee
Review of Executive Committee shareholdings
Review of Committee terms of reference

Annual salary review and LTPP proposals for Executive Committee
2014/15 APP financial outturns and individual performance and confirmation of awards
Final approval of 2015/16 objectives for Executive Committee
Final approval of APP targets for 2015/16 financial year
Review of gender and ethnicity pay statistics

Approval of remuneration package for incoming CEO and of payments
on retirement for outgoing CEO

Update on corporate governance and disclosure issues and review of AGM outcomes
Directors’ Remuneration Report planning for 2016
Review of competitive benchmarking for secondary comparator groups
Review of gender and ethnicity pay statistics disclosure for external website
Update on 2015/16 APP and outstanding LTPPs

Approval of remuneration package for incoming Executive Director, UK
Benchmarking data review for Executive Committee remuneration
2016 Directors’ Remuneration Report – review of first draft
Discussion of metrics and targets for APP and LTPP for 2016/17
Review of objectives for Executive Committee for APP 2016/17

Single total figure of remuneration – Executive Directors (audited information)
The following table shows a single total figure in respect of qualifying service for 2015/16, together with comparative figures for 2014/15:

Salary
£’000

2015/16
736

1,033

503

678

2014/15
727

1,021

475

–

Benefits in kind
£’000

2015/16
61

2014/15
58

–

Andrew Bonfield

Steve Holliday

John Pettigrew

Dean Seavers

APP
£’000

LTPP
£’000

Pension
£’000

Other
£’000

Total
£’000

2015/16
865

1,222

503

649

2014/15
854

1,210

527

–

2015/16
1,345

2,125

406

–

2014/15
1,271

2,004

396

–

2015/16
221

2014/15
218

2015/16
–

2014/15
–

2015/16
3,228

730

143

148

523

451

–

170

–

5,151

1,569

1,684

2014/15
3,128

4,798

1,867

–

Total

2,950

2,223

155

116

3,239

2,591

3,876

3,671

1,242

1,192

11,632

9,793

Notes:
Salary: Base salaries were last increased on 1 June 2015. At this time Andrew Bonfield and Steve Holliday received salary increases of approximately 1%, in line with the salary increases
given to other managerial employees of the Company in the UK. John Pettigrew was given an increase of 7% to move closer towards market as Executive Director, UK in 2015/16. Dean Seavers
joined the Board on 1 April 2015 and was not given a salary increase at 1 June 2015, in line with other managerial employees of the Company in the US. Dean Seavers’ base salary has been
converted at $1.4744:£1 for 2015/16.
Benefits in kind: Benefits in kind include private medical insurance, life assurance, and for UK Executive Directors, either a fully expensed car or a cash alternative to a car and the use
of a driver when required. For Andrew Bonfield, it also includes the benefits of Sharesave options granted during the year. For Dean Seavers, this amount includes relocation payments.
Other: For Dean Seavers, Other includes the second $250,000 cash payment for forfeited bonuses from his former employer.
LTPP: A portion of the 2012 LTPP award vested in July 2015, and the remainder is due to vest in July 2016. The above value for 2015/16 is based on the share price (818 pence) on the vesting
date (1 July 2015) for that portion that vested on 1 July 2015, and the average share price over the three months from 1 January 2016 to 31 March 2016 (958 pence) for that portion due to
vest on 1 July 2016. The 2014/15 LTPP amount has been restated to reflect the actual amounts vested on 1 July 2015 for RoE, rather than the estimate shown in last year’s Annual Report.
Due to a lower share price at vesting of 818 pence ($64.17 per ADS) versus the estimate of 899 pence ($70.33 per ADS), the actual value at vesting was £29,358, £46,335, and £12,441 lower
than the estimate for Andrew Bonfield, Steve Holliday and John Pettigrew respectively.

Annual report on remuneration

National Grid Annual Report and Accounts 2015/16Corporate GovernanceAnnual report on remuneration continued

Performance against targets for APP 2015/16 (audited information)
APP awards are earned by reference to the financial year and paid in June. Fifty percent of awards are paid in shares which (after any sales to
pay tax) must be retained until the shareholding requirement is met, and in any event for two years after receipt. In relation to both the financial
measures and individual objectives, threshold, target and stretch performance levels are pre-determined and pay out at 0%, 50% and 100%
respectively and on a straight-line basis in between threshold and target performance and target and stretch performance. Individual objectives
of the Executive Directors reflect the primary focus areas within the Company’s overall strategic priorities:

the drive for business growth in the UK and US;

• building on our strong safety performance;
•
• delivery of operational excellence and improvement in overall Company performance and service to customers;
• promotion of innovative ideas to work more efficiently and effectively;
• strengthening the talent pipeline and keeping all our employees fully engaged; and
• working with external stakeholders to shape energy policy and embed sustainability into our decision-making to preserve natural resources

and focus on environmental issues.

The outcomes of APP awards earned in 2015/16, along with detail of individual objectives, are shown in the figures below:

Adjusted EPS (p/share)

Group RoE (%)

UK RoE (%)

US RoE (%)

Proportion
of max

opportunity Threshold
56.2

35%

11.2

35%

Stretch
62.2

12.0

Target
59.2

11.6

13.25

8.25

Proportion
of max
achieved
100%

100%

55%

50%

Actual
62.3

12.0

13.3

8.25

Safety

Group strategy

Financial strategy
Business growth

Individual objectives

30%

See adjacent table

80–86%

Operational excellence

Notes:
Overall: Group RoE pertains to the CEO and Finance Director, whilst UK RoE and US RoE pertain
to the Executive Director, UK and Executive Director, US, respectively. RoE in some form comprises
35% of the total maximum APP opportunity.
Adjusted EPS: Adjusted EPS actual is reduced by 1.2 pence to account for the impact of timing,
absence of a budgeted rise in the UK corporate tax rate, and the impact of scrip dividend uptake
and currency adjustments.
Group RoE: Group RoE actual is reduced by 30 basis points to account for the absence of
a budgeted rise in the UK corporate tax rate.
US RoE: US RoE actual is adjusted to capture half of the realised gains achieved from the exchange
of National Grid USA’s share in the Iroquois pipeline joint venture.

Customer experience

Employee engagement

Capability development

Stakeholder relations

Proportion of
maximum achieved

Andrew
Bonfield
•

Steve
Holliday
•

John
Pettigrew
•

Dean
Seavers
•

•
•

•

80%

82%

86%

80%

2015/16 APP as proportion of base salary

125.00%

37.50%

117.50%

30.00%

125.00%
37.50%

118.25%

30.75%

125.00%

37.50%

125.00%

37.50%

43.75%

100.0625%

32.25%

95.625%

30.00%

24.06%

21.88%

43.75%

Max
Actual
Andrew Bonfield

Max
Steve Holliday

Actual

Max
John Pettigrew

Actual

Max
Dean Seavers

Actual

£919,750

£864,565

£1,291,666

£1,221,916

£628,385

£503,023

£847,802

£648,568

APP Amounts

Individual
US RoE
UK RoE
Group RoE
Adjusted EPS

2015/16 LTPP performance (audited information)
The LTPP value included in the 2015/16 single total figure relates to vesting of the conditional LTPP award granted in 2012. The 2012 award
is determined based on differing performance periods and vesting dates:

• performance over the three years ending 31 March 2015 for the EPS measure (50% weighting), which vested on 1 July 2015;
• performance over the three years ending 30 June 2015 for the TSR measure (25% weighting), which vested on 1 July 2015; and
• performance over the four years ending 31 March 2016 for the UK RoE measure and 31 December 2015 for the US RoE measure

(25% weighting overall, split by Executive Director as shown overleaf), which will vest on 1 July 2016.

National Grid Annual Report and Accounts 2015/16

Corporate Governance

Corporate Governance continued
The performance achieved against the targets, including the expected vesting percentage for the RoE measures, was:

Performance measure

Threshold – 25% vesting

Maximum – 100% vesting

Actual/expected vesting

TSR ranking (25% weighting)

Ranked at median of the
comparator group (FTSE 100)

7.5 percentage points or more
above median

2.99 percentage points
above median

Adjusted EPS (50% weighting)

EPS growth exceeds RPI increase
by 3 percentage points

EPS growth exceeds RPI increase
by 8 percentage points or more

Exceeded RPI increase by
6.3 percentage points

UK RoE (12.5% weighting for
the CEO and Finance Director;
25% weighting for the Executive
Director, UK)

US RoE (12.5% weighting for
the CEO and Finance Director;
25% weighting for the former
Executive Director, US)

RoE is equal to the average
allowed regulatory return

RoE is 2 percentage points or
more above the average allowed
regulatory return

Exceeded average allowed
regulatory return by
3.2 percentage points

RoE is 1 percentage point
below the average allowed
regulatory return

RoE is 1 percentage point
or more above the average
allowed regulatory return

1.1 percentage points below the
average allowed regulatory return

Actual/expected
proportion of
maximum achieved

55.0%

74.4%

100.0%

The amounts vesting under the 2012 LTPP during the year and included in the 2015/16 single total figure are shown in the table below.
The valuation is based on the following share prices:

• 818 pence ($64.17 per ADS) on the vesting date of 1 July 2015 for the EPS and TSR elements of the award; and
• average share price over the three months from 1 January 2016 to 31 March 2016 of 958 pence ($69.23 per ADS) for the RoE element

of the award.

Andrew Bonfield

Steve Holliday

John Pettigrew

Dean Seavers

Original number
of share awards
in 2012 LTPP
213,095

336,702

52,395

–

Overall vesting
percentage (including
expected vesting
percentage for RoE
measure)
63.45%

Number of awards
vesting (including
expected
vesting for RoE
measure)
135,203

63.45%

75.95%

–

213,628

39,793

–

Dividend
equivalent

shares
23,787

37,586

7,136

–

Total value of awards
vesting (including
expected vesting for RoE
measure) and dividend
equivalent shares

(£’000)
1,345

2,125

406

–

Last year’s Directors’ Remuneration Report covering remuneration for 2014/15 included an estimated vesting of the US and UK RoE portions
of the 2011 LTPP award. These awards vested on 1 July 2015 and the performance achieved against the performance targets was the same
as the expected vesting disclosed in the 2014/15 report. As a result of the actual achievement against the performance targets being the same
as estimated, the vesting percentage and number of awards vesting are the same as disclosed in the 2014/15 report. However, the actual number
of dividend equivalent shares varied as did the total value of awards vesting due to share price changes between the estimate and the actual date
of vesting of the RoE portion. Specifically, the actual price on 1 July 2015 was 818 pence ($64.17 per ADS) rather than the estimate of 899 pence
($70.33 per ADS) disclosed in the 2014/15 report based on the average price from 1 January 2015 to 31 March 2015. As a result, the actual
numbers of dividend equivalent shares granted for the 2011 LTPP were 22,454, 35,440 and 7,261 and the actual values of the awards at vesting
were £29,358, £46,335 and £12,441 lower than originally estimated for Andrew Bonfield, Steve Holliday and John Pettigrew respectively.

Total pension benefits (audited information)
The table below provides details of the Executive Directors’ pension benefits. Steve Holliday and John Pettigrew participate in a Defined Benefit
pension plan, whilst Andrew Bonfield receives cash in lieu of participation in a pension plan, and Dean Seavers participates in a Defined
Contribution arrangement. The UK-based Executive Directors in a Defined Benefit pension participate in a salary sacrifice arrangement (FPS),
under which the individual’s salary is reduced by an amount equal to the employee pension contribution that would have been paid into the
scheme. An equivalent contribution is paid into the scheme by the employer. There are no additional benefits in the event of early retirement.

Total
contributions
to DC
arrangement

Cash in lieu of
pension
contributions

Accrued
DB pension
at 31 March 2016

£’000
–

–

148

£’000
221

–

£’000 pa
–

591

151

–

Increase
in accrued
DB pension
over year
£’000 pa
–

–

Reduction
in salary
due to FPS

Increase/

(decrease) in
any lump sum

£’000
–

–

£’000
–

–

Value of
pension benefit
calculated using
BIS methodology
£’000
221

730

143

148

Normal
retirement

date
17/08/2027

26/10/2016

26/10/2031

30/08/2025

Andrew Bonfield

Steve Holliday

John Pettigrew

Dean Seavers

Notes:
Steve Holliday: In addition to the accrued DB pension at 31 March 2016 above, there is an accrued lump sum entitlement of £129,000 as at 31 March 2016. The increase to the accumulated
lump sum, net of inflation, was £2,000 in the year to 31 March 2016. The increase in accrued DB pension over the year shown above is net of inflation, as UK pensions in payment or deferment
increase in line with inflation.
John Pettigrew: In addition to the accrued DB pension at 31 March 2016 above, there is an accrued lump sum entitlement of £452,000 as at 31 March 2016. The increase to the accumulated
lump sum, net of inflation, was £23,000 in the year to 31 March 2016. The increase in accrued DB pension over the year shown above is net of inflation, as UK pensions in payment or deferment
increase in line with inflation.
Dean Seavers: The average exchange rate for 2015/16 was $1.4744:£1. Through his participation in the 401(k) plan in the US (a DC arrangement) the Company made contributions worth
£27,400. The Company also made contributions worth £121,049 to the Non-Qualified Executive Supplemental Retirement Plan which pays the portion of core contributions that cannot be paid
under the qualified plan due to IRS limitations. The plan also provides a supplemental top-up benefit through additional company contributions to yield an overall company contribution of 9% of
pensionable pay, including both the qualified and non-qualified plan benefits. The retirement date shown is the typical retirement age in the US. The 401(k) plan does not have a retirement age.
Benefits can be taken without penalty on leaving the Company from age 55 (subject to vesting requirements) or can be rolled over into another qualifying plan.
BIS calculation: In accordance with BIS methodology, the pension benefit for Andrew Bonfield and Dean Seavers is calculated as the aggregate of contributions made to a DC arrangement
and cash in lieu of pension contributions. Also in accordance with BIS methodology, the pension benefit for Steve Holliday and John Pettigrew is calculated as the increase in accrued DB
pension over the year shown above multiplied by 20 plus the increase in the lump sum shown above, less the reduction in salary due to FPS. Each element is calculated separately and rounded
to produce the numbers in the table above.

Annual report on remuneration

National Grid Annual Report and Accounts 2015/16Corporate GovernanceAnnual report on remuneration continued

Single total figure of remuneration – Non-executive Directors (audited information)
The following table shows a single total figure in respect of qualifying service for 2015/16, together with comparative figures for 2014/15:

Nora Mead Brownell

Jonathan Dawson

Therese Esperdy

Sir Peter Gershon

Paul Golby

Ruth Kelly

Mark Williamson

Total

Fees
£’000

2015/16
94

128

494

103

121

2014/15
91

488

118

1,121

1,044

Other emoluments
£’000

2015/16
–

2014/15
–

Total
£’000

2015/16
94

–

2014/15
91

504

118

128

509

103

121

1,136

1,060

Therese Esperdy: Fees for 2015/16 include £22,917 in fees for serving on the National Grid USA Board.
Sir Peter Gershon: Other emoluments comprise private medical insurance, cash in lieu of a car and the use of a driver when required.

In accordance with the Company’s expenses policies, Non-executive Directors receive reimbursement for their reasonable expenses for attending
Board meetings. In instances where those costs are treated by HMRC as taxable benefits, the Company also meets the associated tax cost to
the Non-executive Directors through a PAYE settlement agreement with HMRC.

The total emoluments paid to Executive and Non-executive Directors in the year was £13 million (2014/15: £15 million).

LTPP (conditional award) granted during the financial year (audited information)
The face value of the awards is calculated using the volume-average weighted share price at the date of grant (25 June 2015) (£8.5147 per share
and $66.9618 per ADS).

LTPP
Andrew Bonfield

Steve Holliday

John Pettigrew

Dean Seavers

Basis of award
300% of salary

350% of salary

300% of salary

Face value ’000
£2,211

£3,622

£1,525

$3,000

Proportion vesting at
threshold performance
20%

20%

Number of shares
259,668

425,440

179,072

44,801 (ADSs)

Performance

period end date
June 2018

June 2018

Performance conditions for LTPP awards granted during the financial year (audited information)

Performance measure
Group RoE

Andrew Bonfield
50%

Steve Holliday
50%

Weighting

UK RoE

US RoE

John Pettigrew
25%

25%

Dean Seavers
25%

Conditional share awards granted – 2015
Threshold – 20% vesting Maximum – 100% vesting
12.5% or more

11.0%

1 percentage point
above the average
allowed regulatory return

3.5 percentage points or
more above the average
allowed regulatory return

25%

90% of the average
allowed regulatory return

105% or more of the
average allowed
regulatory return

Value growth

50%

10.0%

12.0% or more

Payments for loss of office (audited information)
There were no payments made for loss of office during 2015/16.

Payments to past Directors (audited information)
Nick Winser stepped down from the Board at the 2014 AGM and left the Company on 31 July 2015. Tom King stepped down from the Board and
left the Company on 31 March 2015. Mr Winser and Mr King held awards over shares and ADSs, respectively, which were pro-rated according
to their departure date. The vesting of all these awards will occur at the normal vesting dates subject to satisfaction of their specified performance
conditions at that time. Portions of these awards vested on 1 July 2015 and pertain to the RoE portion of the 2011 LTPP and the TSR and EPS
portions of the 2012 LTPP.

Tom King

Nick Winser

Pro-rated number of
share awards in 2011

(RoE portion) and 2012 LTPP
44,846 (ADSs)

Overall vesting percentage
56.12%

Number of awards vesting
25,168 (ADSs)

Dividend equivalent
shares
4,063 (ADSs)

166,305

76.37%

127,000

24,035

Total value of awards
vesting and dividend

equivalent shares

(£’000)
1,202

1,235

Shareholder dilution
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 Committee reviews dilution against these limits regularly and under these limits the Company, as at 31 March 2016,
had headroom of 4.01% and 7.98% respectively.

National Grid Annual Report and Accounts 2015/16

Corporate Governance

Corporate Governance continuedStatement of Directors’ shareholdings and share interests (audited information)
The Executive Directors are required to build up and hold a shareholding from vested share plan awards. Deferred share plan awards are not taken
into account for these purposes until the end of the deferral period. Shares are valued for these purposes at the 31 March 2016 price, which was
987 pence per share ($71.42 per ADS).

The following table shows how each Executive Director complies with the shareholding requirement and also the number of shares owned
by the Non-executive Directors, including connected persons, as Non-executive Directors do not have a shareholding requirement.

The shareholding is as at 31 March 2016 and the salary used to calculate the value of shareholding is the gross annual salary as at 31 March 2016:

• The normal vesting dates for the conditional share awards subject to performance conditions are 1 July 2016; 1 July 2016 and 1 July 2017;

1 July 2017; and 1 July 2018 for the LTPP 2012, LTPP 2013, LTPP 2014 and LTPP 2015 respectively.

• The normal vesting dates for the conditional share awards subject to continuous employment are 13 June 2016 and 17 June 2017 for the

•

DSP 2013 and DSP 2014 respectively.
In each of April and May 2016 a further 15 shares were purchased on behalf of Andrew Bonfield, Steve Holliday and John Pettigrew
via the Share Incentive Plan (an HMRC approved all-employee share plan), thereby increasing their beneficial interests. There have been
no other changes in Directors’ shareholdings between 1 April 2016 and 18 May 2016.

• Both Andrew Bonfield and Steve Holliday have met their shareholding requirement of 400% and 500% of base salary, respectively. As both
John Pettigrew and Dean Seavers were relatively new in post, they have not yet met their requirements and will not be allowed to sell shares
other than to pay tax on receipt of vested shares or in exceptional circumstances until this requirement is met.

Directors
Executive Directors
Andrew Bonfield

Steve Holliday

John Pettigrew

Dean Seavers (ADSs)

Non-executive Directors
Nora Mead Brownell (ADSs)

Jonathan Dawson

Therese Esperdy (ADSs)

Sir Peter Gershon

Paul Golby

Ruth Kelly

Mark Williamson

Share ownership
requirements

(multiple of salary)

Number of shares
owned outright
(including connected
persons)

Number of shares
held as a multiple
of current salary

Number of options
granted under the
Sharesave Plan

Conditional share
awards subject to
performance
conditions (LTPP 2012,
2013, 2014 and 2015)

Conditional share
awards subject to
continuous
employment (DSP 2013
and 2014)

400%

500%

400%

–

317,711

1,306,289

198,749

1,225

5,000

36,586

1,600

83,363

2,500

800

4,726

426%

1,246%

386%

n/a

6,651

3,542

4,286

–

756,209

1,224,546

417,251

85,767

–

92,754

126,771

28,691

–

Notes:
Overall: Sharesave options are valued using fair values. Andrew Bonfield was the only Director who made a gain on the exercise of share options during the year.
Andrew Bonfield: On 31 March 2016 Andrew Bonfield held 6,651 options granted under the Sharesave plan. 2,022 options were granted at a value of 749 pence per share and they can be
exercised at 749 pence per share between April 2020 and September 2020. 1,208 options were granted at a value of 745 pence per share and they can be exercised at 745 pence per share
between April 2019 and September 2019. On 1 April 2016, he exercised a Sharesave option over 3,421 shares at the option price of 455 pence per share for expiration in September 2016 at
a gain of £18,549. For Andrew Bonfield, the number of conditional share awards subject to performance conditions is as follows: LTPP 2012: 53,273; LTPP 2013: 194,798; LTPP 2014: 248,470;
LTPP 2015: 259,668. The number of conditional share awards subject to continuous employment is as follows: DSP 2013: 45,706; DSP 2014: 47,048.
Steve Holliday: On 31 March 2016 Steve Holliday held 3,524 options granted under the Sharesave plan. 1,502 options were granted at a value of 599 pence per share, and they can be
exercised at 599 pence per share between April 2017 and September 2017. 2,022 options were granted at a value of 749 pence per share and they can be exercised at 749 pence per share
between April 2020 and September 2020. For Steve Holliday, the number of conditional share awards subject to performance conditions is as follows: LTPP 2012: 84,175; LTPP 2013: 307,793;
LTPP 2014: 407,138; LTPP 2015: 425,440. The number of conditional share awards subject to continuous employment is as follows: DSP 2013: 57,118; DSP 2014: 69,653.
John Pettigrew: On 31 March 2016 John Pettigrew held 4,286 options granted under the Sharesave plan. 1,252 options were granted at a value of 599 pence per share, and they can be
exercised at 599 pence per share between April 2019 and September 2019. 3,034 options were granted at a value of 749 pence per share and they can be exercised at 749 pence per share
between April 2020 and September 2020. The number of conditional share awards subject to performance conditions is as follows: LTPP 2012: 13,098; LTPP 2013: 63,361; LTPP 2014:
161,720; LTPP 2015: 179,072. The number of conditional share awards subject to continuous employment is as follows: DSP 2013: 14,341; DSP 2014: 14,350.
Dean Seavers: The number of conditional share awards subject to performance conditions is as follows: LTPP 2014: 40,966; LTPP 2015: 44,801.
Dean Seavers, Nora Mead Brownell and Therese Esperdy: Holdings and, for Dean Seavers, awards are shown as ADSs and each ADS represents five ordinary shares.

External appointments and retention of fees
The table below details the Executive Directors who served as non-executive directors in other companies during the year ended 31 March 2016
and were allowed to retain fees for their services:

Andrew Bonfield

Company
Kingfisher plc

Retained fees (£)
82,400

Relative importance of spend on pay
This chart shows the relative importance of spend on pay compared
with other costs and disbursements (dividends, tax, net interest and
capital expenditure). Given the capital-intensive nature of our business
and the scale of our operations, these costs were chosen as the most
relevant for comparison purposes. All amounts exclude exceptional
items and remeasurements.

+12.2%

3,893

3,470

+3.2%

1,459

1,506

+0.7%

1,611

1,622

+8.3%

695

753

-1.9%

1,033

1,013

Payroll costs

Dividends

Tax

Net interest

Capital expenditure

2014/15 £m
2015/16 £m

Annual report on remuneration

National Grid Annual Report and Accounts 2015/16Corporate GovernanceAnnual report on remuneration continued

Performance graph and table
This chart shows National Grid plc’s seven-year annual total
shareholder return (TSR) performance against the FTSE 100 Index
since 31 March 2009. The FTSE 100 Index has been chosen
because it is the widely recognised performance benchmark for
large companies in the UK. The Company’s TSR has outperformed
that of the FTSE 100 for the last five years and underpins
the pay shown for the CEO in the table below, using current
and previously published single total remuneration figures.

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. It assumes dividends are reinvested.

CEO’s pay in the last seven financial years
Steve Holliday was the CEO throughout this seven-year period.

Total single figure £’000

APP (proportion of maximum awarded)

PSP/LTPP (proportion of maximum vesting including expected vesting
for RoE measure)

Total shareholder return

300

250

200

150

100

289.19

248.64

227.33

211.21

223.74

211.45

197.94

190.98

155.79

167.17

173.94

123.65

131.11

100.00

155.42

31/03/09 31/03/10 31/03/11 31/03/12 31/03/13 31/03/14 31/03/15 31/03/16

National Grid plc

FTSE 100 Index

Source: Thomson Reuters

2009/10
3,931

2010/11
3,738

2011/12
3,539

2012/13
3,170

2013/14
4,801

2014/15
4,845

2015/16
5,151

95.33% 81.33%

68.67% 55.65% 77.94% 94.80% 94.60%

100.00% 65.15%

49.50% 25.15% 76.20% 55.81% 63.45%

Percentage change in CEO’s remuneration
The table below shows how the percentage change in the CEO’s salary, benefits and APP between 2014/15 and 2015/16 compares with the
percentage change in the average of each of those components of remuneration for non-union employees in the UK. The Committee views this
group as the most appropriate comparator group, as the CEO is UK-based and this group excludes employees represented by trade unions,
whose pay and benefits are negotiated with each individual union.

Steve Holliday

UK non-union employees (increase per employee)

Salary

Taxable benefits

APP

£’000

2015/16
1,033

£’000

Increase

2014/15
1,021

1.2%

1.9%

£’000

2015/16
41

£’000

Increase

2014/15
40

2.5%

7.9%

£’000

2015/16
1,222

£’000

Increase

2014/15
1,210

1.0%

(9.1)%

Note:
The APP for UK non-union employees decreased, which is a reflection of the reduction in payout level for the UK RoE measure which forms a key part of the APP for this population.

Statement of implementation of remuneration policy in 2016/17
The remuneration policy adopted at the 2014 AGM will continue to be implemented during 2016/17 as described below. Steve Holliday is retiring
in July 2016 and will be stepping down from the Board at that time. He will be treated as a ‘good leaver’ in line with our remuneration policy.
He is intending to draw from his pension from October 2016.

Salary
Salary increases will normally be in line with the increase awarded to other employees in the UK and US, unless there is a change in role or
responsibility. In line with the policy on recruitment remuneration, salaries for new directors may be set below market level initially and aligned
to market level over time (provided the increase is merited by the individual’s contribution and performance). John Pettigrew’s base salary
was increased to £825,000 upon his appointment as CEO. This was some £210,000 below that of Steve Holliday, the retiring CEO.

Andrew Bonfield

Steve Holliday

Nicola Shaw from 1 July 2016

John Pettigrew from 1 April 2016

Dean Seavers

From 1 June 2016
£751,740

£1,035,000

£450,000

£825,000

$1,025,000

From 1 June 2015
£737,000

£1,035,000

–

£508,250

$1,000,000

Increase
2.0%

n/a

62.3%

2.5%

APP measures for 2016/17
The APP targets are considered commercially sensitive and consequently will be disclosed after the end of the financial year in the 2016/17
annual report on remuneration. Steve Holliday will be eligible to receive a prorated portion of the 2016/17 APP.

Adjusted EPS

Group or UK or US RoE
Individual objectives

Weighting
35%

35%
30%

National Grid Annual Report and Accounts 2015/16

Corporate Governance

Corporate Governance continuedPerformance measures for LTPP to be awarded in 2016
Steve Holliday will not receive a 2016 LTPP award. John Pettigrew’s 2016 award will increase to 350% of salary.

Andrew Bonfield
50%

John Pettigrew
50%

Dean Seavers
25%

Nicola Shaw
25%

Threshold – 20% vesting
11.0%

Maximum – 100% vesting
12.5% or more

Group RoE

UK RoE

US RoE

–

Value growth

50%

–

25%

50%

25%

1 percentage point
above the average
allowed regulatory return

3.5 percentage points or
more above the average
allowed regulatory return

–

90% of the average
allowed regulatory return

105% or more of the
average allowed
regulatory return

50%

10.0%

12.0% or more

NEDs’ fees
Committee chair fees are in addition to committee membership fees. Therese Esperdy was appointed as a Non-executive Director to the
National Grid USA Board on 1 May 2015 with an annual fee of £25,000 in addition to her current NED fees.

Chairman

Senior Independent Director

Board fee (UK-based)

Board fee (US-based)

Committee membership fee
Chair Audit Committee

Chair Remuneration Committee

Chair (other Board committee)

£’000

From 1 June 2016
500

From 1 June 2015
495

9
19

12.5

9
17

12.5

Increase
1%

0%
12%

12%

Advisors to the Remuneration Committee
The Committee received advice during 2015/16 from independent remuneration consultants New Bridge Street (NBS), a trading name of
Aon Hewitt Ltd (part of Aon plc). NBS were selected as advisors by the Committee from 1 August 2013 following a competitive tendering process.

Work undertaken by NBS included updating the Committee on trends in compensation and governance matters and advising the Committee in
connection with benchmarking of the total reward packages for the Executive Directors and other senior employees. NBS are a member of the
Remuneration Consultants Group and have signed up to that group’s Code of Conduct. The Committee is satisfied that any potential conflicts
were appropriately managed. NBS does not provide any other advice or services to the Company. In the year to 31 March 2016 the Committee
paid a total of £77,820 to NBS, with fees being charged on a time incurred basis.

The Committee also received specialist advice from the following organisations:

• Alithos Limited: provision of TSR calculations for the LTPP (£10,417 paid in 2015/16);
• Linklaters LLP: advice relating to share schemes and to Directors’ service contracts (£44,621 paid in 2015/16); and
• Willis Towers Watson: advice relating to the benchmarking of the total reward packages for the Executive Committee and the Chairman

(£58,509 paid in 2015/16).

The Committee reviews the objectivity and independence of the advice it receives from its advisors each year. It is satisfied that they all provided
credible and professional advice.

The Committee considers the views of the Chairman on the performance and remuneration of the CEO; and of the CEO on the performance and
remuneration of the other members of the Executive Committee. The Committee is also supported by the Group General Counsel & Company
Secretary who acts as Secretary to the Committee, the Group HR Director, the Group Head of Reward & Performance and the Group Head of
Pensions. No other advisors have provided significant services to the Committee in the year.

Voting on 2013/14 Directors’ Remuneration Policy at 2014 AGM
The voting figures shown refer to votes cast at the 2014 AGM and represent 61.76% of the issued share capital. In addition, shareholders holding
74 million shares abstained.

Number of votes

Proportion of votes

For
2,223,573,203

96.31%

Against
85,131,552

3.69%

Voting on 2014/15 Annual Remuneration Report at 2015 AGM
The voting figures shown refer to votes cast at the 2015 AGM and represent 62.61% of the issued share capital. In addition, shareholders holding
30 million shares abstained.

Number of votes

Proportion of votes

For
2,240,539,614

97.26%

Against
63,053,994

2.74%

The Directors’ Remuneration Report has been approved by the Board and signed on its behalf by:

Jonathan Dawson
Chairman of the Remuneration Committee
18 May 2016

Annual report on remuneration

National Grid Annual Report and Accounts 2015/16Corporate Governance
Financial Statements contents

Introduction to the financial statements

Directors’ statement and independent auditors’ report
84 Statement of Directors’ responsibilities
85
93 Report of Independent Registered Public Accounting Firm

Independent auditors’ report

Consolidated financial statements under IFRS
Primary statements
94 Consolidated income statement
96 Consolidated statement of comprehensive income
97 Consolidated statement of changes in equity
98 Consolidated statement of financial position
100 Consolidated cash flow statement

Notes to the consolidated financial statements –
analysis of items in the primary statements
102 Note 1 – Basis of preparation and recent

accounting developments

104 Note 2 – Segmental analysis
109 Note 3 – Operating costs
111 Note 4 – Exceptional items and remeasurements
112 Note 5 – Finance income and costs
113 Note 6 – Tax
118 Note 7 – Earnings per share (EPS)
119 Note 8 – Dividends
120 Note 9 – Goodwill
121 Note 10 – Other intangible assets
122 Note 11 – Property, plant and equipment
123 Note 12 – Other non-current assets
124 Note 13 – Financial and other investments
125 Note 14 – Investments in joint ventures and associates
126 Note 15 – Derivative financial instruments
128 Note 16 – Inventories and current intangible assets
129 Note 17 – Trade and other receivables
130 Note 18 – Cash and cash equivalents
130 Note 19 – Borrowings
132 Note 20 – Trade and other payables
132 Note 21 – Other non-current liabilities
132 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
144 Note 27 – Commitments and contingencies
145 Note 28 – Related party transactions
145 Note 29 – Actuarial information on pensions

and other post-retirement benefits
149 Note 30 – Financial risk management
156 Note 31 – Borrowing facilities
157 Note 32 – Subsidiary undertakings, joint ventures and associates
160 Note 33 – Sensitivities on areas of estimation and uncertainty
161 Note 34 – Additional disclosures in respect

of guaranteed securities

Company financial statements under FRS 101
Basis of preparation
168 Company accounting policies

Primary statements
170 Company balance sheet
171 Company statement of changes in equity

Notes to the Company financial statements
172 Note 1 – Fixed asset investments
172 Note 2 – Debtors
172 Note 3 – Creditors
173 Note 4 – Derivative financial instruments
173 Note 5 – Investments
173 Note 6 – Borrowings
173 Note 7 – Share capital
173 Note 8 – Shareholders’ equity and reserves
173 Note 9 – Parent Company guarantees
173 Note 10 – Audit fees

National Grid Annual Report and Accounts 2015/16

Financial Statements

Introduction to the Financial Statements

Throughout these financial statements we have provided explanations of the disclosures and why they are important to the understanding
of our financial performance and position. In places we have also highlighted ‘Our strategy in action’, drawing out the key elements of our
business model (set out in the Strategic Report on pages 14 to 15), and showing how the disclosures reflect this strategy.

Audit opinions
We have two audit opinions on our financial statements, reflecting our listing on both 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. The audit opinion as required under our UK listing (starting on page 85) continues to provide more detail
as to how our auditors have planned and conducted their audit, as well as their views on significant matters they have noted and that were
discussed by the Audit Committee.

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 (note 1) provides
details of accounting policies that apply to transactions and balances in general. There are also additional specific disclosure requirements
due to our US listing which are included in the notes.

Unaudited commentary
We have presented with the financial statements certain analysis as part of the Strategic Report of our Annual Report. This approach
provides a clearer narrative, a logical flow of information and reduces duplication. We have created a combined financial review, including
a commentary on items within the primary statements, on pages 94 to 101. Unless otherwise indicated, all analysis provided in the financial
statements is on a statutory IFRS basis. All information in ruled boxes styled in the same manner as this one does not form part of the
audited financial statements. This has been further highlighted by including the word ‘unaudited’ at the start of each box header. Unaudited
commentary boxes appear on pages 95 to 97, 99, 101, 107 to 108, 117, 119 and 131.

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsStatement 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 Report, 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 United Kingdom Accounting Standards,
comprising Financial Reporting Standard 101 ‘Reduced Disclosure
Framework’ (FRS 101), and applicable law – 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.

The Directors are responsible for the maintenance and integrity of the
Company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.

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.

Each of the Directors, whose names and functions are listed on
pages 47 and 48, 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
FRS 101 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 Strategic Report contained
in 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
position and performance, business model and strategy.

Directors’ Report
The Directors’ Report, prepared in accordance with the requirements
of the Companies Act 2006 and the UK Listing Authority’s Listing
Rules, and Disclosure Rules and Transparency Rules, comprising
pages 08 to 81 and 174 to 202, was approved by the Board and
signed on its behalf.

Strategic Report
The Strategic Report, comprising pages 02 to 45, was approved
by the Board and signed on its behalf.

By order of the Board

Alison Kay
Group General Counsel & Company Secretary
18 May 2016
Company number: 4031152

National Grid Annual Report and Accounts 2015/16

Financial Statements

Independent auditors’ report
to the Members of National Grid plc

Report on the financial statements

Our opinion
In our opinion:
• National Grid’s Group and Company financial statements (the ‘financial statements’) give a true and fair view of the state of the Group’s

•

and the Company’s affairs as at 31 March 2016 and of the Group’s profit and cash flows for the year then ended;
the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRS)
as adopted by the European Union;
the Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting
Practice (UK GAAP); and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the
Group financial statements, Article 4 of the IAS Regulation.

Separate opinion in relation to IFRSs as issued by the IASB
As explained in note 1 to the financial statements, the Group, in addition to applying IFRSs as adopted by the European Union, has also
applied IFRSs as issued by the International Accounting Standards Board (IASB).

In our opinion, the Group financial statements comply with IFRSs as issued by the IASB.

What we have audited
The financial statements, included within the Annual Report, comprise the statements and notes on pages 94 to 173 with the exception of the
unaudited commentary sections. Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes
to the financial statements. These are cross-referenced from the financial statements and are identified as audited.

The financial reporting framework that has been applied in the preparation of the Group financial statements is IFRSs as adopted by the
European Union and applicable law. The financial reporting framework that has been applied in the preparation of the Company financial
statements is United Kingdom Accounting Standards, comprising FRS 101 ‘Reduced Disclosure Framework’, and applicable law (UK GAAP).

Overview of our audit

Materiality
£157m
(2015: £132m)

Based on 5% of Group profit
before tax, exceptional items
and remeasurements.

Scope
80%
(2015: 80%)

Coverage of Group profit
before tax, exceptional items
and remeasurements.

Areas of focus

Component

Change in level of
risk year on year

Event-driven
US financial controls
Potential disposal of UK Gas Distribution business
Recurring
Accuracy of capital expenditures
Accuracy and valuation of treasury derivative transactions
Valuation of environmental provisions
Accounting for net pension obligations
Revenue recognition

US
UK

UK & US
US & Corporate centre
UK & US
US & Corporate centre
UK & US

No change
New

Increased
Decreased
No change
No change
No change

Highlights of what we reported to the Audit Committee

• While areas for improvement remain, in particular property, plant and equipment, there has been

progress in improving the US financial controls.

• Although they contain significant judgements, estimates for pensions and environmental provisions

fall within what we consider to be an acceptable range.

• With respect to revenue and treasury we completed our work in accordance with our audit plan and

had no specific matters of concern to report.

Our audit team
In building our audit team for National Grid we focused on continuity and relevant industry experience, whilst meeting the rotation requirements
set by Ethical Standards.

This is my fourth year working on the National Grid audit (but first as Senior Statutory Auditor). I have also been the Senior Statutory Auditor
for three other large LSE Listed companies. With regards to the components, our NG US lead partner has had three years of involvement, and
this is the first year of involvement of our NG UK lead partner as a result of audit partner rotation. The NG UK and NG US lead partners and I
all have significant electricity and gas utility audit experience, averaging 15 years each. Our core audit team, excluding specialists who support
us in treasury, accounting technical, IT, tax, pensions, and valuations, comprises approximately 74 people. At manager grade and above we
have continuity from the prior year of 65% and an average of three years’ experience on the National Grid audit and six years of electricity and
gas utility audit experience.

Context for our audit
Our recurring areas of focus largely reflect National Grid’s key activities of network investment and the associated financing, where it
seeks to maximise returns allowable under the regulatory frameworks in the UK and US, as well as fulfilling their social and environmental
responsibilities and remunerating their staff.

The most notable development during the year was National Grid’s announcement of the potential sale of a majority stake in UK Gas
Distribution. The changes in business processes and financial control in National Grid US continued throughout the year.

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsIndependent auditors’ report
to the Members of National Grid plc continued

Materiality
Materiality is the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of reasonably
knowledgeable members would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating
the results of our work.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Area

Commentary

Overall Group materiality
£157m

£157m (2015: £132m) is 5% of profit before tax, exceptional items and remeasurements
(‘adjusted profit before tax’). Whilst the benchmark has not changed, this is higher than the
level we set for last year reflecting the increased profitability of the Group during the period.

Rationale for benchmark applied
5% of adjusted profit before tax,
exceptional items and remeasurements

Performance materiality
£117m

We have chosen adjusted profit before tax because it is disclosed on the face of the
consolidated income statement as the consistent year on year measure of performance and
excludes the non-recurring disproportionate impact of exceptional items and remeasurements.
We also considered this measure to be suitable having compared to other benchmarks: our
materiality is 5.2% of statutory profit before tax, 0.3% of total assets and 1.2% of net assets.

We set a lower level of performance materiality for planning our audit to reduce the probability
that the aggregate of uncorrected and undetected misstatements exceeds materiality for the
financial statements as a whole to an appropriately low level.

Our judgement was that performance materiality for the Group should be 75% (2015: 75%)
of overall materiality, being £117m (2015: £105m).

In planning our audit we allocate a specific performance materiality to each of our component
audit teams. This is used to determine the extent of our audit procedures at a component level
for the purposes of reporting on the National Grid Group financial statements. These are
summarised below.

Component performance materiality

US Regulated (full scope audit)
UK Electricity Transmission (full scope audit)
UK Gas Transmission (full scope audit)
UK Gas Distribution (full scope audit)
Corporate activities

UK treasury and UK tax
UK pensions

UK Property (environmental provisions only) and Insurance

(accounts payable and financial investments only)

2016
£m
65
38
30
39

68
83

2015
£m
60
32
19
29

65
65

Reporting level
£7m

We agreed with the Audit Committee that we would report to them misstatements identified
during our audit above £7m (2015: £6m) being 5% of our overall materiality. We also report
misstatements below that amount that, in our view, warrant reporting for qualitative reasons.

Scope of our audit procedures
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as
a whole, taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the
Group operates.

The UK Electricity Transmission, UK Gas Transmission, UK Gas Distribution and US Regulated business required an audit of their complete
financial information due to their size.

In addition due to the size and location of certain balances, specified procedures were performed on environmental provisions (by the UK
Property audit team) and on amounts payable and financial investments (by the PwC Insurance audit team in the Isle of Man).

The Group has a number of separate operations in the US and UK and each of these operations maintain their own accounting records and
report to Group through an integrated consolidation system. For this reason we used component auditors within PwC UK and PwC US who
are familiar with the local laws and regulations to perform this audit work.

We ensured our involvement in the work of our component auditors was sufficient to allow us to conclude on our opinion on the Group financial
statements as a whole. Given both the developing control environment discussed below and the potential UK Gas Distribution transaction,
the Group team visited both components on a number of occasions for meetings with our team and local National Grid management.

The Group consolidation, financial statement disclosures and corporate activities including tax, treasury related activities and UK pensions
were audited by the Group team using specialists where appropriate. The charts on the following page illustrate the coverage obtained
from the territories and functions where we performed our audit work.

National Grid Annual Report and Accounts 2015/16

Financial Statements

Proﬁt before tax after exceptionals

Total assets

Total revenue

1. Full scope audit
2. Other procedures

80%
20%

1. Full scope audit
2. Speciﬁed procedures
3. Other procedures

93%
1%
6%

1. Full scope audit
2. Other procedures

95%
5%

Our areas of focus
We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular,
we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making
assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management
override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material
misstatement due to fraud.

We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. As a consequence
of being listed in both London and New York, we conducted our audit in accordance with International Standards on Auditing (UK and Ireland)
and the standards of the Public Company Accounting Oversight Board (PCAOB). Accordingly our audit approach combines high reliance on
controls over financial reporting for the purpose of our audit where we consider them to be operating effectively along with evidence gained
from substantive testing (an ‘integrated audit’ approach).

Based on materiality and our understanding of the business, the risks of material misstatement that had the greatest effect on our audit,
including the allocation of our resources and effort, were identified in the following table.

We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements
as a whole, and any comments we make on the results of our procedures should be read in this context.

Area of focus

US financial controls
National Grid US are going through a finance function reorganisation
and a programme of process and control improvements. In this
period of change and until processes and controls are finalised and
the new finance structure is embedded, there is higher risk of error
in the financial information reported by the US Regulated business.

Change in level of risk year on year: No change
We are seeing progress in some processes on control remediation
and additional focus on the control environment. Some areas, in
particular property, plant and equipment (PPE) are proving more
complex and will take longer.

How our audit addressed the area of focus and what we reported
to the Audit Committee

As a consequence of the higher risk of error in financial information
reported by National Grid US, a significant portion of both US and
Group senior audit team members’ time has been spent developing
our audit response to the US control environment, which is
summarised below, and discussing this with management and
the Audit Committee.

We performed additional testing of key account reconciliations
across a number of different general ledger accounts, ensuring
that significant reconciling items were supported with sufficient
and appropriate documentation. Management continue to operate
their additional control of preparing an aggregation of unreconciled
items across all accounts in order to assess the potential impact
of adjusting for these items. We tested this aggregation to ensure
it was complete and accurate by agreeing these items to the
underlying account reconciliations and vice versa. The net
impact on the income statement if all unsupported reconciling
items were to be resolved was below our reporting level for the
Audit Committee.

We tested the design and operating effectiveness of journal review
controls and found nothing that would cause us to believe these
controls were not working as intended. We also tested manual
journal entries based on a risk assessment of value and nature,
with no matters arising that required reporting to the Audit Committee.

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsIndependent auditors’ report
to the Members of National Grid plc continued

Area of focus

Accuracy of capital expenditures
A key focus for National Grid is network investment with total
capital expenditures across the Group of £3.9bn during 2015/16
(2014/15: £3.5bn).

Depending upon its nature, expenditure may be capitalised as PPE
or expensed in the year the cost is incurred. In making this decision
the directors have to consider whether the expenditure will generate
future economic benefits which necessarily involves judgment, for
example in determining whether activities or items are adding value
or maintaining existing assets.

In relation to the US, there was a heightened risk that the controls
over: the classification of costs between PPE and expenses; and
the controls over the transfer of assets under construction to assets
in service may not have been working effectively due to control
weaknesses previously identified. In addition, there are complex
adjustments that are required to translate local plant accounting
records prepared under generally accepted accounting principles
in the United States (US GAAP) to comply with IFRS.

In relation to the UK, our interim review work highlighted weaknesses
in relation to some reconciliations and classifications within PPE.

Change in level of risk year on year: Increased
Because of significantly increased level of capital expenditures in
the US and the control weaknesses identified in the US and UK.

Accuracy and valuation of treasury derivative transactions
In order to fund its activities, at 31 March 2016 National Grid had
total borrowings of £28.3bn, of which £6.4bn is denominated in
currencies other than Sterling or US Dollars and exposes the
Group to foreign exchange and interest rate risk.

As a result, the Group has a significant treasury operation with
sophisticated risk management activities and uses financial
instruments including complex derivatives to manage the foreign
exchange and interest rate risks, primarily interest rate swaps
and cross-currency interest rate swaps.

The valuation of a number of the derivative contracts entered into
by National Grid is a complex and judgemental area and includes
key assumptions over estimates of future interest, exchange rates
and determination of appropriate discount rates to apply to future
cash flows.

Change in level of risk year on year: Decreased
Because our work in 2014/15 on the introduction of regression
for hedge effectiveness testing identified no issues.

How our audit addressed the area of focus and what we reported
to the Audit Committee

We assessed whether the Group’s accounting policies in relation to
the capitalisation of expenditures complied with IFRSs, and tested
the implementation of those policies through a combination of
controls testing, including IT General Controls over the PPE
accounting systems, and substantive testing of the supporting
documentation behind the costs and we found no material issues
that would impact our audit approach.

In the US, we performed additional testing to ensure the
completeness and accuracy of capitalisation. Our procedures
included identification of projects where the proportions of costs
capitalised were different to those we would expect based on the
nature of the work performed, and procedures around the
appropriateness of capitalisation of payroll costs, noting that
amounts had been properly recorded.

As a result of issues identified by our testing, we extended our
sample of certain types of open work orders. Our work identified a
small factual adjustment which we reported to the Audit Committee
together with a larger projected adjustment. Taken together, these
were considered to be not material for adjustment in the financial
statements.

With respect to the IFRS adjustments to US GAAP reporting, we
tested the analysis to underlying accounting records, recalculations
and supporting documentation, identifying no adjustments that
required reporting to the Audit Committee.

In the UK, we focused our testing on the capital expenditures that
had the most significant value, with a particular focus on Electricity
Transmission which is the largest area of UK capital expenditures.
As part of our testing, we inspected contracts and underlying
invoices to ensure the classification between capital and operating
expenditure was appropriate. We reviewed the ageing of the assets
under construction balance for indicators of impairment and key
judgments associated with the PPE balance. Our approach is
supported by comfort obtained from our testing of the key controls
within the PPE process, which included reconciliations and controls
over classification. Based on year-end tests we performed, the
weaknesses identified at our interim review had been rectified by
management. We found no material issues arising from this work.

We tested the design and operating effectiveness of IT General
Controls including user access, change management and
segregation of duties within the treasury management system and
we found no material issues that would impact our audit approach.

We tested the design and operating effectiveness of key controls that
relate to recording and valuing derivative transactions in the treasury
management system. We also tested the accuracy and completeness
of the information held within the system by agreeing to third-party
confirmations and found no differences when compared to the
system data.

We tested the models and key assumptions used by management
to value complex derivatives which were agreed as appropriate.
Where management entered into new significant contracts in the
year, we tested the contracts and assumptions used to assess
whether the accounting treatment adopted is in accordance with
IAS 39.

National Grid Annual Report and Accounts 2015/16

Financial Statements

Area of focus

Potential disposal of UK Gas Distribution business
In November 2015, National Grid announced its intention to
dispose of a majority share of the UK Gas Distribution (UKGD)
business. This will be a significant transaction as UKGD comprises
approximately 21% of Group profit/net assets and in addition is
currently part of the National Grid Gas plc legal entity.

Due to the expected timing of any transaction, this is not an area
of significant risk for our 2015/16 audit, but it has had a major
impact on the resource and timing of our audit.

Change in level of risk year on year: New

Valuation of environmental provisions
Over time National Grid has acquired, owned and operated a
number of businesses that have created an environmental impact
that will require remediation. This is particularly significant in the US
partly as a result of National Grid’s exposure to certain ‘Superfund’
sites. At 31 March 2016, the total liability in respect of environmental
provisions is £1.2bn, of which £0.9bn relates to the US.

Environmental provisions require significant judgement in
determining the form of remediation and the timing and value of
projected cash flows associated with it, 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.

Change in level of risk year on year: No change

Accounting for net pension obligations
National Grid provides defined pension and other post-employment
benefits to employees in the UK and US through a number of
schemes. At 31 March 2016, National Grid’s gross defined benefit
obligation is £29.0bn which is offset by scheme assets of £26.4bn
which are significant in the context of both the overall balance sheet
and the results of the Group.

The valuation of the pension liability requires significant levels
of judgement and technical expertise in choosing appropriate
assumptions. Changes to the key assumptions including salary
increases, inflation, discount rates, and mortality can have a material
impact on the calculation of the liability.

Also, the pension plan assets include a number of investments for
which there is no observable input to the fair value (i.e. no quoted
market price); the valuation technique used to measure the fair
value of these assets involves a number of subjective judgements.

Change in level of risk year on year: No change

How our audit addressed the area of focus and what we reported
to the Audit Committee

Although there are no significant accounting impacts in 2015/16 as
a result of the transaction process, we have reassessed our risks and
materiality benchmarks for UKGD and have worked with management
to plan for a significantly accelerated UK component audit timetable.

In the US and UK, National Grid uses external and internal experts
to help determine the total expenditure required to remediate sites.
As part of the audit we obtained and inspected these experts’ reports
and assessed their independence and competence and we found
no material issues that would impact our audit approach.

For all material sites and a sample of other sites, we corroborated
information on the nature of each of these sites to National Grid’s
underlying site usage records. In addition, to assess the reliability
of the experts’ estimates, we compared previous estimates against
actual spend for sites which have been remediated, without
material issue.

In the US, due to the individually significant sites, we utilised our own
environmental specialists to review management’s key assumptions
underlying the calculations. Where possible we confirmed other
inputs into the calculation by reference to publicly available
information and noted no exceptions.

We inspected responses to our confirmation requests from
National Grid’s legal advisors in order to identify any issues related
to the valuation of the Group’s exposure to environmental
remediation costs and noted no issues.

In order to assess the reasonableness of management’s discount
rate assumptions we compared these to our internally developed
benchmarks, including performing sensitivity analysis. We identified
a potential adjustment related to one discount rate which was
marginally outside our expected range and reported this to the
Audit Committee. We considered this immaterial for adjustment
in the Group financial statements.

We have tested the significant judgements made by National
Grid’s third party actuaries as set out below and assessed their
independence and competence. We found no material issues
that would impact our audit approach.

We agreed the discount and inflation rates used in the valuation
of the pension liability to our internally developed benchmarks. We
compared the assumptions around salary increases and mortality
to national and industry averages. All of the assumptions used fell
within our acceptable range.

We obtained details of the measurement of fair value for assets
with unobservable inputs. Such assets were typically private equity
or real estate fund investments for which we obtained audited
financial statements in support of the measurement of net asset
value. We found no material issues from this testing.

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsIndependent auditors’ report
to the Members of National Grid plc continued

Area of focus

Revenue recognition
During the year National Grid has recognised revenue of £15.1bn;
£14.2bn of which is mostly related to the regulated segments in the
UK and US.

In the UK, National Grid’s revenue is derived from a number of
price controls imposed by the UK regulator, Ofgem, when combined
with the application of IFRS, revenue recognition involves limited
judgement. The majority of revenue is derived from a small number
of customers who settle within agreed terms.

How our audit addressed the area of focus and what we reported
to the Audit Committee

In the UK, we have tested the design and operating effectiveness of
key controls in relation to the recognition of revenue, with particular
focus on controls over the setting of prices compared to those
allowed by the Ofgem price controls and we found no material
issues that would impact our audit approach.

We have tested the revenue recognised to amounts invoiced to
customers and the subsequent receipt of payment from those
customers, with no material exceptions noted.

In the US, different services and locations are regulated by different
authorities and are subject to numerous price controls. Unlike the
UK, revenue is earned through the transportation and supply of gas
and electricity to end customers, which does involve judgement
as a result of the estimate of accrued income for services delivered
but not yet billed to these customers. This is determined using a
long-established methodology within the Group.

In the US, in respect of transmission and other non-utility revenues,
we selected and tested individual transactions to ensure they were
appropriately recorded as revenue in the correct period. We inspected
proof of cash payments or confirmed amounts with customers where
it was possible to do so. We also inspected regulator-approved
tariffs to test that amounts charged were consistent with such tariffs.
We found no material issues arising from our work.

As such revenue recognition is not an area of significant risk for our
audit but does require significant time and resource to audit due
to the magnitude.

Change in level of risk year on year: No change

For utility revenues, we selected samples of rate classes to test
that customer rates were properly updated in the billing systems,
and that rate types were assigned to customers consistent with
the type of customer and (where appropriate) the volume of usage.
We also selected samples of customer bills and tested that such
bills were paid by customers and were consistent with the regulator-
approved rate plans. For those bills selected that were outstanding
at the end of the year, we confirmed the balance with customers,
and tested amounts to subsequent cash receipts where no
confirmation was received.

With respect to unbilled revenue we tested management’s
assumptions in relation to consumption by reference to historical
data as well as specific current year factors, including weather
patterns. In so doing, we did not note any significant issues which
would impact the Group financial statements.

Going concern
Under the Listing Rules we are required to review the Directors’ statement, set out on page 102, in relation to going concern. We have nothing
to report having performed our review.

Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to the
Directors’ statement about whether they considered it appropriate to adopt the going concern basis in preparing the financial statements.
We have nothing material to add or to draw attention to.

As noted in the Directors’ statement, the Directors have concluded that it is appropriate to adopt the going concern basis in preparing
the financial statements. The going concern basis presumes that the Group and Company have adequate resources to remain in operation,
and that the Directors intend them to do so, for at least one year from the date the financial statements were signed. As part of our audit
we have concluded that the Directors’ use of the going concern basis is appropriate. However, because not all future events or conditions
can be predicted, these statements are not a guarantee as to the Group’s and Company’s ability to continue as a going concern.

National Grid Annual Report and Accounts 2015/16

Financial Statements

Adequacy of accounting records and information and
explanations received
Under the Companies Act 2006 we are required to report to you if,
in our opinion:

• we have not received all the information and explanations

we require for our audit; or

• 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 Directors’
Remuneration Report to be audited are not in agreement
with the accounting records and returns.

We have no exceptions to report arising from this responsibility.

Directors’ remuneration
Directors’ Remuneration Report – Companies Act 2006 opinion
In our opinion, the part of the Directors’ Remuneration Report to
be audited has been properly prepared in accordance with the
Companies Act 2006. Our procedures have been performed to
a threshold of £1,000.

Other Companies Act 2006 reporting
We are required to report to you if, in our opinion, certain disclosures
of Directors’ remuneration specified by law are not made.

We have no exceptions to report arising from this responsibility.

Corporate Governance Statement
Under the Listing Rules we are required to review the part of the
Corporate Governance Statement relating to ten further provisions
of the Code.

We have nothing to report having performed our review.

Other required reporting

Consistency of other information
Companies Act 2006 opinions
In our opinion, the information given in the Strategic Report and
the Directors’ Report for the financial period for which the financial
statements are prepared is consistent with the financial statements.

ISAs (UK & Ireland) reporting
We are required to report to you if, in our opinion:

•

Information in the Annual Report is:
– materially inconsistent with the information in the audited

financial statements; or

– apparently materially incorrect based on, or materially

inconsistent with, our knowledge of the Group and Company
acquired in the course of performing our audit; or

– otherwise misleading.

• The statement given by the Directors on page 84, in accordance
with provision C.1.1 of the UK Corporate Governance Code
(the ‘Code’), that they consider the Annual Report taken as a
whole to be fair, balanced and understandable and provides the
information necessary for members to assess the Group’s and
Company’s position and performance, business model and
strategy is materially inconsistent with our knowledge of the Group
and Company acquired in the course of performing our audit.

• The section of the Annual Report on pages 54 to 58, as required
by provision C.3.8 of the Code, describing the work of the Audit
Committee does not appropriately address matters
communicated by us to the Audit Committee.

We have no exceptions to report.

The directors’ assessment of the prospects of the Group
and of the principal risks that would threaten the solvency
or liquidity of the Group
Under ISAs (UK & Ireland) we are required to report to you if we
have anything material to add or to draw attention to in relation to:

•

the Directors’ confirmation on page 66 of the Annual Report,
in accordance with provision C.2.1 of the Code, that they have
carried out a robust assessment of the principal risks facing the
Group, including those that would threaten its business model,
future performance, solvency or liquidity; or
the disclosures in the Annual Report that describe those risks
and explain how they are being managed or mitigated; or
the Directors’ explanation on page 66 of the Annual Report,
in accordance with provision C.2.2 of the Code, as to how they
have assessed the prospects of the Group, over what period
they have done so and why they consider that period to be
appropriate, and their statement as to whether they have a
reasonable expectation that the Group will be able to continue
in operation and meet its liabilities as they fall due over the period
of their assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.

We have nothing material to add or to draw attention to.

Under the Listing Rules we are required to review the Directors’
statement that they have carried out a robust assessment of the
principal risks facing the Group and the Directors’ statement in
relation to the longer-term viability of the Group. Our review was
substantially less in scope than an audit and only consisted of
making inquiries and considering the Directors’ process supporting
their statements; checking that the statements are in alignment with
the relevant provisions of the Code; and considering whether the
statements are consistent with the knowledge acquired by us in
the course of performing our audit.

We have nothing to report having performed our review.

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsIndependent auditors’ report
to the Members of National Grid plc continued

Responsibilities for the financial
statements and the audit

Our responsibilities and those of the directors
As explained more fully in the Directors’ Responsibilities Statement,
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 ISAs (UK &
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.

What an audit of financial statements involves
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 the 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.

•

We primarily focus our work in these areas by assessing the directors’
judgements against available evidence, forming our own judgements,
and evaluating the disclosures in the financial statements.

We test and examine information, using sampling and other auditing
techniques, to the extent we consider necessary to provide a
reasonable basis for us to draw conclusions. We obtain audit
evidence through testing the effectiveness of controls, substantive
procedures or a combination of both.

In addition, we read all the financial and non-financial information
in the Annual Report to identify material inconsistencies with the
audited financial statements and to identify any information that is
apparently materially incorrect based on, or materially inconsistent
with, the knowledge acquired by us in the course of performing the
audit. If we become aware of any apparent material misstatements
or inconsistencies we consider the implications for our report.

Michael Timar (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London 18 May 2016

National Grid Annual Report and Accounts 2015/16

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
18 May 2016

Audit opinion for Form 20-F

In our opinion, the accompanying consolidated statement of financial
position and the related consolidated income statement, consolidated
statement of comprehensive income, consolidated cash flow
statement and consolidated statement of changes in equity, present
fairly, in all material respects, the financial position of National Grid plc
and its subsidiaries at 31 March 2016 and 31 March 2015, and the
results of their operations and their cash flows for each of the three
years in the period ended 31 March 2016 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 2016, based on criteria established in Internal Control –
Integrated Framework (2013) 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 183 of the 2016 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.

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsConsolidated income statement
for the years ended 31 March

Revenue
Operating costs
Operating profit
Before exceptional items and remeasurements
Exceptional items and remeasurements

Total operating profit

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 and remeasurements
Exceptional items and remeasurements

Total profit before tax
Tax
Before exceptional items and remeasurements
Exceptional items and remeasurements

Total tax
Profit after tax
Before exceptional items and remeasurements
Exceptional items and remeasurements
Profit for the year
Attributable to:

Equity shareholders of the parent
Non-controlling interests

Earnings per share1
Basic
Diluted

Notes

2016
£m

15,115
(11,030)

2015
£m

15,201
(11,421)

2014
£m

14,809
(11,074)

2(a)
3

2(b)
4

2(b)

5
4,5

5
14

2(b)
4

2(b)

6
4,6

7(a)
7(b)

4,096
(11)

3,863
(83)

3,664
71

4,085

(1,134)
59

3,780

(1,234)
46

(1,069)
(165)

2,876
(248)

(1,144)
93

2,584
164

3,735

(1,051)
28

3,032

2,628

2,748

(695)
78

(581)
297

(438)

(617)

(284)

2,181
(170)

2,003
461

(1,035)
(99)

3,142
(110)

(753)
315

2,389
205

2,594

2,591
3
2,594

69.0p
68.7p

2,011

2,019

(8)
2,011

53.2p
52.9p

2,464

2,476

(12)
2,464

65.2p
64.9p

1. Comparative amounts have been restated to reflect the impact of additional shares issued as scrip dividends.

National Grid Annual Report and Accounts 2015/16

Financial Statements

Adjusted earnings and EPS
Adjusted earnings and EPS, which exclude exceptional items and
remeasurements, are provided to reflect the business performance
subtotals used by the Company. 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.
See page 196 for a reconciliation of adjusted basic EPS to EPS.

Adjusted earnings and adjusted EPS1

£1,913m

£2,015m

50.4p

53.1p

£1,709m

45.1p

£2,386m

63.5p

£2,189m

57.6p

2011/12

2012/13

2013/14

2014/15

2015/16

Adjusted earnings
Adjusted EPS

1. Adjusted earnings and adjusted EPS are attributable to equity shareholders of the parent.

The above earnings performance translated into adjusted EPS
growth in 2015/16 of 5.9p (10%).

In accordance with IAS 33, all earnings per share and adjusted
earnings per share amounts for comparative periods have been
restated for shares issued via scrip dividends.

Exchange rates
Our financial results are reported in sterling. Transactions for our
US operations are denominated in dollars, so the related amounts
that are reported in sterling depend on the dollar to sterling
exchange rate. The table below shows the average and closing
exchange rates of sterling to US dollars.

Weighted average (income statement)
Year end (balance sheet)

2015/16
1.47
1.44

2014/15
1.58
1.49

% change
(7)%
(3)%

The movement in foreign exchange during 2015/16 has resulted in
a £560m increase in revenue, a £73m increase in adjusted operating
profit and a £67m increase in operating profit.

Unaudited commentary on the consolidated income statement

The consolidated income statement shows all revenue earned
and costs incurred in the year, with the difference being the
overall profit for the year.

Revenue
Revenue for the year ended 31 March 2016 decreased by £86m
to £15,115m. This decrease was driven by lower revenues in our
US Regulated business, partly offset by revenue growth across
all of our other businesses, in particular UK Electricity Transmission.
US Regulated revenues were £493m lower year on year due to
lower commodity costs passed on to customers and unfavourable
timing of recoveries. This was partly offset by higher increased
revenue allowances under the Niagara Mohawk three year rate plan
and the benefits of capex trackers and the stronger US dollar. UK
Electricity Transmission revenue increased by £223m, mostly
reflecting the recovery of higher pass-through costs such as
payments to other UK network owners and system balancing costs.

Operating costs
Operating costs for the year ended 31 March 2016 of £11,030m
were £391m lower than the prior year. This decrease in costs
included a £72m impact in exceptional items and remeasurements,
which is discussed below. Excluding exceptional items and
remeasurements, operating costs were £319m lower, principally
due to lower pass-through costs such as gas and electric commodity
costs in the US and additional costs incurred last year in the US to
improve data quality and bring regulatory filings up to date, partially
offset by higher depreciation as a result of newly commissioned
assets and the impact of the stronger US dollar on sterling results.

Net finance costs
For the year ended 31 March 2016, net finance costs before
exceptional items and remeasurements were £20m lower than
2014/15 at £1,013m, mainly as a result of lower UK RPI inflation,
continued focus on management of cash balances and the
benefit of last year’s debt repurchases, partially offset by increased
borrowings and the impact of the stronger US dollar.

Tax
The tax charge on profits before exceptional items and
remeasurements was £58m higher than 2014/15. This was mainly
a result of increased taxable profits in the year. The effective tax
rate for the year was 24.0% (2014/15: 24.2%).

Exceptional items and remeasurements
Operating costs for the year ended 31 March 2016 included an
£11m gain on remeasurement of commodity contracts, together
with £22m exceptional costs associated with the Gas Distribution
sales process. In the previous year, operating costs included a net
£83m loss on remeasurements.

Finance costs for the year ended 31 March 2016 included a
loss of £99m on financial remeasurements, relating to net losses
on derivative financial instruments. For the previous year ended
31 March 2015, we incurred exceptional debt redemption costs
of £131m and a loss of £34m on financial remeasurements.
Exceptional tax for 2015/16 was a credit of £315m which represents
tax credits on the exceptional items and remeasurements above,
together with a deferred tax credit on the recalculation of deferred
tax liabilities as a result of the reduction in the UK tax rate from
20% to 18%.

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsConsolidated statement of comprehensive income
for the years ended 31 March

Profit for the year

Other comprehensive income/(loss)
Items that will never be reclassified to profit or loss:

Remeasurements of net retirement benefit obligations
Tax on items that will never be reclassified to profit or loss
Total items that will never be reclassified to profit or loss
Items that may be reclassified subsequently to profit or loss:

Exchange adjustments
Net gains/(losses) in respect of cash flow hedges
Transferred to profit or loss in respect of cash flow hedges
Net gains on available-for-sale investments
Transferred to profit or loss on sale of available-for-sale investments
Tax on items that may be reclassified subsequently to profit or loss
Total items that may be reclassified subsequently to profit or loss
Other comprehensive income/(loss) for the year, net of tax
Total comprehensive income for the year
Attributable to:

Equity shareholders of the parent
Non-controlling interests

Notes

2016
£m
2,594

2015
£m
2,011

2014
£m
2,464

22
6

539
(125)
414

69
50
29
43
–
(32)
159
573
3,167

3,164
3
3,167

(771)
299
(472)

175
(154)
13
41
(8)
11
78
(394)
1,617

1,624
(7)
1,617

485
(172)
313

(158)
63
27
6
(14)
(2)
(78)
235
2,699

2,711
(12)
2,699

Unaudited commentary on consolidated statement of comprehensive income

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.

Remeasurements of net retirement benefit obligations
We had a net gain after tax of £414m (2014/15: net loss of £472m) on our pension and other post-retirement benefit schemes which is due
to changes in key assumptions made in the valuation calculation of pension liabilities and differences between the expected and actual
pension asset returns.

Exchange adjustments
Adjustments are made when we translate the results and net assets of our companies operating outside the UK, as well as debt and
derivative transactions designated as a net investment hedge of our foreign currency operations. The net movement for the year resulted
in a gain of £69m (2014/15: £175m gain).

Net gains/(losses) in respect of cash flow hedges
The value of derivatives held to hedge cash flows is impacted by changes in expected interest rates and exchange rates. The net gain for
the year was £50m (2014/15: £154m loss).

National Grid Annual Report and Accounts 2015/16

Financial Statements

Consolidated statement of changes in equity
for the years ended 31 March

At 1 April 2013
Profit for the year
Total other comprehensive income/(loss) for the year
Total comprehensive income/(loss) for the year
Equity dividends
Scrip dividend related share issue2
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 2014
Profit for the year
Total other comprehensive (loss)/income for the year
Total comprehensive income/(loss) for the year
Equity dividends
Scrip dividend related share issue2
Purchase of treasury shares
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 2015
Profit for the year
Total other comprehensive income for the year
Total comprehensive income for the year
Equity dividends
Scrip dividend related share issue2
Purchase of treasury shares
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 2016

Share
capital
£m
433
–
–
–
–
6
–
–
–
–
–
439
–
–
–
–
4
–
–
–
–
–
–
443
–
–
–
–
4
–
–
–
–
–
–

447

Share
premium
account
£m
1,344
–
–
–
–
(8)
–
–
–
–
–
1,336
–
–
–
–
(5)
–
–
–
–
–
–
1,331
–
–
–
–
(5)
–
–
–
–
–
–

Retained
earnings
£m
13,133
2,476
313
2,789
(1,059)
–
14
(5)
(4)
20
7
14,895
2,019
(472)
1,547
(1,271)
–
(338)
23
(7)
(3)
20
4
14,870
2,591
414
3,005
(1,337)
–
(267)
16
(6)
–
22
2

Other equity
reserves1
£m
(4,681)
–
(78)
(78)
–
–
–
–
–
–
–
(4,759)
–
77
77
–
–
–
–
–
–
–
–
(4,682)
–
159
159
–
–
–
–
–
–
–
–

Total
shareholders’
equity
£m
10,229
2,476
235
2,711
(1,059)
(2)
14
(5)
(4)
20
7
11,911
2,019
(395)
1,624
(1,271)
(1)
(338)
23
(7)
(3)
20
4
11,962
2,591
573
3,164
(1,337)
(1)
(267)
16
(6)
–
22
2

Non-
controlling
interests
£m
5
(12)
–
(12)
–
–
–
–
15
–
–
8
(8)
1
(7)
–
–
–
–
–
11
–
–
12
3
–
3
–
–
–
–
–
(5)
–
–

Total
equity
£m
10,234
2,464
235
2,699
(1,059)
(2)
14
(5)
11
20
7
11,919
2,011
(394)
1,617
(1,271)
(1)
(338)
23
(7)
8
20
4
11,974
2,594
573
3,167
(1,337)
(1)
(267)
16
(6)
(5)
22
2

1,326

16,305

(4,523)

13,555

13,565

1. For further details of other equity reserves, see note 25.
2. Included within share premium account are costs associated with scrip dividends.

Unaudited commentary on consolidated statement of changes in equity

The consolidated statement of changes in equity shows additions and reductions to equity. For us, the main items are profit earned and
dividends paid in the year.

Dividends
The Directors are proposing a final dividend of 28.34p, bringing the total dividend for the year to 43.34p, a 1.1% increase on 2014/15.
The Directors intend to continue the policy of increasing the annual dividend by at least the rate of RPI inflation for the foreseeable future.

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsConsolidated 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
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
Total liabilities
Net assets
Equity
Share capital
Share premium account
Retained earnings
Other equity reserves
Shareholders’ equity
Non-controlling interests
Total equity

Notes

2016
£m

2015
£m

9
10
11
12
22
13
14
15

16
17
13
15
18

19
15
20

19
15
21
6
22
23

5,315
887
43,364
82
410
482
397
1,685
52,622

437
2,472
2,998
278
127
6,312
58,934

(3,611)
(337)
(3,285)
(252)
(236)
(7,721)

(24,733)
(1,732)
(2,071)
(4,634)
(2,995)
(1,483)
(37,648)
(45,369)
13,565

447
1,326
16,305
(4,523)
13,555
10
13,565

5,145
802
40,723
80
121
330
318
1,539
49,058

340
2,836
2,559
177
119
6,031
55,089

(3,028)
(635)
(3,292)
(184)
(235)
(7,374)

(22,882)
(1,764)
(1,919)
(4,297)
(3,379)
(1,500)
(35,741)
(43,115)
11,974

443
1,331
14,870
(4,682)
11,962
12
11,974

The consolidated financial statements set out on pages 94 to 167 were approved by the Board of Directors on 18 May 2016 and were
signed on its behalf by:

Sir Peter Gershon Chairman
Andrew Bonfield Finance Director

National Grid plc
Registered number: 4031152

National Grid Annual Report and Accounts 2015/16

Financial Statements

Unaudited commentary on consolidated statement of financial position

Net debt
Net debt is the aggregate of cash and cash equivalents, current
financial and other investments, borrowings, and derivative financial
assets and liabilities. See further analysis with the consolidated cash
flow statement on page 100.

Net pension and other post-retirement obligations
A summary of the total UK and US assets and liabilities and the
overall net IAS 19 (revised) accounting deficit is shown below:

Net plan liability
As at 1 April 2015
Exchange movements
Current service cost
Net interest cost
Curtailments and other
Actuarial (losses)/gains
– on plan assets
– on plan liabilities
Employer contributions
As at 31 March 2016
Represented by:
Plan assets
Plan liabilities

UK
£m
(672)
–
(74)
(18)
(24)

(18)
552
239
(15)

US
£m
(2,586)
(81)
(147)
(94)
(15)

(320)
325
348
(2,570)

Total
£m
(3,258)
(81)
(221)
(112)
(39)

(338)
877
587
(2,585)

19,401
(19,416)
(15)

7,033
(9,603)
(2,570)

26,434
(29,019)
(2,585)

The principal movements in net obligations during the year include
net actuarial gains of £539m and employer contributions of £587m.
Net actuarial gains include actuarial gains on plan liabilities of £877m
arising as a consequence of decreases in the nominal discount
rate in the US and experience gains reflecting liability experience
throughout the year including the impact of pension increases being
lower than assumed and some updates to the way a section of plan
liabilities is estimated. This is partially offset by actuarial losses of
£338m arising on plan assets resulting from actual asset returns
being less than assumed returns which is based upon the discount
rate at the start of the year.

Further information on our pension and other post-retirement
obligations can be found in notes 22 and 29 to the consolidated
financial statements.

Off balance sheet items
There were no significant off balance sheet items other than the
contractual obligations shown in note 30(b) to the consolidated
financial statements, and the commitments and contingencies
discussed in note 27.

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.

The consolidated statement of financial position shows all of
the Group’s assets and liabilities at the year end. As a capital-
intensive business, we have significant amounts of physical
assets and corresponding borrowings.

Goodwill and other intangible assets
Goodwill and intangibles increased by £255m to £6,202m as at
31 March 2016. This increase primarily relates to foreign exchange
movements of £184m and software additions of £220m, partially
offset by software amortisation of £147m.

Property, plant and equipment
Property, plant and equipment increased by £2,641m to £43,364m
as at 31 March 2016. This was principally due to capital expenditure
of £3,673m on the renewal and extension of our regulated networks
and foreign exchange movements of £543m, offset by depreciation
of £1,468m in the year. See page 24 for further details of our capital
expenditure.

Investments and other non-current assets
Investments in joint ventures and associates, financial and other
investments and other non-current assets have increased by
£233m to £961m. This is primarily due to an increase in investments
in joint ventures of £79m, together with an increase in available-for-
sale investments of £152m.

Inventories and current intangible assets, and trade
and other receivables
Inventories and current intangible assets, and trade and other
receivables have decreased by £267m to £2,909m as at 31 March
2016. This is due to an increase in inventories and current intangible
assets of £97m, more than offset by a net decrease in trade and
other receivables of £364m. The £364m decrease consists of a
foreign exchange impact of £57m due to the stronger US dollar
against sterling offset by a decrease in the underlying balances
of £421m, reflecting collection of high 2015 winter billings, coupled
with the impact of the recent mild winter.

Trade and other payables
Trade and other payables have decreased by £7m to £3,285m,
primarily due to a foreign exchange impact of £48m more than
offset by movements in the US related to warmer weather and
energy billing settlements.

Current tax balances
Net current tax balances have increased by £51m to £175m as at
31 March 2016, which includes a £77m current tax asset in trade
and other receivables (£60m current tax asset in 2014/15). This is
primarily due to the tax payments made in 2015/16 being only
partially offset by a smaller current year tax charge.

Deferred tax balances
Deferred tax balances have increased by £337m to £4,634m
as at 31 March 2016. This was primarily due to the impact of the
£125m deferred tax charge on actuarial gains in reserves (£299m
tax credit in 2014/15) and foreign exchange movements being
offset by the impact of the reduction in the UK statutory tax rate.

Provisions and other non-current liabilities
Provisions (both current and non-current) and other non-current
liabilities increased by £136m to £3,790m as at 31 March 2016.

Total provisions decreased by £16m in the year. The underlying
movements include additions of £63m, primarily relating to an
increase to the provision for the estimated environmental restoration
and remediation costs for a number of sites and other provision
increases of £33m, together with foreign exchange movements
of £42m, offset by utilisation of £200m in relation to all classes
of provisions.

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsConsolidated cash flow statement
for the years ended 31 March

Cash flows from operating activities
Total operating profit
Adjustments for:

Exceptional items and remeasurements
Depreciation, amortisation and impairment
Share-based payment charge
Gain on exchange of associate for available-for-sale investment
Changes in working capital
Changes in provisions
Changes in pensions and other post-retirement benefit obligations

Cash flows relating to exceptional items
Cash generated from operations
Tax paid
Net cash inflow from operating activities
Cash flows from investing activities
Acquisition of investments
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
Purchase of treasury shares
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 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 year1

1. Net of bank overdrafts of £3m (2015: £3m; 2014: £15m).

Notes

2016
£m

2015
£m

2014
£m

2(b)

4,085

3,780

3,735

26(a)

11
1,614
22
(49)
456
(90)
(327)
(62)
5,660
(292)
5,368

(116)
(220)
(3,408)
4
72
23
(391)
(4,036)

(267)
16
(6)
2,726
(896)
(730)
(834)
–
(1,337)
(1,328)
4
4
116
124

83
1,494
20
–
301
(41)
(270)
(17)
5,350
(343)
5,007

–
(207)
(3,076)
9
79
37
1,157
(2,001)

(338)
23
(7)
1,534
(2,839)
623
(826)
(152)
(1,271)
(3,253)
(247)
24
339
116

(71)
1,417
20
–
(59)
(150)
(323)
(150)
4,419
(400)
4,019

(4)
(179)
(2,944)
4
38
35
1,720
(1,330)

–
14
(5)
1,134
(2,192)
37
(901)
–
(1,059)
(2,972)
(283)
(26)
648
339

100

National Grid Annual Report and Accounts 2015/16

Financial Statements

Unaudited commentary on the consolidated cash flow statement

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, share issues
or share buybacks and other loan borrowings or repayments
(Financing activities).

Reconciliation of cash flow to net debt

Cash generated from operations
Net capital expenditure
Business net cash flow
Net interest paid (including exceptional interest)
Tax paid
Dividends paid
Other cash movements
Non-cash movements
Increase in net debt
Opening net debt
Closing net debt

Cash generated from operations

Cash generated from operations (£m)

2016
£m
5,660
(3,740)
1,920
(811)
(292)
(1,337)
(185)
(705)
(1,410)
(23,915)
(25,325)

2015
£m
5,350
(3,274)
2,076
(941)
(343)
(1,271)
(243)
(2,003)
(2,725)
(21,190)
(23,915)

4,487

4,037

4,419

5,350

5,660

2011/12

2012/13

2013/14

2014/15

2015/16

Cash flows from our operations are largely stable when viewed
over the longer term. Our electricity and gas transmission and
distribution operations in the UK are subject to multi-year rate
agreements with regulators. In the UK, we have largely stable 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 can affect revenues and
hence, cash flows, particularly in the winter months.

For the year ended 31 March 2016, cash flow from operations
increased by £310m to £5,660m.

Changes in working capital improved by £155m over the prior
year, principally in the US due to the collection of winter 2015
billings and lower closing balances due to milder weather.

Net capital expenditure
Net capital expenditure in the year of £3,740m was £466m higher
than the prior year. This was a result of higher spend in our US and
UK regulated businesses. Further details of our capital expenditure
can be seen on page 24.

Net interest paid
Net interest paid and exceptional finance costs in 2015/16 were
£811m, £130m lower than 2014/15 primarily due to prior year debt
redemption cash outflows.

Tax paid
Tax paid in the year to 31 March 2016 was £292m, £51m lower than
the prior year. This reflected the reduction in the UK corporation
tax rate from 21% to 20%, partially offset by repayments received
in the US in the prior year.

Dividends paid
Dividends paid in the year ended 31 March 2016 amounted to
£1,337m. This was £66m higher than 2014/15, reflecting the
increase in the final dividend for the year ended 31 March 2015
paid in August 2015, together with a lower average scrip dividend
take-up in the year.

Other cash movements
Other cash flows principally arise from dividends from joint
ventures and movements in treasury shares, including the cost
of repurchasing shares as part of the share buyback programme
(£267m, £71m lower than the prior year).

Non-cash movements
The non-cash movements are predominantly due to the strengthening
of the US dollar against sterling, resulting in movements in foreign
exchange arising on net debt held in US dollars. In the year, the
dollar strengthened from $1.49 at 31 March 2015 to $1.44 at
31 March 2016.

Other non-cash movements are from changes in fair values of
financial assets and liabilities and interest accretions and accruals.

Net debt

Net debt at 31 March (£m)

19,597

21,429

21,190

23,915

25,325

2012

2013

2014

2015

2016

101

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements
Notes to the consolidated financial statements
– analysis of items in the primary statements

1. Basis of preparation and recent accounting developments

Accounting policies describe our approach to recognising and measuring transactions and balances 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 relevant note.

This section also shows areas of judgement and key sources of estimation uncertainty in these financial statements. In addition,
we summarise new EU endorsed accounting standards, amendments and interpretations and whether these are effective in 2016
or later years, explaining how significant changes are expected to affect our reported results.

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 and Wales, 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 on 18 May 2016.

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 IFRS as adopted by the EU. They are prepared on
the basis of all IFRS accounting standards and interpretations that are mandatory for periods ended 31 March 2016 and in accordance with the
Companies Act 2006 applicable to companies reporting under IFRS and Article 4 of the EU IAS Regulation. The 2015 and 2014 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.

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 D).

A. Going concern
The Directors considered it appropriate to prepare the financial statements on a going concern basis. The going concern basis presumes
that the Group has adequate resources to remain in operation, and that the Directors intend it to do so, for at least one year from the date
the financial statements are signed.

B. 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 or associate, 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 affect the returns
of an entity to which it is exposed or to which it has rights.

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.

102

National Grid Annual Report and Accounts 2015/16

Financial Statements

1. Basis of preparation and recent accounting developments continued

C. 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 15.

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 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.

D. 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 and the definition of adjusted earnings – notes 4 and 7;

•
• energy purchase contracts as being for normal purchase, sale or usage – note 27; and
•

the recognition of surpluses in respect of defined benefit pension schemes – notes 22 and 29.

IFRS provides certain options available within accounting standards. Choices we have made, and continue to make, include the following:

• Presentational formats: we use the nature of expense method for our income statement and aggregate 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 and remeasurements. Exceptional
items and remeasurements 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.

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:

•

review of residual lives, carrying values and impairment charges for other intangible assets and property, plant and equipment – notes
10 and 11;

• estimation of liabilities for pensions and other post-retirement benefits – notes 22 and 29;
• valuation of financial instruments and derivatives – notes 15 and 30;
•
• environmental and decommissioning provisions – note 23.

revenue recognition and assessment of unbilled revenue – note 2; and

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 33.

New IFRS accounting standards and interpretations adopted in 2015/16
The following standards, interpretations and amendments, issued by the IASB and by the IFRS Interpretations Committee (IFRIC), are effective
for the year ended 31 March 2016. None of the pronouncements has had a material impact on the Company’s consolidated results or assets
and liabilities for the year ended 31 March 2016.

• Amendment to IAS 19 ‘Defined Benefit Plans: Employee Contributions’;
• Annual Improvements to IFRSs 2010-2012 Cycle; and
• Annual Improvements to IFRSs 2011-2013 Cycle.

103

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements1. Basis of preparation and recent accounting developments continued

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 ‘Financial Instruments’ and IFRS 16
‘Leases’, effective for periods beginning on or after 1 January 2018 and 1 January 2019 respectively, subject to EU endorsement.
We are assessing the likely impact of these standards on the Company’s financial statements.

IFRS 15 ‘Revenue from Contracts with Customers’ was issued by the IASB in May 2014. Subject to EU endorsement, it is effective for
accounting periods beginning on or after 1 January 2018. The new standard provides enhanced detail on the principle of recognising
revenue to reflect the transfer of goods and services to customers at a value which the Company expects to be entitled to receive.

The Group has completed an initial impact assessment of the new standard by completing a survey of all businesses identifying the likely
impact of IFRS 15. This was a tailored questionnaire based on the known impacts of the new standard on power and utility companies.
Whilst no material differences were identified as part of the questionnaire process, further follow-up work will be required to determine the
impact, if any, on certain revenue items including, but not limited to, variable consideration contracts, take or pay arrangements and
performance obligations where multiple goods or services are provided in individual contracts.

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.

2. Segmental analysis

This note sets out the financial performance for the year 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 range from businesses with high levels of investment and growth (such as UK Electricity
Transmission) to cash generative developed assets with minimal investment requirements (such as National Grid Metering, included
within Other activities).

We generate the majority of our revenue from our regulated operating segments in the UK and US. We work with our regulators to
obtain agreements that balance the risks we face with the opportunity to deliver reasonable returns for our investors. When investing
in Other activities 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.
In any one year, the revenue recognised may differ from that allowed under our regulatory agreements and any such timing differences
are adjusted through future prices. Our Other activities 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. 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 a regulatory agreement, 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. As part of our regulatory
agreements we are entitled to recover certain costs directly from customers (pass through costs). These amounts are included in the overall
calculation of revenue as stipulated by regulatory agreements and explained further on pages 176 to 182.

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 of Directors 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 and remeasurements (see note 4).

There have been no changes to our reporting structure for the year ended 31 March 2016.

104

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued2. Segmental analysis continued

The following table describes the main activities for each operating segment:

UK Electricity Transmission
UK Gas Transmission
UK Gas Distribution
US Regulated

High voltage electricity transmission networks in Great Britain.
The gas transmission network in Great Britain and UK LNG storage activities.
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 and electricity generation facilities in New York.

Other activities primarily relate to non-regulated businesses and other commercial operations not included within the above segments,
including: UK gas metering activities; the Great Britain-France Interconnector; UK property management; a UK LNG import terminal
(National Grid Grain LNG Limited); US 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 Electricity Transmission
UK Gas Transmission
UK Gas Distribution
US Regulated

Other activities

Geographical areas:

UK
US

2016

Sales
between
segments
£m

Total
sales
£m

3,977
1,047
1,918
7,493
876
15,311

(20)
(109)
(36)
–
(31)
(196)

Sales
to third
parties
£m

3,957
938
1,882
7,493
845
15,115

7,522
7,593
15,115

2015

Sales
between
segments
£m

Total
sales
£m

3,754
1,022
1,867
7,986
762
15,391

(12)
(107)
(43)
–
(28)
(190)

Sales
to third
parties
£m

3,742
915
1,824
7,986
734
15,201

7,191
8,010
15,201

2014

Sales
between
segments
£m

Total
sales
£m

3,387
941
1,898
8,040
736
15,002

(14)
(104)
(49)
–
(26)
(193)

Sales
to third
parties
£m

3,373
837
1,849
8,040
710
14,809

6,759
8,050
14,809

105

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements2. 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
and remeasurements are provided in note 4.

Operating segments:

UK Electricity Transmission
UK Gas 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

Operating segments:

UK Electricity Transmission
UK Gas 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
and remeasurements
2016
£m

2015
£m

2014
£m

1,173
486
878
1,185
374
4,096

2,889
1,207
4,096

4,096
22
(1,035)
59
3,142

1,237
437
826
1,164
199
3,863

2,820
1,043
3,863

3,863
36
(1,069)
46
2,876

1,087
417
904
1,125
131
3,664

2,723
941
3,664

3,664
36
(1,144)
28
2,584

After exceptional items
and remeasurements
2016
£m

2015
£m

2014
£m

1,173
486
878
1,196
352
4,085

2,867
1,218
4,085

4,085
22
(1,134)
59
3,032

1,237
437
826
1,081
199
3,780

2,820
960
3,780

3,780
36
(1,234)
46
2,628

1,027
406
780
1,388
134
3,735

2,531
1,204
3,735

3,735
36
(1,051)
28
2,748

Net book value of property,
plant and equipment and other
intangible assets

Capital expenditure

Depreciation and amortisation

2016
£m

2015
£m

2014
£m

2016
£m

2015
£m

2014
£m

2016
£m

2015
£m

2014
£m

11,907
4,140
8,378
17,490
2,336
44,251

25,914
18,337
44,251

43,364
887
44,251

11,276
4,132
8,130
15,664
2,323
41,525

25,073
16,452
41,525

40,723
802
41,525

10,635
4,120
7,921
12,948
2,224
37,848

24,285
13,563
37,848

37,179
669
37,848

1,084
186
549
1,856
218
3,893

1,952
1,941
3,893

3,673
220
3,893

1,074
184
498
1,501
213
3,470

1,864
1,606
3,470

3,263
207
3,470

1,381
181
480
1,219
180
3,441

2,155
1,286
3,441

3,262
179
3,441

(390)
(178)
(298)
(535)
(213)
(1,614)

(1,018)
(596)
(1,614)

(1,467)
(147)
(1,614)

(376)
(172)
(286)
(452)
(196)
(1,482)

(983)
(499)
(1,482)

(1,361)
(121)
(1,482)

(343)
(172)
(271)
(419)
(211)
(1,416)

(938)
(478)
(1,416)

(1,289)
(127)
(1,416)

Total non-current assets other than financial instruments and pension assets located in the UK and US were £26,261m and £23,784m
respectively as at 31 March 2016 (31 March 2015: UK £25,278m, US £21,790m; 31 March 2014: UK £24,531m, US £18,349m).

106

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continuedUnaudited commentary on the results of our principal operations by segment

UK Gas Distribution
UK Gas Distribution revenue increased by £51m in the year
to £1,918m, and adjusted operating profit increased by £52m
to £878m.

Revenue was £51m higher, principally reflecting increased regulatory
allowances. In part, these allowances were increased to compensate
for expected increases in taxation costs reflecting a change to the
tax treatment of replacement expenditure. Regulated controllable
costs were £21m higher due to inflation, recruitment, property costs
and higher charges from our strategic partners to cover connections
and winter resourcing. Depreciation and amortisation was £12m
higher reflecting the continued mains replacement programme
(investment in the year was £51m higher at £549m). Pass-through
costs charged to customers were £11m lower this year, and other
costs were £23m lower than prior year, which included provisions
for additional asset protection costs.

US Regulated
Revenue in our US Regulated businesses was £493m lower
at £7,493m, while adjusted operating profit increased by £21m
to £1,185m.

The stronger US dollar increased operating profit in the year by
£81m. Excluding the impact of foreign exchange rate movements,
revenue decreased by £1,051m, principally as a result of lower
commodity costs passed on to customers and unfavourable
timing of recoveries year over year, partly offset by higher revenue
allowances under the Niagara Mohawk three year rate plan and
the benefit of capex trackers. The reduction in revenue was mostly
offset by a £1,027m reduction in pass-through costs incurred
(excluding the impact of foreign exchange). Regulated controllable
costs reduced by £71m at constant currency, partly as a result of
lower gas leak and compliance work this year and additional costs
incurred last year to improve data quality and bring regulatory filings
up to date. Depreciation and amortisation costs were £51m higher
this year at constant currency as a result of ongoing investment in
our networks. Pension costs were £15m higher at constant currency
due to changes in actuarial discount rates, while other operating
costs were £41m higher at constant currency including higher asset
removal costs.

Our capital investment programme continues in the US, with a
further £1,856m invested in 2015/16, including spend on gas mains
replacement, gas customer growth and electric system reinforcement.

Other activities
Revenue in Other activities increased by £114m to £876m in the year
ended 31 March 2016. Adjusted operating profit was £175m higher
at £374m.

In the US, adjusted operating profit was £143m higher, reflecting
lower spend on upgrades to our finance systems which completed
last year. In addition, we benefited from a £49m gain on disposal of
our investment in the Iroquois pipeline, and the deconsolidation of
our investment in Clean Line. In the UK, adjusted operating profit
was £32m higher as a result of strong auction revenues at the French
interconnector and higher property sales. Capital investment in our
Other activities was at a similar level to last year at £218m.

As a business, we have three measures of operating profit that
are used on a regular basis and disclosed in this Annual Report.

Statutory operating profit: This is operating profit as calculated
under International Financial Reporting Standards (IFRS). Statutory
operating profit by segment is shown in note 2 on page 106.

Adjusted operating profit: Adjusted operating profit (business
performance) excludes items that if included could distort
understanding of our performance for the year and the comparability
between periods. Further details of items that are excluded in
adjusted operating profit are shown in note 4 on page 111.

Regulated financial performance: This is particularly relevant for
our UK operations and is a measure of operating profit that reflects
the impact of the businesses’ regulatory arrangements when
presenting financial performance.

Reconciliations between statutory and adjusted operating profit
can be found on page 196. Reconciliations between adjusted
operating profit and regulated financial performance for UK
Electricity Transmission, UK Gas Transmission and UK Gas
Distribution can be found on page 108.

Commentary on segmental adjusted operating profit results

We have summarised the results of our principal operating
segments here by segment to provide direct reference to the
results as disclosed in note 2. This analysis has been prepared
based on adjusted operating profit (operating profit before
exceptional items and remeasurements) as set out in note 2(b).

UK Electricity Transmission
For the year ended 31 March 2016, revenue in the UK Electricity
Transmission segment increased by £223m to £3,977m, and
adjusted operating profit decreased by £64m to £1,173m.

The revenue growth of £223m was principally due to the recovery
of higher pass-through costs such as payments to other UK
network owners and system balancing costs, and under-recoveries
of allowed revenues in the prior year. This was partly offset by
reductions in allowed revenues this year and a legal settlement
received in 2014/15 that did not repeat this year. Net revenue
(after deducting pass-through costs) was £14m higher. Regulated
controllable costs were £28m higher due to inflation and salary
growth, together with legal cost recoveries in the prior year, higher
tower maintenance costs and transformation costs associated with
our System Operator business. Depreciation and amortisation was
£14m higher reflecting the continued capital investment programme.
Other costs were £36m higher than prior year due to additional
asset impairments this year and lower scrap and disposal proceeds.

Capital investment remained around the same level as last year
at £1,084m.

UK Gas Transmission
Revenue in the UK Gas Transmission segment increased by £25m
in 2015/16 to £1,047m and adjusted operating profit increased by
£49m to £486m.

Revenue was £25m higher, principally due to over-recoveries
of allowed revenues in the year. Regulated controllable costs were
£10m higher than last year, mainly as a result of inflation, higher
gas system service charges and organisational change costs.
Depreciation costs were £6m higher due to ongoing investment
(investment in the year was £186m, similar to last year). Other
operating costs were £19m lower than last year, mostly reflecting
additional costs in 2014/15 relating to the closure of LNG facilities.

107

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsUnaudited commentary on the results of our principal operations by segment continued

Commentary on UK regulated financial performance

The regulated financial performance calculation provides a
measure of the performance of the regulated operations before
the impacts of interest and taxation. It adjusts reported operating
profit under IFRS to reflect the impact of the businesses’
regulatory arrangements when presenting financial performance.

Adjustments in calculating regulatory financial performance
The principal adjustments from reported operating profit to UK
regulated financial performance are:

Movement in regulatory ‘IOUs’: Revenue related to performance
in one year may be recovered in later years. Revenue may be
recovered in one year but be required to be returned to customers in
future years. IFRS recognises these revenues when they flow through
invoices to customers and not in the period to which they relate.

Performance RAV: UK performance efficiencies are in part
remunerated by the creation of additional RAV which is expected
to result in future earnings under regulatory arrangements.

Pension adjustment: Cash payments against pension deficits
in the UK are recoverable under regulatory contracts.

3% RAV indexation: Future UK revenue allowances are expected
to be set using an asset base adjusted for inflation. These will be
billed in future periods and recognised under IFRS at that time. A 3%
RPI inflation assumption is used, reflecting the long-run expectation.

Deferred taxation adjustment: Future UK revenues are expected
to recover cash taxation costs, including the unwinding of deferred
taxation balances created in the current year.

Regulatory depreciation: UK regulated revenues include an
allowance for a return of regulatory capital in accordance with
regulatory assumed asset lives. This return does not form part
of regulatory profit.

Fast/slow money adjustment: The regulatory remuneration of
costs incurred is split between in year revenue allowances and the
creation of additional RAV. This does not align with the classification
of costs as operating costs and fixed asset additions under IFRS
accounting principles.

UK Electricity Transmission
Regulated financial performance for UK Electricity Transmission
decreased to £1,195m from £1,232m, down 3%. The slight
year-on-year decrease is principally a result of a one-off legal
settlement of £56m included in last year's results. Electricity
Transmission underlying performance and operational return
on equity were broadly similar this year.

Reconciliation of regulated financial
performance to operating profit
Reported operating profit
Movement in regulatory ‘IOUs’
Deferred taxation adjustment
RAV indexation (average 3%

long-run inflation)

Regulatory vs IFRS depreciation difference
Fast/slow money adjustment
Pensions
Performance RAV created
Regulated financial performance

2016
£m
1,173
(147)
80

339
(368)
92
(54)
80
1,195

2015
£m
1,237
(130)
88

326
(352)
34
(48)
77
1,232

UK Gas Transmission
Regulated financial performance for UK Gas Transmission
decreased to £535m from £648m, down 17%. This reflected
a lower operational return on equity, mainly as a result of the
expiration of the gas permit incentive scheme.

Reconciliation of regulated financial
performance to operating profit
Reported operating profit
Movement in regulatory ‘IOUs’
Deferred taxation adjustment
RAV indexation (average 3%

long-run inflation)

Regulatory vs IFRS depreciation difference
Fast/slow money adjustment
Pensions
Performance RAV created
Regulated financial performance

2016
£m
486
(80)
45

166
(18)
18
(77)
(5)
535

2015
£m
437
(16)
85

166
(22)
54
(49)
(7)
648

%
change
(5)

(3)

%
change
11

(17)

UK Gas Distribution
Regulated financial performance for UK Gas Distribution was
unchanged at £819m. This reflects similar achieved operational
return on equity year-on-year, with the benefit of a higher asset
base being offset by lower allowed cost of debt.

Reconciliation of regulated financial
performance to operating profit
Reported operating profit
Movement in regulatory ‘IOUs’
Deferred taxation adjustment
RAV indexation (average 3%

long-run inflation)

Regulatory vs IFRS depreciation difference
Fast/slow money adjustment
Pensions
Performance RAV created
Regulated financial performance

2016
£m
878
(35)
(34)

255
(104)
(168)
(13)
40
819

2015
£m
826
(28)
60

255
(148)
(182)
(5)
41
819

%
change
6

–

108

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued3. 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.

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 and development expenditure

(a) Payroll costs

Wages and salaries1
Social security costs
Other pension costs (note 22)
Share-based payment
Severance costs (excluding pension costs)

Less: payroll costs capitalised

Before exceptional items
and remeasurements
2016
£m
1,614
1,506
1,304
1,003
1,050
907
971
2,664
11,019

2015
£m
1,482
1,459
1,615
1,403
1,004
874
801
2,700
11,338

2014
£m
1,416
1,373
1,513
1,722
963
872
630
2,656
11,145

Exceptional items
and remeasurements
2016
£m
–
–
8
(19)
–
–
–
22
11

2015
£m
–
–
70
13
–
–
–
–
83

2014
£m
–
(155)
(49)
33
–
–
–
100
(71)

2016
£m
1,614
1,506
1,312
984
1,050
907
971
2,686
11,030

303
99
29

2016
£m
1,720
137
238
22
5
2,122
(616)
1,506

Total

2015
£m
1,482
1,459
1,685
1,416
1,004
874
801
2,700
11,421

365
98
23

2015
£m
1,598
129
224
20
4
1,975
(516)
1,459

2014
£m
1,416
1,218
1,464
1,755
963
872
630
2,756
11,074

422
115
12

20141
£m
1,377
126
229
20
30
1,782
(564)
1,218

1. Included within wages and salaries are US other post-retirement benefit costs of £52m (2015: £39m; 2014: £44m) and a curtailment gain on LIPA MSA transaction of £nil (2015: £nil;

2014: £198m). For further information refer to note 22.

(b) Number of employees

UK
US

31 March
2016
10,238
14,830
25,068

Monthly
average
2016
10,035
14,775
24,810

31 March
2015
9,701
14,573
24,274

Monthly
average
2015
9,670
14,434
24,104

31 March
2014
9,693
14,216
23,909

Monthly
average
2014
9,641
15,094
24,735

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 2016, there were 2,232 (2015: 2,131; 2014: 2,044) employees in other operations, excluding
shared services.

109

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements3. Operating costs continued

Short-term employee benefits
Post-employment benefits
Share-based payment

2016
£m
9
1
4
14

2015
£m
10
9
4
23

2014
£m
9
1
5
15

Key management compensation relates to the Board, including the Executive Directors and Non-executive Directors for the years presented.

(d) Directors’ emoluments
Details of Executive Directors’ emoluments are contained in the audited part of the Remuneration Report on page 75 and those of
Non-executive Directors on page 78.

(e) Auditors’ remuneration
Auditors’ remuneration is presented below in accordance with the requirements of the Companies Act 2006 and the principal accountant fees
and services disclosure requirements of Item 16C of Form 20-F:

Audit fees1 payable to the parent Company’s auditors and their associates in respect of:
Audit of the parent Company’s individual and consolidated financial statements
The auditing of accounts of any associate of the Company
Other services supplied2

Total other services3
Tax fees4:

Tax compliance services
Tax advisory services

All other fees5:

Other assurance services
Services relating to corporate finance transactions not covered above
Other non-audit services not covered above

Total auditors’ remuneration

2016
£m

1.3
9.2
3.6
14.1

0.5
–

4.3
1.6
2.5
8.9
23.0

2015
£m

1.3
8.1
3.3
12.7

0.4
0.1

0.1
–
0.3
0.9
13.6

2014
£m

0.9
9.2
3.2
13.3

0.5
0.3

0.1
–
0.8
1.7
15.0

1. 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 2016, 2015 and 2014, and the review

of interim financial statements for the six month periods ended 30 September 2015, 2014 and 2013 respectively.

2. 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.

3. There were no audit related fees as described in Item 16C(b) of Form 20-F.
4. Tax fees include amounts charged for tax compliance, tax advice and tax planning.
5. All other fees include amounts incurred in respect of the potential disposal of a majority stake in the Gas Distribution business (vendor due diligence and separation support), as well

as data assurance work in respect of financial information included in US rate filings all of which have been subject to approval by the Audit Committee. Total other fees for the year ended
31 March 2016 were £8.4m (2015: £0.4m; 2014: £0.9m).

PwC has contracted with Ofgem to assess the UK gas industry’s readiness for the introduction of new settlement processes and systems.
Fees for these services are paid by Xoserve Limited, a subsidiary of National Grid, on behalf of the industry, under instruction from Ofgem.
As PwC has no contract with or duty of care to Xoserve Limited, these amounts are not included above.

In addition, fees of £0.1m were incurred in 2016 in relation to the audits of the pension schemes of the Company (2015: £0.2m; 2014: £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 in excess of £50,000 to be performed by the independent auditors
to ensure that the service will not compromise auditor independence. The Audit Committee has delegated the approval in advance for
all non-audit work below this level, up to a maximum of 5% of the total audit fee, to the Finance Director. Certain services are prohibited
from being performed by the external auditors under Sarbanes-Oxley. All of the above services were pre-approved pursuant to this policy.

110

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued4. Exceptional items and remeasurements

To monitor our financial performance, we use a profit measure that excludes certain income and expenses. We call that measure
‘business performance’ or ‘adjusted profit’. We exclude items from business performance because, if included, these items could
distort understanding of our performance for the year and the comparability between periods. This note analyses these items, which
are included in our results for the year but are excluded from business performance.

Our financial performance is analysed into two components: business performance, which excludes exceptional items and remeasurements;
and exceptional items and remeasurements. 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.

Management utilises an exceptional items framework that has been discussed and approved by the Group Audit Committee. This follows
a three-step process which considers the nature of the event, the financial materiality involved and any particular facts and circumstances.
In considering the nature of the event, management focuses on whether the event is within the Group’s control and how frequently such
an event typically occurs. In determining the facts and circumstances management considers factors such as ensuring consistent treatment
between favourable and unfavourable transactions, precedent for similar items, number of periods over which costs will be spread or gains
earned and the commercial context for the particular transaction.

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 significant 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.

Included within operating profit
Exceptional items:

Transaction costs
Restructuring costs
Gas holder demolition costs
LIPA MSA transition
Other

Remeasurements – commodity contracts

Included within finance costs
Exceptional items:

Debt redemption costs

Remeasurements – net (losses)/gains on derivative financial instruments

Total included within profit before tax
Included within tax
Exceptional credits/(charges) arising on items not included in profit before tax:
Deferred tax credit arising on the reduction in the UK corporation tax rate
Deferred tax charge arising from an increase in US state income tax rates

Tax on exceptional items
Tax on remeasurements

Total exceptional items and remeasurements after tax
Analysis of total exceptional items and remeasurements after tax
Exceptional items after tax
Remeasurements after tax
Total exceptional items and remeasurements after tax

2016
£m

2015
£m

2014
£m

(22)
–
–
–
–
(22)
11
(11)

–
(99)
(99)
(110)

296
–
4
15
315
205

278
(73)
205

–
–
–
–
–
–
(83)
(83)

(131)
(34)
(165)
(248)

6
–
28
44
78
(170)

(97)
(73)
(170)

–
(136)
(79)
254
16
55
16
71

–
93
93
164

398
(8)
(57)
(36)
297
461

388
73
461

Further detail of operating exceptional items specific to 2015/16
In November 2015, the Group announced that it was considering disposing of a majority stake in its UK Gas Distribution business. In the year
ended 31 March 2016, sale preparation costs of £22m were recognised in respect of this potential transaction. These costs have been treated
as exceptional, achieving a consistent presentation with the expected treatment of the transaction on completion.

Further detail of operating exceptional items in respect of previous years
Debt redemption costs in the year ending 31 March 2015 represents costs arising from a liability management programme. We reviewed
and restructured the Group debt portfolio following the commencement of the RIIO price controls in 2013 and the slow down in our planned
UK capital investment programme as the industry assessed the impact of Electricity Market Reform.

£16m was received in year ending 31 March 2014 following the sale to a third party of a settlement award which arose as a result of a legal
ruling in 2008. The business to which this item related had previously been treated as discontinued.

111

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements4. Exceptional items and remeasurements continued

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.

Net (losses)/gains on derivative financial instruments comprise (losses)/gains 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
(2015: £1m credit; 2014: £nil) in respect of prior years.

Items included within tax
The Finance No. 2 Bill 2015 included a reduction in the UK corporation tax rate from 20% to 19% for the year beginning 1 April 2017, with
a further reduction from 19% to 18% for the year beginning 1 April 2020.

The Finance Act 2013 enacted reductions in the UK corporation tax rate from 23% to 21% from 1 April 2014, and from 21% to 20% from
1 April 2015. Other UK tax legislation also reduced the UK corporation tax rate in prior periods (2013: from 24% to 23%). These reductions
have resulted in decreases to UK deferred tax liabilities in these periods.

5. Finance income and costs

This note details the interest income generated by our financial assets and interest expense incurred on our financial liabilities. It also
includes the expected return on our pensions and other post-retirement assets, which is offset by the interest payable on pensions and
other post-retirement obligations and presented on a net basis. In reporting business performance, we adjust net financing costs to exclude
any net gains or losses on derivative financial instruments included in remeasurements. In addition, the prior year debt redemption costs
have been treated as exceptional (see note 4).

Finance income
Interest income on financial instruments:

Bank deposits and other financial assets
Gains on disposal of available-for-sale investments

Finance costs
Net interest on pensions and other post-retirement benefit obligations
Interest expense on financial liabilities held at amortised cost:

Bank loans and overdrafts
Other borrowings

Derivatives
Unwinding of discount on provisions
Other interest
Less: interest capitalised1

Exceptional items
Debt redemption costs
Remeasurements
Net gains/(losses) on derivative financial instruments included in remeasurements2:

Ineffectiveness on derivatives designated as:

Fair value hedges3
Cash flow hedges
Net investment hedges
Net investment hedges – undesignated forward rate risk

Derivatives not designated as hedges or ineligible for hedge accounting

Net finance costs

2016
£m

2015
£m

2014
£m

22
–
22

28
8
36

22
14
36

(112)

(101)

(128)

(38)
(940)
43
(73)
(27)
112
(1,035)

(45)
(984)
56
(73)
(8)
86
(1,069)

(61)
(1,106)
79
(73)
(3)
148
(1,144)

–

(131)

–

39
(15)
–
(34)
(89)
(99)
(1,134)

36
(13)
2
33
(92)
(165)
(1,234)

22
4
38
(7)
36
93
(1,051)

(1,112)

(1,198)

(1,015)

1. Interest on funding attributable to assets in the course of construction in the current year was capitalised at a rate of 3.3% (2015: 3.8%; 2014: 4.5%). In the UK, capitalised interest
qualifies for a current year tax deduction with tax relief claimed of £19m (2015: £24m; 2014: £32m). In the US, capitalised interest is added to the cost of plant and qualifies for tax
depreciation allowances.

2. Includes a net foreign exchange loss on financing activities of £407m (2015: £636m gain; 2014: £268m gain) offset by foreign exchange gains and losses on derivative financial instruments

measured at fair value.

3. Includes a net gain on instruments designated as fair value hedges of £34m (2015: £219m gain; 2014: £183m loss) and a net gain of £5m (2015: £162m loss; 2014: £205m gain) arising from

fair value adjustments to the carrying value of debt.

112

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued6. Tax

Tax is payable in the territories where we operate, mainly the UK and the US. This note gives further details of the total 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 the accounting and tax bases of profit.

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 tax 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 the 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 tax authority and the Company and its subsidiaries intend to settle their current tax
assets and liabilities on a net basis.

Tax charged/(credited) to the income statement

Tax before exceptional items and remeasurements
Exceptional tax on items not included in profit before tax (note 4)
Tax on other exceptional items and remeasurements
Tax on total exceptional items and remeasurements (note 4)
Total tax charge

Tax as a percentage of profit before tax

Before exceptional items and remeasurements
After exceptional items and remeasurements

2016
£m
753
(296)
(19)
(315)
438

2016
%
24.0
14.4

2015
£m
695
(6)
(72)
(78)
617

2015
%
24.2
23.5

2014
£m
581
(390)
93
(297)
284

2014
%
22.5
10.3

113

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements6. Tax continued

The tax charge for the year can be analysed as follows:

Current tax
UK corporation tax at 20% (2015: 21%; 2014: 23%)
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

Tax (credited)/charged to other comprehensive income and equity

Current tax
Share-based payment
Available-for-sale investments
Deferred tax
Available-for-sale investments
Cash flow hedges
Share-based payment
Remeasurements of net retirement benefit obligations

Total tax recognised in the statement of comprehensive income
Total tax relating to share-based payment recognised directly in equity

2016
£m

322
(7)
315
38
(19)
19
334

(152)
26
(126)
229
1
230
104

438

2015
£m

309
(2)
307
51
(62)
(11)
296

123
7
130
138
53
191
321

617

2014
£m

355
(9)
346
54
(88)
(34)
312

(292)
(3)
(295)
276
(9)
267
(28)

284

2016
£m

2015
£m

2014
£m

(2)
5

12
15
–
125
155
157
(2)
155

(7)
5

2
(18)
3
(299)
(314)
(310)
(4)
(314)

(3)
(5)

2
5
(4)
172
167
174
(7)
167

114

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued6. Tax continued

The tax charge for the year after exceptional items and remeasurements is lower (2015: higher; 2014: lower) than the standard rate of corporation
tax in the UK of 20% (2015: 21%; 2014: 23%):

Profit before tax
Before exceptional items and remeasurements
Exceptional items and remeasurements
Profit before tax
Profit before tax multiplied by UK corporation
tax rate of 20% (2015: 21%; 2014: 23%)

Effect 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

and US tax rates

Other

Total tax charge

Effective tax rate

Before
exceptional
items and
remeasurements
2016
£m

After
exceptional
items and
remeasurements
2016
£m

Before
exceptional
items and
remeasurements
2015
£m

After
exceptional
items and
remeasurements
2015
£m

Before
exceptional
items and
remeasurements
2014
£m

After
exceptional
items and
remeasurements
2014
£m

3,142
–
3,142

628

2
29
(26)
124
(1)

–
(3)
753

%
24.0

3,142
(110)
3,032

606

1
118
(113)
129
(1)

(296)
(6)
438

%
14.4

2,876
–
2,876

604

(3)
31
(20)
91
(1)

–
(7)
695

%
24.2

2,876
(248)
2,628

552

(4)
327
(320)
77
(1)

(6)
(8)
617

%
23.5

2,584
–
2,584

594

(109)
32
(24)
98
(3)

–
(7)
581

%
22.5

2,584
164
2,748

632

(109)
284
(268)
138
(3)

(390)
–
284

%
10.3

Factors that may affect future tax charges
The Finance Act 2015 (No.2) (the Act) was enacted on 18 November 2015. The Act reduced the main rate of UK corporation tax to 19% with
effect from 1 April 2017 and 18% from 1 April 2020 and deferred tax balances have been calculated at 18%.

The Budget in March this year announced a further reduction in the corporate tax rate to 17% from 1 April 2020, from the previously enacted
18%. This has not been substantively enacted at the reporting date. As the change to 17% had not been substantively enacted at the reporting
date its effects are not included in these financial statements. The overall effect of that change, if it had applied to the deferred tax balances at
the reporting date, would be to reduce the deferred tax liability by an additional £139m and reduce the tax expense for the period by £139m.

There continued to be significant international focus on tax reform during 2015/16, including the OECD’s Base Erosion and Profit Shifting
(BEPS) project to address mismatches in international rules and European Commission initiatives. We will continue to monitor developments
and assess the potential impact for National Grid of these and any further initiatives.

115

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements6. Tax continued

Tax 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 2014
Deferred tax liabilities at 31 March 2014
At 1 April 2014
Exchange adjustments
Charged/(credited) to income statement
Charged/(credited) to other comprehensive income and equity
At 31 March 2015
Deferred tax assets at 31 March 2015
Deferred tax liabilities at 31 March 2015
At 1 April 2015
Exchange adjustments and other
Charged/(credited) to income statement
Charged to other comprehensive income and equity
At 31 March 2016
Deferred tax assets at 31 March 2016
Deferred tax liabilities at 31 March 2016

Accelerated
tax
depreciation
£m

Share-
based
payment
£m

Pensions
and other
post-
retirement
benefits
£m

Financial
instruments
£m

Other net
temporary
differences
£m

(1)
5,650
5,649
408
599
–
6,656
(1)
6,657
6,656
141
266
–
7,063
(1)
7,064
7,063

(22)
–
(22)
–
1
3
(18)
(18)
–
(18)
1
3
–
(14)
(14)
–
(14)

(960)
143
(817)
(99)
38
(299)
(1,177)
(1,337)
160
(1,177)
(33)
47
125
(1,038)
(1,201)
163
(1,038)

(13)
6
(7)
(2)
(34)
(16)
(59)
(64)
5
(59)
(1)
(6)
13
(53)
(66)
13
(53)

(796)
75
(721)
(104)
(280)
–
(1,105)
(1,186)
81
(1,105)
(30)
(203)
14
(1,324)
(1,408)
84
(1,324)

Total
£m

(1,792)
5,874
4,082
203
324
(312)
4,297
(2,606)
6,903
4,297
78
107
152
4,634
(2,690)
7,324
4,634

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 £4,634m (2015: £4,297m). Deferred tax of £667m (2015: £461m) has been recognised in respect of net operating losses.

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

2016
£m
232
5
–

2015
£m
250
1
4

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 trading losses arising
in the US have up to 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 £502m (2015: £773m). 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 UK tax legislation,
which largely exempts overseas dividends received, the temporary differences are unlikely to lead to additional tax.

116

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continuedUnaudited commentary on tax

Tax strategy
National Grid manages its tax affairs in a proactive and responsible
way in order to comply with all relevant legislation and minimise
reputational risk. As a regulated public utility we are very conscious
of the need to manage our tax affairs responsibly in the eyes of our
stakeholders. 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. Management responsibility and oversight for
our tax strategy, which is approved by the Finance Committee, rests
with the Finance Director and the Group Tax and Treasury Director
who monitor our tax activities and report to the Finance Committee.

Total UK tax contribution
This year we have again disclosed additional information in
respect of our total UK tax contribution for consistency and to aid
transparency in an area in which there remains significant public
interest. As was the case in prior years, the total amount of taxes
we pay and collect in the UK year on year is significantly more than
just the corporation tax which we pay on our UK profits. Within the
total, we again include other taxes paid such as business rates
and taxes on employment together with employee taxes and
other indirect taxes.

For 2015/16 our total tax contribution to the UK Exchequer was
£1.6bn (2014/15: £1.5bn). Taxes borne in 2015/16 were £703m,
an 8% decrease on taxes borne in 2014/15 of £761m and primarily
due to lower corporation tax payments in the current year. The main
reasons for this are the impact of the reduction in the UK corporation
tax rate, and the impact of our debt redemption costs during the
year ended 31 March 2015, which reduced corporation tax payments
due for that year but were settled by instalment payments made
in the year ended 31 March 2016. However, our taxes collected
were £899m, an increase of 21% on 2014/15 of £742m, and this
was primarily due to the introduction of the VAT Domestic Reverse
Charge on gas and electricity trading (introduced in July 2014)
being in force for the full year, rather than for six months in 2014/15.

Our 2014/15 total tax contribution of £1.5bn resulted in National
Grid being the 13th highest contributor of UK taxes based on the
results of the Hundred Group’s 2015 Total Tax Contribution Survey,
a position commensurate with the size of our business and
capitalisation relative to other contributors to the Survey. In 2014
we were also in 13th position. In 2015 we ranked 7th in respect
of taxes borne.

National Grid’s contribution to the UK economy is again broader
than just the taxes it pays over to and collects on behalf of HMRC.
The Hundred Group’s 2015 Total Tax Contribution Survey ranks
National Grid in 5th place in respect of UK capital expenditure on
fixed assets. For instance, National Grid’s economic contribution
also supports a significant number of UK jobs in our supply chain.

The most significant amounts making up the 2015/16 total tax
contribution were as follows:

Tax transparency
The UK tax charge for the year disclosed in the financial statements
in accordance with accounting standards and the UK corporation
tax paid during the year will differ. For transparency we have
included a reconciliation below of the tax charge per the income
statement to the UK corporation tax paid in 2015/16.

The tax charge for the Group as reported in the income statement
is £438m (2014/15: £617m). The UK tax charge is £189m (2014/15:
£437m) and UK corporation tax paid was £285m (2014/15: £353m),
with the principal differences between these two measures as follows:

Reconciliation of UK total tax charge
to UK corporation tax paid
Total UK tax charge (current tax £315m

(2015: £307m) and deferred tax credit £126m
(2015: charge £130m))

Adjustment for non-cash deferred tax credit/(charge)
Adjustments for current tax credit in respect

of prior years

UK current tax charge
UK corporation tax instalment payments not payable

until the following year

UK corporation tax instalment payments in respect

of prior years paid in current year

UK corporation tax paid

Year ended 31 March
2015
£m

2016
£m

189
126

7
322

437
(130)

2
309

(164)

(127)

127
285

171
353

Tax losses
We have total unrecognised deferred tax assets in respect of losses
of £237m (2014/15: £255m) of which £232m (2014/15: £250m) are
capital losses in the UK as set out above. 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 that the continued development of a coherent and
transparent tax policy in the UK is critical to help drive growth
in the economy.

We continue to contribute to research into the structure of
business tax and its economic impact by contributing to the
funding of the Oxford University Centre for Business Tax 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.
Our Finance Director is Chairman of its Tax Committee. This helps
to ensure that we are engaged at the earliest opportunity on tax
issues which affect our business. In the current year we have
reviewed and responded to a number of HMRC consultations, the
subject matter of which directly impacts taxes borne or collected
by our business, with the aim of openly contributing to the debate
and development of UK tax legislation.

UK total tax contribution 2015/16
Taxes borne

285

347

1. VAT
2. PAYE and NIC
3. UK corporation tax
4. Business rates
5. Other
Total

Taxes collected

751

147

£m
1
57
285
347
13
703

1. VAT
2. PAYE and NIC
3. Other
Total

£m
751
147
1
899

117

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements

7. Earnings per share (EPS)

EPS is the amount of post-tax profit attributable to each ordinary 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. The weighted average number of shares is increased
by additional shares issued as scrip dividends and reduced by shares repurchased by the Company during the year.

Adjusted earnings and EPS, which exclude exceptional items and remeasurements, are provided to reflect the business performance
subtotals used by the Company. We have included reconciliations from this additional EPS measure to earnings for both basic and diluted
EPS to provide additional detail for these items. For further details of exceptional items and remeasurements, see note 4.

(a) Basic earnings per share

Adjusted earnings
Exceptional items after tax
Remeasurements after tax
Earnings

Weighted average number of shares – basic1

1. 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
Earnings

Weighted average number of shares – diluted1

1. Comparative amounts have been restated to reflect the impact of additional shares issued as scrip dividends.

Weighted average number of ordinary shares – basic
Effect of dilutive potential ordinary shares – employee share plans
Weighted average number of ordinary shares – diluted

1. Comparative amounts have been restated to reflect the impact of additional shares issued as scrip dividends.

Earnings
2015
£m
2,189
(97)
(73)
2,019

Earnings
2016
£m
2,386
278
(73)
2,591

Earnings
per share
2016
pence
63.5
7.4
(1.9)
69.0

2016
millions
3,755

Earnings
2016
£m
2,386
278
(73)
2,591

Earnings
per share
2016
pence
63.3
7.3
(1.9)
68.7

Earnings
2015
£m
2,189
(97)
(73)
2,019

2016
millions
3,771

2016
millions
3,755
16
3,771

Earnings
per share
2015
(restated)1
pence
57.6
(2.6)
(1.8)
53.2

2015
millions
3,798

Earnings
per share
2015
(restated)1
pence
57.4
(2.6)
(1.9)
52.9

2015
millions
3,815

2015
(restated)1
millions
3,798
17
3,815

Earnings
2014
£m
2,015
388
73
2,476

Earnings
per share
2014
(restated)1
pence
53.1
10.2
1.9
65.2

2014
millions
3,798

Earnings
per share
2014
(restated)1
pence
52.8
10.2
1.9
64.9

2014
millions
3,817

2014
(restated)1
millions
3,798
19
3,817

118

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued8. Dividends

Dividends represent 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.

Interim dividend in respect of the current year
Final dividend in respect of the prior year

2016

Cash
dividend
paid
£m
532
805
1,337

Pence
per share
15.00
28.16
43.16

Scrip
dividend
£m
31
248
279

Pence
per share
14.71
27.54
42.25

2015

Cash
dividend
paid
£m
531
740
1,271

Scrip
dividend
£m
26
289
315

Pence
per share
14.49
26.36
40.85

2014

Cash
dividend
paid
£m
539
520
1,059

Scrip
dividend
£m
–
444
444

The Directors are proposing a final dividend for the year ended 31 March 2016 of 28.34p per share that will absorb approximately £1,059m
of shareholders’ equity (assuming all amounts are settled in cash). It will be paid on 10 August 2016 to shareholders who are on the register
of members at 3 June 2016 (subject to Shareholders' approval at the AGM). A scrip dividend will be offered as an alternative.

Unaudited commentary on dividends

Following the announcement of our dividend policy in March 2013,
the Board remains confident that National Grid is able to support a
dividend growing at least in line with RPI inflation for the foreseeable
future, while continuing to invest as required in our regulated assets.

With the exception of the 2013/14 interim dividend paid in January
2014, a scrip option has been offered for all interim and final
dividends in the last five years.

In August 2014 we began a share buyback programme that will
allow us to offer the scrip dividend option for both the full-year and
interim dividend. The buyback programme is designed to balance
shareholders’ appetite for the scrip dividend option with our desire
to operate an efficient balance sheet with appropriate leverage.

Dividend cover
Ratio of earnings cover over cash dividend paid and scrip dividend

1.4

1.2

1.5

1.6

1.3

1.4

1.3

1.6

1.5

2012

2013

2014

2015

2016

Adjusted earnings
Earnings

119

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements9. 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.

Net book value at 1 April 2014
Impairment
Exchange adjustments
Net book value at 31 March 2015
Exchange adjustments
Net book value at 31 March 2016

Total
£m
4,594
(12)
563
5,145
170
5,315

The cost of goodwill at 31 March 2016 was £5,327m (2015: £5,157m) with an accumulated impairment charge of £12m (2015: £12m).

The amounts disclosed above as at 31 March 2016 include balances relating to the following cash-generating units: New York £3,061m
(2015: £2,964m); Massachusetts £1,145m (2015: £1,108m); Rhode Island £426m (2015: £412m); and Federal £683m (2015: £661m).

Goodwill is reviewed annually for impairment and the recoverability of goodwill 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 (including changes in commodity prices), 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 economic growth rate used to extrapolate projections beyond five years has been lowered to 2% (2015: 2.25%). The growth rate
has been determined having regard to data on projected growth in US real gross domestic product (GDP). 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
a pre-tax discount rate of 8% (2015: 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.

As part of their review in 2014/15, the Directors specifically reviewed the carrying value of goodwill associated with Clean Line Energy Partners
LLC. This review resulted in a full impairment being recorded of £12m.

120

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued10. Other intangible assets

Other intangible assets include software which is 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.

Other intangible assets are amortised on a straight-line basis over their estimated useful economic lives. Amortisation periods for categories
of intangible assets are:

Software

Cost at 1 April 2014
Exchange adjustments
Additions
Reclassifications1
Cost at 31 March 2015
Exchange adjustments
Additions
Disposals
Reclassifications1
Cost at 31 March 2016
Accumulated amortisation at 1 April 2014
Exchange adjustments
Amortisation charge for the year
Reclassifications1
Accumulated amortisation at 31 March 2015
Exchange adjustments
Amortisation charge for the year
Reclassifications1
Accumulated amortisation at 31 March 2016
Net book value at 31 March 2016
Net book value at 31 March 2015

1. Reclassifications includes amounts transferred (to)/from property, plant and equipment (see note 11) and reclasses between cost and accumulated amortisation of £nil (2015: £6m).

Years
3 to 10

Software
£m
1,222
59
207
16
1,504
22
220
(3)
1
1,744
(553)
(20)
(121)
(8)
(702)
(8)
(147)
–
(857)
887
802

121

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements11. 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 are flexible and resilient. 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:

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 recognised 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.

122

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued11. Property, plant and equipment continued

Cost at 1 April 2014
Exchange adjustments
Additions
Disposals
Reclassifications1
Cost at 31 March 2015
Exchange adjustments
Additions
Disposals
Reclassifications1
Cost at 31 March 2016
Accumulated depreciation at 1 April 2014
Exchange adjustments
Depreciation charge for the year2
Disposals
Reclassifications1
Accumulated depreciation at 31 March 2015
Exchange adjustments
Depreciation charge for the year2
Disposals
Reclassifications1
Accumulated depreciation at 31 March 2016
Net book value at 31 March 2016
Net book value at 31 March 2015

Assets
in the
course of
construction
£m
4,024
82
2,514
(1)
(2,104)
4,515
20
2,686
(78)
(3,269)
3,874
–
–
–
–
–
–
–
–
–
–
–
3,874
4,515

Plant and
machinery
£m
46,425
2,019
544
(334)
1,981
50,635
669
801
(393)
3,060
54,772
(15,350)
(533)
(1,138)
307
1
(16,713)
(168)
(1,273)
386
(60)
(17,828)
36,944
33,922

Motor
vehicles
and office
equipment
£m
853
47
150
(74)
8
984
23
126
(62)
100
1,171
(585)
(29)
(143)
74
5
(678)
(10)
(116)
61
–
(743)
428
306

Land and
buildings
£m
2,248
132
55
(30)
105
2,510
41
60
(26)
173
2,758
(436)
(15)
(82)
7
(4)
(530)
(32)
(79)
6
(5)
(640)
2,118
1,980

1. Represents amounts transferred between categories, (to)/from other intangible assets (see note 10) and reclasses between cost and accumulated depreciation of £64m (2015: £nil).
2. Includes amounts in respect of capitalised depreciation of £1m (2015: £2m).

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

12. Other non-current assets

2016
£m

1,622
226
87

47
1,649

Total
£m
53,550
2,280
3,263
(439)
(10)
58,644
753
3,673
(559)
64
62,575
(16,371)
(577)
(1,363)
388
2
(17,921)
(210)
(1,468)
453
(65)
(19,211)
43,364
40,723

2015
£m

1,506
184
61

47
1,569

Other non-current assets include 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 2017.

Commodity contract assets
Other receivables
Prepayments

2016
£m
10
37
35
82

2015
£m
29
39
12
80

123

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements13. Financial and other investments

Financial and other investments include two main categories. Assets 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 bank deposits with a maturity of greater than three months, and cash balances that cannot be readily used in operations,
principally collateral pledged for certain borrowings.

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.

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 other comprehensive income, 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.

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.

Subsequent to initial recognition, the fair values of financial assets measured at fair value that are quoted in active markets are based on bid
prices. 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.

Non-current
Available-for-sale investments
Current
Available-for-sale investments
Loans and receivables

Financial and other investments include the following:

Investments in short-term money funds1
Managed investments in equity and bonds2
Cash surrender value of life insurance policies
Other investments
Restricted balances:

Collateral3
Other

2016
£m

2015
£m

482

330

1,951
1,047
2,998
3,480

1,516
615
160
–

999
190
3,480

1,232
1,327
2,559
2,889

618
785
158
2

1,199
127
2,889

1. Includes £8m (2015: £34m) held by insurance captives and therefore restricted.
2. All £615m (2015: £644m) is restricted and relates to investments held by insurance captives of £434m (2015: £382m), US non-qualified plan investments of £181m (2015: £170m) and assets

held within security accounts with charges in favour of the UK pension scheme Trustees of £nil (2015: £92m).

3. Refers to collateral placed with counterparties with whom we have entered into a credit support annex to the ISDA (International Swaps and Derivatives Association) Master Agreement.

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(a). None of the financial investments are past due or impaired.

124

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued14. Investments in joint ventures and associates

Investments in joint ventures and associates represent businesses we do not control, but instead exercise joint control or significant influence.

A joint venture is an arrangement established to engage in economic activity, which the Company jointly controls with other parties and has
rights to the net assets of the arrangement. 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
Disposals
Share of post-tax results for the year
Dividends received
Other movements
Share of net assets at 31 March

2016
£m
318
21
116
(52)
59
(72)
7
397

2015
£m
351
(11)
–
–
46
(79)
11
318

A list of joint ventures and associates including the name, proportion of ownership and principal activity is provided in note 32.

The joint ventures and associates have no significant contingent liabilities to which the Group is exposed, and the Group has no significant
contingent liabilities in relation to its interest in the joint ventures and associates. The Group has capital commitments of £305m in relation
to joint ventures.

Outstanding balances with joint ventures and associates are shown in note 28.

The Group’s only material joint venture or associate is in respect of its 50% equity stake in BritNed Development Limited.

Summarised financial information of this joint venture together with the carrying amount of the investment in the consolidated financial
statements is as follows:

Statement of financial position – BritNed Development Limited
Non-current assets
Cash and cash equivalents
All other current assets
Non-current liabilities
Current liabilities
Equity

Carrying amount of the Group’s investment (National Grid ownership 50%)

Income statement – BritNed Development Limited
Revenue
Depreciation and amortisation
Other costs
Operating profit
Finance income and expense
Income tax expense
Profit for the year

Group’s share in profit (National Grid ownership 50%)

2016
£m

376
77
3
(8)
(30)
418

209

2016
£m

198
(11)
(56)
131
–
(32)
99

2015
£m

355
46
2
(10)
(14)
379

189

2015
£m

162
(12)
(66)
84
–
(21)
63

125

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements15. Derivative financial instruments

Derivatives are financial instruments that derive their value from the price of an underlying item such as interest rates, foreign exchange
rates, credit spreads, commodities, equity or other indices. In accordance with Board approved policies, derivatives are transacted to
manage our exposure to fluctuations in interest rate and foreign exchange rate on borrowings and other contractual cash flows. Specifically,
we use derivatives to manage these risks from our financing portfolio to optimise the overall cost of accessing the debt capital markets.
These derivatives are analysed below. We also use derivatives to manage our operational market risks from commodities. The commodity
derivative contracts are detailed in note 30(e).

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 the period they arise, in either the income statement or other comprehensive income depending
on the applicable accounting standards. Where the fair value of a derivative is positive it is carried as a derivative asset, and where negative
as a derivative liability.

We calculate fair value of the financial derivatives by discounting all future cash flows using 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 absence of
sufficient market data, fair values would be based on the quoted market price of similar derivatives. Analysis of these derivatives and the
various methods used to calculate their respective fair values is detailed below and in note 30.

For each class of derivative instrument type the total fair value amounts are as follows:

Interest rate swaps
Cross-currency interest rate swaps
Foreign exchange forward contracts
Inflation linked swaps
Equity options

The maturity profile of derivative financial instruments is as follows:

Current
Less than 1 year

Non-current
In 1 to 2 years
In 2 to 3 years
In 3 to 4 years
In 4 to 5 years
More than 5 years

For each class of derivative the notional contract1 amounts are as follows:

Interest rate swaps
Cross-currency interest rate swaps
Foreign exchange forward contracts
Inflation linked swaps
Equity options

2016
Liabilities
£m
(908)
(589)
(135)
(420)
(17)
(2,069)

Assets
£m
1,095
690
159
1
18
1,963

2016
Liabilities
£m

Assets
£m

278
278

31
159
139
32
1,324
1,685
1,963

(337)
(337)

(213)
(221)
(159)
(155)
(984)
(1,732)
(2,069)

Total
£m
187
101
24
(419)
1
(106)

Total
£m

(59)
(59)

(182)
(62)
(20)
(123)
340
(47)
(106)

Assets
£m
1,153
544
18
1
–
1,716

Assets
£m

177
177

15
37
136
125
1,226
1,539
1,716

2015
Liabilities
£m
(978)
(746)
(294)
(381)
–
(2,399)

2015
Liabilities
£m

(635)
(635)

(97)
(252)
(238)
(235)
(942)
(1,764)
(2,399)

Total
£m
175
(202)
(276)
(380)
–
(683)

Total
£m

(458)
(458)

(82)
(215)
(102)
(110)
284
(225)
(683)

2016
£m
(10,552)
(8,316)
(6,903)
(1,394)
(800)
(27,965)

2015
£m
(11,125)
(8,103)
(6,579)
(1,361)
–
(27,168)

1. The notional contract amounts of derivatives indicate the gross nominal value of transactions outstanding at the reporting date.

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. Our use of derivatives may entail
a derivative transaction qualifying for one or more hedge type designations under IAS 39.

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:

126

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued15. Derivative financial instruments continued

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.

Cross-currency interest rate/interest rate swaps

2016
£m
482

2015
£m
379

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 previously reported in equity is transferred to the
income statement.

Where a non-financial asset or a non-financial liability results from a forecast transaction or firm commitment being hedged, the amounts
deferred in equity are included in the initial measurement of that non-monetary asset or liability.

Cross-currency interest rate/interest rate swaps
Foreign exchange forward contracts
Inflation linked swaps

2016
£m
(46)
47
(151)
(150)

2015
£m
(453)
(34)
(109)
(596)

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.

Cross-currency interest rate swaps
Foreign exchange forward contracts

2016
£m
(199)
(100)
(299)

2015
£m
(72)
(218)
(290)

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.

127

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements15. Derivative financial instruments continued

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.

Cross-currency interest rate/interest rate swaps
Foreign exchange forward contracts
Inflation linked swaps
Equity options

2016
£m
51
77
(268)
1
(139)

2015
£m
119
(24)
(271)
–
(176)

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 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.

16. Inventories and current intangible assets

Inventories represent assets that we intend to use in order to generate revenue in the short term, either by selling the asset itself (for example
fuel stocks) or by using it to fulfil a service to a customer or to maintain our network (consumables).

Inventories are stated at the lower of weighted average cost 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 £28m against inventories as at 31 March 2016 (2015: £28m).

2016
£m
120
203
13
101
437

2015
£m
112
152
13
63
340

128

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued17. Trade and other receivables

Trade and other receivables are amounts which are due from our customers for services (and commodities in the US) we have provided.
Other receivables also include prepayments made by us, for example, property lease rentals paid in advance.

Trade 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
Accrued income
Prepayments
Commodity contract assets
Current tax assets
Other receivables

2016
£m
1,276
796
212
22
77
89
2,472

2015
£m
1,568
852
229
35
60
92
2,836

Trade receivables are non interest-bearing and generally have a 30 to 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

2016
£m
294
11
158
(114)
349

2016
£m
214
48
142
404

2015
£m
249
31
126
(112)
294

2015
£m
299
60
156
515

For further information on our wholesale and retail credit risk, refer to note 30(a). For further information on our commodity risk, refer to
note 30(e).

129

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements18. Cash and cash equivalents

Cash and cash equivalents include 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(d).

Cash at bank
Short-term deposits
Cash and cash equivalents excluding bank overdrafts
Bank overdrafts
Net cash and cash equivalents

2016
£m
126
1
127
(3)
124

2015
£m
109
10
119
(3)
116

At 31 March 2016, £2m (2015: £1m) of cash and cash equivalents were restricted. This primarily relates to cash held in captive insurance
companies.

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
or are linked to RPI. As indicated in note 15, 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 borrowings

2016
£m

1,179
1,282
1,092
53
2
3
3,611

1,816
22,556
190
171
24,733
28,344

2015
£m

561
1,068
1,349
44
3
3
3,028

1,417
21,156
159
150
22,882
25,910

130

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued19. Borrowings continued

Total borrowings are repayable as follows:

Less than 1 year
In 1 to 2 years
In 2 to 3 years
In 3 to 4 years
In 4 to 5 years
More than 5 years:
by instalments
other than by instalments

2016
£m
3,611
1,835
1,816
1,775
2,276

2015
£m
3,028
873
1,601
1,437
1,709

742
16,289
28,344

154
17,108
25,910

The fair value of borrowings at 31 March 2016 was £31,463m (2015: £30,103m). Where market values were available, fair value of borrowings
(Level 1) was £13,283m (2015: £14,583m). Where market values were not available, fair value of borrowings (Level 2) was £18,180m (2015:
£15,520m), calculated by discounting cash flows at prevailing interest rates. The notional amount outstanding of the debt portfolio at 31 March
2016 was £27,836m (2015: £25,419m).

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 £385m at 31 March 2016
(2015: £424m).

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
£610m (2015: £540m) in respect of cash received under collateral agreements. For further details of our borrowing facilities, refer to note 31.
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 to 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 to 5 years
More than 5 years

Unaudited commentary on borrowings

2016
£m

2015
£m

53
156
75
284
(41)
243

53
137
53
243

44
125
72
241
(38)
203

44
110
49
203

As at 31 March 2016, total borrowings of £28,344m (2015: £25,910m) including bonds, bank loans, commercial paper, collateral,
finance leases and other debt had increased by £2,434m. We expect to repay £3,611m of our total borrowings in the next 12 months
including commercial paper, collateral and interest, and to fund this repayment through the capital and money markets. The average
long-term debt maturity of the portfolio is 12 years (2015: 13 years). Further information on our bonds can be found in the debt investor
section of our website.

131

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements20. Trade and other payables

Trade and other payables include 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 delivered 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

2016
£m
2,038
275
96
159
717
3,285

2015
£m
2,050
236
116
196
694
3,292

Due to their short maturities, the fair value of trade payables approximates their book value. Commodity contract liabilities are recorded
at fair value. All other trade and other payables are recorded at amortised cost.

21. Other non-current liabilities

Other non-current liabilities include deferred income which will not be recognised as income until after 31 March 2017. It also includes
payables that are not due until after that date.

Commodity contract liabilities are recorded at fair value. All other non-current liabilities are recorded at amortised cost.

Deferred income
Commodity contract liabilities
Other payables

2016
£m
1,802
39
230
2,071

2015
£m
1,648
55
216
1,919

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 DB (defined benefit) or DC (defined contribution) pension plans. The principal UK
plans are the National Grid UK Pension Scheme, the National Grid Electricity Group of the Electricity Supply Pension Scheme and the
National Grid YouPlan. 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 associated plan assets and present value of DB obligations are updated annually in accordance with IAS 19 (revised).
For further details and the actuarial assumptions used to value the obligations, see note 29.

We separately present our UK and US pension plans to show geographical split. Below we provide a more detailed analysis of the
amounts recorded in the primary financial statements.

For DC pension plans, National Grid pays contributions into separate funds on behalf of the employee and has no further obligations
to employees. The risks associated with this type of plan are assumed by the member.

For DB pension plans, members receive benefits on retirement, the value of which is dependent on factors such as salary and length
of pensionable service. National Grid underwrites both financial and demographic risks associated with this type of plan.

The cost of providing benefits in a DB plan is determined using the projected unit method, with actuarial valuations being carried out
at each reporting date by a qualified actuary. This valuation method is an accrued benefits valuation method that makes allowance
for projected earnings.

132

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued22. Pensions and other post-retirement benefits continued

National Grid’s obligation in respect of DB pension plans is calculated separately for each plan by projecting the estimated amount of future
benefit payments that employees have earned for their pensionable service in the current and prior periods. These future benefit payments
are discounted to determine the present value of the liabilities and the fair value of plan 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.

National Grid takes advice from independent actuaries relating to the appropriateness of any key assumptions applied which include
life expectancy of members, expected salary and pension increases, and inflation. It should be noted that comparatively small changes
in the assumptions used may have a significant effect on the amounts recognised in the income statement and the statement of other
comprehensive income and the net liability recognised in the statement of financial position.

Remeasurements of net retirement obligations are recognised in full in the period in which they occur in the statement of other
comprehensive income.

Risks
The DB pension obligations and other post-retirement benefit liabilities are exposed to the primary risks outlined below.

Liabilities are calculated using discount rates set with reference to yields on high-quality corporate bonds prevailing in the US and UK debt
markets and will fluctuate as yields change. Plan funds are invested in a variety of asset classes, principally: equities, government securities,
corporate bonds and property. Consequently, actual returns will differ from the underlying discount rate adopted and therefore have an
impact on the net balance sheet liability.

Changes in inflation will affect both current and future pension payments and are partially mitigated through investment in inflation matching
assets and hedging instruments.

Longevity is also a key driver of liabilities and changes in expected mortality will have a direct impact on liabilities. The liabilities are,
in aggregate, relatively mature which serves to mitigate this risk to some extent.

Each plan’s investment strategy seeks to balance the level of investment return sought with the aim of reducing volatility and risk.
In undertaking this approach reference is made both to the maturity of the liabilities and the funding level of that plan. A number of
further strategies are employed to manage underlying risks, including liability matching asset strategies, diversification of asset portfolios,
interest rate hedging and management of foreign exchange exposure.

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
Net defined benefit liability
Represented by:
Liabilities
Assets

2016
£m
(28,648)
26,434
(2,214)
(304)
(67)
(2,585)

2015
£m
(29,292)
26,408
(2,884)
(300)
(74)
(3,258)

2014
£m
(25,346)
23,258
(2,088)
(248)
(75)
(2,411)

(2,995)
410
(2,585)

(3,379)
121
(3,258)

(2,585)
174
(2,411)

The geographical split of pensions and other post-retirement benefits is as shown below:

Present value of funded obligations1
Fair value of plan assets

Present value of unfunded obligations
Other post-employment liabilities
Net defined benefit liability
Represented by:
Liabilities
Assets

UK pensions
2015
£m
(20,053)
19,453
(600)
(72)
–
(672)

2016
£m
(19,341)
19,401
60
(75)
–
(15)

(300)
285
(15)

(672)
–
(672)

2014
£m
(18,100)
17,409
(691)
(62)
–
(753)

(753)
–
(753)

US pensions
2015
£m
(5,827)
5,052
(775)
(228)
–
(1,003)

(1,124)
121
(1,003)

2016
£m
(5,916)
5,136
(780)
(229)
–
(1,009)

(1,134)
125
(1,009)

2014
£m
(4,566)
4,229
(337)
(186)
–
(523)

(697)
174
(523)

US other post-retirement benefits

2016
£m
(3,391)
1,897
(1,494)
–
(67)
(1,561)

(1,561)
–
(1,561)

2015
£m
(3,412)
1,903
(1,509)
–
(74)
(1,583)

(1,583)
–
(1,583)

2014
£m
(2,680)
1,620
(1,060)
–
(75)
(1,135)

(1,135)
–
(1,135)

1. Present value of funded obligations split approximately as follows:

• UK pensions at 31 March 2016: 12% active members (2015: 12%; 2014: 12%); 18% deferred members (2015: 18%; 2014: 19%); 70% pensioner members (2015: 70%; 2014: 69%)
• US pensions at 31 March 2016: 39% active members (2015: 38%; 2014: 38%); 9% deferred members (2015: 9%; 2014: 9%); 52% pensioner members (2015: 53%; 2014: 53%)
• US other post-retirement benefits at 31 March 2016: 41% active members (2015: 38%; 2014: 44%); 0% deferred members (2015: 0%; 2014: 0%); 59% pensioner members

(2015: 62%; 2014: 56%)

These figures reflect legal and actuarial advice that we have taken regarding recognition of surplus under IFRIC 14.

133

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements

22. Pensions and other post-retirement benefits continued

Amounts recognised in the income statement and statement of other comprehensive income

Included within operating costs
Administration costs
Included within payroll costs
Defined contribution scheme costs
Defined benefit scheme costs:

Current service cost
Past service costs – augmentations
Past service (credit)/cost – redundancies
Past service cost/(credit) – plan amendments
Special termination benefit cost – redundancies
LIPA MSA transition

Included within finance income and costs
Net interest cost
Included within exceptional items and remeasurements
Administration costs
Total included in income statement
Remeasurements of net retirement benefit obligations
Exchange adjustments
Total included in the statement of other comprehensive income

2016
£m

2015
£m

2014
£m

221
3
(1)
–
11
–
290

112

2
420
539
(81)
458

186
7
1
1
20
–
263

101

–
378
(771)
(236)
(1,007)

225
15
(19)
(11)
39
(214)
75

128

–
215
485
186
671

The geographical split of pensions and other post-retirement benefits is as shown below:

Included within operating costs
Administration costs
Included within payroll costs
Defined contribution scheme costs
Defined benefit scheme costs:

Current service cost
Past service costs – augmentations
Past service (credit)/cost – redundancies
Past service (credit)/cost – plan amendments
Special termination benefit cost – redundancies
LIPA MSA transition

comprehensive income

UK pensions
2015
£m

2016
£m

74
3
(1)
–
11
–
118

2
147
534
–

534

70
7
1
–
20
–
124

–
157
(46)
–

(46)

2014
£m

96
15
(19)
(11)
39
–
139

–
192
354
–

354

US pensions
2015
£m

2016
£m

US other post-retirement benefits

2014
£m

2016
£m

2015
£m

2014
£m

95
–
–
–
–
–
120

–
162
(67)
(33)

77
–
–
1
–
–
100

–
132
(408)
(88)

(100)

(496)

85
–
–
–
–
(16)
90

–
122
81
60

141

–

52
–
–
–
–
–
52

–
111
72
(48)

–

39
–
–
–
–
–
39

–
89
(317)
(148)

(465)

–

44
–
–
–
–
(198)
(154)

–
(99)
50
126

176

134

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued22. Pensions and other post-retirement benefits continued

Reconciliation of the net defined benefit liability

Opening net defined benefit liability
Cost recognised in the income statement
Remeasurement effects recognised in the statement of other comprehensive income
Employer contributions
Other movements
Closing net defined benefit liability

The geographical split of pensions and other post-retirement benefits is as shown below:

2016
£m
(3,258)
(364)
458
587
(8)
(2,585)

2015
£m
(2,411)
(330)
(1,007)
508
(18)
(3,258)

2014
£m
(3,497)
(175)
671
596
(6)
(2,411)

Opening net defined benefit liability
(Cost)/credit recognised in the income statement
Remeasurement effects recognised in the statement

of other comprehensive income

Employer contributions
Other movements
Closing net defined benefit liability

UK pensions
2015
£m
(753)
(131)

2016
£m
(672)
(116)

534
239
–
(15)

(46)
258
–
(672)

2014
£m
(1,169)
(173)

354
235
–
(753)

US pensions
2015
£m
(523)
(110)

(496)
126
–
(1,003)

2016
£m
(1,003)
(137)

(100)
231
–
(1,009)

2014
£m
(740)
(101)

141
174
3
(523)

US other post-retirement benefits

2016
£m
(1,583)
(111)

24
117
(8)
(1,561)

2015
£m
(1,135)
(89)

(465)
124
(18)
(1,583)

2014
£m
(1,588)
99

176
187
(9)
(1,135)

135

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements22. Pensions and other post-retirement benefits continued

Changes in the present value of defined benefit obligations (including unfunded obligations)

Opening defined benefit obligations
Current service cost
Interest cost
Actuarial gains – experience
Actuarial losses – demographic assumptions
Actuarial gains/(losses) – financial assumptions
Past service credit/(cost) – redundancies
Special termination benefit cost – redundancies
Past service cost – augmentations
Past service (cost)/credit – plan amendments
Medicare subsidy received
Liabilities extinguished on settlements
Employee contributions
Benefits paid
Exchange adjustments
Closing defined benefit obligations

2016
£m
(29,592)
(221)
(1,026)
659
–
218
1
(11)
(3)
–
(15)
–
(2)
1,348
(308)
(28,952)

2015
£m
(25,594)
(186)
(1,127)
163
(342)
(2,746)
(1)
(20)
(7)
(1)
(19)
–
(2)
1,268
(978)
(29,592)

2014
£m
(26,696)
(225)
(1,124)
41
(283)
542
154
(39)
(15)
30
(17)
60
(2)
1,257
723
(25,594)

The geographical split of pensions and other post-retirement benefits is as shown below:

Opening defined benefit obligations
Current service cost
Interest cost
Actuarial gains/(losses) – experience
Actuarial losses – demographic assumptions
Actuarial (losses)/gains – financial assumptions
Past service credit/(cost) – redundancies
Special termination benefit cost – redundancies
Past service cost – augmentations
Past service credit/(cost) – plan amendments
Medicare subsidy received
Liabilities extinguished on settlements
Employee contributions
Benefits paid
Exchange adjustments
Closing defined benefit obligations

UK pensions
2015
£m
(18,162)
(70)
(762)
100
(95)
(1,980)
(1)
(20)
(7)
–
–
–
(2)
874
–
(20,125)

2016
£m
(20,125)
(74)
(649)
552
–
–
1
(11)
(3)
–
–
–
(2)
895
–
(19,416)

2014
£m
(18,561)
(96)
(780)
16
–
436
19
(39)
(15)
11
–
–
(2)
849
–

(18,162)

US pensions
2015
£m
(4,752)
(77)
(235)
(22)
(125)
(486)
–
–
–
(1)
–
–
–
269
(626)
(6,055)

2016
£m
(6,055)
(95)
(242)
15
–
120
–
–
–
–
–
–
–
310
(198)
(6,145)

2014
£m
(5,115)
(85)
(221)
(22)
(129)
57
16
–
–
–
–
–
–
291
456
(4,752)

US other post-retirement benefits

2016
£m
(3,412)
(52)
(135)
92
–
98
–
–
–
–
(15)
–
–
143
(110)
(3,391)

2015
£m
(2,680)
(39)
(130)
85
(122)
(280)
–
–
–
–
(19)
–
–
125
(352)
(3,412)

2014
£m
(3,020)
(44)
(123)
47
(154)
49
119
–
–
19
(17)
60
–
117
267
(2,680)

136

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued22. Pensions and other post-retirement benefits continued

Changes in the fair value of plan assets

Opening fair value of plan assets
Interest income
Return on assets (less)/greater than assumed
Administration costs
Employer contributions
Employee contributions
Benefits paid
Exchange adjustments
Closing fair value of plan assets
Actual return on plan assets
Expected contributions to plans in the following year

2016
£m
26,408
914
(338)
(18)
587
2
(1,348)
227
26,434
576
686

2015
£m
23,258
1,026
2,154
(14)
508
2
(1,268)
742
26,408
3,180
533

2014
£m
23,285
996
185
(12)
596
2
(1,257)
(537)
23,258
1,181
409

The geographical split of pensions and other post-retirement benefits is as shown below:

UK pensions
2015
£m
17,409
735
1,929
(6)
258
2
(874)
–
19,453
2,664
225

2016
£m
19,453
631
(18)
(11)
239
2
(895)
–
19,401
613
228

2014
£m
17,392
733
(98)
(6)
235
2
(849)
–
17,409
635
182

US pensions
2015
£m
4,229
210
225
(7)
126
–
(269)
538
5,052
435
204

2016
£m
5,052
206
(202)
(6)
231
–
(310)
165
5,136
4
220

2014
£m
4,378
194
175
(5)
174
–
(291)
(396)
4,229
369
118

US other post-retirement benefits

2016
£m
1,903
77
(118)
(1)
117
–
(143)
62
1,897
(41)
238

2015
£m
1,620
81
–
(1)
124
–
(125)
204
1,903
81
104

2014
£m
1,515
69
108
(1)
187
–
(117)
(141)
1,620
177
109

137

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements23. Provisions

We make provisions when an obligation exists, resulting from a past event and it is probable that cash will be paid to settle it, but the
exact amount of cash required can only be estimated.

The main estimates relate to environmental remediation and decommissioning costs for various sites we own or have owned and other
provisions, including restructuring plans and lease contracts we have entered into that are now loss making. The evaluation of the likelihood
of the contingent events has required best judgement by management regarding the probability of exposure to potential loss. Should
circumstances change following unforeseeable developments, the likelihood could alter.

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. Therefore we have a provision that
reflects the expected cost to remediate these sites. Current operations will seldom result in new sites with significant expected costs
being added to the provision.

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.

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 2014
Exchange adjustments
Additions
Unused amounts reversed
Unwinding of discount
Utilised
At 31 March 2015
Exchange adjustments
Additions
Unused amounts reversed
Unwinding of discount
Utilised
At 31 March 2016

Current
Non-current

Environmental
£m
1,072
95
25
(5)
57
(80)
1,164
29
30
(15)
58
(97)
1,169

Decommissioning
£m
144
8
7
–
3
(25)
137
3
22
(8)
4
(17)
141

Restructuring
£m
79
–
9
(2)
1
(48)
39
–
10
(1)
1
(19)
30

Emissions
£m
14
2
7
–
–
–
23
1
1
–
–
(7)
18

Other
£m
336
28
57
(5)
12
(56)
372
9
33
(3)
10
(60)
361

2016
£m
236
1,483
1,719

Total
provisions
£m
1,645
133
105
(12)
73
(209)
1,735
42
96
(27)
73
(200)
1,719

2015
£m
235
1,500
1,735

138

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued23. Provisions continued

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
US sites

2016

2015

Discounted
£m

Undiscounted
£m

280
889
1,169

348
1,031
1,379

Real
discount
rate

2%
2%

Discounted
£m

Undiscounted
£m

286
878
1,164

367
999
1,366

Real
discount
rate

2%
2%

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 2016 and 2060. A number of estimation 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 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.

The remediation expenditure in the US is expected to be incurred between 2016 and 2071. The uncertainties regarding the calculation of this
provision are similar to those considered in respect of UK sites. 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 represents £66m (2015: £51m) of expenditure relating to asset retirement obligations estimated to be incurred
until 2095, and £37m (2015: £64m) of expenditure relating to the demolition of gas holders estimated to be incurred until 2020. It also includes
the net present value of the estimated expenditure (discounted at a real rate of 2%) expected to be incurred until 2033 in respect of the
decommissioning of certain US nuclear generating units that National Grid no longer owns.

Restructuring provision
The restructuring provision principally relates to business reorganisation costs in the UK and is expected to be incurred until 2023.

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 2016 are amounts provided in respect of onerous lease commitments and rates payable
on surplus properties of £100m (2015: £117m) with expenditure expected to be incurred until 2039.

Other provisions also include £190m (2015: £182m) 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. Other provisions also include £13m (2015: £13m) in respect of
obligations associated with investments in joint ventures.

139

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements24. 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 the scrip dividend programme
and 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.

At 1 April 2014
Issued during the year in lieu of dividends1
At 31 March 2015
Issued during the year in lieu of dividends1
At 31 March 2016

Allotted, called up
and fully paid

million
3,854
38
3,892
32
3,924

£m
439
4
443
4
447

1. The issue of shares under the scrip dividend programme 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 ADSs. The ordinary shares and
ADSs 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, the Company has amended its Articles of Association and ceased to have authorised
share capital.

Treasury shares
At 31 March 2016, the Company held 179m (2015: 153m) of its own shares. The market value of these shares as at 31 March 2016 was
£1,767m (2015: £1,323m).

The Company made the following transactions in respect of its own shares during the year ended 31 March 2016:

1. During the year, the Company, as part of management of the dilutive effect of share issuances under the scrip dividend programme,
repurchased 31m (2015: 37m) ordinary shares for aggregate consideration of £267m (2015: £338m), including transaction costs.
The shares repurchased have a nominal value of £4m (2015: £4m) and represented approximately 1% (2015: 1%) of the ordinary
shares in issue as at 31 March 2016.

2. During the year, 2m (2015: 3m) treasury shares were gifted to National Grid Employee Share Trusts and 3m (2015: 5m) treasury shares

were re-issued in relation to employee share schemes, in total representing approximately 0.1% (2015: 0.2%) of the ordinary shares in issue
as at 31 March 2016. The nominal value of these shares was £1m (2015: £1m) and the total proceeds received were £16m (2015: £23m).

3. During the year the Company made payments totalling £6m (2015: £7m) to National Grid Employee Share Trusts, outside of its share
repurchase programme, to enable the trustees to make purchases of National Grid plc shares in order to satisfy the requirements of
employee share option and reward plans.

The maximum number of shares held during the year was 179m ordinary shares (2015: 153m) representing approximately 4.6% (2015: 3.9%)
of the ordinary shares in issue as at 31 March 2016 and having a nominal value of £20m (2015: £17m).

140

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued25. 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 C in note 1), cash flow hedge reserve (see note 15), available-for-
sale reserve (see note 13), 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 2013
Exchange adjustments
Net gains taken to equity
Transferred to/(from) profit or loss
Tax
At 31 March 2014
Exchange adjustments
Net (losses)/gains taken to equity
Transferred to/(from) profit or loss
Tax
At 31 March 2015
Exchange adjustments
Net gains taken to equity
Transferred to profit or loss
Tax
At 31 March 2016

Translation
£m
463
(158)
–
–
–
305
174
–
–
–
479
69
–
–
–
548

Cash flow
hedge
£m
(71)
–
63
27
(5)
14
–
(154)
13
18
(109)
–
50
29
(15)
(45)

Available-
for-sale
£m
73
–
6
(14)
3
68
–
41
(8)
(7)
94
–
43
–
(17)
120

Capital
redemption
£m
19
–
–
–
–
19
–
–
–
–
19
–
–
–
–
19

Merger
£m
(5,165)
–
–
–
–
(5,165)
–
–
–
–
(5,165)
–
–
–
–
(5,165)

Total
£m
(4,681)
(158)
69
13
(2)
(4,759)
174
(113)
5
11
(4,682)
69
93
29
(32)
(4,523)

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.

The cash flow hedge reserve 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 £21m (pre-tax) and the remainder released with the same maturity profile
as borrowings due after more than one year.

141

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial Statements26. Net debt

Net debt represents the amount of borrowings and overdrafts less cash, financial investments and related derivatives.

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. Details of the main
risks arising from our financing and commodity hedging activities can be found in the risk factors discussion starting on page 183 and in
note 30 to the consolidated financial statements on pages 149 to 155.

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.

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 debt1
Change in 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 debt1
Extinguishment of debt resulting from LIPA MSA transition (note 4)
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

Composition of net debt
Net debt is made up as follows:

Cash, cash equivalents and financial investments
Borrowings and bank overdrafts
Derivatives

2016
£m
4
391
(1,100)
810
105
(515)
(913)
–
(87)
(1,410)
(23,915)
(25,325)

2015
£m
(247)
(1,157)
682
925
203
(1,777)
(1,068)
–
(83)
(2,725)
(21,190)
(23,915)

2014
£m
(283)
(1,720)
1,021
841
(141)
1,360
(1,053)
98
(25)
239
(21,429)
(21,190)

2016
£m
3,125
(28,344)
(106)
(25,325)

2015
£m
2,678
(25,910)
(683)
(23,915)

2014
£m
3,953
(25,950)
807
(21,190)

1. An exceptional charge of £nil (2015: £131m; 2014: £nil) is included in net interest charge on the components of net debt and an exceptional cash outflow of £nil (2015: £152m; 2014: £nil)

is included in net interest paid on the components of net debt.

142

National Grid Annual Report and Accounts 2015/16

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued26. Net debt continued

(b) Analysis of changes in net debt

At 1 April 2013
Cash flow
Fair value gains and losses and exchange movements
Interest income/(charges)
Extinguishment of debt resulting from LIPA MSA transition (note 4)
Other non-cash movements
At 31 March 2014
Cash flow
Fair value gains and losses and exchange movements
Interest income/(charges)2
Other non-cash movements
At 31 March 2015
Cash flow
Fair value gains and losses and exchange movements
Interest income/(charges)2
Other non-cash movements
At 31 March 2016
Balances at 31 March 2016 comprise:
Non-current assets
Current assets
Current liabilities
Non-current liabilities

Cash
and cash
equivalents
£m
671
(291)
(26)
–
–
–
354
(259)
24
–
–
119
4
4
–
–
127

Bank
overdrafts
£m
(23)
8
–
–
–
–
(15)
12
–
–
–
(3)
–
–
–
–
(3)

Net cash
and cash
equivalents
£m
648
(283)
(26)
–
–
–
339
(247)
24
–
–
116
4
4
–
–
124

Financial
investments
£m
5,431
(1,755)
(113)
36
–
–
3,599
(1,194)
118
36
–
2,559
368
49
22
–
2,998

Borrowings
£m
(28,072)
2,009
1,223
(1,168)
98
(25)
(25,935)
1,721
(451)
(1,160)
(82)
(25,907)
(631)
(739)
(978)
(86)
(28,341)

Derivatives
£m
564
(112)
276
79
–
–
807
(77)
(1,468)
56
(1)
(683)
364
171
43
(1)
(106)

–
127
–
–
127

–
–
(3)
–
(3)

–
127
(3)
–
124

–
2,998
–
–
2,998

–
–
(3,608)
(24,733)
(28,341)

1,685
278
(337)
(1,732)
(106)

Total1
£m
(21,429)
(141)
1,360
(1,053)
98
(25)
(21,190)
203
(1,777)
(1,068)
(83)
(23,915)
105
(515)
(913)
(87)
(25,325)

1,685
3,403
(3,948)
(26,465)
(25,325)

1. Includes accrued interest at 31 March 2016 of £243m (2015: £230m; 2014: £239m).
2. An exceptional expense of £nil (2015: £131m; 2014: £nil) is included in net interest charge on the components of net debt and an exceptional cash outflow of £nil (2015: £152m; 2014: £nil)

is included in net interest paid on the components of net debt.

143

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsNotes 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 (a US SEC requirement), 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 34 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 to 2 years
In 2 to 3 years
In 3 to 4 years
In 4 to 5 years
More than 5 years

Energy purchase commitments1
Less than 1 year
In 1 to 2 years
In 2 to 3 years
In 3 to 4 years
In 4 to 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)
Guarantees of certain obligations for construction of HVDC West Coast Link (expected expiry 2016)
Guarantees of certain obligations of Nemo Link Limited (various expiry dates)
Guarantees of certain obligations of National Grid North Sea Link Limited (various expiry dates)
Other guarantees and letters of credit (various expiry dates)

2016
£m

2015
£m

2,616

2,360

92
86
72
54
52
286
642

1,096
598
454
362
315
1,477
4,302

219
113
415
166
1,038
440
2,391

87
81
74
63
45
277
627

1,199
601
458
360
305
1,415
4,338

236
151
555
–
–
355
1,297

1. 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 (i.e. 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 30(e).

The total of future minimum sublease payments expected to be received under non-cancellable subleases is £21m (2015: £26m).

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.

144

National Grid Annual Report and Accounts 2015/16

Financial Statements

28. Related party transactions

Related parties include joint ventures, associates, 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 associates1

Receivable from a pension plan and joint ventures
Payable to joint ventures and associates2

Dividends received from joint ventures and associates3

2016
£m
16
266

7
103

2015
£m
52
120

4
6

2014
£m
15
128

3
5

1. 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 £8m (2015: £24m; 2014:
£30m), Millennium Pipeline Company, LLC of £29m (2015: £26m; 2014: £31m) for the transportation of gas in the US; Algonquin Gas Transmission LLC of £43m (2015: £nil; 2014: £nil) for
pipeline services in the US; and NGET/SPT Upgrades Limited of £167m (2015: £68m; 2014: £67m) for the construction of a transmission link in the UK.

2. Included in amounts payable to joint ventures and associates is £87m (2015: £nil; 2014: £nil) in respect of deposits received for National Grid property sites from St William Homes LLP.
3. Dividends were received from BritNed Development Limited of £48m (2015: £49m; 2014: £17m), Iroquois Gas Transmission System, L.P. of £7m (2015: £14m; 2014: £11m) and Millennium

Pipeline Company, LLC of £17m (2015: £16m; 2014: £10m).

Details of investments in principal subsidiary undertakings, joint ventures and associates are disclosed in note 32 and information relating to
pension fund arrangements is disclosed in notes 22 and 29. For details of Directors’ and key management remuneration, refer to the audited
section of the Remuneration Report and note 3(c).

29. Actuarial information on pensions and other post-retirement benefits

Further details of the DB pension plans terms and the actuarial assumptions used to value the obligations are set out in this note.

When deciding on these assumptions we take independent actuarial advice. Comparatively small changes in the assumptions applied
may have a significant effect on the overall deficit or surplus of a DB pension plan.

UK pension plans
National Grid’s defined benefit pension arrangements are funded with assets held in separate trustee administered funds. The arrangements
are managed by trustee companies with boards consisting of company and member appointed directors. The directors are required to manage
the arrangements in accordance with local regulations and the arrangements’ governing documents, acting on behalf of their beneficiaries.

The arrangements are subject to independent actuarial funding valuations at least every three years and following consultation and agreement
with us, the qualified actuary certifies the employers’ contribution, which, together with the specified contributions payable by the employees
and proceeds from the plans’ assets, are expected to be sufficient to fund the benefits payable. The last full actuarial valuations were carried
out as at 31 March 2013. The 2016 valuation processes have commenced.

The results of the 2013 valuations are shown below:

Latest full actuarial valuation
Actuary
Market value of plan assets at latest valuation
Actuarial value of benefits due to members
Market value as percentage of benefits
Funding deficit
Funding deficit (net of tax)

1. National Grid UK Pension Scheme
2. National Grid Electricity Group of the Electricity Supply Pension Scheme

NG UKPS1
31 March 2013
Willis Towers Watson
£15,569m
£17,332m
90%
£1,763m
£1,446m

NGEG of ESPS2
31 March 2013
Aon Hewitt
£1,900m
£2,708m
70%
£808m
£663m

From April 2014 an annual cap was placed on future increases to the salary used to calculate pensions at the lower of 3% or the annual
increase in RPI. This capped salary applied to all pensionable service from 1 April 2013 onwards. During the year ended 31 March 2014 these
changes resulted in a past service credit of £11m to the income statement (see note 22) and a change to the salary increase assumption which
affects how our DB liabilities as at 31 March have been calculated. These changes are to ensure our schemes remain affordable and
sustainable over the coming years.

145

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsNotes to the consolidated financial statements
– supplementary information continued

29. Actuarial information on pensions and other post-retirement benefits continued

National Grid UK Pension Scheme
The 2013 actuarial funding valuation showed that, based on long-term financial assumptions, the contribution rate required to meet future
benefit accrual was 36% of pensionable earnings (currently 33% by employers and 3% by employees; from 1 April 2016 this will be 31% by
employers and 5% by employees). In addition, National Grid makes payments to the scheme to cover administration costs and the Pension
Protection Fund levy.

Following the 2013 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, payments of £60m were made in 2013/14, £99m in 2014/15 and £100m in 2015/16,
and will thereafter rise in line with RPI until 2026/27. As part of the 2013 agreement, National Grid has established a security arrangement
with a charge in favour of the Trustees. At 31 March 2016 the value of this was required to be £427m. This was provided via £427m in letters
of credit. The assets held as security will be paid to the scheme in the event that National Grid Gas plc (NGG) is subject to an insolvency
event, is given notice of less than 12 months that Ofgem intends to revoke its licence under the Gas Act 1986, or National Grid fails to make
the required contributions in relation to the scheme. The assets held as security will be released back to National Grid if the scheme moves
into surplus. In addition, National Grid will make a payment of £200m (increased in line with RPI) into the scheme if NGG’s credit rating by
two out of three specified agencies falls below certain agreed levels for a period of 40 days.

This scheme ceased to allow new hires to join from 1 April 2002. A DC section of the scheme was offered for employees joining after this
date, which has since been replaced by The National Grid YouPlan (YouPlan) (see below).

National Grid Electricity Group of the Electricity Supply Pension Scheme
The 2013 actuarial funding valuation showed that, based on long-term financial assumptions, the contribution rate required to meet future
benefit accrual was 33.4% of pensionable earnings (currently 27.5% by employers and an average of 5.9% by employees; from 1 April 2016
this will be an average of 26.5% by employers and an average of 6.9% by employees).

Following the 2013 valuation, National Grid and the Trustees agreed a recovery plan that would see the funding deficit repaid by 31 March 2027.
Under the schedule of contributions, a payment of £80m was made in 2013/14, £46m in 2014/15 and £47m in 2015/16, and will thereafter rise
in line with RPI until 2026/27. As part of the 2013 agreement, National Grid has established security arrangements with a charge in favour of
the Trustees. At 31 March 2016 the value of this was required to be £150m. This was provided via £150m in a letter of credit. The assets held
as security 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 assets held as security 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 £500m 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.

The National Grid YouPlan
The YouPlan is a DC scheme that was launched in 2013 and under the rules of the plan, National Grid double matches contributions to
YouPlan up to a maximum of 6% of employee salary. YouPlan is the qualifying scheme used for automatic enrolment and new hires are
enrolled into YouPlan.

US pension plans
National Grid sponsors numerous non-contributory DB pension plans. The DB plans provide retirement benefits to vested union employees,
as well as vested non-union employees hired before 1 January 2011. Benefits under these plans generally reflect age, years of service and
compensation and are paid in the form of an annuity or lump sum. An independent actuary performs valuations annually. The Company funds
the DB plans by contributing no less than the minimum amount required, but no more than the maximum tax deductible amount allowed under
US Internal Revenue Service regulations. The range of contributions based upon these regulations can vary significantly based upon the
funded status of the plans. 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 the amounts collected in rates and capitalised in the rate base during the year, to the
extent that the funding is no less than the minimum amount required. The assets of the plans are held in trusts and administered by fiduciary
committees comprised of appointed employees of the Company.

National Grid also has several DC pension plans, primarily comprised of employee savings and Company matching contributions. Non-union
employees hired after 1 January 2011, as well as new hires in 10 groups of represented union employees, receive a core contribution into the
DC plan, irrespective of the employee’s contribution into the plan.

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 and capitalised in the rate base during the year.

146

National Grid Annual Report and Accounts 2015/16

Financial Statements

29. Actuarial information on pensions and other post-retirement benefits continued

Asset allocations
Within the asset allocations below there is significant diversification across regions, asset managers, currencies and bond categories.

UK pensions

Equities1
Corporate bonds2
Government securities
Property
Diversified alternatives3
Liability matching assets4
Other5

Quoted
£m
3,272
5,601
6,059
90
159
1,020
649
16,850

2016
Unquoted
£m
962
–
–
1,081
505
–
3
2,551

Total
£m
4,234
5,601
6,059
1,171
664
1,020
652
19,401

Quoted
£m
3,848
6,494
4,637
86
–
878
936
16,879

2015
Unquoted
£m
761
–
–
1,082
716
–
15
2,574

Total
£m
4,609
6,494
4,637
1,168
716
878
951
19,453

Quoted
£m
4,045
5,706
4,161
33
–
598
433
14,976

2014
Unquoted
£m
620
–
–
1,057
793
–
(37)
2,433

Total
£m
4,665
5,706
4,161
1,090
793
598
396
17,409

1. Included within equities at 31 March 2016 were ordinary shares of National Grid plc with a value of £7m (2015: £14m; 2014: £15m).
2. Included within corporate bonds at 31 March 2016 was an investment in a number of bonds issued by subsidiary undertakings with a value of £70m (2015: £80m; 2014: £72m).
3. Includes return seeking non-conventional asset classes.
4. Includes liability-driven investment vehicles.
5. Includes cash and cash type instruments.

US pensions

Equities1
Corporate bonds1
Government securities1
Property
Diversified alternatives1,2
Other

Quoted
£m
625
954
711
–
163
–
2,453

2016
Unquoted
£m
1,508
483
–
276
334
82
2,683

1. Comparatives have been represented on a basis consistent with the current year presentation.
2. Includes return seeking non-conventional asset classes.

US other post-retirement benefits

Equities1
Corporate bonds
Government securities
Diversified alternatives1,2
Other

Quoted
£m
281
37
390
122
–
830

2016
Unquoted
£m
853
1
–
104
109
1,067

Total
£m
2,133
1,437
711
276
497
82
5,136

Total
£m
1,134
38
390
226
109
1,897

Quoted
£m
617
969
727
–
164
–
2,477

2015
Unquoted
£m
1,455
473
–
249
334
64
2,575

Quoted
£m
289
34
382
114
–
819

2015
Unquoted
£m
872
–
–
100
112
1,084

Total
£m
2,072
1,442
727
249
498
64
5,052

Total
£m
1,161
34
382
214
112
1,903

Quoted
£m
508
823
632
–
139
–
2,102

2014
Unquoted
£m
1,225
336
28
189
295
54
2,127

Quoted
£m
245
2
357
102
–
706

2014
Unquoted
£m
823
10
1
80
–
914

Total
£m
1,733
1,159
660
189
434
54
4,229

Total
£m
1,068
12
358
182
–
1,620

1. Comparatives have been represented on a basis consistent with the current year presentation.
2. Includes return seeking non-conventional asset classes.

Target asset allocations
Each plan’s investment strategy is formulated specifically in order to manage risk, through investment in diversified asset classes, including the
use of liability matching assets and where appropriate through the employment of interest rate and inflation hedging instruments. The target
asset allocation of the plans as at 31 March 2016 is as follows:

Equities
Other

UK pensions
%
21
79
100

US pensions
%
40
60
100

US other
post-retirement
benefits
%
65
35
100

147

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsNotes to the consolidated financial statements
– supplementary information continued

29. Actuarial information on pensions and other post-retirement benefits continued

Actuarial assumptions
The Company has applied the following financial assumptions in assessing DB liabilities.

Discount rate1
Rate of increase in salaries2
Rate of increase in RPI3
Initial healthcare cost trend rate
Ultimate healthcare cost trend rate

UK pensions
2015
%
3.3
3.2
2.9
n/a
n/a

2016
%
3.3
3.2
2.9
n/a
n/a

2014
%
4.3
3.6
3.3
n/a
n/a

US pensions
2015
%
4.1
3.5
n/a
n/a
n/a

2016
%
4.3
3.5
n/a
n/a
n/a

2014
%
4.8
3.5
n/a
n/a
n/a

US other post-retirement benefits

2016
%
4.3
3.5
n/a
7.5
4.5

2015
%
4.1
3.5
n/a
8.0
5.0

2014
%
4.8
3.5
n/a
8.0
5.0

1. 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.

2. A promotional scale has also been used where appropriate. The UK assumption stated is that relating to service prior to 1 April 2014. The UK assumption for the rate of increase in

salaries for service after this date is 2.1% (2015: 2.1%).

3. This is the key assumption that determines assumed increases in pensions in payment and deferment in the UK only. The assumptions for the UK were 2.9% (2015: 2.9%; 2014: 3.3%)

for increases in pensions in payment and 2.9% (2015: 2.9%; 2014: 3.3%) for increases in pensions in deferment.

For sensitivity analysis see note 33.

Assumed life expectations for a retiree age 65
Today:

Males
Females
In 20 years:
Males
Females

2016

UK
years

US
years

2015

UK
years

22.8
25.2

25.1
27.6

21.8
24.0

23.5
25.6

22.7
25.1

24.9
27.4

US
years

21.7
23.9

23.4
25.6

2014

UK
years

22.9
25.4

25.2
27.8

US
years

20.6
22.9

22.8
24.7

Maturity profile of DB obligations
The weighted average duration of the DB obligation for each category of scheme is 16 years for UK pension schemes; 13 years for US pension
schemes and 17 years for US other post-retirement benefits.

148

National Grid Annual Report and Accounts 2015/16

Financial Statements

30. Financial risk management

Our activities expose us to a variety of financial risks including currency risk, interest rate risk, commodity price risk, credit risk, capital risk
and liquidity risk. Our risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential
volatility of financial performance from these risks. We use financial instruments, including derivative financial instruments, to manage risks
of this type.

This note describes our approach to managing 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 a maturity
analysis of contractual undiscounted cash flows) 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.

We have exposure to the following risks, which are described in more detail below:

liquidity risk;
interest rate risk;

• credit risk;
•
•
• currency risk;
• commodity risk; and
• capital risk.

(a) 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 financial instruments. As at 31 March 2016, the
following limits were in place for investments held with banks and financial institutions:

Triple ‘A’ G8 sovereign entities (AAA)
Triple ‘A’ vehicles (AAA)
Triple ‘A’ range institutions and non G8 sovereign entities (AAA)
Double ‘A+’ G8 sovereign entities (AA+)
Double ‘A’ range institutions (AA)
Single ‘A’ range institutions (A)

Maximum limit
£m
Unlimited
322
1,099 to 1,658
1,658
656 to 826
226 to 322

Long-term limit
£m
Unlimited
273
553 to 867
867
334 to 413
115 to 165

As at 31 March 2015 and 2016, 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.

Commodity credit risk
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.

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 set out the level of credit relative to the 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 17.

149

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsNotes to the consolidated financial statements
– supplementary information continued

30. Financial risk management continued

(a) Credit risk continued
Offsetting financial assets and liabilities
The following tables set out our financial assets and liabilities which are subject to offset and to enforceable master netting arrangements
or similar agreements. The tables show the amounts which are offset and reported net in the statement of financial position. Amounts which
cannot be offset under IFRS, but which could be settled net under terms of master netting agreements if certain conditions arise, and with
collateral received or pledged, are shown to present National Grid’s net exposure.

Financial assets and liabilities on different transactions are only reported net if the transactions are with the same counterparty, a legal right
of offset exists and the cash flows are intended to be settled on a net basis.

Amounts which do not meet the criteria for offsetting on the statement of financial position but could be settled net in certain circumstances
principally relate to derivative transactions under ISDA agreements where each party has the option to settle amounts on a net basis in the
event of default of the other party.

Commodity contracts that have not been offset on the balance sheet may be settled net in certain circumstances under ISDA or NAESB
(North American Energy Standards Board) agreements.

National Grid has similar arrangements in relation to bank account balances and bank overdrafts; and trade payables and trade receivables
which are subject to general terms and conditions. However, these balances are immaterial.

At 31 March 2016
Assets
Derivative financial instruments
Commodity contracts

Liabilities
Derivative financial instruments
Commodity contracts

At 31 March 2015
Assets
Derivative financial instruments
Commodity contracts

Liabilities
Derivative financial instruments
Commodity contracts

Related amounts
available to be offset but
not offset in statement
of financial position

Gross
carrying
amounts
£m

Gross
amounts
offset1
£m

Net amount
presented in
statement
of financial
position
£m

Financial
instruments
£m

Cash
collateral
received/
pledged
£m

Net amount
£m

1,963
33
1,996

(2,069)
(145)
(2,214)

(218)

–
(1)
(1)

–
10
10

1,963
32
1,995

(2,069)
(135)
(2,204)

(997)
(4)
(1,001)

997
4
1,001

(209)

–

(597)
–
(597)

932
20
952

355

369
28
397

(140)
(111)
(251)

146

Related amounts
available to be offset but
not offset in statement
of financial position

Gross
carrying
amounts
£m

Gross
amounts
offset1
£m

Net amount
presented in
statement of
financial
position
£m

Financial
instruments
£m

1,716
64
1,780

(2,399)
(182)
(2,581)

(801)

–
–
–

–
11
11

1,716
64
1,780

(2,399)
(171)
(2,570)

(839)
(11)
(850)

839
11
850

Cash
collateral
received/
pledged
£m

(527)
–
(527)

1,125
–
1,125

Net amount
£m

350
53
403

(435)
(160)
(595)

(192)

(790)

–

598

1. The gross financial assets and liabilities offset in the statement of financial position primarily relate to commodity contracts. Offsets relate to margin payments for NYMEX gas futures which

are traded on a recognised exchange.

150

National Grid Annual Report and Accounts 2015/16

Financial Statements

30. Financial risk management continued

(b) Liquidity risk
Our policy is to determine our liquidity requirements by the use of both short-term and long-term cash flow forecasts. These forecasts are
supplemented by a financial headroom analysis which is used to assess funding requirements for at least a 24 month period and maintain
adequate liquidity for a continuous 12 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 2016
Non-derivative financial liabilities
Borrowings, excluding finance lease liabilities
Interest payments on borrowings1
Finance lease liabilities
Other non-interest bearing liabilities

Derivative financial liabilities
Derivative contracts – receipts
Derivative contracts – payments
Commodity contracts

At 31 March 2015
Non-derivative financial liabilities
Borrowings, excluding finance lease liabilities
Interest payments on borrowings1
Finance lease liabilities
Other non-interest bearing liabilities

Derivative financial liabilities
Derivative contracts – receipts
Derivative contracts – payments
Commodity contracts

Less than
1 year
£m

(3,225)
(839)
(53)
(2,755)

314
(389)
(104)
(7,051)

Less than
1 year
£m

(2,289)
(790)
(44)
(2,744)

602
(935)
(116)
(6,316)

1 to 2
years
£m

(1,777)
(806)
(58)
(230)

487
(964)
(32)
(3,380)

1 to 2
years
£m

(1,179)
(790)
(41)
(216)

244
(318)
(43)
(2,343)

2 to 3
years
£m

More than
3 years
£m

(1,760)
(746)
(43)
–

(20,831)
(13,549)
(130)
–

Total
£m

(27,593)
(15,940)
(284)
(2,985)

846
(855)
(9)
(2,567)

811
(914)
1
(34,612)

2,458
(3,122)
(144)
(47,610)

2 to 3
years
£m

More than
3 years
£m

(1,513)
(766)
(32)
–

411
(952)
(21)
(2,873)

(20,235)
(13,587)
(86)
–

1,194
(1,631)
–
(34,345)

Total
£m

(25,216)
(15,933)
(203)
(2,960)

2,451
(3,836)
(180)
(45,877)

1. 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.

(c) 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 sets out the carrying amount, by contractual maturity, of borrowings that are exposed to interest rate risk before taking
into account interest rate swaps.

151

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsNotes to the consolidated financial statements
– supplementary information continued

30. Financial risk management continued

(c) Interest rate risk continued
During 2016 and 2015, net debt was managed using derivative instruments to hedge interest rate risk as follows:

Cash and cash equivalents
Financial investments
Borrowings2
Pre-derivative position
Derivative effect3
Net debt position

Fixed rate
£m
1
54
(17,706)
(17,651)
1,788
(15,863)

Floating
rate
£m
126
2,939
(3,008)
57
(2,481)
(2,424)

2016
Inflation
linked
£m
–
–
(7,629)
(7,629)
587
(7,042)

Other1
£m
–
5
(1)
4
–
4

Total
£m
127
2,998
(28,344)
(25,219)
(106)
(25,325)

Fixed rate
£m
1
281
(16,229)
(15,947)
1,593
(14,354)

Floating
rate
£m
118
2,273
(2,746)
(355)
(2,294)
(2,649)

2015
Inflation
linked
£m
–
–
(6,933)
(6,933)
18
(6,915)

Other1
£m
–
5
(2)
3
–
3

Total
£m
119
2,559
(25,910)
(23,232)
(683)
(23,915)

1. Represents financial instruments which are not directly affected by interest rate risk, such as investments in equity or other similar financial instruments.
2. Includes bank overdrafts.
3. The impact of 2016/17 (2015: 2015/16) maturing short-dated interest rate derivatives is included.

(d) Currency 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. 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 2016 and 2015, derivative financial instruments were used to manage foreign currency risk as follows:

Cash and cash equivalents
Financial investments
Borrowings1
Pre-derivative position
Derivative effect
Net debt position

1. Includes bank overdrafts.

Sterling
£m
3
1,201
(13,131)
(11,927)
2,374
(9,553)

Euro
£m
1
105
(5,061)
(4,955)
4,971
16

2016

Dollar
£m
123
1,622
(8,806)
(7,061)
(8,989)
(16,050)

Other
£m
–
70
(1,346)
(1,276)
1,538
262

Total
£m
127
2,998
(28,344)
(25,219)
(106)
(25,325)

Sterling
£m
12
1,227
(11,791)
(10,552)
1,608
(8,944)

Euro
£m
–
90
(5,099)
(5,009)
5,203
194

2015

Dollar
£m
107
1,181
(7,604)
(6,316)
(8,858)
(15,174)

Other
£m
–
61
(1,416)
(1,355)
1,364
9

Total
£m
119
2,559
(25,910)
(23,232)
(683)
(23,915)

The overall exposure to dollars largely relates to our net investment hedge activities as described in note 15.

The currency exposure on other financial instruments is as follows:

Trade and other receivables
Trade and other payables
Other non-current assets

Sterling
£m
220
(1,380)
(17)

Euro
£m
8
–
–

2016

Dollar
£m
1,236
(1,471)
(252)

Other
£m
–
–
–

Total
£m
1,464
(2,851)
(269)

Sterling
£m
200
(1,403)
(19)

2015

Dollar
£m
1,495
(1,457)
(252)

Euro
£m
–
–
–

Other
£m
–
–
–

Total
£m
1,695
(2,860)
(271)

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.

152

National Grid Annual Report and Accounts 2015/16

Financial Statements

30. Financial risk management continued

(e) 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. In addition, state regulators require National Grid to manage
commodity risk and cost volatility prudently through diversified pricing strategies. In some jurisdictions we are required to file a plan outlining
our strategy to be approved by regulators. In certain cases we might receive guidance with regard to specific hedging limits.

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. 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 futures, swaps and options 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.

The fair value of our commodity contracts by type can be analysed as follows:

2016
Liabilities
£m

Assets
£m

Total
£m

Assets
£m

2015
Liabilities
£m

Commodity purchase contracts accounted for as derivative contracts
Forward purchases of electricity
Forward purchases of gas

Derivative financial instruments linked to commodity prices
Electricity capacity
Electricity swaps
Electricity options
Gas swaps

The maturity profile of commodity contracts is as follows:

–
25

2
2
–
3
32

(26)
(27)

(26)
(2)

–
(69)
(1)
(12)
(135)

Current
Less than one year

Non-current
In 1 to 2 years
In 2 to 3 years
In 3 to 4 years
In 4 to 5 years
More than 5 years

2016
Liabilities
£m

Assets
£m

22
22

8
1
–
–
1
10
32

(96)
(96)

(30)
(9)
–
–
–
(39)
(135)

For each class of commodity contract, our exposure based on the notional quantities is as follows:

Forward purchases of electricity1
Forward purchases/sales of gas2
Electricity swaps
Electricity options
Electricity capacity
Gas swaps
Gas options
NYMEX gas futures3

1. Forward electricity purchases have terms up to three years. The contractual obligations under these contracts are £40m (2015: £77m).
2. Forward gas purchases have terms up to five years. The contractual obligations under these contracts are £20m (2015: £26m).
3. NYMEX gas futures have been offset with related margin accounts (see note 30(a)).

–
42

–
21
–
1
64

(42)
(42)

–
(59)
(1)
(27)
(171)

Assets
£m

2015
Liabilities
£m

35
35

25
2
1
1
–
29
64

(116)
(116)

(37)
(18)
–
–
–
(55)
(171)

2
(67)
(1)
(9)
(103)

Total
£m

(74)
(74)

(22)
(8)
–
–
1
(29)
(103)

Total
£m

(42)
–

–
(38)
(1)
(26)
(107)

Total
£m

(81)
(81)

(12)
(16)
1
1
–
(26)
(107)

2016
481 GWh
44m Dth
11,786 GWh
22,375 GWh
1 kWm
76m Dth
16m Dth
14m Dth

2015
984 GWh
55m Dth
10,779 GWh
25,157 GWh
–
65m Dth
4m Dth
20m Dth

153

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsNotes to the consolidated financial statements
– supplementary information continued

30. Financial risk management continued

(f) Capital risk management
The capital structure of the Group consists of shareholders’ equity, as disclosed in the consolidated statement of changes in equity, and
net debt (note 26). 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 manage 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. As noted on page 25, we monitor our balance sheet efficiency using several metrics including our retained cash flow/net debt
and interest cover. Interest cover for the year ended 31 March 2016 was 5.5 (2015: 5.1). Our long-term target range for interest cover is greater
than 3.0, which we believe is consistent with single A range long-term senior unsecured debt credit ratings within our main UK operating
companies, NGET and NGG, based on guidance from the rating agencies.

In addition, we monitor the RAV gearing within each of NGET and the regulated transmission and distribution businesses within NGG. 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 to 65%.

The majority of our regulated operating companies in the US and the UK (and one intermediate UK holding company), are subject to certain
restrictions on the payment of dividends by administrative order, 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:

the subsidiary must have at least two recognised rating agency credit ratings of at least investment grade;

• dividends must be approved in advance by the relevant US state regulatory commission;
•
• 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 for 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 2016 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.

(g) 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 are representative 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
Commodity contracts

Liabilities
Derivative financial instruments
Commodity contracts

2016

2015

Level 1
£m

Level 2
£m

Level 3
£m

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

2,040
–
–
2,040

–
–
–
2,040

393
1,945
5
2,343

(1,855)
(81)
(1,936)
407

–
18
27
45

2,433
1,963
32
4,428

(214)
(54)
(268)
(223)

(2,069)
(135)
(2,204)
2,224

1,315
–
–
1,315

–
–
–
1,315

247
1,702
22
1,971

(2,219)
(87)
(2,306)
(335)

–
14
42
56

(180)
(84)
(264)
(208)

Total
£m

1,562
1,716
64
3,342

(2,399)
(171)
(2,570)
772

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.

154

National Grid Annual Report and Accounts 2015/16

Financial Statements

30. Financial risk management continued

(g) Fair value analysis continued
Our level 3 derivative financial instruments include cross-currency swaps, inflation linked swaps and equity options, all of which are traded
on illiquid markets. 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 year1,2
Purchases3
Settlements
Reclassification/transfers out of level 3
At 31 March

Derivative financial
instruments
2016
£m
(166)
(20)
1
(11)
–
(196)

2015
£m
(100)
(63)
–
(3)
–
(166)

Commodity
contracts

2016
£m
(42)
(27)
13
29
–
(27)

2015
£m
(58)
(53)
38
28
3
(42)

Total

2016
£m
(208)
(47)
14
18
–
(223)

2015
£m
(158)
(116)
38
25
3
(208)

1. Loss of £17m (2015: £63m loss) is attributable to derivative financial instruments held at the end of the reporting period and has been recognised in finance costs in the income statement.
2. Loss of £28m (2015: £48m loss) is attributable to commodity contract financial instruments held at the end of the reporting period.
3. Purchases in the year relate to equity options.

The impacts on a post-tax basis of reasonably possible changes in significant level 3 assumptions are as follows:

10% increase in commodity prices¹
10% decrease in commodity prices1
Volume forecast uplift2
Volume forecast reduction2
+10% market area price change
–10% market area price change
+20 basis point change in Limited Price Inflation (LPI) market curve3
–20 basis points change in LPI market curve3

Derivative financial
instruments
2016
Income
statement
£m
–
–
–
–
–
–
(83)
80

2015
Income
statement
£m
–
–
–
–
–
–
(77)
75

Commodity
contracts

2016
Income
statement
£m
4
–
(1)
1
(2)
2
–
–

2015
Income
statement
£m
4
(3)
(2)
2
(4)
4
–
–

1. Level 3 commodity price sensitivity is included within the sensitivity analysis disclosed in note 33.
2. Volumes were flexed using maximum and minimum historical averages, or by >10% where historical averages were not available.
3. 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.

155

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsNotes to the consolidated financial statements
– supplementary information continued

31. 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 2016, we had bilateral committed credit facilities of £2,808m (2015: £2,094m). In addition, we had committed credit facilities from
syndicates of banks of £295m at 31 March 2016 (2015: £884m). All committed credit facilities were undrawn in 2016 and 2015. An analysis
of the maturity of these undrawn committed facilities is shown below:

Undrawn committed borrowing facilities expiring:

Less than 1 year
In 1 to 2 years
In 2 to 3 years
In 3 to 4 years
In 4 to 5 years
More than 5 years

2016
£m

–
–
1,115
295
–
1,693
3,103

2015
£m

572
–
874
1,220
312
–
2,978

Of the unused facilities at 31 March 2016, £2,808m (2015: £2,666m) was held as backup to commercial paper and similar borrowings, while
£295m (2015: £312m) is available as backup to specific US borrowings.

In addition to the above, the Group has a bank loan agreement totalling £1,500m with the European Investment Bank (EIB), of which £900m
is currently undrawn, and an Export Credit Agreement (ECA) totalling £162m, which is undrawn.

Further information on our bonds can be found on the debt investor section of our website.

156

National Grid Annual Report and Accounts 2015/16

Financial Statements

32. Subsidiary undertakings, joint ventures and associates

While we present consolidated results in these financial statements as if we were one company, our legal structure is such that there are
a number of different operating and holding companies that contribute to the overall result. This structure has evolved through acquisitions
as well as regulatory requirements to have certain activities within separate legal entities.

Subsidiary undertakings
A list of the Group’s subsidiaries as at 31 March 2016 is given below. The entire share capital of subsidiaries is held within the Group except
where the Group’s ownership percentages are shown. These percentages give the Group’s ultimate interest and therefore allow for the
situation where subsidiaries are owned by partly-owned intermediate subsidiaries. Where subsidiaries have different classes of shares, this
is largely for historical reasons and the effective percentage holdings given represent both the Group’s voting rights and equity holding.
Shares in National Grid (US) Holdings Limited, National Grid Holdings One plc and NGG Finance plc are held directly by National Grid plc.
All other holdings in subsidiaries are owned by other subsidiaries of the National Grid plc Group. All subsidiaries are consolidated in the Group’s
financial statements.

Principal Group companies are identified in bold. These companies are incorporated and principally operate in the countries under which
they are shown.

Incorporated in England and Wales
Beegas Nominees Limited
Birch Sites Limited
Carbon Sentinel Limited
Gridcom Limited
Icelink Interconnector Limited
KeySpan (U.K.)**
Landranch Limited
Lattice Group Employee Benefit Trust Limited
Lattice Group plc
Lattice Group Trustees Limited
Natgrid Finance Holdings Limited*
Natgrid Finance Limited*
Natgrid Limited
NatGrid One Limited
NatgridTW1 Limited
National Grid (US) Holdings Limited
National Grid (US) Investments 2 Limited
National Grid (US) Investments 4 Limited
National Grid (US) Partner 1 Limited
National Grid Belgium Limited
National Grid Blue Power Limited
National Grid Carbon Limited
National Grid Commercial Holdings Limited
National Grid Eight*
National Grid Eighteen Limited*
National Grid Electricity Group Trustee Limited
National Grid Electricity Transmission plc
National Grid Energy Metering Limited
National Grid Five Limited*
National Grid Four Limited
National Grid Fourteen Limited
National Grid Gas Finance (No 1) plc
National Grid Gas Holdings Limited
National Grid Gas plc
National Grid Grain LNG Limited
National Grid Holdings Limited
National Grid Holdings One plc
National Grid IFA 2 Limited
National Grid Interconnector Holdings Limited
National Grid Interconnectors Limited
National Grid International Limited
National Grid Land and Properties Limited*
National Grid Metering Limited
National Grid Nine Limited*
National Grid North Sea Link Limited
National Grid Offshore Limited

National Grid Property (High Wycombe) Limited*
National Grid Property Holdings Limited
National Grid Property Limited*
National Grid Property (Northfleet) Limited**
National Grid Property (Taunton) Limited*
National Grid Seven Limited*
National Grid Seventeen Limited
National Grid Smart Limited
National Grid Ten
National Grid Thirty Eight Limited
National Grid Thirty Five Limited
National Grid Thirty Four Limited
National Grid Thirty Limited
National Grid Thirty Seven Limited
National Grid Thirty Six Limited
National Grid Three Limited*
National Grid Twelve Limited
National Grid Twenty Eight Limited
National Grid Twenty Four Limited*
National Grid Twenty Seven Limited
National Grid Twenty Three Limited
National Grid Twenty-Five Limited
National Grid UK Limited
National Grid UK Pension Services Limited
National Grid Viking Link Limited
National Grid William Limited
NG Luxembourg Holdings Limited*
NG Nominees Limited
NGC Employee Shares Trustee Limited
NGG Finance plc
NGG Telecoms Holdings Limited*
NGG Telecoms Limited*
Ngrid Intellectual Property Limited
NGT Telecom No. 1 Limited
NGT Two Limited
Port Greenwich Limited
Stargas Nominees Limited
Supergrid Electricity Limited
Supergrid Energy Transmission Limited
Supergrid Limited
Telecom International Holdings Limited*
Thamesport Interchange Limited
The National Grid Group Quest Trustee Company Limited
The National Grid YouPlan Trustee Limited
Transco Limited
Xoserve Limited (56.5%)

*Dissolved 14 April 2016 **In liquidation

157

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsNotes to the consolidated financial statements
– supplementary information continued

32. Subsidiary undertakings, joint ventures and associates continued

Incorporated in the US
Boston Gas Company
British Transco Capital Inc.
British Transco Finance, Inc.
Broken Bridge Corp.
Colonial Gas Company
EUA Energy Investment Corporation
GridAmerica Holdings Inc.
Grid NY LLC
KeySpan CI Midstream Limited
KeySpan Corporation
KeySpan Energy Corporation
KeySpan Energy Services Inc.
KeySpan Gas East Corporation
KeySpan International Corporation
KeySpan MHK, Inc.
KeySpan Midstream, Inc.
KeySpan Plumbing Solutions, Inc.
KSI Contracting, LLC
KSI Electrical, LLC
KSI Mechanical, LLC
Land Management & Development, Inc.
Landwest, Inc.
Massachusetts Electric Company
Metro Energy L.L.C.
Metrowest Realty LLC
Mystic Steamship Corporation
Nantucket Electric Company
National Grid Algonquin LLC
National Grid Development Holdings Corp.
National Grid Electric Services LLC
National Grid Energy Management LLC
National Grid Energy Services LLC
National Grid Energy Trading Services LLC
National Grid Engineering & Survey Inc.
National Grid Generation LLC
National Grid Generation Ventures LLC
National Grid Glenwood Energy Center LLC
National Grid IGTS Corp.
National Grid Insurance USA Ltd
National Grid Islander East Pipeline LLC
National Grid LNG GP LLC
National Grid LNG LLC
National Grid LNG LP LLC
National Grid Millennium LLC
National Grid NE Holdings 2 LLC
National Grid North America Inc.
National Grid North East Ventures Inc.
National Grid Port Jefferson Energy Center LLC
National Grid Services, Inc.
National Grid Technologies Inc.
National Grid Transmission Services Corporation
National Grid US LLC
National Grid US 6 LLC
National Grid USA
National Grid USA Service Company, Inc.
Nees Energy, Inc.
New England Electric Transmission Corporation

New England Energy Incorporated
New England Hydro Finance Company, Inc. (53.704%)
New England Hydro-Transmission Corporation (53.704%)
New England Hydro-Transmission Electric Company, Inc. (53.704%)
New England Power Company
Newport America Corporation
NGNE LLC
Niagara Mohawk Energy, Inc.
Niagara Mohawk Holdings, Inc.
Niagara Mohawk Power Corporation
NM Properties, Inc.
North East Transmission Co., Inc.
Opinac North America, Inc.
Philadelphia Coke Co., Inc.
Port of the Islands North LLC
The Brooklyn Union Gas Company
The Narragansett Electric Company
Transgas Inc.
Upper Hudson Development Inc.
Valley Appliance and Merchandising Company
Wayfinder Group, Inc.

Incorporated in Australia
National Grid Australia Pty Limited

Incorporated in Canada
Keyspan Energy Development Co.

Incorporated in the Cayman Islands
British Transco Finance (No 1) Limited**
British Transco Finance (No 2) Limited**
Keyspan C.I. II Ltd**
Keyspan C.I. Ltd**
NGT Five Limited**
NGT Four Limited**

Incorporated in Chile
Inversiones ABC Limitada (98.84%)
SCC Uno S.A.

Incorporated in the Isle of Man
Lattice Telecom Finance (No 1) Limited**
National Grid (IOM) UK Ltd**
National Grid Insurance Company (Isle of Man) Limited
NGT Holding Company (Isle of Man) Limited

Incorporated in Jersey
National Grid Jersey Investments Limited
NG Jersey Limited

Incorporated in the Netherlands
British Transco International Finance B.V.
National Grid Holdings B.V.

Incorporated in the Republic of Ireland
National Grid (Ireland) 1**
National Grid (Ireland) 2**
National Grid Insurance Company (Ireland) Designated Activity Company

158

National Grid Annual Report and Accounts 2015/16

Financial Statements

*Dissolved 14 April 2016 **In liquidation

32. Subsidiary undertakings, joint ventures and associates continued

Joint ventures
A list of the Group’s joint ventures as at 31 March 2016 is given below. All joint ventures are included in the Group’s financial statements using
the equity method of accounting. Principal joint ventures are identified in bold.

Incorporated in England and Wales
BritNed Development Limited (50%)
Joint Radio Company Limited (50%)
Nemo Link Limited (50%)
NGET/SPT Upgrades Limited (50%)
St William Homes LLP (50%)

Incorporated in the US
Clean Energy Generation LLC (50%)
Island Park Energy Center LLC (50%)
Islander East Pipeline Company, L.L.C. (50%)
LI Energy Storage System, LLC (50%)
LI Solar Generation LLC (50%)

Associates
A list of the Group’s associates as at 31 March 2016 is given below. All associates are included in the Group’s financial statements using the
equity method of accounting.

Incorporated in the US
Algonquin Gas Transmission LLC (20%)
Clean Line Energy Partners LLC (32%)
Connecticut Yankee Atomic Power Company (19.5%)
Direct Global Power, Inc. (26%)
Energis plc (33.06%)
Energy Impact Fund LP (33%)
Maine Yankee Atomic Power Company (24%)
Millennium Pipeline Company LLC (26.25%)
New York Transco LLC (28.3%)
Nysearch RMLD LLC (22.63%)
Yankee Atomic Electric Company (34.5%)

Incorporated in Belgium
Coreso SA (20%)

Our interests and activities are held or operated through the subsidiaries, joint arrangements or associates as disclosed above. These interests
and activities (and their branches) are established in – and subject to the laws and regulations of – these jurisdictions.

159

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsNotes to the consolidated financial statements
– supplementary information continued

33. Sensitivities on areas of estimation and uncertainty

In order to give a clearer picture of the impact on our results or financial position of potential changes in significant estimates and assumptions,
the following sensitivities are presented. These sensitivities are hypothetical, 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.

The sensitivities in the tables below show the potential impact in the income statement (and consequential impact on net assets) for a range
of different variables each of which have been considered in isolation (i.e. with all other variables remaining constant). There are a number of
these sensitivities which are mutually exclusive and therefore if one were to happen, another would not, meaning a total showing how sensitive
our results are to these external factors is not meaningful.

We are further required to show additional sensitivity analysis for changes in interest and exchange rates and these are shown separately
in the subsequent table due to the additional assumptions that are made in order to produce meaningful sensitivity disclosures.

The sensitivities included in the tables below all have an equal and opposite effect if the sensitivity increases or decreases by the same
amount unless otherwise stated. For example, a 10% increase in unbilled revenue at 31 March 2016 would result in an increase in the
income statement of £58m and a 10% decrease in unbilled revenue would have the equal but opposite effect.

One year average change in useful economic lives (pre-tax):
Depreciation charge on property, plant and equipment
Amortisation charge on intangible assets

2016

2015

Income
statement
£m

Net
assets
£m

Income
statement
£m

Net
assets
£m

79
20

69
26

Estimated future cash flows in respect of provisions, change of 10% (pre-tax)

172

174

Assets and liabilities carried at fair value change of 10% (pre-tax):

Derivative financial instruments1
Commodity contract liabilities

Pensions and other post-retirement benefits2 (pre-tax):

UK discount rate change of 0.5%3
US discount rate change of 0.5%3
UK RPI rate change of 0.5%4
UK long-term rate of increase in salaries change of 0.5%5
US long-term rate of increase in salaries change of 0.5%
UK change of one year to life expectancy at age 65
US change of one year to life expectancy at age 65
Assumed US healthcare cost trend rates change of 1%

Unbilled revenue at 31 March change of 10% (post-tax)
No hedge accounting for our derivative financial instruments (post-tax)

Commodity risk6 (post-tax):

10% increase in commodity prices
10% decrease in commodity prices

(11)
(10)

11
16
9
2
3
2
3
35

58
(123)

22
(22)

1,482
640
1,268
87
45
703
295
514

58
36

22
(22)

68
11

9
12
9
1
2
1
3
28

60
(611)

26
(24)

68
11

1,575
670
1,349
93
42
620
352
465

60
316

26
(24)

1. The effect of a 10% change in fair value assumes no hedge accounting.
2. The changes shown are a change in the annual pension or other post-retirement benefit service charge and change in the defined benefit obligations.
3. A change in the discount rate is likely to occur as a result of changes in bond yields and as such would be expected to be offset to a significant degree by a change in the value of the bond

assets held by the plans.

4. The projected impact resulting from a change in RPI reflects the underlying effect on pensions in payment, pensions in deferment and resultant increases in salary assumptions.
5. This change has been applied to both the pre 1 April 2014 and post 1 April 2014 rate of increase in salary assumption.
6. Represents potential impact on fair values of commodity contracts only.

Financial risk (post-tax):

UK RPI change of 0.5%1
UK interest rates change of 0.5%
US interest rates change of 0.5%
US dollar exchange rate change of 10%2

2016

2015

Income
statement
£m

Other
equity
reserves
£m

Income
statement
£m

Other
equity
reserves
£m

31
76
66
57

–
85
17
553

27
92
77
62

–
101
11
607

1. Excludes sensitivities to LPI curve. Further details on sensitivities are provided in note 30(g).
2. The other equity reserves impact does not reflect the exchange translation in our US subsidiaries’ net assets. It is estimated this would change by £788m (2015: £771m) in the opposite

direction if the dollar exchange rate changed by 10%.

160

National Grid Annual Report and Accounts 2015/16

Financial Statements

33. Sensitivities on areas of estimation and uncertainty continued

Pensions and other post-retirement benefits assumptions
Sensitivities have been prepared to show how the DB obligations and annual service costs could potentially be impacted by changes in the
relevant actuarial assumption that were reasonably possible as at 31 March 2016. In preparing sensitivities the potential impact has been
calculated by applying the change to each assumption in isolation and assuming all other assumptions remain unchanged. This is with the
exception of RPI in the UK where the corresponding change to increases to pensions in payment, increases to pensions in deferment and
increases in salary is recognised.

Financial instruments assumptions
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 impact the valuation of our borrowings, deposits, derivative financial instruments and
commodity contracts. The 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 2016 and 2015
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.

34. 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
other 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 100% owned
and National Grid plc’s guarantee of Niagara Mohawk Power Corporation’s preferred shares is full and unconditional pursuant to Rule 3-10(i)(8)
(i) and (ii) of Regulation S-X. The guarantees of National Grid Gas plc and National Grid plc are joint and several.

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 other disclosure in these financial statements.

Summary statements of comprehensive income are presented, on a consolidated basis, for the three years ended 31 March 2016. 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.

161

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsNotes to the consolidated financial statements
– supplementary information continued

34. Additional disclosures in respect of guaranteed securities continued

Summary statements of comprehensive income for the year ended 31 March 2016 – IFRS

Revenue
Operating costs:

Depreciation and amortisation
Payroll costs
Purchases of electricity
Purchases of gas
Rates and property tax
Balancing Service Incentive Scheme
Payments to other UK network owners
Other operating costs

Total operating profit
Net finance income/(costs)
Dividends receivable
Interest in equity accounted affiliates
Profit before tax
Tax
Profit for the year
Amounts recognised in other comprehensive income2
Total comprehensive income for the year
Attributable to:

Equity shareholders
Non-controlling interests

Parent
guarantor

Issuer of notes

Subsidiary
guarantor

Niagara
Mohawk
Power
Corporation
£m
2,027

National
Grid plc
£m
–

British
Transco
Finance Inc.
£m
–

National
Grid Gas
plc
£m
3,165

Other
subsidiaries
£m
10,104

Consolidation
adjustments
£m
(181)

National
Grid
consolidated
£m
15,115

–
–
–
–
–
–
–
–
–
–
701
–
1,843
2,544
47
2,591
573
3,164

3,164
–
3,164

(162)
(260)
(484)
(86)
(155)
–
–
(433)
(1,580)
447
(87)
–
–
360
(141)
219
(1)
218

218
–
218

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–1
–
–

–
–
–

(553)
(269)
–
(92)
(252)
–
–
(605)
(1,771)
1,394
(242)
–
33
1,185
(80)
1,105
(5)
1,100

1,100
–
1,100

(899)
(977)
(828)
(806)
(643)
(907)
(971)
(1,829)
(7,860)
2,244
(1,484)
620
59
1,439
(264)
1,175
509
1,684

1,681
3
1,684

–
–
–
–
–
–
–
181
181
–
–
(620)
(1,876)
(2,496)
–
(2,496)
(503)
(2,999)

(2,999)
–
(2,999)

(1,614)
(1,506)
(1,312)
(984)
(1,050)
(907)
(971)
(2,686)
(11,030)
4,085
(1,112)
–
59
3,032
(438)
2,594
573
3,167

3,164
3
3,167

1. 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.
2. Includes other comprehensive income relating to interest in equity accounted affiliates.

162

National Grid Annual Report and Accounts 2015/16

Financial Statements

34. Additional disclosures in respect of guaranteed securities continued

Summary statements of comprehensive income for the year ended 31 March 2015 – IFRS

Revenue
Operating costs:

Total operating profit
Net finance costs
Dividends receivable
Interest in equity accounted affiliates
Profit before tax
Tax
Profit for the year
Amounts recognised in other comprehensive income2
Total comprehensive income for the year
Attributable to:

Equity shareholders
Non-controlling interests

Parent
guarantor

Issuer of notes

Subsidiary
guarantor

Niagara
Mohawk
Power
Corporation
£m

National
Grid plc
£m

–

2,109

–
–
–
–
–
–
–
–
–
–
(223)
–
2,192
1,969
50
2,019
(395)
1,624

1,624
–
1,624

(146)
(256)
(604)
(147)
(146)
–
–
(501)
(1,800)
309
(76)
–
–
233
(98)
135
1
136

136
–
136

British
Transco
Finance Inc.
£m

National
Grid Gas
plc
£m

Other
subsidiaries
£m

Consolidation
adjustments
£m

National
Grid
consolidated
£m

–

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–1
–
–

–
–
–

3,136

10,125

(169)

15,201

(540)
(253)
–
(98)
(247)
–
–
(655)
(1,793)
1,343
(352)
–
8
999
(230)
769
22
791

791
–
791

(796)
(950)
(1,081)
(1,171)
(611)
(874)
(801)
(1,713)
(7,997)
2,128
(547)
700
46
2,327
(339)
1,988
(588)
1,400

1,407
(7)
1,400

–
–
–
–
–
–
–
169
169
–
–
(700)
(2,200)
(2,900)
–
(2,900)
566
(2,334)

(2,334)
–
(2,334)

(1,482)
(1,459)
(1,685)
(1,416)
(1,004)
(874)
(801)
(2,700)
(11,421)
3,780
(1,198)
–
46
2,628
(617)
2,011
(394)
1,617

1,624
(7)
1,617

163

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsNotes to the consolidated financial statements
– supplementary information continued

34. Additional disclosures in respect of guaranteed securities continued

Summary statements of comprehensive income for the year ended 31 March 2014 – IFRS

Parent
guarantor

Issuer of notes

Subsidiary
guarantor

Revenue
Operating costs:

Equity shareholders
Non-controlling interests

Niagara
Mohawk
Power
Corporation
£m

National
Grid plc
£m

2,185

–
–
–
–
–
–
–
15
15
19
(128)
–
2,550
2,441
35
2,476
235
2,711

2,711
–
2,711

(127)
(278)
(647)
(194)
(137)
–
–
(440)
(1,823)
362
(85)
–
–
277
(97)
180
(8)
172

172
–
172

British
Transco
Finance Inc.
£m

National
Grid Gas
plc
£m

Other
subsidiaries
£m

Consolidation
adjustments
£m

National
Grid
consolidated
£m

–

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–1
–
–

–
–
–

3,141

9,653

(174)

14,809

(529)
(251)
–
(112)
(241)
–
–
(661)
(1,794)
1,347
(285)
–
11
1,073
3
1,076
9
1,085

1,085
–
1,085

(760)
(689)
(817)
(1,449)
(585)
(872)
(630)
(1,844)
(7,646)
2,007
(517)
600
28
2,118
(225)
1,893
383
2,276

2,288
(12)
2,276

–
–
–
–
–
–
–
174
174
–
–
(600)
(2,561)
(3,161)
–
(3,161)
(384)
(3,545)

(3,545)
–
(3,545)

(1,416)
(1,218)
(1,464)
(1,755)
(963)
(872)
(630)
(2,756)
(11,074)
3,735
(1,015)
–
28
2,748
(284)
2,464
235
2,699

2,711
(12)
2,699

164

National Grid Annual Report and Accounts 2015/16

Financial Statements

34. Additional disclosures in respect of guaranteed securities continued

Statements of financial position as at 31 March 2016 – IFRS

Parent
guarantor

Issuer of notes

Subsidiary
guarantor

Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
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
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
Total liabilities
Net assets
Equity
Share capital
Share premium account
Retained earnings
Other equity reserves
Shareholders’ equity

Non-controlling interests
Total equity

National
Grid plc
£m

–
–
–
–
318
–
17,428
157
17,903

–
1
11,516
1,244
279
1
13,041
30,944

(933)
(239)
(43)
(12,633)
(3)
–
(13,851)

(1,194)
(358)
–
(1,982)
(4)
–
–
(3,538)
(17,389)
13,555

447
1,326
16,305
(4,523)
13,555

–
13,555

Niagara
Mohawk
Power
Corporation
£m

British
Transco
Finance Inc.
£m

National
Grid Gas
plc
£m

Other
subsidiaries
£m

Consolidation
adjustments
£m

National
Grid
consolidated
£m

664
–
5,466
7
–
125
26
–
6,288

42
413
300
28
–
4
787
7,075

(47)
–
(248)
–
(61)
–
(356)

(2,043)
–
(297)
–
(939)
(761)
(250)
(4,290)
(4,646)
2,429

130
2,119
180
–
2,429

–
2,429

–
–
–
–
209
–
–
–
209

–
–
6
–
–
–
6
215

(5)
–
–
–
–
–
(5)

(209)
–
–
–
–
–
–
(209)
(214)
1

–
–
1
–
1

–
1

–
239
12,628
41
5,609
–
86
1,014
19,617

26
432
57
116
66
–
697
20,314

(602)
(39)
(661)
(1,518)
(34)
(55)
(2,909)

(6,078)
(527)
(1,031)
(1,174)
(1,548)
–
(126)
(10,484)
(13,393)
6,921

45
204
5,400
1,272
6,921

–
6,921

4,651
648
25,270
34
2,630
285
10,131
514
44,163

369
1,626
12,785
1,610
131
126
16,647
60,810

(2,028)
(257)
(2,333)
(10,513)
(154)
(181)
(15,466)

(15,209)
(847)
(743)
(5,610)
(2,143)
(2,234)
(1,107)
(27,893)
(43,359)
17,451

182
8,033
9,316
(90)
17,441

10
17,451

–
–
–
–
(8,766)
–
(26,792)
–
(35,558)

–
–
(24,664)
–
(198)
(4)
(24,866)
(60,424)

4
198
–
24,664
–
–
24,866

–
–
–
8,766
–
–
–
8,766
33,632
(26,792)

(357)
(10,356)
(14,897)
(1,182)
(26,792)

–
(26,792)

5,315
887
43,364
82
–
410
879
1,685
52,622

437
2,472
–
2,998
278
127
6,312
58,934

(3,611)
(337)
(3,285)
–
(252)
(236)
(7,721)

(24,733)
(1,732)
(2,071)
–
(4,634)
(2,995)
(1,483)
(37,648)
(45,369)
13,565

447
1,326
16,305
(4,523)
13,555

10
13,565

165

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsNotes to the consolidated financial statements
– supplementary information continued

34. Additional disclosures in respect of guaranteed securities continued

Statements of financial position as at 31 March 2015 – IFRS

Non-controlling interests
Total equity

Parent
guarantor

National
Grid plc
£m

–
–
–
–
341
–
14,988
148
15,477

–
2
11,484
740
281
10
12,517
27,994

(1,068)
(289)
(39)
(11,208)
(3)
–
(12,607)

(1,117)
(411)
–
(1,894)
(3)
–
–
(3,425)
(16,032)
11,962

443
1,331
14,870
(4,682)
11,962

–
11,962

Issuer of notes

Niagara
Mohawk
Power
Corporation
£m

British
Transco
Finance Inc.
£m

653
–
5,025
11
–
121
26
–
5,836

40
502
254
9
–
11
816
6,652

(44)
–
(267)
–
(61)
–
(372)

(2,021)
–
(287)
–
(782)
(801)
(267)
(4,158)
(4,530)
2,122

126
2,039
(43)
–
2,122

–
2,122

–
–
–
–
202
–
–
–
202

–
–
5
–
–
–
5
207

(5)
–
–
–
–
–
(5)

(202)
–
–
–
–
–
–
(202)
(207)
–

–
–
–
–
–

–
–

Subsidiary
guarantor

National
Grid Gas
plc
£m

–
232
12,428
18
5,609
–
56
988
19,331

26
417
298
363
70
4
1,178
20,509

(521)
(133)
(877)
(1,973)
(34)
(39)
(3,577)

(6,056)
(481)
(1,038)
(1,123)
(1,655)
–
(168)
(10,521)
(14,098)
6,411

45
204
4,885
1,277
6,411

–
6,411

Other
subsidiaries
£m

Consolidation
adjustments
£m

National
Grid
consolidated
£m

4,492
570
23,270
51
3,017
–
9,905
403
41,708

274
1,915
13,052
1,447
88
104
16,880
58,588

(1,400)
(475)
(2,109)
(11,912)
(86)
(196)
(16,178)

(13,486)
(872)
(594)
(6,152)
(1,857)
(2,578)
(1,065)
(26,604)
(42,782)
15,806

182
8,033
7,761
(182)
15,794

12
15,806

–
–
–
–
(9,169)
–
(24,327)
–
(33,496)

–
–
(25,093)
–
(262)
(10)
(25,365)
(58,861)

10
262
–
25,093
–
–
25,365

–
–
–
9,169
–
–
–
9,169
34,534
(24,327)

(353)
(10,276)
(12,603)
(1,095)
(24,327)

–
(24,327)

5,145
802
40,723
80
–
121
648
1,539
49,058

340
2,836
–
2,559
177
119
6,031
55,089

(3,028)
(635)
(3,292)
–
(184)
(235)
(7,374)

(22,882)
(1,764)
(1,919)
–
(4,297)
(3,379)
(1,500)
(35,741)
(43,115)
11,974

443
1,331
14,870
(4,682)
11,962

12
11,974

166

National Grid Annual Report and Accounts 2015/16

Financial Statements

34. Additional disclosures in respect of guaranteed securities continued

Cash flow statements

Parent
guarantor

Issuer of notes

Subsidiary
guarantor

Niagara
Mohawk
Power
Corporation
£m

British
Transco
Finance Inc.
£m

National
Grid plc
£m

National
Grid Gas
plc
£m

Other
subsidiaries
£m

Consolidation
adjustments
£m

National
Grid
consolidated
£m

Year ended 31 March 2016
Net cash flow from operating activities
Net cash flow from/(used in) investing activities
Net cash flow (used in)/from financing activities
Net increase/(decrease) in cash and cash equivalents in the year
Year ended 31 March 2015
Net cash flow from operating activities
Net cash flow from/(used in) investing activities
Net cash flow (used in)/from financing activities
Net (decrease)/increase in cash and cash equivalents in the year
Year ended 31 March 2014
Net cash flow from operating activities
Net cash flow from/(used in) investing activities
Net cash flow (used in)/from financing activities
Net (decrease)/increase in cash and cash equivalents in the year

57
502
(555)
4

38
2,103
(2,169)
(28)

52
1,358
(1,724)
(314)

580
(440)
(148)
(8)

531
(393)
(145)
(7)

581
(555)
(18)
8

–
13
(13)
–

–
–
–
–

1,743
(506)
(1,248)
(11)

1,575
(603)
(959)
13

1,717
(91)
(1,632)
(6)

2,988
(1,736)
(1,233)
19

2,863
(1,051)
(2,037)
(225)

1,669
(993)
(647)
29

–
(1,869)
1,869
–

–
(2,057)
2,057
–

–
(1,049)
1,049
–

5,368
(4,036)
(1,328)
4

5,007
(2,001)
(3,253)
(247)

4,019
(1,330)
(2,972)
(283)

Cash dividends were received by National Grid plc from subsidiary undertakings amounting to £930m during the year ended 31 March 2016
(2015: £1,355m; 2014: £1,050m).

Maturity analysis of parent Company borrowings

Total borrowings are repayable as follows:

Less than 1 year
In 1 to 2 years
In 2 to 3 years
In 3 to 4 years
In 4 to 5 years
More than 5 years

2016
£m

933
–
482
395
–
317
2,127

2015
£m

1,068
–
–
443
360
314
2,185

167

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsCompany 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
National Grid plc is the parent company of the National Grid Group
which is engaged in 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 following exemptions from the requirements of IFRS have
been applied in the preparation of these financial statements
of the Company in accordance with FRS 101:

• a cash flow statement and related notes;
• disclosures in respect of transactions with wholly

owned subsidiaries;

The financial statements of National Grid plc for the year ended
31 March 2016 were approved by the Board of Directors on
18 May 2016. The Company meets the definition of a qualifying
entity under Financial Reporting Standard 100 (FRS 100) issued
by the Financial Reporting Council. Accordingly these individual
financial statements of the Company were prepared in accordance
with Financial Reporting Standard 101 ‘Reduced Disclosure
Framework’ (FRS 101). In preparing these financial statements the
Company applies the recognition and measurement requirements
of International Financial Reporting Standards (IFRS) as adopted
by the EU, but makes amendments where necessary in order to
comply with the provisions of the Companies Act 2006 and sets
out below where advantage of the FRS 101 disclosure exemptions
has been taken.

These individual financial statements for the year ended 31 March
2016 are the first prepared in accordance with FRS 101. Accordingly
the date of transition is 1 April 2014. The 2015 comparative financial
information has also been prepared on this basis.

There were no material measurement or recognition adjustments
on the adoption of FRS 101.

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.

These individual financial statements have been prepared on a
going concern basis, which presumes that the Company has
adequate resources to remain in operation, and that the Directors
intend it to do so, for at least one year from the date the financial
statements are signed. As the Company is part of a larger group it
participates in the Group’s centralised treasury arrangements and
so shares banking arrangements with its subsidiaries. The Company
is expected to continue to generate positive cash flows or be in
a position to obtain finance via intercompany loans to continue to
operate for the foreseeable future.

The Directors are not aware of any material uncertainties related
to events or conditions that may cast significant doubt upon the
Company’s ability to continue as a going concern. Thus they continue
to adopt the going concern basis of accounting in preparing the
annual financial statements.

The Company has not presented its own income statement or
statement of comprehensive income as permitted by section 408
of the Companies Act 2006.

• disclosures in respect of capital management;
•

the presentation of a third balance sheet (being the opening
balance sheet of the Company at the date of application of
FRS 101); and
the effects of new but not yet effective IFRSs.

•

As the consolidated financial statements of National Grid plc,
which are available from the registered office, include the equivalent
disclosures, the Company has also taken the exemptions under
FRS 101 in respect of certain disclosures required by IFRS 13
‘Fair value measurement’ and the disclosures required by IFRS 7
‘Financial instruments: disclosures’. The Company intends to apply
the above exemptions in the financial statements for the year ending
31 March 2017.

There are no critical areas of judgement that are considered to
have a significant effect on the amounts recognised in the financial
statements. 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
the valuation of financial instruments and derivatives.

The balance sheet has been prepared in accordance with the
Company’s accounting policies approved by the Board and
described below:

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. Tax
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 temporary 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 temporary differences reverse based on tax rates
and tax laws that have been enacted or substantively enacted by
the balance sheet date. 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 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.

168

National Grid Annual Report and Accounts 2015/16

Financial Statements

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 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 13, 15, 17, 18, 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 33 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 15 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.

J. Directors’ remuneration
Full details of Directors’ remuneration are disclosed on pages
68 to 81.

169

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsCompany 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 (liabilities)/assets
Total assets less current liabilities

Creditors (amounts falling due after more than one year)
Net assets

Equity
Share capital
Share premium account
Cash flow hedge reserve
Available-for-sale reserve
Other equity reserves
Profit and loss account
Total shareholders’ equity

Notes

2016
£m

2015
£m

8,845

8,823

2
2
5

11,796
475
1,244
1
13,516

11,767
489
750
–
13,006

(13,851)
(335)
8,510

(12,607)
399
9,222

(3,538)
4,972

(3,425)
5,797

447
1,326
17
–
302
2,880
4,972

443
1,331
17
–
280
3,726
5,797

The notes on pages 172 and 173 form part of the individual financial statements of the Company, which were approved by the Board of
Directors on 18 May 2016 and were signed on its behalf by:

Sir Peter Gershon Chairman
Andrew Bonfield Finance Director

National Grid plc
Registered number: 4031152

170

National Grid Annual Report and Accounts 2015/16

Financial Statements

Company statement of changes in equity
for the years ended 31 March

At 1 April 2014
Profit for the year
Other comprehensive income/(loss)
Transferred from equity in respect of cash flow hedges (net of tax)
Net losses taken to income statement
Other equity movements
Scrip dividend related share issue1
Purchase of treasury shares
Issue of treasury shares
Purchase of own shares
Share awards to employees of subsidiary undertakings
Dividends paid to equity shareholders
At 31 March 2015
Profit for the year
Other equity movements
Scrip dividend related share issue1
Purchase of treasury shares
Issue of treasury shares
Purchase of own shares
Share awards to employees of subsidiary undertakings
Dividends paid to equity shareholders

Share
capital
£m
439
–

Share
premium
account
£m
1,336
–

Cash flow
hedge
reserve
£m
20
–

Available-
for-sale
reserve
£m
1
–

Other
equity
reserves
£m
260
–

Profit
and loss
account
£m
4,138
1,181

–
–

4
–
–
–
–
–
443
–

4
–
–
–
–
–

–
–

(5)
–
–
–
–
–
1,331
–

(5)
–
–
–
–
–

(3)
–

–
–
–
–
–
–
17
–

–
–
–
–
–
–

–
(1)

–
–
–
–
–
–
–
–

–
–
–
–
–
–

–

–
–

–
–
–
–
20
–
280
–

–
–
–
–
22
–

302

–
–

–
(338)
23
(7)
–
(1,271)
3,726
748

–
(267)
16
(6)
–
(1,337)

2,880

At 31 March 2016

447

1,326

1. Included within share premium account are costs associated with scrip dividends.

Total
equity
£m
6,194
1,181

(3)
(1)

(1)
(338)
23
(7)
20
(1,271)
5,797
748

(1)
(267)
16
(6)
22
(1,337)

4,972

171

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsNotes to the Company financial statements

1. Fixed asset investments

At 1 April 2014
Additions
At 31 March 2015
Additions
At 31 March 2016

Shares in
subsidiary
undertakings
£m
8,803
20
8,823
22
8,845

During the year there was a capital contribution of £22m (2015: £20m) which represents the fair value of equity instruments granted to
subsidiaries’ employees arising from equity-settled employee share schemes.

The names of the subsidiary undertakings, joint ventures and associates are included in note 32 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

The carrying values stated above are considered to represent the fair values of the assets.

3. Creditors

Amounts falling due within one year
Borrowings (note 6)
Derivative financial instruments (note 4)
Amounts owed to subsidiary undertakings
Corporation tax payable
Other creditors

Amounts falling due after more than one year
Borrowings (note 6)
Derivative financial instruments (note 4)
Amounts owed to subsidiary undertakings1
Deferred tax

2016
£m

279
11,516
1
11,796

157
318
475

2015
£m

281
11,484
2
11,767

148
341
489

2016
£m

2015
£m

933
239
12,633
3
43
13,851

1,194
358
1,982
4
3,538

1,068
289
11,208
3
39
12,607

1,117
411
1,894
3
3,425

1. All amounts owed to subsidiary undertakings in 2015 and 2016 are repayable after five years.

The carrying values stated above are considered to represent the fair values of the liabilities. A reconciliation of the movement in deferred tax
in the year is shown below:

At 1 April 2014
Charged to the profit and loss account
Credited to equity
At 31 March 2015
Charged to the profit and loss account
At 31 March 2016

Deferred
tax
£m
3
1
(1)
3
1
4

172

National Grid Annual Report and Accounts 2015/16

Financial Statements

2016
Liabilities
£m
(239)
(358)
(597)

Assets
£m
279
157
436

Total
£m
40
(201)
(161)

Assets
£m
281
148
429

2015
Liabilities
£m
(289)
(411)
(700)

Total
£m
(8)
(263)
(271)

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

For each class of derivative the notional contract1 amounts are as follows:

Interest rate swaps
Cross-currency interest rate swaps
Foreign exchange forward contracts

1. 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 balances – collateral

6. Borrowings
The following table analyses the Company’s total borrowings:

Amounts falling due within one year
Bank overdrafts
Bank loans
Bonds
Commercial paper

Amounts falling due after more than one year
Bonds

2016
£m

(2,442)
(3,537)
(14,361)
(20,340)

2015
£m

(2,499)
(3,529)
(13,708)
(19,736)

2016
£m

1,007
–
237
1,244

2015
£m

217
252
281
750

2016
£m

2015
£m

–
28
21
884
933

1,194
2,127

13
28
70
957
1,068

1,117
2,185

The maturity of total borrowings is disclosed in note 34 to the consolidated financial statements. There are no differences in the maturities
as calculated under IFRS or FRS 101 ‘Reduced Disclosure Framework’.

The notional amount of borrowings outstanding as at 31 March 2016 was £2,101m (2015: £2,157m). Further information on significant
borrowings can be found on the debt investors section of our website.

7. Share capital
The share capital amounting to £447m (2015: £443m) consists of 3,924,038,086 (2015: 3,891,691,900) ordinary shares. For further information
on share capital, refer to note 24 to the consolidated financial statements.

8. Shareholders’ equity and reserves
At 31 March 2016 the profit and loss account reserve stood at £2,880m (2015: £3,726m) of which £86m (2015: £86m) related to gains
on intra-group transactions which was not distributable to shareholders.

For further details of dividends paid and payable to shareholders, refer to note 8 to the consolidated financial statements.

9. 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 2016, the sterling equivalent amounted to £2,674m (2015: £2,593m). The
guarantees are for varying terms from less than one year to open-ended.

10. Audit fees
The audit fee in respect of the parent Company was £28,380 (2015: £27,553). Fees payable to PricewaterhouseCoopers LLP for non-audit
services to the Company are not required to be disclosed as they are included within note 3 to the consolidated financial statements.

173

Financial StatementsNational Grid Annual Report and Accounts 2015/16Financial StatementsAdditional Information contents

174 The business in detail
174 Key milestones
175 Where we operate
176 UK regulation
178 US regulation

183 Internal control and risk factors
183 Disclosure controls
183 Internal control over financial reporting
183 Risk factors

187 Shareholder information
187 Articles of Association
188 Depositary payments to the Company
188 Description of securities other than equity
securities: depositary fees and charges

188 Documents on display
188 Events after the reporting period
188 Exchange controls
189 Exchange rates
189 Material interests in shares
189 Share capital
190 Share price
190 Shareholder analysis
190 Taxation

193 Other disclosures
193 All-employee share plans
193 Change of control provisions
193 Code of Ethics
193 Conflicts of interest
193 Corporate governance practices: differences
from New York Stock Exchange (NYSE)
listing standards
194 Directors’ indemnity
194 Employees
194 Human rights
194 Listing Rule 9.8.4 R cross reference table
194 Material contracts
194 Political donations and expenditure
194 Property, plant and equipment
194 Research and development
195 Unresolved SEC staff comments

196 Other unaudited financial information

200 Summary consolidated financial information

202 Further information regarding financial KPIs

and other performance measures

203 Definitions and glossary of terms

207 Want more information or help?

The business in detail

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

British Gas (BG) privatisation

1990

Electricity transmission network in England and Wales
transferred to National Grid on electricity privatisation

1995

National Grid listed on the London Stock Exchange

1997

Centrica demerged from BG

Energis demerged from National Grid

2000

Lattice Group demerged from BG and listed separately

New England Electric System and Eastern Utilities
Associates acquired

2002

Niagara Mohawk Power Corporation merged
with National Grid in US

National Grid and Lattice Group merged to
form National Grid Transco

2004

2005

UK wireless infrastructure network acquired from
Crown Castle International Corp

Four UK regional gas distribution networks sold
and National Grid adopted as our name

2006

Rhode Island gas distribution network acquired

2007

UK and US wireless infrastructure operations and
the Basslink electricity interconnector in Australia sold

KeySpan Corporation acquired

2008

Ravenswood generation station sold

2010

Rights issue raised £3.2 billion

2012

New Hampshire electricity and gas distribution
businesses sold

174

National Grid Annual Report and Accounts 2015/16

Additional Information

Where we operate
Our UK network

to/from
Northern Ireland

to Ballylumford

to Dublin
Barrow

to/from Ireland

Burton Point

South Hook

Dragon

St. Fergus

Teesside

Easington

Theddlethorpe

from the
Netherlands

Bacton

to/from
Belgium

UK Transmission1

Scottish electricity transmission system

English and Welsh electricity
transmission system

Approximately 7,200 kilometres (4,470 miles)
of overhead line, 1,500 kilometres (932 miles)
of underground cable and 338 substations.

Gas transmission system

Approximately 7,660 kilometres (4,760 miles)
of high pressure pipe and 24 compressor
stations connecting to eight distribution networks
and also other third-party independent systems.

Terminal

LNG terminal owned by National Grid

LNG terminal

Electricity interconnector

Gas interconnector

UK Gas Distribution1

Gas distribution operating area

Approximately 131,000 kilometres
(81,400 miles) of gas distribution pipeline
owned and operated by National Grid.2

The Company has commenced a process for
the potential sale of a majority stake in its UK
Gas Distribution business, as announced on
10 November 2015 in our half-year results.

Principal ofﬁces

BritNed to/from
the Netherlands

Owned ofﬁce space:

Hinckley, Warwick and Wokingham

Grain LNG

to/from
France

Our US network

Canada

Vermont

Maine

New Hampshire

New York

Massachusetts

Connecticut

Rhode Island

Pennsylvania

New Jersey

At present, environmental issues are not preventing our UK and US businesses from utilising any material operating assets in the course
of their operations.

1 Access to electricity and gas transmission and distribution assets on property owned by others is controlled through various agreements.

2 As submitted by the Company in its 2014/15 Gas Distribution Regulatory Reporting Pack.

Leased ofﬁce space:
Solihull and London

Leased ofﬁce space totalling 15,122 square
metres (162,771 square feet) with remaining
terms of 3 months to 10 years.

US Regulated1

Electricity transmission network

Gas distribution operating area

Electricity distribution area

Gas and electricity distribution

area overlap

An electricity transmission network of
approximately 14,145 kilometres (8,789 miles)
of overhead line, 174 kilometres (108 miles)
of underground cable and 491 transmission
substations.

An electricity distribution network of
approximately 116,645 circuit kilometres
(72,480 miles) and 668 distribution substations
in New England and upstate New York.

A network of approximately 56,491 kilometres
(35,102 miles) of gas pipeline serving an area
of approximately 25,597 square kilometres
(9,883 square miles). Our network also consists
of approximately 790 kilometres (491 miles)
of gas transmission pipe, as deﬁned by the
US Department of Transportation.

Generation

Principal ofﬁces

Owned ofﬁce space:
Syracuse, New York

Leased ofﬁce space:
Brooklyn, New York and
Waltham, Massachusetts

Leased ofﬁce space totalling approximately
52,676 square metres (567,000 square feet)
with remaining terms of 9 to 13 years.

The business in detail

175

Additional InformationNational Grid Annual Report and Accounts 2015/16

The business in detail continued

UK Regulation
Our licences are established under the Gas Act 1986 and Electricity
Act 1989, as amended (the Acts). They 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 (GB). They also give us statutory powers. These include
the right to bury our pipes or cables under public highways and
the ability to use compulsory powers to purchase land so we can
conduct our business.

Our networks are regulated by Ofgem, which has established price
control mechanisms that set the amount of revenue our regulated
businesses can earn. Price control regulation is designed to make
sure our interests, as a monopoly, are balanced with those of our
customers. Ofgem allows us to charge reasonable, but not excessive,
prices. This gives us a future level of revenue that is sufficient to meet
our statutory duties and licence obligations, and makes a reasonable
return on our investment.

The price control includes a number of mechanisms designed to
help achieve its objectives. These include financial incentives that
encourage us to:

• efficiently deliver by investment and maintenance the network
outputs that customers and stakeholders require, including
reliable supplies, new connections and infrastructure capacity;
innovate in order to continuously improve the services we give
our customers, stakeholders and communities; and

•

• efficiently balance the transmission networks to support the

wholesale markets.

Our UK Electricity Transmission (UK ET), UK Gas Transmission
(UK GT) and UK Gas Distribution (UK GD) businesses operate under
eight separate price controls in the UK. These comprise two for our
UK ET operations, one covering our role as transmission owner (TO)
and the other for our role as system operator (SO); two for our UK GT
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, there is also a tariff cap price
control applied to certain elements of domestic metering and daily
meter reading activities carried out by National Grid Metering.

Interconnectors derive their revenues from sales of capacity to users
who wish to move power between market areas with different prices.
These sales revenues are called congestion revenues because
market price differences result from the congestion on the finite
interconnector capacity, which limits full price convergence. European
legislation governs how congestion revenues may be used and how
interconnection capacity is allocated. It requires all interconnection
capacity to be allocated to the market through auctions.

There are a range of different regulatory models available for
interconnector projects. These involve various levels of regulatory
intervention ranging from fully merchant (the project is fully reliant
on sales of interconnector capacity) to cap and floor (where sales
revenues above the cap are returned to transmission system users
and revenues below the floor are topped up by transmission system
users, thus reducing the overall project risk).

The cap and floor regime is now the regulated route for interconnector
investment in GB, which sits alongside the exemption route (whereby
project developers apply for exemptions from aspects of European
legislation).

RIIO price controls
On 1 April 2013, Ofgem introduced a new regulatory framework
called RIIO (revenue = incentives + innovation + outputs), with the first
price control agreed under the new framework lasting 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 influence the decisions.

There are six output categories:

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 (UK GD 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 we have submitted, along with independent
assessments, determines the efficient level of expected costs
necessary to deliver them. Under RIIO this is known as totex, which
is a component of total allowable expenditure, and is the sum of what
was defined in previous price controls as operating expenditure
(opex), capital expenditure (capex) and, in UK GD controls, mains
replacement expenditure (repex).

A number of assumptions are necessary in setting these outputs,
such as certain prices or the volumes of work that will be needed.
Consequently, 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. These mechanisms
protect us and our customers from windfall gains and losses.

Where we under- or over-spend the allowed totex for reasons that
are not covered by uncertainty mechanisms, there is a sharing factor.
This means the under- or over-spend is shared between us and
customers through an adjustment to allowed revenues in future years.
This sharing factor provides an incentive for us to provide the outputs
efficiently, as we are able to keep a portion of savings we make,
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
has an impact on everyone in our business.

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Additional Information

Allowed revenue to fund totex costs are split between fast and slow
money – a concept under RIIO, based on a specified percentage
that is fixed for the duration of the price control (except for UK GD’s
repex which changes on a linear scale across the price control). Fast
money represents the amount of totex we are able to recover in the
next available year. Slow money is added to our RAV – effectively the
regulatory IOU. For more details on the sharing factors under RIIO,
please see the table below.

In addition to fast money, in each year we are allowed to recover
a portion of the RAV (regulatory depreciation) and a return on the
outstanding RAV balance.

The asset life for regulatory depreciation in electricity transmission
spans 45 years across the RIIO period. This is also the case for the
asset life depreciation for UK GD. 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 incentive mechanisms that encourage
us 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. Most of our incentives affect our
revenues two years after the year of performance.

RIIO regulatory building blocks
RIIO regulatory building blocks

Totex

(capital invested
+ controllable
operating costs)

RAV
(slow money)

Allowed return

Depreciation
of RAV

Fast money

R
e
v
e
n
u
e

Other costs
e.g. tax

Performance
against incentives

Allowed returns
The cost of capital allowed under RIIO is as follows:

Transmission

Gas Distribution

The RIIO controls for both our transmission and gas distribution
businesses were introduced on 1 April 2013 and the first price control
period lasts for eight years. During the eight year period our regulator
included a provision for a potential mid-period review, with scope
driven by:

Cost of equity (post-tax real)
Cost of debt (pre-tax real)

Notional gearing
Vanilla WACC1

Gas
Electricity
7.0%
6.8%
iBoxx 10-year simple trailing average index
(2.55% for 2015/16)
60.0%
4.33%

62.5%
4.14%

65.0%
4.01%

6.7%

• changes to outputs that can be justified by clear changes

•

in government policy; and
the introduction of new outputs that are needed to meet
the needs of consumers and other network users.

In November 2015, Ofgem launched a consultation on a potential
RIIO-T1 and GD1 mid-period review.

Under the RIIO controls, we are required to deliver agreed outputs
for consumers and are funded to cover the costs of delivering
these. The eight year price control includes a number of uncertainty
mechanisms to take account of the fact that some outputs and
funding cannot be set with certainty at the start of the period. One of
these uncertainty mechanisms is the review of outputs. In May 2016,
Ofgem decided to launch a mid-period review focusing on the
transmission outputs.

Sharing factors under RIIO are as follows:

1. Vanilla WACC = cost of debt x gearing + cost of equity x (1-gearing).

The sharing factor means that any over- and under-spend is
shared between the businesses and consumers. The shared figures
displayed in the table below are the sharing factors that apply
to UK ET, UK GT and UK GD.

For more information on RIIO, including incentive mechanisms, please
see the relevant investor fact sheets on the Investor Relations section
of our website.

Gas Transmission

Electricity Transmission

Gas Distribution

Transmission
Operator

System
Operator

Transmission
Operator

System
Operator

Baseline3 35.6%
Uncertainty 10% 62.60%

15.00%

72.10%

Baseline3 64.4%
Uncertainty 90% 37.40%

85.00%

27.90%

London

East of
England

West
Midlands

North
West
Repex:
Stepped decline from 50% in 2013/14 to 0% in 2020/21
in seven equal instalments of 7.14% per annum
73.90%
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%

73.37%

75.05%

24.95%

76.53%

23.47%

44.36%

46.89%

63.04%

Fast1

Slow2
Sharing

1. Fast money allows network companies to recover a percentage of total expenditure within a one year period.
2. Slow money is where costs are added to RAV and, therefore, revenues are recovered slowly (e.g. over 20 years) from both current and future consumers.
3. The baseline is the expenditure that is funded through ex-ante allowances, whereas the uncertainty adjusts the allowed expenditure automatically where the level outputs delivered

differ from the baseline level, or if triggered by an event.

The business in detail

177

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The business in detail continued

US Regulation
Regulators
In the US, public utilities’ retail transactions are regulated by state
utility commissions. The commissions serve as economic regulators,
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. They also serve the public interest
by making sure utilities provide safe and reliable service at just and
reasonable prices. The commissions establish service standards
and approve public utility mergers and acquisitions.

Utilities are regulated at the federal level (FERC) for wholesale
transactions, such as interstate transmission and wholesale electricity
sales, including rates for these services. FERC also regulates public
utility holding companies and centralised service companies,
including those of our US businesses.

Regulatory process
The US regulatory regime is premised on allowing the utility the
opportunity to recover its cost of service and earn a reasonable return
on its investments as determined by the commission. Utilities submit
formal rate filings (‘rate cases’) to the relevant state regulator when
additional revenues are necessary to provide safe, reliable service
to customers. Utilities can be compelled to file a rate case due
to complaints filed with the commission or at the commission’s
own discretion.

The rate case is typically litigated with parties representing customer
and other interests. In the states in which we operate, it can take nine
to thirteen months for the commission to render a final decision. The
utility is required to prove that the requested rate change is prudent
and reasonable, and the requested rate plan 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.

Gas and electricity rates are established from a revenue requirement,
or cost of service, equal to the utility’s total cost of providing
distribution or delivery service to its customers, as approved by the
commission in the rate case. This revenue requirement includes
operating expenses, depreciation, taxes and a fair and reasonable
return on shareholder capital invested in certain components of the
utility’s regulated asset base, typically referred to as its rate base.

The final revenue requirement and rates for service are 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 and may include forecasted capital investments and
operating costs.

US regulatory revenue requirement

Capex and RoE

Cost of service

X allowed
RoE

RoE

Interest

X cost
of debt

A Rate base
B Debt
C Equity
D Return
E Controllable costs

F Non-controllable costs
G Depreciation
H Taxes
I Lagged recoveries
J Allowed revenue

Our rate plans
Each operating company has a set of rates for service. We have three
electric distribution operations (upstate New York, Massachusetts
and Rhode Island) and six gas distribution networks (upstate New York,
New York City, Long Island, Massachusetts (two) and Rhode Island).

Our operating companies have revenue decoupling mechanisms that
de-link the companies’ revenues from the quantity of energy delivered
and billed to customers. These mechanisms remove the natural
disincentive utility companies have for promoting and encouraging
customer participation in energy efficiency programmes that lower
energy end use and thus distribution volumes.

Our rate plans are designed to 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, achieved 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.

One measure used to monitor the performance of our regulated
businesses is a comparison of achieved RoE to allowed RoE.
However, this measure cannot be used in isolation, as there are a
number of factors that may prevent us from achieving the allowed
RoE. These factors include financial market conditions, regulatory
lag and decisions by the regulator preventing cost recovery in rates
from customers.

We work to increase achieved RoE through: productivity
improvements; positive performance against incentives or earned
savings mechanisms such as energy efficiency programmes, where
available; and filing a new rate case when achieved returns are lower
than the Company could reasonably expect to attain through a new
rate case.

Features of our rate plans
We bill 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. With the exception of residential gas customers in
Rhode Island, our customers are allowed to select an unregulated
competitive supplier for the supply component of electricity and gas
utility services.

A substantial proportion of our costs, in particular electricity and gas
commodity purchases, 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 make sure that any over- or under-recovery of these costs
is returned to, or recovered from, our customers.

Our FERC-regulated transmission companies use formula rates
(instead of rate cases) to set rates annually to recover their cost of
service. Through the use of annual true-ups, formula rates recover
our actual costs incurred and the allowed RoE based on the actual
transmission rate base each year. The Company must make annual
formula rate filings documenting the revenue requirement, which
customers can review and challenge.

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.

178

National Grid Annual Report and Accounts 2015/16

Additional Information

Our Long Island generation plants sell capacity to LIPA under 15-year
and 25-year power supply agreements, and within wholesale tariffs
approved by FERC. Through the use of cost based formula rates,
these long-term contracts provide a similar economic effect to cost
of service rate regulation.

US regulatory filings
The objectives of our rate case filings are to make sure we have
the right cost of service, with the ability to earn a fair and reasonable
rate of return while providing safe, reliable and economical 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
true-ups, separately from base rates. These terms are explained
below the table on page 182.

Below, we summarise significant developments in rate filings and
the regulatory environment during the year. We completed the final
stabilisation upgrade to our new financial systems in July 2014.
With 12 months of historical ‘test year’ data available from the
stabilised financial systems, we commenced a new round of full
rate case filings, starting with the filing for Massachusetts Electric in
November 2015, and followed by the filings for KEDNY and KEDLI in
January 2016. We expect to make a number of such filings over the
next two to three years to update the capital investment allowances
and rate bases across many of our businesses. These filings are
expected to capture the benefit of recent increased investments
in asset replacement and network reliability, and reflect long-term
growth in costs, including property tax and healthcare costs. Along
with a clear focus on productivity, the filings are key to improving
achieved returns in the Company’s US distribution activities.

Moreover, as part of current regulatory initiatives, we filed a proposal
for investments in grid modernisation in Massachusetts and anticipate
a similar proposal for innovative technology deployments and service
offerings as part of the Reforming the Energy Vision (REV) effort in
New York in 2016.

Massachusetts
Massachusetts electric rate case
On 6 November 2015, we filed a one-year rate plan for our
Massachusetts electric business to take effect from 1 October 2016,
which was updated on 29 April 2016. The updated rate case filing
requests an annualised net increase in distribution revenue of
approximately $137 million. The filing includes a request to increase
annual capital investment subject to the capital investment recovery
mechanism from $170 million to $285 million, and to include property
tax recovery on incremental capital placed in service. The filing also
requests an increase in annual base rate funding of the storm fund
mechanism from $4.3 million to $14 million, and a 14-month extension
of the incremental funding to address the storm fund’s deficit, created
by weather events occurring through February 2015. The filing is
based on an RoE of 10.5% and a capital structure of 52% equity
and 48% debt.

Capital investment programmes
On the gas side, on 30 October 2015, we filed the second plan in a
20-year programme to replace ageing gas infrastructure by receiving
concurrent cost recovery for eligible capital investments. On 29 April
2016, MADPU approved our proposal to place an additional $28.9
million into rates effective from 1 May 2016, related to $219 million
of anticipated investments in 2016 under this accelerated pipe
replacement plan. The Company filed the reconciliation of the 2015
investments on 29 April 2016. Additionally, the Company continues
to recover costs associated with its pre-existing leak prone pipe
replacement programme outside of base rates until the next rate
case, including the submittal of a proposal to begin recovery of an
additional $4.1 million of incremental revenue requirement effective
from 1 November 2016.

Storm fund recovery
The Massachusetts electricity business collects $4.3 million annually
in base rates to credit towards a storm fund devoted to fund major
storm response and restoration efforts. The severity and frequency of
storms in Massachusetts between February 2010 and February 2016
resulted in approximately $252 million of incremental storm-related
costs as at 31 March 2016.

MADPU allowed us to begin collecting $40 million annually for three
years beginning on 4 May 2013, and an additional $7.6 million from
1 July 2014, towards the replenishment of the storm fund. This
annual recovery was further extended through 4 August 2016.
Ultimate recovery of the storm costs is subject to a prudency review
by MADPU of the underlying costs. The Company expects an order
on the prudency of $213 million of storm-related costs from the
February 2010 through March 2013 storm events by August 2016.
As explained above, in the Massachusetts electric rate case, we
proposed to collect the deficit created by storm events through
February 2015, subject to a prudency review, and increase the annual
base rate funding of the storm fund. Recoverable costs associated
with storm events after February 2015 are deferred for future recovery
and subject to future prudency review.

Grid modernisation
In response to a 2014 regulatory requirement, the Company filed
a Massachusetts electricity grid modernisation plan on 19 August
2015 that proposed multiple investment options that would further
MADPU’s goals of reducing the effect of outages, optimising demand,
integrating distributed resources, and improving workforce and asset
management. The Company presented a range of investment options
for MADPU to consider, with investment levels over five years ranging
from $225 million to $831 million. MADPU established criteria that,
if met, would allow the capital costs from the plan to be recovered
through a separate capital recovery mechanism. MADPU initiated
its review of the Company’s plan in April 2016.

New York
Upstate New York 2015 petition to use deferred credits
to fund capital expenditures
With the three-year rate plan for Niagara Mohawk’s electricity
and gas businesses expiring on 31 March 2016, in December
2015, we filed a petition with NYPSC to use up to $124 million and
$27 million of deferred credits associated with its electricity and gas
operations, respectively, to fund incremental capital expenditures
for those businesses in 2017 and 2018 above the capital allowances
in the expiring rate plan. The Company expects an order in May
or June 2016.

Reforming the Energy Vision (REV)
In April 2014, NYPSC instituted the REV proceeding, which envisions
a new role for utilities as distributed system platform (DSP) providers
who create markets for distributed energy resources (DER) and more
fully integrate DER in distribution system operations and planning.
The REV proceeding’s objectives include: enhanced customer energy
choices and control; improved electricity system efficiency, reliability,
and resiliency; and cleaner, more diverse electricity generation.

NYPSC is expected to issue an order in 2016 to address rate-making
issues under REV, including opportunities for outcome-based
shareholder incentive mechanisms, market-based earnings, changes
to rate design, DER compensation and the rate-making process.
The Company’s first five-year distributed system implementation
plan is expected to be filed in June 2016 and will identify incremental
investments in utility infrastructure necessary for implementation
of the DSP role and greater DER integration.

The business in detail

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KEDLI gas investment plan
In June 2014, KEDLI petitioned NYPSC for approval of a deferral
mechanism related to a proposed gas infrastructure investment
programme. In December 2014, NYPSC approved two gas
investment plans for 2015 and 2016, one for leak-prone pipe capital
expenditures (capped at $211.7 million in total) and one for gas
service expansion expenditures (capped at $202.7 million in total).

Rhode Island
Rhode Island electricity and gas infrastructure, safety and
reliability (ISR) plans
State law provides our Rhode Island gas and electricity operating
divisions with rate mechanisms that allow for the recovery of capital
investment, including a return, and certain expenses outside base
rate proceedings through the submission of annual ISR plans.

NYPSC approved a surcharge to begin recovery of the deferred
leak-prone pipeline investment costs, allowing for the recovery up to
a total of $23.4 million through a surcharge effective from 1 April 2015
until the end of 2016. KEDLI received approval to establish a new
deferral accounting mechanism for the balance of the approved
costs not covered by the surcharge.

KEDNY gas investment plan and site investigation
and remediation (SIR) surcharge
In October 2015, NYPSC approved KEDNY’s petition to extend
its capital investment recovery mechanism and reconciliation
period for two more years through 2016 and to use a deferred
credit balance from underspending in 2013 and 2014 to offset
the revenue requirement associated with over $870 million of total
capital investment in 2015 and 2016 (compared with a total capital
allowance of roughly $614 million for 2013 and 2014). Also in October
2015, NYPSC approved KEDNY’s petition to increase its current
SIR surcharge by $37.5 million annually, effective from 1 November
2015, to offset its SIR deferral balances.

KEDNY and KEDLI rate cases
On 29 January 2016, KEDNY and KEDLI filed base rate cases
with NYPSC to increase their delivery revenues by $245 million and
$142 million, respectively, with new rates expected to come into effect
in early 2017. The cases include capital investment of approximately
$610 million for KEDNY and $340 million for KEDLI for 2017. The rate
case filings maintain tracker and true-up mechanisms for property
taxes, commodity-related bad debt, and pension/OPEBs and seek to
establish reconciling mechanisms for city/state construction-related
costs and SIR recovery surcharge/tracker mechanisms.

KEDNY and KEDLI filed one year cases, but submitted two additional
years of data to facilitate a multi-year settlement. The filings are based
on a RoE of 9.94% (plus 50 basis points for a stay-out premium for
a multi-year rate plan) and a 48% equity ratio.

Operations staffing audit
In January 2014, NYPSC initiated an operational audit to review
internal staffing levels and use of contractors for the core utility
functions of the investor owned utilities in New York, including
Niagara Mohawk, KEDNY and KEDLI. The focus of the audit is
on electricity and gas operations and network strategy functions,
and includes a review of staffing levels, resource planning, work
management, overtime levels, contractor use and succession
planning. The final report is expected to be issued in July 2016.

RIPUC approved the fiscal year 2017 ISR plans on 25 February 2016.
The electricity ISR plan encompasses an $83.4 million spending
programme for capital investment and $10 million for operating and
maintenance expenses for vegetation management and inspection
and maintenance. The gas ISR plan encompasses $86.05 million
for capital investment and incremental operation and maintenance
expense for the hiring and training of additional personnel to support
increases in leak-prone pipe replacement.

Changing distribution system and modernisation of rates
On 3 March 2016, RIPUC opened a docket to investigate the
modernisation of rates in light of the changing electric distribution
system, including the costs and benefits of distributed energy
resources.

FERC
Complaints on New England transmission allowed RoE
In September 2011, December 2012 and July 2014, complaints were
filed with FERC against certain transmission owners, including our
New England electricity transmission business, to lower the base
RoE from the FERC approved rate of 11.14%. In a series of orders
addressing the first complaint, with the last order in March 2015,
FERC set the prospective base RoE at 10.57%, effective October
2014. FERC also found that the total, or maximum, RoE for our
New England transmission business, including various RoE incentive
adders authorised by FERC, cannot exceed 11.74%. In April and
May 2015 a number of parties, including the Company, appealed
FERC’s orders on the first complaint to US federal court. A US federal
court decision on these appeals is expected no earlier than late 2016.

On 22 March 2016, a FERC administrative law judge issued a
decision with non-binding preliminary findings in the second and third
complaint cases, setting the prospective base RoE at 10.9%, with a
maximum RoE of 12.19%. A FERC order acting on these preliminary
findings is not expected until the end of 2016 or early 2017.

On 29 April 2016, a fourth complaint was filed against the New England
electricity transmission businesses seeking to reduce their base RoE
and maximum RoE to 8.61% and 11.24% respectively. Resolution by
FERC of this latest complaint may take two years or longer.

New York Transco
In late 2014, the four New York investor-owned utilities, including
Niagara Mohawk Power Corporation, formed New York Transco,
LLC, a new high voltage electricity transmission development
company in New York State, and filed on behalf of New York Transco
an application with FERC to establish the financial terms for a portfolio
of five new transmission projects with a combined estimated total
cost of over $1.7 billion.

A number of entities intervened in the docket and challenged various
aspects of the application. In April 2015, FERC approved certain
elements of our filing (including some rate incentives), rejected others,
and set the remainder for hearing and settlement. In November 2015,
New York Transco reached a negotiated settlement on formula rate
issues for the first three transmission projects under construction
with an estimated cost of approximately $230 million.

The settlement included an RoE of 10% inclusive of 0.50% incentives.
FERC approved the settlement without modification on 17 March
2016. National Grid’s ownership interest in New York Transco is 28%.

180

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Additional Information

FERC Order 1000
Issued in 2011, Order 1000 was FERC’s major policy order intended
to foster regional and inter-regional transmission planning, address
transmission needs driven by public policy requirements and increase
competition in the electricity transmission industry. Policies to comply
with Order 1000 have been in effect in New York and New England
since January 2014 and May 2015 respectively. The competitive
transmission planning processes instituted under Order 1000 have
opened National Grid’s service territory to competition from non-
incumbent transmission developers and also created opportunities
for National Grid to compete for transmission projects outside of the
Company’s current geographic footprint.

In the first applications of the Order 1000 planning and competitive
solicitation processes in New York or New England, NYPSC has
identified two transmission needs in New York driven by public policy
goals. The first, in western New York, is intended to relieve congestion
and to maximise hydropower and Ontario imports. In December 2015,
National Grid submitted two competitive transmission proposals for
projects to address the need in western New York. In addition, NYPSC
identified a transmission need to allow greater flow of power from
upstate to downstate New York. Competitive proposals to meet this
transmission need were solicited in February 2016. National Grid
submitted a competitive transmission proposal in April 2016, with
project selection expected in 2016.

National Grid LNG LLC
On 1 April 2016, the Company filed an application seeking FERC
approval of a planned $180 million liquefaction facility at the
Providence, Rhode Island, LNG plant, with a FERC decision expected
by November 2016. The expected in-service date is December 2018.
Rates for the new liquefaction service will be cost-based formula rates
charged to customers who opt to take liquefaction service.

New England gas and electricity interdependency
New England’s gas and electricity systems have become increasingly
interdependent as the region’s reliance on gas-fired electricity generation
has grown without commensurate pipeline infrastructure expansion,
driving significant increases in the region’s wholesale and retail electricity
costs and electricity reliability concerns. To address this challenge, New
England’s governors are pursuing strategic infrastructure investments
focused on expanding the region’s energy portfolio.

Working with state representatives and our peer utilities, our
Massachusetts and Rhode Island electricity distribution companies
issued a multi-state solicitation for proposals for clean energy and
associated transmission infrastructure to increase the ability to deliver
low-carbon energy. Proposals were submitted on 28 January 2016,
including a proposal comprised of the Vermont Green Line being
developed by Anbaric and National Grid paired with renewable
energy generation.

A multi-year effort in coordination with representatives from several
states, other regional utilities, interstate gas pipelines, state regulators
and FERC led to a filing in January 2016 in Massachusetts by our
electricity distribution companies for approval of precedent agreements
to enter into gas interstate pipeline and storage capacity contracts with
the Access Northeast pipeline project sponsored by Spectra Energy.
The Company also plans to make a filing in Rhode Island in mid 2016
seeking approval of a similar contract on behalf of Narragansett
Electric Company.

With these contracts, our electricity distribution companies will secure
incremental pipeline capacity to release to electricity generators that
will both improve electricity reliability and lower electricity costs for
customers. National Grid is a co-developer, with a 20% stake, of the
Access Northeast project.

Formula rate transparency 206 proceeding
On 28 December 2015, FERC initiated a proceeding against National
Grid and other New England transmission owners under Section
206 of the Federal Power Act. FERC found that the tariff governing
electricity transmission service in New England lacks adequate
transparency and challenge procedures with regard to the formula
rates through which the Company recovers its costs and that the
formula rates appear to lack sufficient detail regarding certain
costs recovered. The parties are currently involved in settlement
negotiations to develop formula rate protocols and to address
FERC’s concerns about specific elements of the formula rate.

FERC financial audit of National Grid USA and affiliates
On 24 November 2015, FERC commenced a financial audit of
National Grid USA, including its service companies and other
affiliates, which covers the period from 1 January 2013 to the present.
The audit will evaluate compliance with the FERC's accounting,
record keeping and reporting requirements as well as interactions
among the service companies and affiliated operating companies.
Based on past audits, we expect the audit to last about 18 months.

The business in detail

181

Additional InformationNational Grid Annual Report and Accounts 2015/16The business in detail continued

Summary of US price controls and rate plans

New York
Public Service
Commission

Rate plan
Niagara Mohawk1
(upstate, electricity)
Niagara Mohawk
(upstate, gas)

KEDNY (downstate)2

KEDLI (downstate)3

Massachusetts
Department of
Public Utilities

Massachusetts Electric/
Nantucket Electric

Boston Gas

Colonial Gas

Rhode Island
Public Utilities
Commission

Narragansett Electric

Narragansett Gas

Federal Energy
Regulatory
Commission

Narragansett

Canadian
Interconnector

New England Power

Long Island Generation

1. Both transmission and distribution, excluding stranded costs.
2. KeySpan Energy Delivery New York (The Brooklyn Union Gas Company).
3. KeySpan Energy Delivery Long Island (KeySpan Gas East Corporation).

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$4,621m 48 : 52

9.3% 8.1%

$1,160m 48 : 52

9.3% 8.4%

$2,525m 48 : 52

9.4% 7.1%

$2,176m 45 : 55

9.8% 7.3%

$2,156m 50 : 50 10.35% 3.4%

$1,595m 50 : 50

9.75% 8.7%

$351m 50 : 50

9.75% 7.9%

$657m 49 : 51

9.5% 10.5%

$577m 49 : 51

9.5% 9.8%

$608m 50 : 50 10.57% 11.2% n/a

$11m 72 : 28

13.0% 13.0% n/a

$1,405m 64 : 36 10.57% 11.0%

n/a

$420m 46 : 54

9.9% 12.5% n/a

n/a

Rate filing made

Feature in place

New rates effective

P Feature partially in place

Rate plan ends

F Feature requested in pending filing

Rates continue indefinitely

Multi-year rate plan

†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.

§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.

‡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.

◊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.

182

National Grid Annual Report and Accounts 2015/16

Additional Information

Internal control and risk factors

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 2016. 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 Rules 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.

Management evaluation of the effectiveness of the Company’s
internal control over financial reporting was based on the revised
Internal Control-Integrated Framework (2013) 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 2016.

PricewaterhouseCoopers LLP, which has audited our consolidated
financial statements for the year ended 31 March 2016, has also
audited the effectiveness of our internal control over financial
reporting. Their attestation report can be found on page 93.

During the year, there were no changes in our internal control over
financial reporting that have materially affected, or are reasonably
likely to materially affect, it.

Risk factors
Management of our risks is an important part of our internal control environment, as we describe on pages 26 to 29. In addition to
the principal risks listed we face a number of inherent risks 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 inside back cover. An overview of the key inherent risks we face is provided below.

Risk factors

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 generation, transmission and distribution of
electricity and the storage, transmission and distribution of gas.

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.

A significant safety or environmental incident, or the failure of our
safety processes or of our occupational health plans, as well as the
breach of our regulatory or contractual obligations or our climate
change targets, could materially adversely affect our results of
operations and our reputation.

We commit significant resources and expenditure to process
safety and to monitoring personal safety, occupational health
and environmental performance, and to meeting our obligations
under negotiated settlements.

We are subject to laws and regulations in the UK and US governing
health and safety matters to protect the public and our employees
and contractors, who could potentially be harmed by these activities
as well as 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, including those inherited from predecessor bodies,
whether currently 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 to enable reduction
in energy use by our customers.

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 business, reputation, results of
operations and financial position.

Internal control and risk factors

183

Additional InformationNational Grid Annual Report and Accounts 2015/16Internal control and risk factors continued

Infrastructure and IT systems

We may suffer a major network failure or interruption, or may not be
able to carry out critical operations due to the failure of infrastructure,
data or technology or a lack of supply.
Operational performance could be materially adversely affected by
a failure to maintain the health of our assets or networks, inadequate
forecasting of demand, inadequate record keeping or control of
data or failure of information systems and supporting technology.

This in turn 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.

Where demand for electricity or gas exceeds supply and our
balancing mechanisms are not able to mitigate this fully, a lack
of supply to consumers may damage 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), unlawful or unintentional acts of third parties, insufficient
or unreliable supply or force majeure.

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.

If we fail to engage in the energy policy debate, we may not be able
to influence future energy policy and deliver our strategy.

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

(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 and of advancing energy

Business performance

Current and future business performance may not meet our
expectations or those of our regulators and 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.

Weather conditions can affect financial performance and severe
weather that causes outages or damages infrastructure together
with our actual or perceived response could materially adversely
affect operational and potentially business performance and our
reputation.

Malicious attack, sabotage or other intentional acts, including
breaches of our cyber security, may also damage our assets
(which include critical national infrastructure) or otherwise
significantly affect corporate activities and, as a consequence,
have a material adverse impact on our reputation, business,
results of operations and financial condition.

Unauthorised access to, or deliberate breaches of, our IT systems
may also lead to manipulation of 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.

technologies, 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.

Following the introduction of EMR, there has been an increased
focus (from some of our stakeholders) on the potential conflicting
duties of our transmission and system operator roles, which may
damage our reputation.

The remediation plans in place or being implemented to address
control weaknesses in our US business may not operate as
expected, as a result of which we may be unable to provide timely
regulatory reporting, which may include the provision of financial
statements. This could result in the imposition of regulatory fines,
penalties and other sanctions, which could impact our operations,
our reputation and our relationship with our regulators and other
stakeholders.

For further information see pages 176 to 182, which explain our
regulatory environment in detail.

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 to our US enterprise resource planning
systems and controls over financial reporting, or are not able to
deliver our RIIO operating model and the US rate plans strategy
successfully, 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.

184

National Grid Annual Report and Accounts 2015/16

Additional Information

Growth and business development activity

Failure to respond to external market developments and execute our
growth strategy may negatively affect our performance. Conversely,
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.
Failure to grow our core business sufficiently and have viable
options for new future business over the longer term or failure to
respond to the threats and opportunities presented by emerging
technology (including for the purposes of adapting our networks
to meet the challenges of increasing distributed energy resources)
could negatively affect the Group’s credibility and reputation and
jeopardise the achievement of intended financial returns.

Our business development activities and the delivery of our growth
ambition, include acquisitions, disposals, joint ventures, partnering
and organic investment opportunities such as development activities
relating to changes to the energy mix and the integration of distributed
energy resources and other advanced technologies. These are
subject to a wide range of both external uncertainties (including the

Cost escalation

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

Our results of operations could be affected by inflation or deflation.
In our regulated UK networks, our allowed revenues are set in real
terms and then adjusted for actual RPI inflation. There is a risk that
inflationary impacts on our costs are higher than RPI inflation and
are not fully compensated by this inflation adjustment to revenues.
There is also a risk that year-on-year RPI inflation is negative with no
corresponding decrease in costs or insufficient decrease to offset
the impact on revenues.

We may be required to make significant contributions to fund
pension and other post-retirement benefits.
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 DB 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 performance of the
scheme assets; future long-term bond yields; average life
expectancies; and relevant legal requirements.

availability of potential investment targets and attractive financing and
the impact of competition for onshore transmission in both the UK
and US) and internal uncertainties (including actual performance of
our existing operating companies and our business planning model
assumptions and ability to integrate acquired businesses effectively).
As a result, we may suffer unanticipated costs and liabilities and
other unanticipated effects.

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.

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.

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 the results of
our operations.

Actual performance of scheme assets may be affected by volatility
in debt and equity markets.

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 the results of our
operations and financial condition.

Internal control and risk factors

185

Additional InformationNational Grid Annual Report and Accounts 2015/16Internal control and risk factors continued

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. 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.

Customers and counterparties

Customers and counterparties may not perform their obligations.
Our operations are exposed to the risk that customers, suppliers,
banks and other 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 significant where our subsidiaries have concentrations of
receivables from gas and electricity utilities and their affiliates, such
as from our previous LIPA managed services agreement (MSA) and
current PSEG-LI transition services agreement, 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, including leadership and business capabilities,
values and behaviours required to deliver our strategy and vision
and ensure they are engaged to act in our best interests.
Our ability to implement our strategy depends on the capabilities
and performance of our employees and leadership at all levels of
the business. Our ability to implement our strategy and vision may
be negatively affected by the loss of key personnel or an inability
to attract, integrate, engage and retain appropriately qualified
personnel, or if significant disputes arise with our employees.

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.

The remediation plans in place or being implemented to address
control weaknesses in our US business may not operate as
expected, as a result of which we may be unable to provide
accurate financial information to our debt investors in a timely
manner.

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.

To the extent that counterparties are contracted with for physical
commodities (gas and electricity) and they experience events that
impact their own ability to deliver, we may suffer supply interruption
as described in Infrastructure and IT systems on page 184.

There is also a risk to us where we invest excess cash or enter into
derivatives and other financial contracts with banks or other financial
institutions. Banks who provide us with credit facilities may also fail
to perform under those contracts.

As a result, there may be a material adverse effect on our business,
financial condition, results of operations and prospects.

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 the results of our operations, our reputation and our
relationship with our regulators and other stakeholders.

186

National Grid Annual Report and Accounts 2015/16

Additional Information

Shareholder information

Articles of Association
The following description is a summary of the material terms of
our Articles and applicable English law. It is a summary only and
is qualified in its entirety by reference to the Articles.

Summary
The Articles set out the Company’s internal regulations. Copies
are available on our website and upon request. Amendments to the
Articles have to be approved by at least 75% of those voting at a
general meeting of the Company. Subject to company law and the
Articles, the Directors may exercise all the powers of the Company.
They may delegate authorities to committees and day-to-day
management and decision-making to individual Executive Directors.
The committee structure is set out on page 49.

General
The Company is incorporated under the name National Grid plc and
is registered in England and Wales with registered number 04031152.
Under the Companies Act 2006, 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 2006, the
Articles allow non conflicted Directors of the Company to 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. In total, these fees must not exceed
£2,000,000 a year or any higher sum 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.
Further details of Directors’ remuneration are set out in the Directors’
Remuneration Report (see page 68 to 81).

The Directors may exercise all the powers of National Grid to borrow
money. However, the aggregate principal amount of all the Group’s
borrowings 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, although they 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 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.

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 2006 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 2006) and to the extent that
the distribution does not reduce the amount of those assets to
less than that aggregate. Ordinary shareholders and ADS holders
receive dividends.

Subject to these points, 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. 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
they hold. On a show of hands or poll, shareholders may cast votes
either personally or by proxy. A proxy need not be a shareholder.
Under the Articles, all substantive resolutions at a general meeting
must be decided on a poll. Ordinary shareholders and ADS holders
can vote at general meetings.

(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); the liquidator 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. In neither case
will a shareholder be compelled to accept assets upon which there
is a liability.

(iv) Restrictions
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 Directors’ 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. Treasury shares do not
attract a vote or dividends.

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. This
must be 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.

Shareholder information

187

Additional InformationNational Grid Annual Report and Accounts 2015/16Shareholder information continued

General meetings
AGMs must be convened each year within six months of the
Company’s accounting reference date upon 21 clear days’ advance
written notice. Under the Articles, 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.

Description of securities other than equity securities:
depositary fees and charges
The Bank of New York Mellon, as the Depositary, collects fees,
by deducting those fees from the amounts distributed or by selling
a portion of distributable property, 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; and

• making distributions to investors (including, it is expected,

cash dividends).

Rights of non residents
There are no restrictions under the 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 2006, 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.

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:
$5.00 per 100 ADSs (or portion
of 100 ADSs)

Under the UK Disclosure Rules 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.

Registration or transfer fees

Expenses of the Depositary

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; and distribution of securities
distributed to holders of deposited
securities that are distributed by
the Depositary to ADS 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); and converting foreign
currency to dollars.
As necessary.

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.

Depositary payments to the Company
The Depositary reimburses the Company for certain expenses it
incurs in relation to the ADS programme. The Depositary also pays
the standard out-of-pocket maintenance costs for the ADSs, which
consist of the expenses for the mailing of 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 also reimburses the
Company 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 is not necessarily tied
to the amount of fees the Depositary collects from investors. For the
period 1 April 2015 to 18 May 2016, the Company received a total
of $1,948,523.97 in reimbursements from the Depositary consisting
of $1,277,966.88 and $670,557.09 received in October 2015 and
February 2016 respectively. Fees that are charged on cash dividends
will be apportioned between the Depositary and the Company,
see below.

Any questions from ADS holders should be directed to The Bank
of New York Mellon at the contact details on page 207.

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’s Deposit Agreement under which the ADSs are issued
allows a fee of up to $0.05 per ADS to be charged for any cash
distribution made to ADS holders, including cash dividends. ADS
holders who receive cash in relation to the 2015/16 final dividend
will be charged a fee of $0.02 per ADS by the Depositary prior to
distribution of the cash dividend.

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.

Events after the reporting period
There have been no material events affecting the Company since
the year end.

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 on page 190 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).

188

National Grid Annual Report and Accounts 2015/16

Additional Information

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 2016
March 2016
February 2016
January 2016
December 2015

2015/16
2014/15
2013/14
2012/13
2011/12

High
1.4650
1.4514
1.4592
1.4689
1.5211

Low
1.4086
1.3925
1.3862
1.4135
1.4795

Average1

1.51
1.61
1.60
1.57
1.60

1. 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. See weighted average exchange rate on page 95.

Material interests in shares
As at 31 March 2016, National Grid had been notified of the following
holdings in voting rights of 3% or more in the issued share capital of
the Company:

Black Rock, Inc.
Competrol International
Investments Limited
The Capital Group
Companies, Inc.

Number of ordinary shares
220,432,122

% of voting rights1
5.88

149,414,285

145,094,617

3.98

3.88

1. This number is calculated in relation to the issued share capital at the time the holding

was disclosed.

As at 18 May 2016, no further notifications have been received.

The rights attached to ordinary shares are detailed on page 187.
All ordinary shares and all major shareholders have the same voting
rights. The Company is not, to the best of its knowledge, directly or
indirectly controlled.

Share capital
The share capital of the Company consists of ordinary shares
of 1117∕43 pence nominal value each and ADRs, which represent
five ordinary shares each.

Authority to purchase shares
Shareholder approval was given at the 2015 AGM to purchase up
to 10% of the Company’s share capital (being 374,138,605 ordinary
shares). The Directors intend to seek shareholder approval to renew
this authority at this year’s AGM.

In some circumstances, the Company may find it advantageous to
have the authority to purchase its own shares in the market, where
the Directors believe this would be in the interests of shareholders
generally. The Directors believe that it is an important part of the
financial management of the Company to have the flexibility to
repurchase issued shares in order to manage its capital base,
including actively managing share issuances from the operation
of the scrip dividend scheme. It is expected that repurchases to
manage share issuances under the scrip dividend scheme will not
exceed 2.5% of the issued share capital (excluding treasury shares)
per annum.

When purchasing shares, the Company has, and will continue to,
take into account market conditions prevailing at the time, other
investment and financing opportunities and the overall financial
position of the Company.

During the year the Company purchased ordinary shares in the
capital of the Company as part of the management of the dilutive
effect of share issuances under the scrip dividend scheme.

Shares held in Treasury
purchased in prior years
Shares purchased and
held in Treasury during
the year2,3
Shares transferred from
Treasury during the year
(to employees under
employee share plans)2
Maximum number of
shares held in Treasury
during the year2

Number
of shares

Total
nominal
value

Percentage
of called up
share capital1

152,945,477

£17,428,670.63

3.90 %

31,690,010

£3,611,187.19

0.81 %

5,090,406

£580,069.52

0.13 %

179,065,924

£20,405,186.69

4.56 %

1. Called up share capital of 3,924,038,086 ordinary shares as at the date of this Report.
2. From 29 June 2015 to 31 March 2016.
3. Shares purchased for a total cost of £267,109,568.

During the period from 1 April 2016 to 7 April 2016 the Company
purchased 657,000 ordinary shares in the capital of the Company.

As at the date of this Report, the Company held 177,211,465 ordinary
shares as treasury shares, representing 4.52% of the Company’s
called up share capital.

Shareholder information

189

Additional InformationNational Grid Annual Report and Accounts 2015/16
Shareholder information continued

Authority to allot shares
Shareholder approval was given at the 2015 AGM to allot shares
of up to one third of the Company’s share capital. The Directors are
seeking this same level of authority this year. The Directors consider
that the Company will have sufficient flexibility with this level of
authority to respond to market developments. This authority is
in line with investor guidelines.

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, the operation
and management of the Company’s scrip dividend scheme and
the exercise of options under the Company’s share plans. No issue
of shares will be made which would effectively alter control of the
Company without the sanction of shareholders in general meeting.

The Company expects to actively manage the dilutive effect of share
issuance arising from the operation of the scrip dividend scheme.
In some circumstances, additional shares may be allotted to the
market for this purpose under the authority provided by this resolution.
Under these unlikely circumstances, it is expected that the associated
allotment of new shares (or rights to subscribe for or convert any
security into shares) will not exceed 1% of the issued share capital
(excluding treasury shares) per year.

Dividend waivers
The trustees of the National Grid Employees Share Trust, which
are independent of the Company, waived the right to dividends
paid during the year, and have agreed to waive the right to future
dividends, in relation to the ordinary shares and American Depositary
Receipts (ADR) held by the trust.

Under the Company’s ADR programme, the right to dividends in
relation to the ordinary shares underlying the ADRs was waived
during the year by the ADR Depositary, under an arrangement
whereby the Company pays the monies to satisfy any dividends
separately to the Depositary for distribution to ADR holders entitled
to the dividend. This arrangement is expected to continue for
future dividends.

Share price
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.

Price history
The following table shows the highest and lowest intraday market
prices for our ordinary shares and ADSs for the periods indicated:

Ordinary share
(pence)

ADS
($)

2015/16
2014/15
2013/14
2012/13
2011/12
2015/16 Q4
Q3
Q2
Q1
2014/15 Q4
Q3
Q2
Q1
April 2016
March 2016
February 2016
January 2016
December 2015

High
998.20
965.00
849.50
770.00
660.50
998.20
968.57
918.90
940.90
954.00
965.00
916.00
897.92
1,011.50
998.20
992.50
985.80
968.57

Low
806.40
806.22
711.00
627.00
545.50
906.10
890.60
806.40
817.20
842.60
853.78
835.76
806.22
950.20
932.00
925.55
906.10
892.93

High
72.53
77.21
70.07
58.33
52.18
72.47
72.53
69.71
72.14
72.41
75.08
77.21
75.09
73.10
72.47
72.36
70.86
71.05

Low
63.75
62.25
55.16
49.55
45.80
64.76
67.31
63.75
64.37
62.25
67.01
70.37
67.62
68.83
66.56
67.20
64.76
67.62

Shareholder analysis
The following table includes a brief analysis of shareholder numbers
and shareholdings as at 31 March 2016.

Size of
shareholding
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

Number of
shareholders
164,955
248,832
400,098
56,663
53,455
2,120
205
464
140
314
927,246

% of
shareholders
17.79
26.84
43.15
6.11
5.76
0.23
0.02
0.05
0.02
0.03
100.00

Number
of shares
4,739,232
17,628,238
84,389,639
39,596,174
132,042,157
38,087,028
14,532,280
113,514,429
101,923,402
3,377,585,507
3,924,038,086

% of
shares
0.12
0.45
2.15
1.01
3.37
0.97
0.37
2.89
2.60
86.07
100.00

US$

Apr 2015
NG/LN Equity
Source: Datastream

Aug 2015

Dec 2015

Mar 2016

NGG US Equity

pence

1,000

900

Taxation
The discussion in this section provides information about certain US
federal income tax and UK tax consequences for US Holders (defined
below) of owning ADSs and ordinary shares. A US Holder is beneficial
owner of ADSs or ordinary shares that:

800

•

700

is for US federal income tax purposes (i) an individual citizen
or resident of the United States, (ii) a corporation created or
organised under the laws of the United States, any State thereof,
(iii) an estate the income of which is subject to US federal income
tax without regard to its source or (iv) a trust if a court within the
United States is able to exercise primary supervision over the
administration of the trust and one or more US persons have the
authority to control all substantial decisions of the trust, or the
trust has elected to be treated as a domestic trust for US federal
income tax purposes;
is not resident or ordinarily resident in the UK for UK tax purposes; and

•
• does not hold ADSs or ordinary shares in connection with the

conduct of a business or the performance of services in the UK
or otherwise in connection with a branch, agency or permanent
establishment in the UK.

190

National Grid Annual Report and Accounts 2015/16

Additional Information

This discussion is not a comprehensive description of all the US
federal income tax and UK tax considerations that may be relevant
to any particular investor (including consequences under the US
alternative minimum tax or net investment income tax) and does not
address state, local, or other tax laws. 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. This discussion deals only with
US Holders who hold ADSs or ordinary shares as capital assets.
It does not address the tax treatment of investors who are subject
to special rules, such as:

insurance companies;

• financial institutions;
•
• dealers in securities or currencies;
•
• entities treated as partnerships or other pass-through

investors who elect mark-to-market treatment;

•
•
•

•

entities and their partners;
individual retirement accounts and other tax-deferred accounts;
tax-exempt organisations;
investors who own (directly or indirectly) 10% or more of our
voting stock;
investors who hold ADSs or ordinary shares as a position in
a straddle, hedging transaction or conversion transaction;

• persons that have ceased to be US citizens or lawful permanent

residents of the US; and
investors whose functional currency is not the US 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, potentially with retroactive effect. In addition, the statements
set forth below are based on the representations of the Depositary
and assume that each party to the Deposit Agreement will perform
its obligations thereunder in accordance with its terms.

US Holders of ADSs generally will be treated as the owners of the
ordinary shares represented by those ADSs for US federal income
tax purposes. For the purposes of the Tax Convention, the Estate
Tax Convention and UK tax considerations, this discussion assumes
that a US Holder of ADSs will be treated as the owner of the ordinary
shares represented by those ADSs. HMRC has stated that it will
continue to apply its long-standing practice of treating a holder
of ADSs as holding the beneficial interest in the ordinary shares
represented by the ADSs; however, we note that this is an area
of some uncertainty and may be subject to change.

US Holders should consult their own advisors regarding the tax
consequences of buying, owning and disposing of ADSs or ordinary
shares in light of their particular circumstances, including the effect
of any state, local, or other tax laws.

Taxation of dividends
The UK does not currently impose a withholding tax on dividends
paid to US Holders.

Cash distributions paid out of our current or accumulated earnings
and profits (as determined for US federal income tax purposes)
generally will be taxable to a US Holder as dividend income.
Distributions in excess of current and accumulated earnings and
profits will be treated as a non-taxable return of capital to the extent
of a US Holder’s basis in its ADSs or ordinary shares, as applicable,
and thereafter as a capital gain. However, we do not maintain
calculations of our earnings and profits in accordance with US
federal income tax principles. US Holders should therefore assume
that any distribution by us with respect to ADSs or ordinary shares
will be reported as dividend income.

Dividends received by non-corporate US Holders with respect to
ADSs or ordinary shares will generally be taxable at the reduced rate
applicable to long-term capital gains provided (i) either (a) we are
eligible for the benefits of the Tax Convention or (b) ADSs or ordinary
shares are treated as ‘readily tradable’ on an established securities
market in the United States and (ii) we are not, for our taxable year
during which the dividend is paid or the prior year, a passive foreign
investment company for US federal income tax purposes (a PFIC),
and certain other requirements are met. We (1) expect that our shares
will be treated as ‘readily tradable’ on an established securities
market in the United States as a result of the trading of ADSs on
the New York Stock Exchange and (2) believe we are eligible for the
benefits of the Tax Convention.

Based on our audited financial statements and the nature of our
business activities, we believe that we were not treated as a PFIC
for US federal income tax purposes with respect to our taxable year
ending 31 March 2016. In addition, based on our current expectations
regarding the value and nature of our assets, the sources and nature
of our income, and the nature of our business activities, we do not
anticipate becoming a PFIC in the foreseeable future.

Dividends received by corporate US Holders with respect to ADSs
or ordinary shares will not be eligible for the dividends received
deduction generally allowed to corporations.

Taxation of capital gains
US Holders will not be subject to UK taxation on any capital gain
realised on the sale or other disposition of ADSs or ordinary shares.

Provided that we are not a PFIC for any taxable year during which a
US Holder holds their ADSs or ordinary shares, upon a sale or other
disposition of ADSs or ordinary shares, a US Holder generally will
recognise capital gain or loss equal to the difference between the
US dollar value of the amount realised on the sale or other disposition
and the US Holder’s adjusted tax basis in the ADSs or ordinary
shares. Such capital gain or loss generally will be long-term capital
gain or loss if the ADSs or ordinary shares were held for more than
one year. For non-corporate US Holders, long-term capital gain is
generally taxed at a lower rate than ordinary income. A US Holder’s
ability to deduct capital losses is subject to significant limitations.

Shareholder information

191

Additional InformationNational Grid Annual Report and Accounts 2015/16UK inheritance tax
An individual who is domiciled in the US for the purposes of the
Estate Tax Convention and who is not a UK national for the purposes
of the Estate Tax Convention will generally not be subject to UK
inheritance tax in respect of (i) the ADSs or ordinary shares on the
individual’s death or (ii) a gift of the ADSs or ordinary shares during
the individual’s lifetime. This is not the case where the ADSs or
ordinary shares are part of the business property of the individual’s
permanent establishment in the UK or relate 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.

Capital gains tax (CGT) for UK resident shareholders
You can find CGT information relating to National Grid shares for UK
resident shareholders on our website under: Investors, Shareholder
centre, More information and help. Share prices on specific dates are
also available on our website.

UK stamp duty and stamp duty reserve tax (SDRT)
Transfers of ordinary shares – SDRT at the rate of 0.5% of the
amount or value of the consideration will generally be payable on any
agreement to transfer ordinary shares that is not completed using a
duly stamped instrument of transfer (such as a stock transfer form).

Where an instrument of transfer is executed and duly stamped before
the expiry of the six year period beginning with the date on which the
agreement is made, the SDRT liability will be cancelled. 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
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 using a stock transfer
form will generally result in a UK stamp duty liability at the rate of
0.5% (rounded up to the nearest £5) of the amount or value of the
consideration. Paperless transfers under the 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
result in a SDRT liability. 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, 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.
Under the terms of the Deposit 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 tax
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 if the US Holder fails to provide an accurate
taxpayer identification number or certification of exempt status
or fails to comply with applicable certification requirements.

US Holders should consult their tax advisors about 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.

192

National Grid Annual Report and Accounts 2015/16

Additional Information

Other disclosures

All-employee share plans
The Company has a number of all-employee share plans as
described below, which operated during the year. These allow
UK- or US-based employees to participate in either HMRC (UK)
or IRS (US) approved plans and to become shareholders in
National Grid.

Sharesave
Employees resident in the UK are eligible to participate in the
Sharesave plan. Under this plan, participants may contribute
between £5 and £500 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 £150 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 DC pension
plans that give participants the opportunity to invest up to applicable
federal salary limits. The federal limits for calendar year 2015 are:
for pre-tax contributions, a maximum of 50% of salary limited
to $18,000 for those under the age of 50 and $24,000 for those
age 50 and above; for post-tax contributions, up to 15% of salary.
The total amount of employee contributions (pre-tax and post-tax)
may not exceed 50% of compensation, and are further subject to the
combined federal annual contribution limit of $53,000. For calendar
year 2016, participants may invest up to the applicable federal salary
limits: for pre-tax contributions, a maximum of 50% of salary limited
to $18,000 for those under the age of 50 and $24,000 for those age
50 and above; for post-tax contributions, up to 15% of salary. The
total amount of employee contributions (pre-tax and post-tax) may
not exceed 50% of compensation, and are further subject to the
combined federal annual contribution limit of $53,000.

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.

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 2016, the Company
had undrawn borrowing facilities of £1.7 billion available to it with
a number of banks, and a further £1.4 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. Such consents or approvals may also be required
for acquisitions of equity securities that do not amount to a change
of control.

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.

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) under: About us, Corporate governance, Code of Ethics.
There were no amendments to, or waivers of, our Code
of Ethics during the year.

Conflicts of interest
In accordance with the Companies Act 2006, the Board has a
policy and procedure in place for the disclosure and authorisation
(if appropriate) of actual and potential conflicts of interest. The Board
continues to monitor and note possible conflicts of interest that
each Director may have. The Directors are regularly reminded of
their continuing obligations in relation to conflicts, and are required
annually to review and confirm their external interests. During the year
ended 31 March 2016, no actual conflicts of interest were identified,
which required approval by the Board. However, the Board was
advised of two situations in relation to which potential conflicts
of interest could arise, and authorised those potential conflicts
in accordance with its powers as set out in the Articles.

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 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 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.

Other disclosures

193

Additional InformationNational Grid Annual Report and Accounts 2015/16Other disclosures continued

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 in prior financial years for matters arising when
they were Directors of the Company. Alongside these indemnities,
the Company places Directors’ and Officers’ liability insurance cover
for each Director.

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.

Human Rights
Respect for human rights is incorporated into our employment
practices and our values, which include respecting others and
valuing diversity. ‘Always Doing the Right Thing’ is our guide to ethical
business conduct – the way in which we conduct ourselves allows
us to build trust with the people we work with. We earn this trust by
doing things in the right way, building our reputation as an ethical
company that our stakeholders want to do business with, and that
our employees want to work for. Although we do not have specific
policies relating to human rights, slavery and human trafficking,
our procurement policies integrate sustainability into the way
we do business throughout our supply chain, so that we create
value, preserve natural resources and respect the interests of the
communities we serve and from which we procure goods and
services. Through our Global Supplier Code of Conduct (GSCoC),
we expect our suppliers to keep to all laws relating to their business,
as well as adhere to the principles of the United Nations Global
Compact, the Ethical Trading Initiative Base Code and the UK Modern
Slavery Act 2015. In 2015 the GSCoC was further updated to include
the requirements of the Living Wage Foundation. To read more on
the Company’s commitment to the Living Wage please see page 45.

Listing Rule 9.8.4 R cross reference table
Information required to be disclosed by LR 9.8.4 R (starting on
page indicated):

Page 112

Interest capitalised
Publication of unaudited financial information Not applicable
Not applicable
Details of long-term incentive schemes
Not applicable
Waiver of emoluments by a director
Not applicable
Waiver of future emoluments by a director
Not applicable
Non pre-emptive issues of equity for cash
Item (7) in relation to major subsidiary
undertakings
Parent participation in a placing by
a listed subsidiary
Contracts of significance
Provision of services by a controlling
shareholder
Shareholder waivers of dividends
Shareholder waivers of future dividends
Agreements with controlling shareholders

Not applicable
Page 190
Page 190
Not applicable

Not applicable
Not applicable

Not applicable

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.

Political donations and expenditure
At this year’s AGM the Directors will seek authority from shareholders,
on a precautionary basis, for the Company and its subsidiaries
to make donations to registered political parties and other political
organisations and/or incur political expenditure in the European Union
(EU), in each case in amounts not exceeding £125,000 in aggregate.
The definitions of these terms in the Companies Act 2006 are very
wide and as a result this can cover bodies such as those concerned
with policy review, law reform and the representation of the business
community. It could include special interest groups, such as
those involved with the environment, which the Company and its
subsidiaries might wish to support, even though these activities are
not designed to support or influence support for a particular party.
The Company has no intention of changing its current practice of
not making political donations or incurring political expenditure within
the ordinary meaning of those words. This authority is therefore being
sought to ensure that none of the Company’s activities inadvertently
infringe these rules.

National Grid made no donations in the EU during the year,
including donations as defined for the purposes of the Political
Parties, Elections and Referendums Act 2000. National Grid USA
and its affiliated New York and federal political action committees
(each, a PAC) made political donations in the US totalling $67,550
(£45,952) during the year. National Grid USA’s affiliated New York
PAC was funded partly by contributions from National Grid USA
and certain of its subsidiaries and partly by voluntary employee
contributions. National Grid USA’s affiliated federal PAC was funded
wholly by voluntary employee contributions.

Property, plant and equipment
This information can be found under the heading note 11 property,
plant and equipment on pages 122 and 123, note 19 Borrowings
on pages 130 and 131, Strategic Report pages 10 to 13, where
we operate on page 175 and principal operations on pages 31 to 43.

Research and development
Expenditure on research and development during the year was
£29 million (2014/15: £23 million; 2013/14: £12 million). Innovation
funding throughout 2015/16 has sustained investment across all
three of our UK Regulated business areas: UK ET, UK GT and UK GD.
Through collaboration across the industry, we have continued our
drive to deliver benefits for our stakeholders, challenging the way
we work and seeking new technologies to deliver these benefits.
Due to the way in which we work with a large number of partners
on new ideas, our disclosed research and development expenditure
is lower than the overall contribution we make to the industry.
We only disclose directly incurred expenditure, and not those
amounts our partners incur working on projects with us.

The UK ET innovation investment continues to aim to advance our
strategic ambitions to reduce the cost of providing a secure, reliable
and sustainable electricity transmission system. We have installed
a 400kV transformer with synthetic ester, an insulating fluid that
presents a significantly lower fire risk than the mineral oil normally
used; and we’ve started work towards live trials of a new insulating
gas that could be an effective alternative to SF6.

194

National Grid Annual Report and Accounts 2015/16

Additional Information

US expenditure for gas research, development and deployment
of new technologies during 2015/16 was $2.6 million. This is largely
funded through a special Regulatory Order and customer surcharge
mechanism in New York State. Primary investments were in the
areas of robotic inspection tools and enhancements for condition
assessments of the most difficult to inspect pipelines. In addition,
new tools and techniques are being developed to increase safety of
the workforce, improve welding practices and advance the inspection
of polyethylene pipe construction, joint quality and the tracking and
traceability of materials used in the construction of our transmission
and distribution assets.

To further advance the safe operation of our systems and to improve
overall customer safety, methane detection equipment is being
deployed and tested both as mobile solutions to identify leakage in
the field and in residential buildings. After completing extensive bench
testing, we are implementing a pilot study in the use of existing and
new technology for methane sensors within residential properties.

Unresolved SEC staff comments
There are no unresolved SEC staff comments required to
be reported.

Research has also progressed on understanding of and ability to
predict and manage the impact of increased levels of distributed
and renewable generation on the system. UK ET has also secured
£12 million of Network Innovation Competition funding support for
our £14 million investment in an innovation facility in northeast Wales.

The UK GT innovation portfolio has continued to grow, with a key
focus on safety and risk reduction through projects exploring new
techniques to conduct internal pipe inspection and improve asset
integrity, alongside those to provide enhanced gas forecasting
and the development of new smart asset maintenance techniques.
In addition, UK GT won £4.8 million funding for Project ‘CLoCC’
(customer low-cost connections), which seeks to minimise the time
and cost of connections to the national gas transmission system.

Innovation in UK GD continues to grow with a diversified portfolio
focusing on six value areas which reflect both the RIIO outputs and
the UK GD ambition. We continue to develop and refine robotic and
pipe-lining technologies to reduce the impact of our pipe replacement
activities on our customers and the environment. Our focus has
shifted towards implementing the output of these innovations into
the business and demonstrating the value of our innovation projects
to our customers.

Research, Development & Demonstration (RD&D) work in the US has
focused on the advancement of products, processes, systems and
work methods that may be new to National Grid. This is accomplished
by working with internal departments to identify where strategic
RD&D investment is needed and is likely to prove beneficial to
National Grid. To achieve these goals, we work in collaboration with
technical organisations, academia and vendors in the energy sector
that align with our goals and objectives. This collaboration has also
helped inform our strategic direction in response to jurisdictional
requests for modernisation (Grid Modernization in Massachusetts
and ‘Reforming the Energy Vision’ in New York).

In the year, we invested and participated in several significant pilot
projects with the intent of obtaining operational knowledge and
experience of technology driven system impacts. For example,
we are pre-approved to construct up to 20 MW of photovoltaic (PV)
facilities in Massachusetts as part of our ‘Solar Phase II’ programme.
These PV sites are designed with advanced grid interactive control
features, beyond what typical PV facilities are required to provide.

Operating and analysing the performance of these grid interactive
controls will help prepare and future proof our system to enable
a high penetration of the Distributed Energy Resources on the
distribution system. We are also supporting several Department
of Energy projects under the SunShot programme, aimed to further
integration and proliferation of solar PV. As part of its ongoing
Worcester Smart Energy Solutions pilot in Massachusetts, the
Company is continuing to examine its learnings from the customer
and grid technology as deployed. Lastly, the Company is also
deploying Volt VAR Optimization and Conservation Voltage Reduction
technology on several distribution circuits in Rhode Island, examining
the impact of intelligent centralised distribution asset control.

Other disclosures

195

Additional InformationNational Grid Annual Report and Accounts 2015/16Other unaudited financial information
Reconciliations of adjusted profit measures

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 EPS 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 and remeasurements.
These items are reported collectively as the second component
of the financial measures. Note 4 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.

Reconciliation of adjusted operating profit to adjusted
earnings and earnings
Adjusted earnings is presented in note 7 to the consolidated
financial statements on page 118.

Adjusted operating profit
Adjusted net finance costs
Share of post-tax results of joint ventures
and associates
Adjusted profit before tax
Adjusted tax
Adjusted profit after tax
Attributable to non-controlling interests
Adjusted earnings
Exceptional items after tax
Remeasurements after tax
Earnings

Year ended 31 March

2016
£m
4,096
(1,013)

59
3,142
(753)
2,389
(3)
2,386
278
(73)
2,591

2015
£m
3,863
(1,033)

46
2,876
(695)
2,181
8
2,189
(97)
(73)
2,019

2014
£m
3,664
(1,108)

28
2,584
(581)
2,003
12
2,015
388
73
2,476

Reconciliation of adjusted EPS to EPS
Adjusted EPS is presented in note 7 to the consolidated
financial statements.

Year ended 31 March

2016
pence
63.5
7.4
(1.9)
69.0

20151
pence
57.6
(2.6)
(1.8)
53.2

20141
pence
53.1
10.2
1.9
65.2

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.

Adjusted EPS
Exceptional items after tax
Remeasurements after tax
EPS

Internal financial reports, budgets and forecasts are primarily
prepared on the basis of adjusted profit measures, although planned
exceptional items, such as significant restructurings, are also reflected
in budgets and forecasts. We separately monitor and disclose the
excluded items as a component of our overall financial performance.

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 and remeasurements.

Adjusted operating profit
Exceptional items
Remeasurements – commodity contracts
Total operating profit

Year ended 31 March

2016
£m
4,096
(22)
11
4,085

2015
£m
3,863
–
(83)
3,780

2014
£m
3,664
55
16
3,735

1. Comparative information has been restated to reflect the additional shares issued as

scrip dividends.

Reconciliation of adjusted operating profit excluding
timing differences to total operating profit
Adjusted operating profit excluding timing differences is discussed
on page 25. There were no major storms in 2014, 2015, or 2016.

Adjusted operating profit excluding
timing differences
Timing differences
Adjusted operating profit
Exceptional items and remeasurements
Total operating profit

Year ended 31 March

2016
£m

2015
£m

2014
£m

4,071
25
4,096
(11)
4,085

3,927
(64)
3,863
(83)
3,780

3,706
(42)
3,664
71
3,735

196

National Grid Annual Report and Accounts 2015/16

Additional Information

Commentary on consolidated financial statements
for the year ended 31 March 2015

Net finance costs
For the year ended 31 March 2015, net finance costs before
exceptional items and remeasurements were £75 million lower than
2013/14 at £1,033 million, mainly as a result of lower average gross
debt through the year, lower RPI in the UK and refinancing debt at
lower rates.

For the year ended 31 March 2014, net finance costs before
exceptional items and remeasurements were £16 million lower than
2012/13 at £1,108 million, mainly due to the impact of the weaker dollar.

Finance costs for the year ended 31 March 2015 included exceptional
debt redemption costs of £131 million and a loss of £34 million on
financial remeasurements (2013/14: gain of £93 million), relating to
net losses on derivative financial instruments.

Tax
The tax charge on profit before exceptional items and remeasurements
for the year ended 31 March 2015 was £114 million higher than
2013/14. This was mainly due to higher profits before tax and the
non recurrence of one-off items that benefited the prior year.

The 2013/14 tax charge on profit before exceptional items and
remeasurements was £38 million lower than 2012/13 at £581 million.
This was mainly due to a 1% decrease in the UK statutory corporation
tax rate in the year and a change in the UK/US profit mix where higher
UK profits were taxed at the lower UK tax rate. Our tax charge was
also affected by changes in tax provisions in respect of prior years.

Exceptional tax for 2014/15 of £78 million primarily represents
tax credits on the exceptional items and remeasurements
described above.

Exceptional tax for 2013/14 included an exceptional deferred tax
credit of £398 million arising from a reduction in the UK corporation
tax rate from 23% to 21% applicable from 1 April 2014 and a further
reduction to 20% from 1 April 2015.

Adjusted earnings and EPS
As a result of the variances described above, adjusted earnings
for the year ended 31 March 2015 were £2,189 million. For the year
ended 31 March 2014, adjusted earnings were £2,015 million.

The above earnings performance translated into adjusted EPS growth
in 2014/15 of 4.5p (8%) and 2.7p (5%) in 2013/14.

In accordance with IAS 33, all EPS and adjusted EPS amounts for
comparative periods have been restated for shares issued via scrip
dividends and the bonus element of the 2010 rights issue.

In compliance with SEC rules, we present a summarised analysis
of movements in the income statement, an analysis of movements
in adjusted operating profit by operating segment and a summarised
analysis of movements in the statement of financial position for the
year ended 31 March 2015. This should be read in conjunction with
the 31 March 2016 unaudited commentary included on pages 95,
99, 107 and 108.

Analysis of the income statement for the years ended
31 March 2015 and 31 March 2014
Revenue
Revenue for the year ended 31 March 2015 increased by £392 million
to £15,201 million. This increase was driven by higher revenues in
our UK ET business, reflecting increases in allowed Transmission
Owner revenues, and higher core allowances and pass-through costs
in UK GT. Revenues in our UK GD business were slightly lower as a
result of changes in allowed revenues for replacement expenditure
(repex). Our US Regulated business revenues were also lower, as a
result of the end of the LIPA MSA last year, partially offset by revenue
increases from existing rate plans, including capex trackers, together
with additional income from gas customer growth and the impact
of the strengthening US dollar.

Revenue for the year ended 31 March 2014 increased by £450 million
to £14,809 million. This increase was driven by higher revenues in our
UK ET and UK GD businesses, principally as a result of the new RIIO
regulatory arrangements. Revenue in our US Regulated business was
also higher, reflecting higher pass-through costs such as gas and
electricity commodity costs, partially offset by the end of Niagara
Mohawk deferral revenue recoveries at March 2013 and the impact
of the weaker dollar.

Operating costs
Operating costs for the year ended 31 March 2015 of £11,421 million
were £347 million higher than the prior year. This increase in costs
included a £154 million year on year impact of changes in exceptional
items and remeasurements, which is discussed below. Excluding
exceptional items and remeasurements, operating costs were
£193 million higher, principally due to: increases in controllable
costs, including the impact of inflation and additional costs incurred
in the US to improve data quality and bring regulatory filings up to
date; higher US bad debt costs following last year’s exceptionally
cold winter; and higher depreciation and amortisation as a result
of continued investment programmes. These cost increases were
partly offset by a reduction in spend on US financial systems
implementation and stabilisation upgrades, with the project
completing in the first half of this year.

Operating profit for the year ended 31 March 2015 included an
£83 million loss (2013/14: £16 million gain) on remeasurement of
commodity contracts. The year ended 31 March 2014 also included
a net £55 million gain on exceptional items, including a net gain on
the LIPA MSA transition in the US of £254 million; restructuring costs
of £136 million, primarily in the UK as we reorganised certain parts
of our business to deliver under the new RIIO price controls; and a
£79 million provision for the demolition of UK gas holders that are
no longer required.

Operating costs for the year ended 31 March 2014 of £11,074 million
were £464 million higher than the prior year. This increase in costs
was predominantly due to increases in pass-through costs in our
UK and US regulated business, together with higher depreciation
and amortisation as a result of continued investment and increases
in our controllable costs.

Other unaudited financial information

197

Additional InformationNational Grid Annual Report and Accounts 2015/16Other unaudited financial information continued

US Regulated
Revenue in our US Regulated business was £54 million lower in
2014/15 at £7,986 million, while adjusted operating profit increased
by £39 million to £1,164 million.

The stronger dollar increased operating profit in the year by
£30 million. Excluding the impact of foreign exchange, net regulated
income increased by £81 million, reflecting increased revenue from
existing rate plans, including capex trackers, together with additional
income from gas customer growth, partially offset by the impact of
the end of LIPA management services activities (MSA) in December
2013. In addition, over-recoveries of allowed revenues in the year of
£30 million were £20 million favourable to last year’s over-recoveries
of £10 million. Regulated controllable costs increased by £17 million
excluding the impact of foreign exchange, as a result of increased gas
leak and compliance work and additional costs incurred to improve
data quality and bring regulatory filings up to date, partly offset
by the cessation of costs associated with the LIPA MSA activities.
Bad debt costs were £62 million higher excluding the impact of
foreign exchange, following last year’s exceptionally cold winter.

There were no major storms affecting our operations in the years
ended 31 March 2014 and 2015.

Our capital investment programme continued in the US, with a further
£1,501 million invested in 2014/15, including gas leak reduction
programmes and electricity capacity and reinforcement work.

Other activities
Revenue in Other activities increased by £26 million to £762 million
in the year ended 31 March 2015. Adjusted operating profit was
£68 million higher at £199 million.

Operating profit in the French interconnector was £18 million higher as
a result of strong auction revenues this year. In the US, corporate and
other activities losses were £63 million lower, mainly as a result of our
finance system upgrade completing in the first half of this year. Capital
investment in our Other activities was £33 million higher at £213 million.

Analysis of the adjusted operating profit by segment for
the year ended 31 March 2015
UK Electricity Transmission
For the year ended 31 March 2015, revenue in the UK ET segment
was £367 million higher at £3,754 million, and adjusted operating
profit increased by £150 million to £1,237 million.

Net regulated income after pass-through costs was £230 million higher,
principally reflecting increases in allowed Transmission Owner revenues
this year and a £43 million benefit relating to legal settlements. This
was partially offset by under-recoveries of allowed revenue in the year
of £89 million compared with under-recoveries of £60 million in the
prior year. Regulated controllable costs were £14 million higher due to
inflation, organisational change costs and additional tower maintenance
costs. Depreciation and amortisation was £33 million higher reflecting
the continued capital investment programme (investment in the year
was £1,074 million). Other costs were £4 million higher than prior year.

UK Gas Transmission
Revenue in the UK GT segment increased by £81 million in 2014/15 to
£1,022 million and adjusted operating profit increased by £20 million
to £437 million.

Net regulated income after pass-through costs was £42 million higher
due to earned gas permit and constraints management incentives. In
addition, under-recoveries of allowed revenue in the year of £18 million
were £3 million favourable to last year’s under-recoveries of £21 million.
Partially offsetting the revenue gains, regulated controllable costs
were £8 million higher, mainly as a result of additional system operator
costs relating to EU work and some organisation change costs. Other
operating costs were also £17 million higher, including a £13 million
provision for decommissioning the Avonmouth LNG plant. Capital
investment remained around the same level as last year at £184 million.

UK Gas Distribution
UK GD revenue decreased by £31 million in 2014/15 to £1,867 million,
and adjusted operating profit decreased by £78 million to £826 million.

Net regulated income after pass-through costs was £11 million
lower, reflecting changes in allowed revenues for replacement
expenditure (repex). Timing differences reduced net revenues by
a further £16 million, with £13 million over-recoveries in 2014/15,
compared with a £29 million over-recovery in the prior year. Regulated
controllable costs were £22 million higher primarily due to inflation
and some organisation change costs. Depreciation and amortisation
was £15 million higher reflecting the continued capital investment
programme (investment in the year was £498 million). Other costs
were £14 million higher, reflecting a provision for additional asset
protection costs.

198

National Grid Annual Report and Accounts 2015/16

Additional Information

Net debt
Net debt is the aggregate of cash and cash equivalents, current
financial and other investments, borrowings, and derivative financial
assets and liabilities.

Net pension and other post-retirement obligations
A summary of the total UK and US assets and liabilities and the
overall net IAS 19 (revised) accounting deficit is shown below:

Net plan liability
As at 1 April 2014
Exchange movements
Current service cost
Net interest cost
Curtailments and other
Actuarial gains/(losses)

– on plan assets
– on plan liabilities

Employer contributions
As at 31 March 2015
Represented by:

Plan assets
Plan liabilities

UK
£m
(753)
–
(70)
(27)
(34)

US
£m
(1,658)
(236)
(116)
(74)
(27)

Total
£m
(2,411)
(236)
(186)
(101)
(61)

1,929
(1,975)
258
(672)

225
(950)
250
(2,586)

2,154
(2,925)
508
(3,258)

19,453
(20,125)
(672)

6,955
(9,541)
(2,586)

26,408
(29,666)
(3,258)

The principal movements in net obligations during the year included
net actuarial losses of £771 million and employer contributions of
£508 million. Net actuarial losses included actuarial losses on plan
liabilities of £2,746 million arising as a consequence of increases in
the UK real discount rate and the nominal discount rate in the US.
This was partially offset by actuarial gains of £2,154 million arising
on plan assets.

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.

Analysis of the statement of financial position for the year
ended 31 March 2015
Goodwill and other intangible assets
Goodwill and intangibles increased by £684 million to £5,947 million
as at 31 March 2015. This increase primarily relates to foreign
exchange movements of £602 million and software additions of
£207 million, partially offset by software amortisation of £121 million.

Property, plant and equipment
Property, plant and equipment increased by £3,544 million to
£40,723 million as at 31 March 2015. This was principally due to
capital expenditure of £3,263 million on the renewal and extension
of our regulated networks and foreign exchange movements of
£1,703 million, offset by depreciation of £1,361 million in the year.

Investments and other non-current assets
Investments in joint ventures and associates, financial and other
investments and other non-current assets increased by £6 million
to £728 million. This was primarily due to a decrease in investments
in joint ventures of £33 million, which includes dividends received of
£79 million, partially offset by our share of post-tax results for the year
of £46 million, more than offset by an increase in available-for-sale
investments of £46 million.

Inventories and current intangible assets, and trade
and other receivables
Inventories and current intangible assets, and trade and other
receivables increased by £53 million to £3,176 million as at 31 March
2015. This was due to an increase in inventories and current intangible
assets of £72 million, offset by a net decrease in trade and other
receivables of £19 million. The £19 million decrease consists of an
increase in foreign exchange of £211 million due to the stronger US
dollar against sterling and a decrease in the underlying balances of
£229 million, reflecting collection of large prior year balances, including
LIPA MSA and Superstorm Sandy re-insurance receivables.

Trade and other payables
Trade and other payables increased by £261 million to £3,292 million,
primarily due to foreign exchange movements of £161 million and an
increase in VAT liability following a change in regulations on wholesale
gas and electricity trading.

Current tax balances
Current tax balances decreased by £33 million to £124 million as at
31 March 2015. This was due to the tax payments made in 2014/15
being only partially offset by a smaller current year tax charge.

Deferred tax balances
Deferred tax balances increased by £215 million to £4,297 million
as at 31 March 2015. This was primarily due to the impact of the
£299 million deferred tax credit on actuarial losses (a £172 million tax
charge in 2013/14) being offset by the impact of the reduction in the
UK statutory tax rate, foreign exchange movements of £203 million
and the reduction in prior year charges.

Provisions and other non-current liabilities
Provisions (both current and non-current) and other non-current
liabilities increased by £168 million to £3,654 million as at 31 March
2015. Total provisions increased by £90 million in the year. The
underlying movements include additions of £105 million relating to an
increase to the provision for the estimated environmental restoration
and remediation costs for a number of sites and other provision
increases of £57 million, together with foreign exchange movements
of £133 million, offset by utilisation of £209 million in relation to all
classes of provisions.

Other unaudited financial information

199

Additional InformationNational Grid Annual Report and Accounts 2015/16

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 2016. It should be read in conjunction with the consolidated financial statements and related notes, together with the
Strategic Report. The information presented below for the years ended 31 March 2012, 2013, 2014, 2015 and 2016 has been prepared under
IFRS issued by the IASB and as adopted by the EU1.

Summary income statement £m
Revenue
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
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)2
Diluted – continuing operations (pence)2
Basic (pence)2
Diluted (pence)2

Number of shares – basic (millions)3
Number of shares – diluted (millions)3
Dividends per ordinary share
Paid during the year (pence)
Approved or proposed during the year (pence)
Paid during the year ($)
Approved or proposed during the year ($)

2016

2015

2014

20131

20121

15,115

15,201

14,809

14,359

13,832

4,096
(11)
4,085

3,142
(110)
3,032

3,863
(83)
3,780

2,876
(248)
2,628

3,664
71
3,735

2,584
164
2,748

3,639
110
3,749

2,533
178
2,711

3,491
44
3,535

2,408
(26)
2,382

2,594

2,011

2,464

2,154

1,919

2,386
205
2,591

69.0
68.7
69.0
68.7

3,755
3,771

43.16
43.34
0.664
0.635

2,189
(170)
2,019

53.2
52.9
53.2
52.9

3,798
3,815

42.25
42.87
0.697
0.672

2,015
461
2,476

65.2
64.9
65.2
64.9

3,798
3,817

40.85
42.03
0.636
0.696

1,913
240
2,153

56.7
56.5
56.7
56.5

3,794
3,813

39.84
40.85
0.633
0.632

1,709
208
1,917

50.6
50.4
50.6
50.4

3,788
3,807

37.40
39.28
0.599
0.623

1. For the years ended 31 March 2015 and 31 March 2016, there have been no significant changes in accounting standards, interpretations or policies that have a material financial impact
on the selected financial data. For the year ended 31 March 2014, the adoption of IAS 19 (revised) ‘Employee benefits’ resulted in a significant change in pensions and employee benefits
accounting. The numbers included in the selected financial data above for the years 31 March 2012 and 2013 were restated to show the impact of IAS 19 (revised).

2. Items previously reported for 2012 – 2015 have been restated to reflect the impact of the bonus element of the rights issue and the additional shares issued as scrip dividends.
3. Number of shares previously reported for 2012 – 2015 have been restated to reflect the impact of the additional shares issued as scrip dividends.

200

National Grid Annual Report and Accounts 2015/16

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
Shareholders’ equity

Summary cash flow statement
Cash generated from continuing operations
Tax paid
Net cash inflow from operating activities
Net cash flows used in investing activities
Net cash flows (used in)/from financing activities
Net increase/(decrease) in cash and cash equivalents

2016

2015

2014

20131

20121

52,622
6,312
–
58,934
(7,721)
(37,648)
–
(45,369)
13,565
13,555

49,058
6,031
–
55,089
(7,374)
(35,741)
–
(43,115)
11,974
11,962

44,895
7,489
–
52,384
(7,331)
(33,134)
–
(40,465)
11,919
11,911

45,129
9,576
–
54,705
(7,445)
(37,026)
–
(44,471)
10,234
10,229

41,684
5,387
264
47,335
(6,004)
(32,001)
(87)
(38,092)
9,243
9,236

5,660
(292)
5,368
(4,036)
(1,328)
4

5,350
(343)
5,007
(2,001)
(3,253)
(247)

4,419
(400)
4,019
(1,330)
(2,972)
(283)

4,037
(287)
3,750
(6,130)
2,715
335

4,487
(259)
4,228
(2,371)
(1,900)
(43)

Summary consolidated
financial information

201

Additional InformationNational Grid Annual Report and Accounts 2015/16Further information regarding financial KPIs and other performance measures

US regulated return on equity
US regulated RoE is a measure of how a business is performing
operationally against the assumptions used by the regulator. This US
operational return measure is calculated using the assumption that
the businesses are financed in line with the regulatory adjudicated
capital structure. This is a post-tax US GAAP metric as calculated
annually (calendar year to 31 December).

Calculation: Regulated net income divided by equity rate base.

• Regulated net income calculated as US GAAP operating profit
less interest on the adjudicated debt portion of the rate base
(calculated at the actual rate on long term debt, adjusted
where the proportion of long term debt in the capital structure
is materially different from the assumed regulatory proportion)
less tax at the adjudicated rate.

• Regulated net income is adjusted for earned savings as appropriate

and for certain material specified items.

• Equity rate base is the average rate base for the calendar year as
reported to the Group’s regulators or, where a reported rate base
is not available, an estimate based on rate base calculations used
in previous rate filings multiplied by the adjudicated equity portion
in the regulatory capital structure.

As part of our financial review on pages 22–25, various financial
KPIs and performance measures are identified. Further details
as to how these are calculated are provided below.

Group return on equity
The Group RoE calculation provides a measure of the performance
of the whole Group compared with the amounts invested by the
Group in assets attributable to equity shareholders.

Calculation: Regulatory financial performance including a long-run
assumption of 3.0% RPI inflation, less adjusted interest and adjusted
taxation divided by equity investment in assets.

• Adjusted interest removes interest on pensions, capitalised

interest and release of provisions.

• Adjusted taxation adjusts the Group taxation charge for

differences between IFRS profit before tax and regulated financial
performance less adjusted interest.

• Equity investment in assets is calculated as the total opening
UK regulatory asset value, the total opening US rate base plus
goodwill plus opening net book value of Other activities and our
share of joint ventures and associates; minus opening net debt
as reported under IFRS.

UK regulated return on equity
UK operational return is a measure of how a business is performing
operationally against the assumptions used by the regulator.
These returns are calculated using the assumption that the
businesses are financed in line with the regulatory adjudicated
capital structure, at the cost of debt assumed by the regulator
and that RPI inflation is equal to a long-run assumption of 3.0%.

Calculation: Base allowed RoE plus or minus the following items:

• Additional allowed revenues/profits earned in the year from
incentive schemes, less associated corporation tax charge;
• Totex outperformance multiplied by the company sharing factor

set by the regulator; and

• Revenues (net of associated depreciation and base allowed asset
return) allowed in the year associated with incentive performance
earned under previous price controls but not yet fully recovered,
less associated corporation tax charge (excluding logging up
or pensions recovery).

Divided by average equity RAV in line with regulatory assumed
capital structure.

202

National Grid Annual Report and Accounts 2015/16

Additional 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 47 and 48).

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.

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/or all or certain of its subsidiaries, depending on context.

Connect21
The Company’s US strategy to build and operate a better energy
distribution network for the 21st century digital economy, helping
to move to a decarbonised future.

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
Dth
Decatherm, being an amount of energy equal to 1 million British
thermal units (BTUs), equivalent to approximately 293 kWh.

DB
Defined benefit, relating to our UK or US (as the context requires)
final salary pension schemes.

DC
Defined contribution, relating to our UK or US (as the context requires)
pension schemes to which National Grid, as an employer, pays
contributions based on a percentage of employees’ salaries.

DECC
The Department of Energy & Climate Change, the UK Government
ministry responsible for energy and climate change.

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 Act 2013, and secondary legislation which came
into force in August 2014, National Grid’s electricity system operator
function became the EMR Delivery Body. In this role National Grid
provides 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 EMR. National Grid also
administers the capacity mechanism, including running the annual
capacity auctions, manages the allocation of contracts for difference
to low carbon generators and reports to the Government annually
on performance against the Government’s delivery plan.

demand side response (DSR)
Arrangements between the Company and certain customers,
through which those customers agree to increase or reduce demand
in response to a signal where the Company requires it.

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.

Deposit Agreement
Deposit Agreement means the 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.

Depositary
Depositary means The Bank of New York Mellon acting as depositary.

Directors/Executive Directors/Non-executive Directors
The Directors/Executive Directors and Non-executive Directors
of the Company whose names are set out on pages 47 and 48
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.

Definitions and glossary of terms

203

Additional InformationNational Grid Annual Report and Accounts 2015/16Definitions and glossary of terms continued

E
earnings per share (EPS)
Profit for the year attributable to equity shareholders of the parent
allocated to each ordinary share.

H
HMRC
HM Revenue & Customs. The UK tax authority.

Electricity Market Reform (EMR)
An energy policy initiative, introduced by the Energy Act 2013,
designed to provide greater financial certainty to investors in both low
carbon and conventional generation in order to meet environmental
targets and maintain security of supply, and to do so at the lowest
cost to consumers.

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.

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
28 member states located in Europe.

Exchange Act
The US 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 168 to 173, which are prepared
in accordance with FRS 101.

G
Grain LNG
National Grid Grain LNG Limited.

Great Britain
England, Wales and Scotland.

Group return on equity (Group RoE)
The Group return on equity calculation provides a measure of the
performance of the whole Group compared with the amounts
invested by the Group in assets attributable to equity shareholders.
The Group return on equity measure is calculated using the Group
capital employed in accordance with the definition used in the RoCE
measures, adjusted for Group net debt and goodwill.

GW
Gigawatt, being an amount of power equal to 1 billion watts
(109 watts).

GWh
Gigawatt hours, being an amount of energy equivalent to delivering
1 billion watts of power for a period of one hour.

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.

J
joint venture
A company or other entity which is controlled jointly with
other parties.

K
kV
Kilovolt, being an amount of electric force equal to 1,000 volts.

kW
Kilowatt, being an amount of power equal to 1,000 watts.

kWm
Kilowatt-month, being an amount of energy equivalient to delivering
1kW of power for a period of one month.

L
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 (LTI)
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.

MSA
The managed services agreement, under which the Company
maintained and operated the electricity transmission and distribution
system on Long Island owned by LIPA, which was transitioned to
a third party with effect from 31 December 2013.

MW
Megawatt, being an amount of power equal to 1 million watts.

204

National Grid Annual Report and Accounts 2015/16

Additional Information

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.

OPEB
Other post-employment benefits.

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)
The return on capital employed metric is designed to give an
alternative comparison between the UK and US businesses showing
the overall return on capital provided by both debt and equity.
The calculation reflects regulatory treatments of costs.

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.

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.

RIIO
The revised regulatory framework issued by Ofgem which was
implemented in the eight-year price controls which started on
1 April 2013.

P
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.

PSA
The 15-year power supply agreement with LIPA which came into
effect on 28 May 2013, under which the Company supplies electricity
to communities and businesses across Long Island.

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.

RIPUC
The Rhode Island Public Utilities Commission.

RPI
The UK retail price index as published by the Office for
National Statistics.

S
Scope 1 greenhouse gas 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 greenhouse gas 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.

Scope 3 greenhouse gas emissions
Scope 3 emissions are indirect greenhouse gas emissions as a
consequence of the operations of the Company, but are not owned
or controlled by the Company, such as emissions from third-party
logistics providers, waste management suppliers, travel suppliers,
employee commuting, and combustion of sold gas by customers.

Definitions and glossary of terms

205

Additional InformationNational Grid Annual Report and Accounts 2015/16U
UK
The United Kingdom, comprising England, Wales, Scotland and
Northern Ireland.

UK Corporate Governance Code (the Code)
Updated guidance, issued by the Financial Reporting Council in
September 2014, on how companies should be governed, applicable
to UK listed companies, including National Grid.

UK GAAP
Generally accepted accounting principles in the UK. These differ
from IFRS and from US GAAP.

UK regulated return on equity (UK RoE)
UK regulated return on equity is a measure of how a business is
performing operationally against the assumptions used by Ofgem.
These returns are calculated using the assumption that the businesses
are financed in line with the regulatory adjudicated capital structure,
at the assumed cost of debt and that UK taxation paid is at the level
assumed by Ofgem.

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 regulated return on equity (US RoE)
US regulated return on equity is a measure of how a business is
performing operationally against the assumptions used by the
relevant regulator. This US operational return measure is calculated
using the assumption that the businesses are financed in line with the
regulatory adjudicated capital structure. This is a post-tax US GAAP
metric as calculated annually (on a calendar year to 31 December).

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
value added
Value added is a measure to capture the value created through
investment attributable to equity holders, being the change in total
regulated and non-regulated assets including goodwill (both at
constant currency) plus the cash dividend paid in the year plus share
repurchase costs less the growth in net debt (at constant currency).
This is then presented on an absolute and a per share basis.

value growth
Value growth is the growth in the value of our regulated and
non-regulated assets including goodwill plus dividend plus share
repurchase costs less net debt, as a percentage.

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.

SEH Committee
The Safety, Environment and Health Committee of the Board whose
role is explained on page 60.

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. The Kyoto protocol
estimated that the global warming potential over 100 years of SF6
is 23,900 times more potent than that of CO2.

share premium
The difference between the amount 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.

STEM
Science, technology, engineering and mathematics; the Company
is currently looking to recruit people with skills in these subjects.

subsidiary
A company or other entity that is controlled by National Grid.

swaption
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.

Tax Convention
Tax Convention means the income tax convention between the
US and the UK.

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.

206

National Grid Annual Report and Accounts 2015/16

Additional Information

Want more information or help?

Capita Asset Services
For queries about ordinary shares:

The Bank of New York Mellon
For queries about American
Depositary Shares:

0371 402 3344
Calls are charged at the standard
geographic rate and will vary by
provider. Calls outside the UK will be
charged at the applicable international
rate. Lines are open 8.30am to
5.30pm, Monday to Friday excluding
public holidays. If calling from outside
the UK: +44 (0)371 402 3344

Visit the National Grid share portal
www.nationalgridshareholders.com
Email: nationalgrid@capita.co.uk

National Grid Share Register
Capita Asset Services
The Registry
34 Beckenham Road
Beckenham, Kent BR3 4TU

1-800-466-7215
If calling from outside the US:
+1-201-680-6825

www.mybnymdr.com
Email: shrrelations@
cpushareownerservices.com

The Bank of New York Mellon
Depository Receipts
PO Box 30170
College Station, Texas 77842-3170

Further information about National Grid
including share price and interactive tools
can be found on our website:
www.nationalgrid.com

Beware of share fraud
Fraudsters use persuasive and high-pressure
tactics to lure investors into scams. 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 Financial Conduct Authority
(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.

Financial calendar
The following dates have been announced or are indicative:

2 June 2016

3 June 2016
9 June 2016
20 June 2016
25 July 2016
10 August 2016

10 November 2016
24 November 2016
25 November 2016
11 January 2017

May 2017

Ordinary shares go ex-dividend for 2015/16
final dividend
Record date for 2015/16 final dividend
Scrip reference price announced
Scrip election date
2016 AGM
2015/16 final dividend paid to qualifying
shareholders
2016/17 half year results
Ordinary shares go ex-dividend
Record date for 2016/17 interim dividend
2016/17 interim dividend paid to qualifying
shareholders
2016/17 preliminary results

Dividends
The Directors are recommending a final dividend of 28.34 pence
per ordinary share ($2.0445 per ADS) to be paid on 10 August 2016
to shareholders on the register as at 3 June 2016. Further details
in respect of dividend payments can be found on page 24. If you
live outside the UK, you may be able to request that your dividend
payments be converted into your local currency.

Under the Deposit Agreement, a fee of up to $0.05 per ADS can be
charged for any cash distribution made to ADS holders, including
cash dividends. ADS holders who receive cash in relation to the
2015/16 final dividend will be charged a fee of $0.02 per ADS by
the Depositary prior to the distribution of the cash dividend.

Have your dividends paid directly into your bank or building
society account:
• Your dividend reaches your account on the payment day
•
• No more trips to the bank

It is more secure – cheques do sometimes get lost in the post

Elect to receive your dividends as additional shares:
• Join our scrip dividend scheme
• No stamp duty or commission to pay

Electronic communications
To receive an email notifying you as soon as new shareholder
information is available to view online, including your electronic
tax voucher, sign up for electronic communications. Simply go to
the National Grid share portal www.nationalgridshareholders.com
and once you have registered, click on the ‘manage your account’
link and follow the on screen instructions to change your
communication preference.

Manage your shareholding online via the National Grid
share portal:
• Have your dividends paid direct to your bank account instead

of receiving cheques

• Choose to receive your dividends in shares, via our scrip

dividend scheme

• Register your AGM vote
• Get copies of your dividend confirmations and view your dividend

payment history

• Update your address details

Registered office
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.

Share dealing
Capita Share Dealing Services offer our European Economic Area
resident shareholders a range of quick and easy share dealing
services by post, online or telephone from 10p per share (plus stamp
duty as applicable). Dealing at live prices is available online or by
telephone, different fees apply.

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 Asset Services.

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, 7th floor, Atria One, 144 Morrison Street, Edinburgh
EH3 8BR.

Want more information or help?

207

Additional InformationNational Grid Annual Report and Accounts 2015/16from 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 or deflation; 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 failure to attract, train or retain employees with the necessary
competencies, including leadership skills, and any significant disputes
arising with our employees or the breach of laws or regulations by our
employees; the failure to respond to market developments, including
competition for onshore transmission, the threats and opportunities
presented by emerging technology, development activities relating
to changes to the energy mix and the integration of distributed energy
resources and the need to grow our business to deliver our strategy,
as well as incorrect or unforeseen assumptions or conclusions
(including unanticipated costs and liabilities) 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
Report and the Risk factors on pages 183 to 186 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.

Cautionary statement
This document comprises the Annual Report and Accounts for the
year ending 31 March 2016 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
08 to 81 and 174 to 202, 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); the timing of construction and delivery by third
parties of new generation projects requiring connection; breaches of,
or changes in, environmental, climate change and health and safety
laws or regulations, including breaches or other incidents arising from
the potentially harmful nature of our activities; network failure or
interruption, the inability to carry out critical non network operations
and damage to infrastructure, due to adverse weather conditions
including the impact of major storms as well as the results of climate
change, due to counterparties being unable to deliver physical
commodities, or due to the failure of or unauthorised access to or
deliberate breaches of our IT systems and supporting technology;
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 and remediation
plans; and customers and counterparties (including financial
institutions) failing to perform their obligations to the Company.
Other factors that could cause actual results to differ materially

208

National Grid Annual Report and Accounts 2015/16

Additional Information

Key highlights
2015/16

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

Financial highlights

Adjusted operating profit

£4,096m
+6%

2014/15: £3,863m

Operating profit

£4,085m
+8%

2014/15: £3,780m

Operational highlights

Capital expenditure

£3,893m
+12%

2014/15: £3,470m

Greenhouse gas emissions
(million tonnes carbon dioxide equivalent)

7.3
+0%

2014/15: 7.3

Adjusted earnings per share

63.5p
+10%

2014/15: 57.6p*

Earnings per share

69.0p
+30%

2014/15: 53.2p*

Group safety performance

0.10 IFR
0.03 improvement

2014/15: 0.13 IFR

Employee engagement score

76%
+1%

2014/15: 75%

* Comparative earnings per share (EPS) data has been restated for

the impact of scrip dividend issues

Printed by Pureprint Group, ISO 14001, FSC® certified
and CarbonNeutral®.

Designed and produced by Addison Group

Annual Report
and Accounts 2015/16

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National Grid plc
1–3 Strand
London WC2N 5EH
United Kingdom