National Grid Annual Report 2017

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FY2017 Annual Report · National Grid

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Annual Report
and Accounts 2016/17

Bring Energy to Life

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Highlights 2016/17

Financial highlights

Adjusted operating profit
(From continuing operations)

£3,773m
+17%

2015/16: £3,214m

Statutory operating profit
(From continuing operations)

£3,208m
-1%

2015/16: £3,225m

Adjusted earnings per share
(From continuing operations)

Adjusted operating profit
(Total)1

Adjusted earnings per share
(Total)1

56.9p
+19%

2015/16: 48.0p*

£4,667m
+14%

2015/16: £4,096m

73.0p
+16%

2015/16: 63.2p*

Statutory earnings per share
(From continuing operations)

Statutory operating profit
(Total)1

Statutory earnings per share
(Total)1

48.1p
-5%

2015/16: 50.4p*

£4,102m
+0.4%

2015/16: £4,085m

207.1p
+201%

2015/16: 68.7p*

* Comparative earnings per share (EPS) data has been restated for the impact of scrip dividend issues.
1 Comprises continuing and discontinued operations.

Operational highlights

Capital investment
(Total)1

£4,450m
+13%

2015/16: £3,946m

Group safety performance

0.10 IFR
+0.00 (See page 10)

2015/16: 0.10 IFR

Greenhouse gas emissions
(million tonnes carbon dioxide equivalent)

Employee engagement score
(From continuing operations)

7.2
-1.4%

2015/16: 7.3

77%
+4 percentage points

2015/16: 73%

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

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

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

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

Our people on the front cover
(clockwise)

Thomas Drumm, Supervisor, Rhode
Island, and Don Wolanski, First Class
Lineman, Rhode Island. Sue Foster,
Customer Service Advisor – Domestic
Customer Operations, Solihull.
Nasima Khanom, Team Coordinator
– Business Development, Blyth, and
Amanda Nock, Governance and
Compliance Officer, Solihull. Mary
Grace Welch, Lead Economic
Development Representative, New
York. Steven Abatiello, Web
Operations Manager, New York.

Contents

National Grid Annual Report and Accounts 2016/17

Strategic Report

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

At a glance
Chairman’s statement
Chief Executive’s review
Our purpose, vision, strategy
and values
Our operating environment
Progress against our current strategy
Our business model
Internal control and risk management
Viability statement
Financial review
Principal operations
Our people

Corporate Governance

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

Corporate Governance contents
and statement of compliance with
the UK Corporate Governance Code
Directors’ Report and other disclosures
Directors’ Remuneration Report

Financial Statements

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

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

02
04
06
08

09
10
14
15
19
20
24
30

53
54

72
73
74
75
83

Additional Information

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

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

172
202
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 on pages
202–206 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 2016/17Total adjusted operating proﬁt (%)

At a glance

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

29
11
37
4
19

You can find more information
about what we do on our website
www.nationalgrid.com

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

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

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

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

Group total adjusted operating profit*

Adjusted operating profit

£4,667m

2015/16: £4,096m

£1,372m

2015/16: £1,173m

Group total statutory operating profit*

Statutory operating profit

£4,102m

2015/16: £4,085m

Group total capital investment†

£4,450m

2015/16: £3,946m

* From continuing and discontinued operations
† Includes investments in joint ventures and associates

£1,361m

2015/16: £1,173m

Capital investment

£1,027m

2015/16: £1,084m

£511m

2015/16: £486m

Statutory operating profit

£507m

2015/16: £486m

Capital investment

£214m

2015/16: £186m

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

National Grid Annual Report and Accounts 2016/17

Strategic Report

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

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

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 liquefied natural gas
(LNG) importation terminal; US LNG operations;
US unregulated transmission pipelines; and
corporate activities.

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

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

Adjusted operating profit

£1,713m

2015/16: £1,185m

Statutory operating profit

£1,278m

2015/16: £1,196m

Capital investment

£2,247m

2015/16: £1,856m

Adjusted operating profit

£177m

2015/16: £370m

Statutory operating profit

£62m

2015/16: £370m

Capital investment

£374m

2015/16: £254m

US regulated RoE %

UK regulated RoE %

16/17
2015

2014

2013

2012

8.2
8.0

8.4

9.0

9.2

16/17

15/16

14/15

13/14

12/13

13.1
13.3

13.7

12.7

13.6

Adjusted operating profit

£894m

2015/16: £882m

Statutory operating profit

£894m

2015/16: £860m

Capital investment

£588m

2015/16: £566m

Gain on sale

£5,321m

Cash receipts of £5.5bn

At a glance

National Grid Annual Report and Accounts 2016/17Strategic ReportChairman’s statement

National Grid is responding positively to wide-reaching
developments in our operating environment and taking
steps to build a stronger foundation for the future.

“We have a
role to play
in helping
communities
have fair and
equal access to
opportunities
to be successful.”

In focus
Full-year dividend of

44.27 p/share

Final dividend of 29.10 p/share
expected to be paid on
16 August 2017*

Special dividend for payment
on 2 June 2017

84.375p

Responsible business

www.nationalgrid.com/responsibility

Our KPIs

pages 10–13

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

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

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

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

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

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

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

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

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

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

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

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

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

National Grid Annual Report and Accounts 2016/17

Strategic Report

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sir Peter Gershon
Chairman

Chairman’s statement

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

The past year was an important period for National Grid.
We completed the sale of a majority interest in our UK Gas
Distribution business, made progress with our new rates
in the US, and developed our thinking on National Grid’s
purpose, vision and strategic direction.

“Our purpose,
which sets out
why National
Grid exists, is
simple – we
bring energy
to life.”

A period of change

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

Find out more

For more information on the challenges
we face see page 9

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

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

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

Our performance in 2016/17
In terms of safety, our overall lost time injury
frequency rate for the Group was 0.08, which
is considered to be world class. This figure,
which includes our contractors and excludes
the UK Gas Distribution business, is slightly
different to our KPI for the Group’s employee
injury frequency rate. You can read about this
on page 10.

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

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

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

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

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

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

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

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

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

National Grid Annual Report and Accounts 2016/17

Strategic Report

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

John Pettigrew
Chief Executive.

Chief Executive’s review

National Grid Annual Report and Accounts 2016/17Strategic ReportOur purpose, vision, strategy and values

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

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

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

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

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

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

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

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

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

1) Find new ways of optimising our

operational performance

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

2) Look for opportunities to grow

our core business

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

3) Make sure National Grid is better

equipped for the future

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

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

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

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

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

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

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

National Grid Annual Report and Accounts 2016/17

Strategic Report

Our operating environment

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

Commentary

Developments

Our response

Affordability

Security of supply

Sustainability

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

National Grid Annual Report and Accounts 2016/17

Our operating environment

Strategic Report

Progress against our current strategy

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

Our strategic objectives

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

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

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.

National Grid Annual Report and Accounts 2016/17

Strategic Report

Deliver operational
excellence

Achieve world-class levels
of safety, reliability, security
and customer service.
Our customers, communities and other
stakeholders demand safe, secure and
reliable supply of their energy. This is reflected
in our regulatory contracts where we are
measured and rewarded on the basis of
meeting our commitments to customers
and other stakeholders.

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

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

0.17

0.14

0.13

0.10

12/13

13/14

14/15

15/16

16/17

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

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

Methodology

UK RIIO-related metrics

agreed with Ofgem

US Customer Trust
Advice metric

Measure

Score from
surveys

Score from
survey

UK Electricity
Transmission

UK Gas
Transmission

UK Gas
Distribution

16/17

15/16

Target

7.4

8.0

7.5

7.6

8.4

6.91

8.31

US – Residential3

60.7% 56.5%

57.4%

1. Figures represent our baseline targets set by Ofgem

for reward or penalty under RIIO. The maximum score
we can receive is 10.

2. Our customer satisfaction results are reported

on an annual basis with the results being published
later this year.

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

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

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

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

Network reliability

Target
or base
%

Performance
against
target

16/17

UK Electricity
Transmission T 99.9999 99.999964

exceeded

UK Gas
Transmission T

100

99.97500

not achieved

UK Gas
Distribution

99.999

99.998

not achieved

US Electricity
Transmission B

99.9

99.97

no target

99.9

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

99.994

no target

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

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

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

Group RoE %

11.7

11.2

11.4 11.4

11.8 11.8

12.3 12.3

11.7 11.7

12/13

13/14

14/15

15/16

16/17

Including major storms
Excluding major storms

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

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

Engage our people

Create an inclusive, high-
performance culture by
developing all our employees.
It is through the hard work of our employees
that we will achieve our vision, respond to
the needs of our stakeholders and create a
competitive advantage. Encouraging engaged
and talented teams that are in step with our
strategic objectives is vital to our success.

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

Employee engagement index %

Data Not
Available

12/13

13/14

14/15

15/16

16/17

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

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

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

Progress against our current strategy

National Grid Annual Report and Accounts 2016/17Strategic ReportProgress against our current strategy continued

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

Workforce diversity %

22.7

23.1

23.6

23.5

23.4

13.8

13.9

14.1

14.5

15.7

12/13

13/14

14/15

15/16

16/17

Women
Ethnic minority

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

Stimulate innovation

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

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

Engage externally

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

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

Community engagement and
investment in education £

12,364,891

10,795,042

Not
measured

12/13

13/14

14/15

15/16

16/17

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

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

Skills and capabilities
Interactions

29,591

18,408

Not
measured

12/13

13/14

14/15

15/16

16/17

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

Embed sustainability

Integrate sustainability into
our decision-making to create
value, help preserve natural
resources and respect the
interests of our communities.
Our long-term sustainability strategy sets our
ambition to deliver these aims and to embed a
culture of sustainability within our organisation.

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

Greenhouse gas emissions
Million tonnes carbon dioxide equivalent

8.2

7.5

7.3

7.2

12/13

13/14

14/15

15/16

16/17

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

National Grid Annual Report and Accounts 2016/17

Strategic Report

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

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

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

Total Adjusted EPS pence

73.0

63.2

57.3

50.2

52.8

12/13

13/14

14/15

15/16

16/17

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

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

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

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

Drive growth

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

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

Value Added £bn

2.1

57.2

1.7

1.8

1.9

47.6

51.6

44.7

Not
measured

12/13

13/14

14/15

15/16

16/17

Value Added per share (pence)

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

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

Total regulated asset base and
regulated asset base growth £bn

42.6

10%

34.7

33.7

37.0

38.8

12/13

13/14

14/15

15/16

16/17

Regulated asset base growth

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

Progress against our current strategy

National Grid Annual Report and Accounts 2016/17Strategic ReportOur business model

How we generate long-term value

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

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

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

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

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

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

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

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

How we generate value

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

Revenue

Cash flows

Investment

The vast majority of our
revenues are set in
accordance with our
regulatory agreements,
(see pages 174–179)
and are calculated based
on a number of factors:
investment in network
assets; performance
against incentives; allowed
returns on equity and
cost of debt; and
customer satisfaction.

Our ability to convert
revenue to profit and
cash is important. By
managing our operations
efficiently, safely and
for the long term, we
are able to generate
strong sustainable
cash flows to finance
returns through
dividends but also to
provide funds for growth.

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

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

Our stakeholders

Our measures of success

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

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

• Operating excellence/safety
• Network reliability
• Greenhouse gas emissions
• Customer satisfaction

• Employee engagement
• Workforce diversity

• Adjusted EPS
• Returns on equity
• Value added

We create value for our stakeholders
and communities by:
• operating as safely, reliably and sustainably

•

as possible;
focusing on affordability to reduce the
impact on customer bills;

• delivering essential services, while

managing loss of supply and customer
service issues in a timely way; and

• aiming to improve customer satisfaction

at all times.

We create value for our people by:
• paying them a market competitive wage,
and an overall pay package that rewards
competency and performance; and
• providing an inclusive culture and
encouraging development and
employee enablement.

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

maintain an acceptable balance
between risk and return;

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

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

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

• disciplined investment in our networks

and protecting our reputation.

National Grid Annual Report and Accounts 2016/17

Strategic Report

Internal control and risk management

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

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

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

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

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

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

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

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

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

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

Risk management process

Feedback and reporting

Vision and
strategic
objectives

I d e n t ify risks

Vision and
strategic
objectives

I d e n t ify risks

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Internal control and risk management

National Grid Annual Report and Accounts 2016/17Strategic Report

Internal control and risk management continued

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

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

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

Risk area

Growth

Energy policy

Emerging
technology

Safety

Risk description

Example of mitigations

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.

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

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

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

• Processes and resources are in place to review, undertake due

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

• While good progress has been made this past year, we must

remain focused on increasing development opportunities in our
core business and emerging opportunities. Mitigating actions
focus on building our business development pipeline and our
capability to pursue non-organic growth options.

•

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

• As part of our new business strategy, we have renewed our

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

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

• We continue to commit significant resources and financial

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

• We have a mature insurance strategy that uses a mix of

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

National Grid Annual Report and Accounts 2016/17

Strategic Report

Risk area

Risk description

Example of mitigations

Data management Failure to operate with a sufficiently mature

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

Cyber breach

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

Leadership
capacity

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

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

• These standards have been launched in the business and will

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

• To support these efforts, we are establishing regional centres

of excellence for data management. Their role will be to provide
expertise to the businesses and to help provide assurance
around the effectiveness of the data management standards.

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

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

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

• The rigour of our succession planning and development

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

•

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

• To help understand our workforce, we formally solicit

employee opinions via a Group-wide employee survey
that is conducted annually.

Internal control and risk management

National Grid Annual Report and Accounts 2016/17Strategic ReportInternal control and risk management continued

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

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

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

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

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

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

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

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

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

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

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

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

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

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

National Grid Annual Report and Accounts 2016/17

Strategic Report

Viability statement

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

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

1. We have reasonable clarity over a five-year

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

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

It matches our business planning cycle.

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

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

this will not have an adverse impact on the
viability of the Company.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Risk

Matters considered by the Board

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

Updates and reviews of:
• the future role of the ESO;
• the impact of Brexit;
• US Regulatory Strategy and initiatives to improve customer service; and
• UK Regulatory Strategy.

Catastrophic asset failure resulting in a significant
safety event.

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

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

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

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

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.

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

The Board has also undertaken cyber security training.

The Board has held three strategy sessions this year.

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

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

Viability statement

National Grid Annual Report and Accounts 2016/17Strategic ReportFinancial review

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

This section

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

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

In focus

Use of adjusted profit and definitions
of alternative performance measures:
page 193.

Commentary on the consolidated
income statement: page 85.

Commentary on results of our principal
operations by segment: pages 97–98.

In focus
Reconciliations of adjusted profit
measures: page 193.

Commentary on statement of
financial position: page 89.

Additional commentary on financial KPIs

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

from the results of that business, which we
report within discontinued operations.

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

Statutory operating profit

Exceptional items and
remeasurements

Adjusted operating profit
Adjusted net finance costs

Share of post-tax results of joint
ventures and associates

Adjusted tax

Attributable to non-controlling
interests

Adjusted earnings

Adjusted EPS

Statutory earnings

Statutory EPS

2017

2016

Continuing
Operations

Discontinued
Operations

Total

Continuing
Operations

Discontinued
Operations

Total

3,208

894

4,102

3,225

860

4,085

565

3,773
(1,029)

(666)

–

2,141

56.9

1,810

48.1

–

565

894 4,667
(1,175)
(146)

–

(142)

(808)

607 2,748

16.1

73.0

5,985

7,795

159.0

207.1

(11)

3,214
(856)

(604)

(1)

1,812

48.0

1,901

50.4

882 4,096
(1,013)
(157)

–

(149)

(753)

(2)

(3)

574 2,386

15.2

63.2

690

2,591

18.3

68.7

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

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

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

+45%
1,713

+17%
1,372

878

+5%
511

UK Electricity
Transmission

UK Gas
Transmission

US
Regulated

Other
activities

-52%
177

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

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

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

National Grid Annual Report and Accounts 2016/17

Strategic Report

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Year ended 31 March

£bn at constant currency

UK regulated assets1
US regulated assets1
Other invested capital

Total assets
Dividend paid

Share buyback

Movement in goodwill
Net debt2

Value Added

2016 Change

2017

26.6

17.1

2.2

45.9

25.9

16.3

2.0

44.2

+0.7

+0.8

+0.2

+1.7

+1.5

+0.2

–

-1.5

+1.9

(29.1)

(27.6)

1. Includes assets held outside RAV and rate base

including deferrals of cost recoveries e.g. environmental
and pension costs.

2. Net debt at 31 March 2017 adjusted to remove the

impact of the UK Gas Distribution sale.

Value Added per share

Year ended 31 March

2017

51.6p

2016

47.6p

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

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

Financial review

National Grid Annual Report and Accounts 2016/17Strategic ReportFinancial review continued

Other performance
measures

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

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

UK return on equity %

13.6

12.7

13.7

13.3

13.1

12/13

13/14

14/15

15/16

16/17

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

US return on equity %

Return on capital employed %

8.6

8.0

7.1

8.6

8.1

7.8

6.4

6.0

5.7

12/13

13/14

14/15

15/16

16/17

UK
US

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

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

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

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

Capital expenditure for continuing
operations £m

9.2

9.0

8.4

8.0

8.2

3,014

2,951

2,958

3,735

3,327

2012

2013

2014

2015

2016/17

RoEs for 2012 to 2015 are for calendar years, RoE for
2016/17 is for the fiscal year to 31 March 2017.

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

12/13

13/14

14/15

15/16

16/17

UK Electricity
Transmission

UK Gas
Transmission

US Regulated

Other activities

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

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

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

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

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

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

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

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

We additionally monitor interest cover, which
is a measure of the cash flows we generate
compared with the net interest cost of servicing
our borrowings. Interest cover for the year
was 5.0 times (2015/16: 5.5 times; 2014/15:
5.1 times). Our target long-term rate for
interest cover is in excess of 3.0 times.

National Grid Annual Report and Accounts 2016/17

Strategic Report

In focus
Commentary on the consolidated cash
flow statement page 91

Commentary on borrowings page
127–128

In focus
UK regulation pages 174–175

US regulation pages 176–179

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

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

Regulatory financial
performance

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

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

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

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

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

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

Financial review

National Grid Annual Report and Accounts 2016/17Strategic ReportPrincipal operations – UK

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

Nicola Shaw CBE
Executive Director, UK

In focus

Evolving energy landscape

11.9GW

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

Cost savings for consumers

£200m

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

Transmission

284TWh

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

90.5bcm

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

Distribution

10.9m

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

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

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

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

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

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

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

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

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

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

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

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

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

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

National Grid Annual Report and Accounts 2016/17

Strategic Report

Switchgear replacement in Walpole

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

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

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

“The positive team ethic,
which we developed
together over a period of
time, led to an extremely
productive 2016.”
Geraint Hancock
Project Manager at UK Power Networks

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

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

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

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

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

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

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

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

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

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

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

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

Principal operations

National Grid Annual Report and Accounts 2016/17Strategic Report

Principal operations – US

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

Dean Seavers
Executive Director, US

In focus

Electricity

3.5m

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

Gas

3.6m

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

National Grid Annual Report and Accounts 2016/17

Strategic Report

Buffalo Niagara Medical Campus

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

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

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

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

“It’s a partnership
model for the
future, National
Grid seeded
initiatives that
have changed
the game.”
Matt Enstice, President & CEO,
Buffalo Niagara Medical
Campus, Inc. Canisius College

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Principal operations

National Grid Annual Report and Accounts 2016/17Strategic ReportPrincipal operations – Other activities

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

National Grid Ventures

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

In focus

Sunrun

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

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

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

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

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

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

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

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

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

National Grid Annual Report and Accounts 2016/17

Strategic Report

“It’s a project that
ticks the boxes –
helping to meet
renewable energy
targets and
keeping the lights
on for customers.”
Nigel Williams
Project Director, North Sea Link

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

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

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

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

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

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

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

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

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

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

Principal operations

National Grid Annual Report and Accounts 2016/17Strategic ReportOur people

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

Being good neighbours

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

Ron Lamb, Rhode Island

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

National Grid Annual Report and Accounts 2016/17

Strategic Report

In focus

100%

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

6.5

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

Celebrating our female role models

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

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

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

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

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

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

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

Financial year ended 31 March 2017

Our
Board

Senior
management

Whole
Company*

Male

Female

Total

Male %

Female %

66.7%

33.3%

167

235

71.1%

28.9%

16,802

5,330

22,132

75.9%

24.1%

* This measure is also one of our Company KPIs.

See page 12 for more information.

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

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

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

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

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

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

Our people

National Grid Annual Report and Accounts 2016/17Strategic ReportLetter from the Chairman
and Corporate Governance contents

Sir Peter Gershon
Chairman

Corporate Governance contents

Letter from the Chairman
Corporate Governance
– Board focus

– Our Board

– Board composition

– Board and committee membership

and attendance

– Directors’ induction programme

– Director development and training

– Investor engagement

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

38
40
45
46
47
48
49

53
54

Dear Shareholders,
This last year has seen a significant focus on shaping
the strategic direction of the Company and maximising
value creation for our shareholders. The Board has
overseen the sale of a majority interest in the Company’s
UK Gas Distribution business, given approval for the IFA2
interconnector, the formation of a partnership with Sunrun
in the US and the work undertaken to support a more
independent electricity system operator in the UK.

We are mindful of value creation for shareholders as
well as our responsibility to all stakeholders in our decision
making. The Board always takes into consideration its
fiduciary duties to the Company under the Companies Act
2006, in particular the duty to promote the success of the
business, when arriving at decisions that it believes are in
the best interests of shareholders and the long-term future
of the Company.

The Board has also undertaken site visits in Buffalo, US,
participated in three strategy sessions and received training
on the Market Abuse Regulations that came into force in
July 2016 as a result of EU legislation.

National Grid Annual Report and Accounts 2016/17

Corporate Governance

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

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

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

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

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

Sir Peter Gershon
Chairman

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

Areas of focus

Commentary

The sale of the Gas
Distribution business

The sale of the UK Gas Distribution business has been a
feature on every agenda this year and the Board has had
input into all the key decisions. The Board has received
updates from the project management team on a range
of topics, including the transfer of employees to the new,
separate company, negotiations with the pension trustees
and progress against the project timetable.

bids against a set of financial and non-financial criteria
that evaluated the value of the bid but also the suitability
of the bidder. Following discussion, the Board unanimously
approved entering in to detailed discussions with the
Consortium for the disposal of a majority interest in the
UK Gas Distribution business and an announcement to
the market was made.

In September, an additional Board meeting was arranged
to consider the first round bids and again in December to
consider second round bids. The Board assessed the

Discussions in March and April focused on the most
appropriate way to return the proceeds of the sale to
shareholders.

The future of the
System Operator

Cyber security

The Board has been kept involved with the future of
the ESO ahead of the joint announcement with the
government and Ofgem of a more independent system
operator (ISO) earlier this year. Updates on progress were

received in April, June and November and the Board
considered the proposed operator model and governance
arrangements and whether the move to an ISO was in the
interests of both customers and shareholders.

Cyber security has remained high on the Board agenda
this year. In December the Board participated in a
two-hour cyber training session delivered by an industry

expert. Moving forward the Board will also receive triannual
cyber management reports to monitor this risk.

The strategic
partnership
with Sunrun in the US

In line with the Code, the Board, and in particular, the
Non-executive Directors should constructively challenge
and help develop proposals on Strategy. Further to
discussions in the July and September strategy sessions

around distributed energy resources, the Board
considered a proposal to form a strategic partnership
with Sunrun in December. The proposal was carefully
considered and approved.

European Energy and
the implications of
Brexit

US regulatory
rate case filings

Mid-period review

Principal risks and
viability

Purpose, vision
and strategy

Site visits

Following the outcome of the EU Referendum, the Board
discussed the implications for the Company at its June
meeting. The issue was also considered in relation to the
final investment decision for the IFA2 interconnector
project with respect to access to the Internal Energy
Market and any adverse effect on import tariffs.

The Board has received regular updates on the
Company’s regulatory strategy and the progress of
regulatory rate case filings in the US. Senior employees
from the US jurisdictions have attended Board

In August, Ofgem published initial proposals for a
mid-period review into the price controls for RIIO-T1.
The Board has been kept up to date with progress on the
Company’s response to the consultation and also market

The Board is responsible for determining the nature
and extent of the Company’s principal risks. The Board
discussed the Group risk profile in September and
March and gave consideration to whether there were
any changes to existing risks, any emerging risks, and
whether the agreed principal risks were consistent with
the Company’s risk appetite levels.

In addition to time spent in Board meetings discussing
strategy, the Board also participated in three separate
strategy sessions this year. The first session focused
on how the energy industry is evolving, the Company’s
strategic priorities and proposals for developing the

The Board will receive an update on a triannual basis
so it can monitor the external political environment and
take this into account in its strategic decision making.

meetings to provide an overview of the political and
stakeholder context in each area and to discuss the
opportunities and challenges that exist.

reaction to the review stages. The Board noted Ofgem’s
final decision in February and will continue to monitor the
Company’s engagement with the regulator.

The impact of the principal risks was tested over the
established assessment period of five years. The Board
confirmed that it was satisfied with the assessment of
the risks including the testing, management and mitigation.
In May, the Audit Committee recommended the viability
statement to the Board and it was approved.

Company’s purpose, vision and values. The final two
sessions considered the Company’s capabilities and
resources and also explored technology and innovation
projects used internally and those available externally.

As referenced last year, the Board meeting in September
2016 took place in Buffalo in the US. The Board members
took this opportunity to explore the work undertaken by
the Company in the local area such as the collaboration
with the Buffalo Niagara Partnership and the Company’s

role in providing infrastructure for the developments
in the River Bend area. The visit also allowed the Board
to interact with various local stakeholders and employees
and gain further insight in to the day-to-day operations of
the Company.

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

• continued regular reviews of safety activities;
• UK and US operational business overviews;
• preparation for RIIO T-2;
• continued detailed review of our strategy for growth and its financing;
•
•
•

the implications of Brexit on our activities;
the future of the SO;
the outcome of the US regulatory rate case filings, including upstate
New York, Rhode Island and the Massachusetts gas companies;

• cyber security updates;
•
•
•

innovation;
the 2017 UK Winter Outlook;
results and follow-up on the action planning from the Board and
committee evaluation;

• updates on UK and US corporate governance and other policy

developments; and
results of the 2017 employee engagement survey.

•

Corporate Governance

National Grid Annual Report and Accounts 2016/17Corporate GovernanceCorporate Governance continued

Our Board

Key

A Audit Committee

F Finance Committee

N Nominations
Committee

R Remuneration
Committee

S Safety, Environment
and Health Committee

(ch) Chairman
of committee

Tenure as at
31 March 2017

Charts and committee
membership are
as at 17 May 2017

Sir Peter Gershon CBE FREng (70)
Chairman N (ch)

John Pettigrew FEI, FIET (48)
Chief Executive F

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

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

Nicola Shaw CBE (47)
Executive Director, UK

Appointed: 1 July 2016

Tenure: Less than a year

Tenure: 5 years

Tenure: 3 years

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

Skills and experience:
Ci, Cu, E, GM, G and I.

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

Skills and experience:
E, G, GM, R and U.

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

Skills and experience:
G, I, R and U.

Andrew Bonfield (54)
Finance Director F

Dean Seavers (56)
Executive Director, US

Appointed: 1 November 2010

Appointed: 1 April 2015

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

Jonathan Dawson (65)
Non-executive Director F, N, R (ch)

Independent

Tenure: 6 years

Tenure: 2 years

Appointed: 1 June 2012

Appointed: 4 March 2013

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

Skills and experience:
Fi, I and U.

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

Skills and experience:
Ci, Cu, Fi, GM and I.

Tenure: 4 years

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

Skills and experience:
G, R and U.

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

Skills and experience:
B, Ci, Fi and P.

National Grid Annual Report and Accounts 2016/17

Corporate Governance

Pierre Dufour (62)
Non-executive Director N, R, S

Therese Esperdy (56)
Non-executive Director A, F (ch), N

Paul Golby CBE FREng (66)
Non-executive Director A, N, S (ch)

Independent

Appointed: 16 February 2017

Tenure: Less than a year

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

Skills and experience:
Cu, E, GM, I and Sa.

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

Appointed: 1 February 2012

Tenure: 5 years

Tenure: 3 years

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

Skills and experience:
B, Ci, Fi and I.

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

Skills and experience:
Cu, E, G, R, Sa and U.

Ruth Kelly (49)
Non-executive Director A, F, N

Independent

Appointed: 1 October 2011

Tenure: 5 years

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

Skills and experience:
B, Fi, G and R.

Mark Williamson (59)
Non-executive Director and Senior
Independent Director A (ch), N, R

Alison Kay (53)
Group General Counsel
& Company Secretary

Independent

Appointed: 3 September 2012

Tenure: 4 years

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

Skills and experience:
Ci, Fi, G, R and U.

Appointed: 24 January 2013

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

Skills and
experience key

B Banking

Ci City*

Cu Customer

E Engineering

Fi Finance

GM General
Management

G Government

I International

P Pensions

R Regulation

Sa Safety

U Utilities

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

Board gender

Women

Men

Executive and
Non-executive
Directors

Executive

Non-executive
(includes Chairman)

Non-executive
Director tenure

0–3 years
3+ years
(includes Chairman)

Our Board

National Grid Annual Report and Accounts 2016/17Corporate GovernanceCorporate Governance continued

Corporate Governance

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

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

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

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

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

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

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

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

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

Key

Lines of reporting

Board to
Board committees

Board and committee interactions

Board

Executive Committee
to Board/Board
committees

Board
committees

Management
committees to
Executive Committee/
Board committees

Lines of
communication

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

Disclosure
Committee

Global
Retirement Plan
Committee

National Grid Annual Report and Accounts 2016/17

Corporate Governance

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

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

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

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

Director

Board Meetings

Audit

Finance

Nominations

Remuneration

Sir Peter Gershon

John Pettigrew

Andrew Bonfield

Dean Seavers

Nicola Shaw1

Nora Mead Brownell

Jonathan Dawson

Pierre Dufour2

Therese Esperdy

Paul Golby

Ruth Kelly

Mark Williamson

Steve Holliday3

11 of 11

8 of 8

11 of 11

10 of 11

1 of 1

11 of 11

3 of 3

–

6 of 6

5 of 6

6 of 6

–

4 of 4

–

3 of 4

–

4 of 4

–

4 of 4

–

7 of 7

–

7 of 7

6 of 7

–

7 of 7

6 of 7

7 of 7

–

8 of 8

1 of 1

–

5 of 8

–

8 of 8

–

Safety,
Environment

& Health

–

5 of 5

–

5 of 5

–

0 of 1

–

5 of 5

–

Attendance notes
1. Nicola Shaw was appointed as Executive Director, UK with effect from 1 July 2016. 2. Pierre Dufour was appointed as a Non-executive Director with effect

from 16 February 2017. 3. Steve Holliday stepped down from the Board with effect from 22 July 2016.

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

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

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

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

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

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

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

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

This includes:

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

• offering the opportunity for individual

stewardship meetings.

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

Corporate Governance

In focus

365

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

Further detail on
www.nationalgrid.com/
investors

National Grid Annual Report and Accounts 2016/17Corporate GovernanceCorporate Governance continued

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

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

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

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

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

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

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

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

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

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

Board and committee evaluation

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

Board and
committee
evaluation
cycle

Year 1
2015/16

Year 2
2016/17

Year 3
2017/18

Externally
facilitated
evaluation

Internal
review

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

• clarity of the Company’s purpose and values;
• effectiveness of the Board’s oversight, shaping and

•
•

monitoring of the Company’s culture;
the balance and structure of Board governance;
the ability of the Board to hold management accountable
for operating the business day-to-day in alignment with
the Company’s purpose and values;

• how the right tone in the boardroom can be set to

reinforce the Company’s purpose and culture and to
empower Board members to raise concerns; and
• ascertaining how the Company’s reward structure

encourages behaviours consistent with the
Company’s culture.

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

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

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

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

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

Actions for 2017/18
• Develop a common definition of ‘culture’ for the

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

• Determine the Board’s role in guiding the cultural

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

National Grid Annual Report and Accounts 2016/17

Corporate Governance

• Develop a method for the Board to track culture

within National Grid
Responsibility: Executive Directors/Human Resources

• Assist with the establishment of a desired culture

throughout the National Grid businesses
Responsibility: Executive Directors/Group General
Counsel & Company Secretary

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

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

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

Progress against actions from 2015/16
Progress against the actions from last year’s externally
facilitated evaluation has been monitored by the Group
General Counsel & Company Secretary and the Chairman
throughout the year and an update on progress was
provided at the April 2017 Board meeting. A commentary
against each action from last year’s review is set out
below. Progress against the actions from last year’s
Board Committee evaluation has also been monitored
throughout the year.

Update on actions from last year

Area

Board
papers

Actions

Commentary

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

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

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

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

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

Bringing out
strategic
themes

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

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

Strategic
proposals

Responsibility: Chief Executive/
Group General Counsel &
Company Secretary

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

Responsibility: Chairman

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

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

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

Risk
and risk
management

Integrate risk more effectively into
strategy development and planning.

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

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

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

Board
composition

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

Responsibility: Chairman

People

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

Responsibility: Chief Executive/
Group General Counsel &
Company Secretary

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

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

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

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

Board and committee evaluation

National Grid Annual Report and Accounts 2016/17Corporate GovernanceCorporate Governance continued

Mark Williamson
Committee chairman

Audit Committee

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

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

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

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

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

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

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

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

National Grid Annual Report and Accounts 2016/17

Corporate Governance

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

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

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

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

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

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

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

Mark Williamson
Committee chairman

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

Examples of Committee focus during the year included:

Areas of focus

Commentary

Viability statement

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

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

Fair, balanced and
understandable

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

Financial reporting

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

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

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

External auditor
independence and
performance

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

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

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

The Committee also considered and approved amendments to the Company’s policy on the provision of non-audit
services by the auditor to take account of the implementation of the EU Audit Regulation and Directive on non-audit
services. See page 43 for more details.

Further details of the transition to Deloitte and the process undertaken to ensure that they were considered to be
independent from 1 January 2017 are included on page 44.

Going concern
statement

At its May meeting, the Committee considered the Group’s short-term liquidity and capital and considered it
appropriate to adopt the going concern basis in the financial statements. The Board considered and approved
the Committee’s recommendation at its May meeting. The Company’s going concern statement is set out on
page 92, note 1A.

Disclosure Committee
reports

When reviewing the half- and full-year announcements, the Committee considers reports of the Disclosure Committee.
The Disclosure Committee also reports the results of its evaluation of the effectiveness of the Company’s disclosure
controls to the Audit Committee. See page 49 for more information on the role of the Disclosure Committee.

Sarbanes-Oxley Act
2002 testing and
attestations

The Committee receives regular updates on the status of testing and considers the impact of deficiencies reported in
the past year. See page 18 for the Company’s statement on the effectiveness of internal control over financial reporting.

In September, alongside the SOX compliance update, the Committee received an update on the launch of a SOX
refresh programme which would review the overall Group SOX approach following significant business change with
the sale of the UK Gas Distribution business.

The Committee also received updates on the SOX control findings in March and May in support of the year-end
accounts, as well as an update on the SOX refresh programme.

Audit Committee

National Grid Annual Report and Accounts 2016/17Corporate GovernanceCorporate Governance continued

Examples of Committee focus during the year included:

Areas of focus

Commentary

Corporate Audit

The Committee received regular controls updates from the Corporate Audit team. Management actions on audit
findings have continued to be a focus at Executive meetings resulting in greater visibility of audit findings, increased
ownership of actions and greater engagement by senior management.

In accordance with best practice, the Corporate Audit Charter was reviewed against the Institute of Internal Auditors
(IIA) international standards and the IIA model charter. No changes to the charter were proposed.

See page 44 for more details on the work of the Corporate Audit team including the outcome of the recent review
by the IIA.

Risk management

The Committee has been delegated responsibility by the Board for monitoring and assessing the effectiveness of our
risk management processes. During the year, the Committee received reports to be considered by the Board on risk
process developments to enable the Committee to keep fully appraised of changes in the risk profile of the Company
and to allow it to monitor the management of risk throughout the year.

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

You can read more about our risk management process and the review of effectiveness on pages 15 to 18. Details
of our internal control systems, including those relating to the financial reporting process, can be found on pages 18
and 180.

Cyber security
risk management

An update on the status of our cyber security risk management process and cyber security strategy was presented
to the Committee in September 2016 and March 2017. The Committee noted that following an in-depth assessment
of National Grid’s cyber security maturity, a revised cyber security strategy was developed.

The Committee also noted that during the development of the new strategy, Corporate Audit continued to provide
assurance in relation to cyber security risk through delivery of a balanced portfolio of planned audits.

Compliance
management

The Committee receives bi-annual reports on compliance with external legal obligations and regulatory commitments.
These reports also updated the Committee on progress against the compliance improvement programme initiated
in 2015. The Committee noted that significant progress had been made in strengthening the existing control framework
with increased engagement and responsibility for actions improving our overall compliance performance.

The Committee also requested that a review of the assurance framework against best practice be undertaken to
identify if there were additional areas of assurance that needed to be covered. The benchmarking exercise indicated
that there were no significant areas not covered by the framework and that the approach was consistent with the peer
group reviewed. Improvements identified would be incorporated into the assurance programme to help strengthen
our assurance framework.

Business separation
compliance

National Grid Gas’s Gas Transportation Licences require business separation between UK Gas Transmission and
UK Gas Distribution to prevent any unfair advantage being obtained by our UK Gas Distribution business over other
independent distribution networks. Business separation compliance reports are submitted to the Committee twice
a year, in May and November.

The Committee noted that the Business Separation Compliance Officer was actively engaged in the sale of the
UK Gas Distribution business with regard to the review of business separation licence obligations.

Business conduct

The Committee receives a bi-annual ethics and business conduct report so that it can monitor the management
and mitigation of business conduct issues as part of the wider control framework.

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

The Committee also receives annual reports on the Company’s anti-bribery procedures and reviewed their adequacy.

Committee
performance
evaluation

The Committee received updates on the action plan agreed following the 2015/16 Committee performance evaluation
at its November 2016 and May 2017 meetings and noted the progress made against the actions identified.

The 2016/17 Board and committee evaluation was conducted internally, see page 38 for more details. The
recommended actions for the Audit Committee were considered by the Committee in May and an action plan agreed.

National Grid Annual Report and Accounts 2016/17

Corporate Governance

Significant issues
The most significant issues the Committee
considered in relation to the financial
statements concerned the accounting
implications of the sale of a majority interest
in the UK Gas Distribution business and the
US financial control environment, including
plant accounting.

In addition to commentary in these areas,
the independent auditors’ report (pages 75
to 82) also includes other areas of focus,
including the accuracy and valuation of treasury
derivative transactions, accounting for net
pension obligations, revenue recognition,
and valuation of environmental provisions
which were also considered by the
Committee during the year.

Accounting for the sale of the UK Gas
Distribution business
The key accounting implications subject
to detailed consideration by the Committee
comprised:

•

the point at which the business met the
criteria to be classified as ‘held for sale’;
the classification of costs between
continuing and discontinued operations,
(including exceptional and financing costs);
and
the accounting applied in respect of the
retained 39% interest in the new separate
business, including:
– the classification of the retained interest
as an associate, reflecting significant
influence exercised by the Group
through its equity interest; and
– the assessment of the fair value of
the retained interest on acquisition.

‘Held for sale’
IFRS 5 states that an asset is considered
as held for sale provided two conditions are
met: it must be available for immediate sale
in its present condition and its sale must be
highly probable.

The Committee challenged management on
the identification of the point at which the UK
Gas Distribution business sale transaction
became highly probable. Having considered
evidence concerning the receipt and evaluation
of bids as well as progress on the business
separation activities, the Committee concurred
with management’s judgement that the sale
was not deemed to be highly probable until
shortly prior to the announcement on 8
December 2016. The resulting impact on
depreciation and amortisation is set out in
note 9.

Classification of costs
In relation to the classification of costs between
continuing and discontinued operations, the
Committee carefully considered management’s
approach to the contractual and other
arrangements put in place at the point of the
business separation for the purposes of
determining an appropriate allocation of costs
throughout 2016/17 and prior periods. The
Committee concurred with management’s
analysis, and in particular the judgements
described in note 9 concerning interest costs
(including liability costs).

The retained interest
The Committee considered the judgements
presented by management as regards the
‘fair value’ of the retained interest, of the UK
Gas Distribution business. The Committee
concurred with management that on the basis
of evidence of recent and historic comparable
transactions, a discount to the price paid by the
Consortium for control should be reflected in
the determination of the fair value of the retained
interest. Refer to note 15 for further details.

The Committee also considered the
accounting implications of the Further
Acquisition Agreement relating to the option
for the Consortium to acquire a further 14%
interest in the UK Gas Distribution business,
and the determination as to whether or not the
contract contains an embedded derivative.

US financial control environment
The Committee has continued to devote a
significant amount of time to reviewing
progress made by management to remediate
control deficiencies identified during 2015/16,
in the US financial controls environment.

The Committee received updates on progress
made by management against the measures
taken and timetable to remediate the US
financial control deficiencies. At year end
the Committee was pleased to note that the
majority of the control deficiencies identified
had been remediated. Management are
confident that the remaining control
weaknesses in relation to plant accounting
will be remediated in 2017/18.

As part of plant accounting, the Committee
received regular updates in respect of a
project to close out aged work orders
addressing an issue identified during the
2015/16 external audit.

The Committee also received updates on the
status of the US finance organisational design
programme. Corporate Audit provided support
during the transition to the new organisational
design to ensure that the integrity of the US
control environment was maintained.

External audit
The Committee is responsible for overseeing
relations with the external auditors, including
the proposed external audit plan, the approval
of fees, and makes recommendations to the
Board on their appointment or reappointment.
Details of total remuneration paid to auditors for
the year, including audit services, audit-related
services and other non-audit services, can be
found in note 3(e) of the consolidated financial
statements on page 100.

Auditor appointment
Consistent with prior years, an annual review
was conducted by the Committee of the level
and make-up of the external audit and non-audit
fees and the effectiveness, independence and
objectivity of PwC. Following this process, the
Committee was satisfied with the effectiveness,
independence and objectivity of PwC and
recommended to the Board their reappointment
for the year ended 31 March 2017 at the
2016 AGM.

Following the audit tender, the Committee has
recommended to the Board the appointment
of Deloitte as auditors for the year ending
31 March 2018. A resolution to appoint
Deloitte and giving authority to the Directors
to determine their remuneration will be
submitted to shareholders at the 2017 AGM.

Auditor independence and objectivity
The independence of the external auditors
is essential to the provision of an objective
opinion on the true and fair view presented in
the financial statements. Auditor independence
and objectivity is safeguarded by a number
of control measures, including:

•

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

• ensuring that employees of the external

auditors who have worked on the audit in
the past one year (two years for a partner
of the audit team) are not appointed to roles
with financial reporting oversight within the
Company in line with our internal code;
• monitoring the changes in legislation related
to auditor objectivity and independence to
help ensure we remain compliant;

• providing a business conduct helpline that

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

•

• PwC’s internal independence rules and

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

•

• an annual review by the Committee of the

structures, policies and practices in place to
make sure the external auditors’ objectivity
and independence is maintained.

During the year, the Committee considered
and approved changes to the Company’s
policy on the provision of non-audit services
by the auditor to take account of the
implementation of the EU Audit Regulation
and Directive on non-audit services. The key
changes made were to update the list of
prohibited services, principally in respect of tax,
and the introduction of a cap on the financial
value of non-audit services to 70% of the
average annual audit fees paid in the last three
financial years. The cap will be implemented
once we have three years of history of fees
charged by Deloitte, and so will be effective
for the financial year ending in March 2021.

Audit Committee

National Grid Annual Report and Accounts 2016/17Corporate GovernanceCorporate Governance continued

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

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

External audit transition arrangements
As described above, subject to shareholder
approval of their appointment at the 2017 AGM,
Deloitte will succeed PwC as the Company’s
auditor for the year ending 31 March 2018.

Auditor independence
The Company and Deloitte planned for
the firm to be independent in line with SEC
requirements with effect from 1 January 2017.
This date was chosen as the most appropriate
date for Deloitte to start to ‘shadow’ the
activities of PwC in the 2016/17 year-end audit.

In order for Deloitte to be considered
independent with effect from 1 January 2017,
non-audit services provided by the firm were
curtailed in a staged and orderly fashion over
the period between November 2015 and
December 2016. Regular updates were
provided to the Audit Committee on the status
of ongoing non-audit services throughout this
period and all services ongoing as at 1 January
2017 were re-approved by the Committee as
at that date. With effect from this date, all
non-audit services are subject to the same
protocols and policies as those applied in
respect of PwC.

In addition to the SEC requirements,
Deloitte became subject to EU independence
requirements with effect from 1 April 2017,
being the first day of the year ending
31 March 2018, adding certain further
restrictions on non-audit services
(principally taxation).

Other audit transition activities
The Committee welcomed Deloitte LLP
to the January, March, April and May 2017
Committee meetings to shadow PwC as
part of the transition process. Deloitte were
also granted access to management and
key documents in the UK and US to assist
in their transition activities.

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

The Committee has delegated approval of
services under this threshold to the Finance
Director. A list of all approved non-audit work
requests is presented to the Committee
quarterly, as well as annually in aggregate
to ensure the Committee is aware of all
non-audit services provided.

Additionally, the Committee receives quarterly
reports from management on non-audit
services and other consultants’ fees to
monitor the types of services being provided
and fees incurred.

Approval for the provision of non-audit services
is given on the basis the service will not
compromise independence and is a natural
extension of the audit, or if there are overriding
business or efficiency reasons making the
external auditors most suited to provide the
service. Certain services are prohibited from
being performed by the external auditors, as
required under the Sarbanes-Oxley Act 2002.

Total non-audit services provided by PwC
during the year ended 31 March 2017 were
£17.3 million (2016: £8.9 million), representing
87% (2016: 63%) of total audit and audit-related
fees (see note 3(e)). £10 million of the non-audit
fees related to work performed by PwC relating
to the disposal of the UK Gas Distribution
business, including a vendor due diligence
assignment, and work on the separation
of the business and its support functions.

Both these projects were discussed by the
Committee and approved in advance by the
Chairman of the Audit Committee prior to
work commencing. The Committee concluded
that the appointment of PwC would allow the
Group to realise significant benefit through the
utilisation of PwC’s accumulated knowledge
concerning the key financial reporting and IT
systems, as well as their knowledge of the Gas
Distribution business and the UK operations
more generally.

Total audit and audit-related fees include the
statutory fee and fees paid to PwC for other
services that the external auditors are required
to perform, such as regulatory audits and
SOX attestation. Non-audit fees represent all
other services provided by PwC not included
in the above.

Non-audit services provided by PwC in the
year included tax compliance services in
territories other than the US (£0.4 million), the
significant majority of which related to the UK.

The Committee considered that tax
compliance services were most efficiently
provided by the external auditors, as much of
the information used in preparing computations
and returns was derived from audited financial
information. In order to maintain the external
auditors’ independence and objectivity,

management reviewed and considered PwC’s
findings and PwC did not make any decisions
on behalf of management.

Non-audit services provided by Deloitte
As set out above, Deloitte became subject
to the Company’s policy on the provision
of non-audit services with effect from
1 January 2017.

Internal (corporate) audit
The corporate audit function provides
independent, objective assurance to the Audit,
Safety, Environment and Health and Executive
Committees on whether our existing control
and governance frameworks are operating
effectively in order to meet our strategic
objectives. Assurance work is conducted and
managed in accordance with the IIA
international standards for the Professional
Practice of Internal Auditing and Code of
Ethics. Following its most recent review,
Corporate Audit was given the highest rating –
Generally Conforms by the IIA on Standards
and Code of Ethics.

To keep the Committee informed of trends
identified from the assurance work and to
update on progress against the corporate audit
plan, the Head of Corporate Audit reports to
the Committee at least twice each year. These
reports present information on specific audits,
as appropriate, summarise common control
themes arising from the work of the team
and update on progress with implementing
management actions.

In order to meet the objectives set out in the
Corporate Audit Charter, audits of varying
types and scopes are conducted as part of
the annual corporate audit plan. The audit plan
is based on a combination of risk-based and
cyclical reviews, together with a small amount
of work that is mandated, typically by US
regulators. The audit plan is agile and regularly
reviewed to prioritise audits relevant to the
needs of and to reflect evolving risks and
changes to the business. The audit plan is
now aligned between General Audit, Safety,
Environment and Health and Information
Systems audits allowing us to manage global
and integrated audit opportunities. The audit
plan was also reviewed and updated to
reflect the audits attributed to the UK Gas
Distribution business.

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

The Committee is responsible for the
appointment and removal of the Head
of Corporate Audit. The Committee met
privately with the Head of Corporate Audit
during the year.

National Grid Annual Report and Accounts 2016/17

Corporate Governance

Therese Esperdy
Committee chairman

Looking forward to 2017/18, we will continue to focus on the
financing strategy for the reshaped Group following the sale
of the majority interest in the UK Gas Distribution business.
This, together with funding the ongoing capex programme
in our US business remain the major focus areas for the
treasury team.

We will also assess, with our tax team, the potential impact
of anticipated US tax policy changes, as more details
continue to emerge from the new administration in the
US following the Presidential election.

Examples of other key matters the Committee
considered during the year included:

•

funding requirements and financing for the
business plan;

Finance Committee

Review of the year
The financing and other related aspects of the Company’s
sale of a majority interest in the UK Gas Distribution
business remained a key area of focus for the Committee
throughout 2016/17. The Committee also considered the
impact of the sale on our retained business, including
financing, insurance arrangements, liquidity management
and pension funding.

The Committee oversaw several major aspects of the Gas
Distribution sale process, including the sectionalisation of
the National Grid UK Pension Scheme. This was a complex
project that ran alongside the sale process, ensuring the
continued protection of all scheme members’ benefits.
See the Committee in action box opposite for more
details of the Committee’s involvement.

During 2016/17, the Committee was briefed on funding
activities in our US business, specifically the long-term
bond issuance programme for our downstate New York
gas businesses and our Massachusetts electricity
operations business. The year saw the initial debt financing
of the Company’s New York Transco joint venture. The
completion of our first two Export Credit arrangements
in relation to our new joint venture for our Norwegian
interconnector represented another major achievement
for the treasury team.

During the year, the Committee monitored the execution
of management’s readiness plans in relation to the
potential short-term market impacts of the Brexit
referendum. The eventual market movements were
well within our contingency planning, although the
ever-changing macroeconomic and political environment
remains a key focus for the Committee.

The Committee assessed the appropriateness of National
Grid’s balance sheet hedging policy to determine whether
the current policy continued to effectively manage the
foreign exchange translation risk associated with our US
investments. Following review, the Committee approved
changes to the policy and agreed an implementation plan
for the agreed policy change.

We continued to keep the Company’s insurance strategy
under review. Specific focus areas during 2016/17
included the impact of the UK Gas Distribution business
sale on our ongoing captive insurance programme together
with a review of management’s proposals to consider
the placement of cyber insurance across National Grid’s
operations. Additionally, the Committee considered the
Company’s approach to the insuring of construction
risks of interconnector projects, a particularly bespoke
insurance market.

foreign exchange and interest rate risk management;
treasury performance updates;

• setting and reviewing treasury policies;
• counterparty risk policy;
•
•
• UK and US tax updates;
• update on US energy procurement activities and
electricity and gas trading activities in the UK;
the triennial valuation of the National Grid Electricity
Group of the Electricity Supply Pension Scheme;
the draft going concern statement for the half- and
full-year results prior to consideration by the Board; and
• update on US post-retirement employee benefits plans.

•

The Committee in action –
the sale of the UK Gas Distribution business
2016/17 saw a range of work streams across the
financing and related aspects of the transaction.
The Committee reviewed the planning for these,
assessing various different options before overseeing
the execution and approving related policy changes.

The Committee oversaw activities across a range
of workstreams including:

restructuring the existing UK debt portfolio;

•
• financing the new standalone UK Gas Distribution

business prior to sale;

• sectionalisation of the National Grid UK

Pension Scheme;

• establishing a new treasury team and banking
group and implementing associated systems
and committed lending facilities;

• establishing initial credit ratings for the new business

•

and the retained Group;
liaison with HMRC around the detailed transaction
steps; and

• options for implementing a structure to enable

additional debt leverage through the sale process.
On completion of the sale, the Committee reviewed
the proposals for investing the proceeds of the sale (in
excess of £5 billion) ensuring the Group’s counterparty
risk policies were appropriately managed.

Therese Esperdy
Committee chairman

Finance Committee

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

Paul Golby
Committee chairman

Safety, Environment and
Health Committee

Review of the year
In February, we welcomed Pierre Dufour to the Safety,
Environment and Health Committee. He brings considerable
experience as an engineer and in safety, industrial risk
management and operations. Last month Andrew Bonfield
stepped down from the Committee, having been a member
for three years. His contribution to the Committee, as well as
his chairmanship of the Engineering Assurance Committee
(EAC), has been extensive.

Over the year, the Committee has seen the Company’s
safety performance remain in line with last year with a
Group employee lost time injury frequency rate of 0.10.

However, this good performance must be viewed in
the context of the death in the UK last November of an
employee working in our Electricity Transmission business,
as referred to in the Chief Executive’s review on page 6.
The Committee has spent time with the business seeking
to understand the circumstances and causes of this fatality
as well as the actions taken by the Company to ensure
lessons are learnt. It will continue to receive updates as
investigations proceed.

Road traffic collisions have reduced in both the UK and US
following an increased programme of training for employees,
although the level is still above target in the US. Cable strikes
(a UK Gas Distribution measure) have reduced.

The US business is currently focusing on switching
errors, which remain at an unsatisfactory level. An external
consultant is currently reviewing relevant incidents from
a human factors perspective and will be advising on
ways to improve our training, processes and procedures
in this respect.

More widely, the Committee has spent considerable time
reviewing the safety culture of the Company. While this is
generally very good, in some parts of the business the
analysis of significant incidents has shown instances of
processes not being followed or inappropriate behaviours.
The Committee monitors the steps taken by the Company
following significant incidents, including looking at its
processes and procedures and how they are being applied
(see the Committee in action box opposite).

The Committee continues to receive reports from the EAC.
In particular, we reviewed the progress made in succession
planning for the Company’s engineering employee
population as well as the career progression and additional
specialist qualification options and incentives available for
engineers within the Company. We were pleased to note the
appointment of chief engineers for both gas and electricity,
with Group-wide remits. The EAC also reported to the
Committee on peer reviews and sharing of best practice

National Grid Annual Report and Accounts 2016/17

Corporate Governance

across the UK and US gas and electricity businesses,
focusing in particular on asset data risk and its ongoing
review of asset data records.

We have also continued to monitor the Company’s process
safety management system. We received updates on the
measures being taken to address levels of risk for major
hazard assets, including key US LNG plants. The
Committee also received updates on the Company’s US
gas pipeline safety compliance and its interface with the
NYPSC on the subject of new gas pipeline safety rules.

In terms of the environment, we have continued to
monitor our strategy and approach to sustainability, as well
as the Company’s external reporting of its environmental
performance, including its greenhouse gas emissions. In
particular, we reviewed the impact of the sale of the UK Gas
Distribution business on the Company’s greenhouse gas
emissions and its ability to meet its target of reducing
emissions by 80% by 2050 against a revised 1990 baseline.

Examples of other matters the Committee
reviewed during the year included:
• ongoing monitoring of safety performance and

•

significant incidents in the UK and US;
the expected impact of the UK Gas Distribution
business sale on the Company’s safety and
environmental performance;

• compliance and risk reporting for safety, environment

•

and health matters;
the Company’s approach to electromagnetic fields and
its alignment with scientific research on the subject;
• sickness absence levels and trends for both UK and US

businesses; and

• employee assistance programmes for mental well-being
and their take up as well as soft tissue injury prevention
programmes.

The Committee in action –
safety processes and procedures
In its monitoring of major safety incidents and work on
process safety management systems, the Committee has
spent time looking at the processes and procedures that
are in place and how these are implemented and applied
in order to promote a strong safety culture across the
whole of the Company.

When significant incidents occur, the Committee closely
monitors management’s analysis of the causes, as well
as reviewing the steps taken by the Company to promote
awareness by both employees and contractors and to
address the risk of recurrence of incidents, including safety
‘stand downs’, briefings and training.

It is essential that all employees and contractors should
be able to understand and apply instructions as a matter
of routine. Where processes and procedures become
too long and complex, there may be a risk that they are
misapplied, circumvented or ignored. In other cases, there
may be a lack of risk and control awareness because
processes and procedures are inadequately designed or
controlled. The Company’s internal audit function, and its
safety specialists, report regularly to the Committee on
their findings and on work being undertaken to address
these issues.

Paul Golby
Committee chairman

Sir Peter Gershon
Committee chairman

Nominations Committee

Review of the year
Once again succession planning has been the main area
of focus for the Committee during the year. It is important
for the Board to anticipate and prepare for the future and to
ensure that the skills, experience and knowledge at director
and senior management level reflect the changing demands
of the business. The process of building a strong and
effective Board also requires a good balance of continuity
and refreshment and the Committee has borne this in mind
in its deliberations throughout the year.

Succession planning
We recognise that an active Nominations Committee is
key to promoting effective board succession and we are
committed to continuing to regularly review succession
planning policy, taking into account the FRC’s guidance
to ensure that our policy is aligned to Company strategy,
both current and in the future.

Following a thorough and rigorous process, Pierre Dufour
was appointed as a Non-executive Director to the Board
on 16 February 2017 and Badar Khan was appointed to
the Executive Committee on 1 April 2017; see opposite for
more details on these search and appointment processes.

Composition
Balance and fit in terms of skills, knowledge and experience
are important considerations in recruitment to the Board.
Therefore, part of the selection process for Board
appointments is for the Committee to review the existing
skills and experience of the Board and consider the current
composition against the needs of the business and the
requirements of the new position. External benchmarking
of skills and a review of potential external candidates is
also undertaken by external search and assessment
consultancies to make sure that the Committee is fully
briefed when making its considerations.

The Committee also takes into account the need to make
sure there is appropriate diversity on the Board, including
diversity in thinking styles. The Committee has considered
the external reviews on diversity published during the year,
namely the Parker Review and the Hampton-Alexander
Review. Further details on the Company’s approach to
diversity are set out overleaf.

Board and committee membership
Following the changes in Board membership, the
composition of the committees was also reviewed. As
a result, our new Non-executive Director, Pierre Dufour
joined the Safety, Environment and Health Committee,
Remuneration Committee and Nominations Committee
upon appointment. Following Pierre’s appointment, Andrew
Bonfield stepped down from the Safety, Environment and
Health Committee on 21 April 2017 and Paul Golby stepped
down from the Remuneration Committee on 16 May 2017.

The Committee in action – Non-executive search
and appointment process
During the year a formal process was undertaken by
the Committee to find an appropriate new Non-executive
Director, to strengthen the experience and skills on the
Board and its Committees.

• The Nominations Committee appointed The Zygos
Partnership as the search consultancy. A Non-
executive Director profile was reviewed and agreed
by the Committee.

• Zygos conducted initial searches and produced
a potential list of candidates which was reduced
to a shortlist against the agreed profile.

• Zygos narrowed its shortlist and interviews were
undertaken with the Chairman, Chief Executive
and other members of the Board.

• References for the potential candidates were circulated
to the Committee and a meeting was held in October
2016 where the Chairman invited feedback from
the Committee on the search and interview process.

• The Committee agreed a preferred candidate
and made a recommendation to the Board in
February 2017.

• The Board approved the recommendation and
Pierre Dufour was appointed to the Board with
effect from 16 February 2017.

Search and appointment process to the
Executive Committee
The Committee was also involved in the recruitment process
for the newly created Executive Committee position to lead
the new business, National Grid Ventures. The search and
appointment process for this position was as follows:

•

the Nominations Committee appointed Heidrick and
Struggles as the search consultancy. With input from the
Committee a role and person specification was agreed;

• Heidrick and Struggles conducted initial searches for
potential candidates, with both internal and external
candidates being put forward for the role;

• a series of interviews were undertaken by the Chairman,

•

Chief Executive and other members of the Board;
the Committee considered the outcomes from
the interviews and selected candidates for further
consideration;

• final interviews with the candidates were carried

•

out by John Pettigrew and members of the Executive
Committee and Board;
the Committee recommended Badar Khan for
appointment to the Executive Committee; and
the Board approved the appointment and Badar Khan
joined the Company as a member of the Executive
Committee on 1 April 2017.

Examples of other matters the Committee
considered during the year included:
•

review of the Chairman’s performance, led by
Mark Williamson, the Senior Independent Director;
review of Director independence and potential conflicts;
and
review of Executive Committee succession.

•

Sir Peter Gershon
Committee Chairman

Nominations Committee

National Grid Annual Report and Accounts 2016/17Corporate GovernanceCorporate Governance continued

Board diversity
National Grid supports the creation of an inclusive and
diverse culture which we believe supports the attraction
and retention of talented people, improves effectiveness,
delivers superior performance and enhances the success
of the Company.

Following the publication of the Parker Review ‘Beyond One
by ‘21’’ and the Hampton-Alexander Report the Committee
considered the recommendations of these reports and
approved updates to the Board diversity policy and the
associated objectives.

We have previously reported against eight objectives,
set out below, to measure our progress against our Board
diversity policy. At its April 2017 meeting the Committee
reviewed these objectives and agreed that the majority of
these should no longer be objectives but instead be the
minimum standard required to support our Board diversity
policy. As a result, only one of the original eight objectives
was retained and updated and a new objective was added
to address the recommendations of the Parker Review and
the Hampton-Alexander Report, as set out below.

The Board diversity policy reflects all of the previous
objectives and the Committee will continue to follow the
requirements of the old objectives including only engaging
executive search firms who have signed up to the Voluntary

Code of Conduct on Gender Diversity, adopting best
practice as appropriate, reviewing progress against
the objectives and the policy annually and reporting
on progress in this report.

Our Board diversity policy continues to promote an inclusive
and diverse culture and reaffirms our aspiration to meet
and exceed the recommended voluntary target of 33%
of Board positions being held by women by 2020. This
objective, as set out below, has been updated following the
recommendations of the Hampton-Alexander Report, to
extend this voluntary target of 33% women by 2020 to the
Executive Committee and direct reports to this committee.

The Parker Review, published in November 2016,
recommended every FTSE 100 board should have at
least one director from a non-white ethnic minority by
2021. The Committee has reflected this recommendation
in a new objective as set out below.

Examples of the initiatives to promote and support
inclusion and diversity throughout our Company are
set out on page 30.

Objectives

Current

Progress

The Board aspires to meet the target of 33% of Board
and Committee positions, and direct reports to the
Executive Committee, to be held by women by 2020.

Objective ongoing. We currently have 33% women on
our Board and 22% women on our Executive Committee
and 30% women direct reports to the Executive Committee.

The Board aspires to meet the Parker Review target
for FTSE 100 boards to have at least one director from
a non-white ethnic minority by 2021.

The number of women in senior management positions
and throughout the organisation is set out on page 31.

Objective met. We currently have one Director from a
non-white ethnic minority on the Board.

All Board appointments will be made on merit, in the
context of the skills and experience that are needed
for the Board to be effective.

Objective met. The appointment of Pierre Dufour
was made on merit.

We will only engage executive search firms who
have signed up to the Voluntary Code of Conduct
on Gender Diversity.

Objective met. Heidrick and Struggles and The Zygos
Partnership are signed up to the Voluntary Code of Conduct
on Gender Diversity.

Where appropriate, we will assist with the development
and support of initiatives that promote gender and other
forms of diversity among our Board, Executive Committee
and other senior management.

Where appropriate, we will continue to adopt best
practice in response to the Davies Review.

Objective met. See page 30 for further details.

Objective met. Ongoing as appropriate.

We will review our progress against the Board diversity
policy annually.

Objective met. Ongoing.

We will report on our progress against the policy and
our objectives in the Annual Report and Accounts along
with details of initiatives to promote gender and other forms
of diversity among our Board, Executive Committee and
other senior management.

We will continue to make key diversity data, both about the
Board and our wider employee population, available in the
Annual Report and Accounts.

Objective met. Ongoing.

National Grid Annual Report and Accounts 2016/17

Corporate Governance

Executive Committee
membership key

1 John Pettigrew
Chief Executive and
Committee chairman
2 Andrew Bonfield
Finance Director
3 Badar Khan
Group Director,
Corporate Development
and National
Grid Ventures
4 Alison Kay
Group General Counsel
& Company Secretary
5 Richard Adduci
Chief Information Officer
6 George Mayhew
Group Corporate
Affairs Director
7 Dean Seavers
Executive Director, US
8 Mike Westcott
Group Human
Resources Director
9 Nicola Shaw
Executive Director, UK

Membership as at
1 April 2017

Management committees

To help make sure we allocate time and expertise
appropriately, the Company has a number of management
committees, which include the Executive Committee, and
Disclosure Committee. These committees provide reports,
where relevant, to the appointing committee in line with
our governance framework on the responsibilities they
have been delegated. See page 36 for management
committee reporting lines.

Executive Committee
Led by the Chief Executive, the Executive Committee
oversees the safety, operational and financial performance
of the Company. It is responsible for making day-to-day
management and operational decisions it considers
necessary to safeguard the interests of the Company and
to further the strategy, business objectives and targets
established by the Board. It approves expenditure and
other financial commitments within its authority levels
and discusses, formulates and approves proposals
to be considered by the Board.

The committee in action –
National Grid Smart (NGS)
Following the decision last year to invest in the NGS
business, the Committee reviewed the investment
opportunities of the business, and considered a number
of matters impacting the opportunities, including the
Government’s support for the smart metering roll-out
in the UK, the associated roll-out challenges faced by the
industry and the alignment of the NGS business to wider
distributed energy opportunities.

The Committee challenged the NGS team on the
business mobilisation progress, the strength of the
customer pipeline, the service proposition, rental pricing
and the operational capability required to make the
business a success.

Acknowledging the competitive nature of the market,
the Committee endorsed a governance framework that
would enable NGS to respond quickly to future contracting
opportunities, manage the performance of the business,
and allow the Committee to monitor the performance of
NGS as appropriate.

The nine Committee members have a broad range of
skills and expertise, which are updated through training
and development. Some members also hold external
non-executive directorships, giving them valuable board
experience. The Committee officially met 12 times this
year, but the members interact much more regularly.
Those members of the Committee who are not Directors
regularly attend Board and committee meetings for specific
agenda items. This means that knowledge is shared and
all members are kept up to date with business activities
and developments.

Disclosure Committee
The role of the Disclosure Committee is to assist the
Chief Executive and the Finance Director in fulfilling their
responsibility for overseeing the accuracy and timeliness
of disclosures made – whether in connection with our
presentations to analysts, financial reporting obligations,
or other material stock exchange announcements,
including the disclosure of price sensitive information.

This year the Committee met to consider the
announcements of the full- and half-year results and
reported on relevant matters to the Audit Committee.
It also met in December to consider the announcement
of the preferred bidder for the sale of a majority interest
in the UK Gas Distribution business and again at the end
of March to review the announcement of the completion
of the sale and the option for the sale of a further 14%
equity interest in the business.

The Committee reports the results of its evaluation of the
effectiveness of the Company’s disclosure controls to the
Audit Committee.

The Committee is chaired by the Finance Director and
its members are the Group General Counsel & Company
Secretary, the Group Tax & Treasury Director, the Group
Financial Controller, the Director of Investor Relations, the
Head of Corporate Audit and the Deputy Group General
Counsel, with other attendees as appropriate.

Management committees

National Grid Annual Report and Accounts 2016/17Corporate GovernanceCorporate Governance continued

Statement of compliance with the UK
Corporate Governance Code

The UK Listing Rules require that listed
companies must include in their annual
report a statement of whether the Company
has complied with all the relevant provisions
of the UK Corporate Governance Code
(the Code). The Code was published in
September 2014 and updated in 2016 to
reflect forthcoming legislation on audit
committees and auditor appointments,
and is available in full at www.frc.org.uk.

For the year ended 31 March 2017, the Board
considers that it has complied in full with the
provisions of the 2014 Code. Our statement
of compliance opposite explains the main
aspects of the Company’s governance
structure to give a greater understanding of
how the Company has applied the principles
and complied with the provisions in the Code.
The Corporate Governance report also explains
compliance with the Disclosure Guidance
and Transparency Sourcebook. The index
on page 53 sets out where to find each of
the disclosures required in the Directors’
Report in respect of Listing Rule 9.8.4.

A.4 Role of the Non-executive
Directors
Independent of management, our
Non-executive Directors bring diverse
skills and experience, vital to constructive
challenge and debate. Exclusively,
they form the Audit, Nominations and
Remuneration Committees, and their
views are actively sought when
developing proposals on strategy.

Our Senior Independent Director acts
as a sounding board for the Chairman
and serves as an intermediary for the
other Directors, as well as shareholders
when required.

Around each of the nine scheduled Board
meetings, the Chairman held meetings
with the Non-executive Directors without
the Executive Directors present. These
meetings were not held around the two
ad-hoc Board meetings in September
and December to consider the bids
in relation to the sale of the UK Gas
Distribution business.

A. Leadership

A.1 The role of the Board
Our Board is collectively responsible for the
effective oversight of the Company and its
businesses. It also determines the strategic
direction, business plan, objectives, principal
risks, viability of the Company and governance
structure that will help achieve the long-term
success of the Company and deliver
sustainable shareholder value.

The Board sets the risk appetite and principal
risks for the Company and takes the lead in
areas such as safeguarding the reputation of
the Company and its financial policy, as well
as making sure we maintain a sound system
of internal control and risk management (see
pages 15 to 18).

There is a clear schedule of matters reserved
for the Board and a schedule of delegation,
which were both reviewed and updated in
January 2017. The schedule of matters
reserved for the Board is available on our
website, together with other governance
documentation.

A.2 A clear division of responsibilities
The Board supports the separation of the roles
of the Chairman and Chief Executive. The key
responsibilities are clearly documented and
reviewed when appropriate. The Chairman
manages and leads the Board. The Chief
Executive is responsible for the executive
leadership and day-to-day management of
the Company and the Group’s businesses,
to ensure the delivery of the strategy agreed
by the Board.

A.3 Role of the Chairman
The Chairman, who was independent on
appointment, is responsible for the leadership
and management of the Board and its
governance. He makes sure the Board is
effective in its role by promoting a culture of
openness and debate, facilitating the effective
contribution of all Directors and helping to
maintain constructive relations between
Executive and Non-executive Directors.
The Chairman sets the Board’s agenda
making sure consideration is given to the
main challenges and opportunities facing the
Company, and adequate time is available to
discuss all items, including strategic issues.

National Grid Annual Report and Accounts 2016/17

Corporate Governance

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

A.4 Role of the Non-executive

Directors

Independent of management, our

Non-executive Directors bring diverse

direction, business plan, objectives, principal

skills and experience, vital to constructive

risks, viability of the Company and governance

challenge and debate. Exclusively,

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

they form the Audit, Nominations and

Remuneration Committees, and their

views are actively sought when

developing proposals on strategy.

Our Senior Independent Director acts

as a sounding board for the Chairman

and serves as an intermediary for the

as making sure we maintain a sound system

other Directors, as well as shareholders

of internal control and risk management (see

when required.

pages 15 to 18).

There is a clear schedule of matters reserved

meetings, the Chairman held meetings

Around each of the nine scheduled Board

with the Non-executive Directors without

the Executive Directors present. These

meetings were not held around the two

ad-hoc Board meetings in September

and December to consider the bids

in relation to the sale of the UK Gas

Distribution business.

for the Board and a schedule of delegation,

which were both reviewed and updated in

January 2017. The schedule of matters

reserved for the Board is available on our

website, together with other governance

documentation.

A.2 A clear division of responsibilities

The Board supports the separation of the roles

of the Chairman and Chief Executive. The key

responsibilities are clearly documented and

reviewed when appropriate. The Chairman

manages and leads the Board. The Chief

Executive is responsible for the executive

leadership and day-to-day management of

the Company and the Group’s businesses,

to ensure the delivery of the strategy agreed

by the Board.

A.3 Role of the Chairman

The Chairman, who was independent on

appointment, is responsible for the leadership

and management of the Board and its

governance. He makes sure the Board is

effective in its role by promoting a culture of

openness and debate, facilitating the effective

contribution of all Directors and helping to

maintain constructive relations between

Executive and Non-executive Directors.

The Chairman sets the Board’s agenda

making sure consideration is given to the

main challenges and opportunities facing the

Company, and adequate time is available to

discuss all items, including strategic issues.

B. Effectiveness

B.1 The composition of the Board
The Board believes it operates effectively
with an appropriate balance of independent
Non-executive and Executive Directors who
have the right balance of skills, experience,
independence and knowledge of the
Company. Details of our Board, their individual
biographies and committee membership
are set out on pages 34 and 35. Board and
committee attendance during the year to
31 March 2017 is set out on page 37. The
independence of the Non-executive Directors
is considered at least annually along with their
character, judgement, commitment and
performance on the Board and relevant
committees. The Board took into consideration
the Code and indicators of potential non-
independence, including length of service.
At year end, all of the Non-executive Directors,
with the exception of the Chairman, whose
independence is only determined on
appointment, have been determined by
the Board to be independent.

B.2 Appointments to the Board
The Nominations Committee, which comprises
the Chairman and Non-executive Directors,
leads the process for Board appointments and
makes recommendations to the Board. Further
details of appointment processes for Nicola
Shaw and Pierre Dufour, succession planning
and the role of the Nominations Committee
can be found on page 47.

The Zygos Partnership and Heidrick and
Struggles provided external search consultancy
services in relation to the above appointments.
Neither have any other connection to the
Company other than providing these external
search consultancy services.

B.3 Time commitment
Non-executive Directors are advised of the
time commitment expected from them on
appointment. External commitments, which
may impact existing time commitments,
must be agreed with the Chairman. Details
of external appointments are set out in the
biographies on pages 34 and 35. As part
of the evaluation of the Chairman, the
Non-executive Directors, with input from
the Executive Directors, assessed his ability
to fulfil his role as Chairman, taking into
account other significant appointments.

B.6 Evaluation
See pages 38 and 39 for more information
on our Board evaluation. During the year,
the Chairman met each Director individually
to discuss their contribution, performance
over the year and training and development
needs. Following these meetings, Sir Peter
confirmed to the Nominations Committee
that he considered that each Director
demonstrated commitment to the role and
their performance continued to be effective.
At a private meeting of the Non-executive
Directors, Mark Williamson, as Senior
Independent Director, led a review of the
Chairman’s performance. The Non-executive
Directors, with input from the Executive
Directors, assessed his ability to fulfil his
role as Chairman and considered the
arrangements he has in place, given he
was also chairman of a FTSE 250 company
during the year and the Aircraft Carrier
Alliance Management Board and a Trustee
of The Sutton Trust. They concluded that
Sir Peter’s performance continued to
be effective.

B.7 Election/re-election
Each Director is subject to election at
the first AGM following their appointment,
and re-election at each subsequent AGM.
Following recommendations from the
Nominations Committee the Board considers
all Directors continue to be effective,
committed to their roles and have sufficient
time available to perform their duties.
Therefore, in accordance with the Code,
Pierre Dufour will seek election and all
other Directors (except Ruth Kelly) will
seek re-election at the 2017 AGM as set
out in the Notice of Meeting.

With the agreement of the Board, Executive
Directors gain experience of other companies’
operations, governance frameworks and
boardroom dynamics through non-executive
appointments. The fees for these positions are
retained by the individual. For further details
about the Directors’ service contracts and
letters of appointment, see page 61 of the
Directors’ Remuneration Report.

B.4 Development
All new Directors are provided with a full
induction programme when they are appointed
to the Board. Details of Director induction and
development can be found on page 37.

B.5 Information and support
The Group General Counsel & Company
Secretary makes sure that appropriate and
timely information is provided to the Board and
its committees and is responsible for advising
and supporting the Chairman and the Board
on all governance matters. All Directors have
access to the Group General Counsel &
Company Secretary and may take
independent professional advice at the
Company’s expense in conducting their duties.
To support discussion and decision making,
Board and committee members receive
papers sufficiently in advance of meetings so
that they can prepare for and consider agenda
items. Additionally, the Chairman holds a short
meeting with the Non-executive Directors
before each Board meeting to discuss the
focus of the upcoming meeting as well as
afterwards to share feedback from the
meeting. Similarly, the Chief Executive holds
a short meeting with the Executive Directors
and the Group General Counsel & Company
Secretary after each meeting and shares
the feedback from these meetings with the
Chairman. A clear set of guidelines are in
place to assist the Executive Directors and
management on the content and presentation
of papers to the Board and committees. A
further refresh of the Board paper process took
place this year. See page 39 for more details.

Statement of compliance

National Grid Annual Report and Accounts 2016/17Corporate GovernanceCorporate Governance continued

Statement of compliance with the UK
Corporate Governance Code continued

C. Accountability

D. Remuneration

C.1 Financial and business reporting
The requirement for Directors to state
that they consider the Annual Report and
Accounts, taken as a whole, is fair, balanced
and understandable remains a key
consideration in the drafting and review
process. The coordination and review of the
Annual Report and Accounts is conducted
in parallel with the formal audit process
undertaken by the external auditors and
the review by the Board and its committees
(of relevant sections).

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 drafting and assurance process
supports the Audit Committee’s and Board’s
assessment of the overall fairness, balance
and clarity of the Annual Report and Accounts
and the statement of Directors’ responsibilities
as set out on page 74. The independent
auditors’ report is on pages 75 to 82 and the
Company’s business model is on page 14.

The Remuneration Report on pages 54 to 71
outlines the activities of the Committee during
the year and sets out the proposed Directors’
remuneration policy which will be presented
to shareholders for approval at the 2017
AGM. The new resolution to approve the
remuneration policy is set out in the Notice
of Meeting for the 2017 AGM.

C.2 Internal control and risk
management
The Board has carried out a robust
assessment of the principal risks facing the
Company including those that would threaten
the business model, future performance,
solvency or liquidity. Further details can be
found on pages 16 and 17.

D.2 Procedure
For further information on the work of the
Remuneration Committee and Directors’
remuneration packages see the Directors’
Remuneration Report on pages 54 to 71.
The Committee’s terms of reference are
available on our website.

The Board also sets the Company’s
risk appetite, internal controls and risk
management processes. The Board
undertakes a review of their effectiveness
annually. Further details are set out
on pages 15 to 18.

The activities of the Audit Committee, which
assists the Board with its responsibilities in
relation to risk and assurance, are set out
on pages 40 to 44.

C.3 Audit Committee and auditors
The Audit Committee report on pages 40
to 44 sets out details of how the Committee
has discharged its duties during the year,
matters reviewed by the Committee and
how it ensures the auditors’ objectivity,
effectiveness and continued independence.

E. 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 37.

E.2 Constructive use of
General Meetings
The AGM provides a key opportunity for
the Board to communicate with and meet
shareholders. Shareholders are able to learn
more about the Company through exhibits
and can ask questions directly of the Board.
Company representatives and our Registrar
are also on hand to answer any questions
shareholders might have.

Our AGM will be held on Monday 31 July 2017
at The International Convention Centre in
Birmingham and broadcast via our website.
The Notice of Meeting for the 2017 AGM,
available on our website, sets out in full the
resolutions for consideration by shareholders,
together with explanatory notes and further
information on the Directors standing for
election and re-election.

We will also be holding a General Meeting
on 19 May 2017 to seek shareholder
approval for a proposed share consolidation
in connection with the return of cash as a
result of the sale of a majority interest in our
UK Gas Distribution business.

In addition, at the General Meeting,
shareholder approval will in addition be sought
to renew the annual authority to enable the
Company to make market purchases of its
own shares, as well as to allot ordinary shares
and to disapply pre-emption rights, to cover
the period between the date of the General
Meeting and the 2017 AGM.

National Grid Annual Report and Accounts 2016/17

Corporate 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’ service contracts and letters
of appointment
Directors’ share interests
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

52
184
74
34
14
190
190
190
174
191

61
68
30
5
185
123
9
12
191

6
15
18
191
186
30
191
191
15
186

National Grid Annual Report and Accounts 2016/17

Index to Directors’ Report
and other disclosures

Jonathan Dawson
Committee chairman

Review of remuneration policy
The Committee held a number of discussions last
Autumn to determine whether any material changes to the
remuneration policy would be appropriate for the future.
Discussions covered recent trends in remuneration strategy
adopted by other major UK corporates, an appraisal of
developments in other major jurisdictions, data comparing
National Grid’s remuneration policy and outturns against
peer group companies, and the pay and conditions for
employees below Board level. The main questions we
considered were:

•

Is the current split between short-term and
long-term incentive pay appropriate?

• Are we incentivising behaviours that support

National Grid’s strategy and values?

• Are we paying executives fairly for performance
and is this appropriate in the context of the wider
employee population?
Is the overall amount paid to senior management
aligned with shareholder value creation?

•

The conclusion we reached was that the overall structure
which we initiated three years ago remains appropriate for
National Grid. We felt that to make any significant changes
to the policy – particularly given that the first LTPP awarded
under the 2014 policy had yet to vest – was premature for
a long-term business. We also felt that the division between
short-term and long-term pay gave proper focus and weight
to generating long-term returns for shareholders.

There is no single approach to executive pay that is definitively
‘right’ for all companies. What we did was to appraise the
way National Grid creates value for its shareholders over time,
and fulfils its national and societal obligations, recognising
also that we are in a competitive market for senior executive
talent. Against this backdrop, we believe the overall structure
described above remains fair.

We are proposing some minor modifications to the metrics
(but not the quantum) in respect of both the APP and LTPP for
the implementation of the policy in 2017/18. More specifically,
for the APP we will sharpen the focus on annual regional
performance for the UK and US Executive Directors, with
half of the weighting of the financial performance being on
regional RoE and half on regional Value Added. There will
be no change to the financial performance metrics for either
the Chief Executive or the Finance Director. The LTPP will
then focus solely on long-term Group performance for all
Executive Directors with a 50% weighting on Group RoE
and a 50% weighting on Group Value Growth. These changes
should enhance the visibility for executives between their
annual performance and short-term incentive outcome,
while reinforcing executives’ collective incentive on sustaining
long-term Group performance. No changes are being
proposed to the maximum level of awards in respect
of either the APP or the LTPP.

Page 70 provides more detail on the implementation
of our policy related to incentive plans for 2017/18.

We also looked at pension provisions as part of our policy
review, including in relation to other employees of the
Company. The annual contribution to a Defined Contribution
plan (DC) is 30% of base salary for UK-based Directors and
certain other senior UK-based employees. In the US the
contribution rate is up to 13% of base salary plus APP award
for US-based Directors and certain other senior US-based
employees. Pension contributions are tiered by managerial
grade down to 12% of base salary in the UK, and in the
US 4-8% of base salary plus APP award (depending on
age and years of service). To highlight the flexibility on
any pension arrangements for new UK-based Directors,
we have modified the wording in the policy related to
UK DC pension contributions to ‘up to’ 30%.

Annual statement from the
Remuneration Committee chairman

Introduction
Three years ago, at our 2014 AGM, shareholders approved
a new three-year remuneration policy for National Grid, with
96% of the votes in favour. At our 2015 and 2016 AGMs
shareholders supported our execution of the policy with 97%
of the votes in favour each year. This year we are seeking your
approval of our remuneration policy for a further three years.

We have reviewed the remuneration policy reflecting on
the wider environment as well as the strategic review of our
business, leading to an evolution of National Grid’s purpose,
vision, values and strategy. In this context, we consider that
the existing framework will continue to provide executives
with an appropriate opportunity to earn remuneration in line
with National Grid’s overall performance and strategy. We
are therefore proposing that the 2014 policy is renewed
without any changes either to the structure, or to the
maximum amounts for the APP and LTPP.

The key elements of our remuneration approach are:

• significant weighting towards the Long Term Performance
Plan (LTPP) versus the Annual Performance Plan (APP);
the bulk of senior executive remuneration is paid in
National Grid shares, with all of the LTPP paid only in
shares, and half of the APP paid in shares;

•

• very high levels of personal shareholding required to be
held by senior executives – specifically, 500% of pre-tax
salary for the Chief Executive and 400% for other
Executive Directors;

• a three-year performance period for measuring

potential awards under the LTPP, coupled with a
holding period of a further two years, irrespective
of whether the mandatory personal shareholding
target has been attained;

• performance metrics for the LTPP which are Return
on Equity (measuring management’s performance in
generating profit from the business) and Value Growth
(measuring management’s creation of shareholder
value over the longer term); and

• malus and clawback provisions applicable to both

the APP and LTPP.

We think that the best way to make sure management
and other shareholders share the same interest comes
from requiring executives to have a very substantial personal
shareholding in National Grid. We want executives to view
their remuneration from employment at National Grid as
a mix of annual earnings, together with both the growth
of their shareholdings in National Grid and the value of
dividends received. As a result, we consider that the
remuneration policy currently in place demonstrates close
alignment between management and other shareholders,
and a proper focus on generating long-term value.

National Grid Annual Report and Accounts 2016/17

Corporate Governance

Corporate Governance continuedPerformance for the year
APP
National Grid had another successful year in 2016/17.
At £4.7 billion, this year’s total adjusted operating profit
was 14% higher than in 2015/16; earnings per share was
73 pence. During the year the Company made significant
capital investment in its networks of some £4.5 billion, split
equally between the UK and the US. In addition, a majority
interest in the UK Gas Distribution business was sold to
a consortium of investors for a price of £13.8 billion. As
already announced, we will be returning the majority of
the net proceeds to shareholders, and a special dividend
of some £3.2 billion is being paid to shareholders on
2 June 2017. Additionally, a further £835 million is being
returned to shareholders via share buybacks this year.

When assessing the results of the APP for the Executive
Directors, one of the performance measures, Earnings per
share (EPS), was adjusted down as in other years to adjust
for the impact of timing, scrip dividend uptake and currency
adjustments. This year we also removed a 2 pence benefit
arising from a one-off gain from the cessation of depreciation
of the UK Gas Distribution assets since December. No
adjustments were made to Group, US or UK RoE outturns.

Based on National Grid’s financial performance, and
taking account of performance against individual
objectives, the APP payments to Executive Directors
on the Board at 31 March 2017 would have been between
96% and 104% of salary. However, following the fatal
incident in November 2016 at the Company’s electricity
sub-station at East Claydon in Buckinghamshire, UK,
the Committee considered carefully whether it would be
appropriate to exercise its discretion to reduce short-term
incentive levels for senior executives. The Committee
decided to reduce the overall APP payout by 10% for the
four Executive Directors at that time, resulting in APP awards
of 86% to 94% of salary. This is in addition to a zero score
for individual objectives relating to UK safety, which were
applicable to John Pettigrew and Nicola Shaw this year.
Similar reductions in APP have been made to other
members of the Group Executive Committee, UK Executive
Committee, and relevant line management. The Committee
considers that this approach to allocating short-term
incentive reductions – which is fully supported by senior
management – serves to emphasise the collective interest
and importance of safety at National Grid.

Details of the APP payouts are presented on page 64,
including that for Steve Holliday, who was an Executive
Director from 1 April until 22 July. He received an APP
payment for that time period, amounting to 81% of his
prorated salary.

Looking ahead to the 2017/18 APP, and following the
sale of a majority interest in the UK Gas Distribution
business, the UK RoE metric for the 2017/18 APP for the
Executive Director, UK will be specific to the wholly-owned
regulated businesses in the UK. The Executive Director,
UK also has an individual objective to manage the 39%
retained interest in the UK Gas Distribution business as
a member of its board.

LTPP
As I reported in my statement last year, our remuneration
has been in a transitional phase since the approval of our
current remuneration policy in 2014. At that time the APP
opportunity was lowered, the LTPP opportunity was
increased and the LTPP performance period was simplified.
This led to the vesting of the final quarter of the 2013 award
made under the previous policy as well as the 2014 award
under the current policy in July 2017, with both performance
periods ending 31 March 2017.

2013 LTPP
Three-quarters of the LTPP that was awarded in 2013
(before the present policy came into force) had a vesting
date of July 2016 and the remaining quarter is due to vest in
July 2017. The performance periods for both portions have
ended, and vesting outcomes ranged from 77% to 90%.

2014 LTPP
The LTPP that was awarded in 2014 according to the
remuneration policy adopted at the 2014 AGM is due to vest
in full in July 2017. The performance period has ended and
the vesting outcomes ranged from 67% to 91%. This vesting
range reflects the Committee’s decision to include, in the
Value Growth outcome, a portion of the value added from the
sale of a majority interest in the UK Gas Distribution business.
The Committee believes this adjustment properly reflects
performance during the year and the benefit to shareholders.

Reflecting the final year of the transitional phase, the single
total figure of remuneration table for 2016/17 discloses
both the 2013 and 2014 LTPP awards in full, although no
Executive Director received more than one LTPP grant in
any year. We have illustrated the impact of the transitional
phase graphically on page 65. Next year the disclosure of
LTPP awards for 2017/18 will be simpler as the number in
the single total figure of remuneration table will incorporate
only the amounts for the 2015 LTPP whose performance
period will have just ended.

Executive Director shareholdings
In 2014, we introduced high levels of shareholding
requirement for our Executive Directors in order to align
them further to shareholders. As at 31 March 2017,
Andrew Bonfield exceeded this shareholding requirement.
As John Pettigrew, Dean Seavers and Nicola Shaw were
appointed to the Board relatively recently, they have not
yet met this shareholding requirement and therefore
under our rules will not be given permission to sell shares
(other than to pay income tax on receipt of the shares
or in exceptional circumstances).

Annual salary review
As I reported last year, when John Pettigrew and Nicola
Shaw were appointed to their respective positions, the
Committee decided not to award them salaries at our
assessment of then current market levels, but instead,
and subject to their individual performance, we would
gradually phase over time increases to salary in excess
of increases awarded to other company employees.
This approach is consistent with that used for the wider
managerial population, where employees whose salaries
are relatively low compared to the market receive
significantly larger salary increases than budget
when justified by individual performance.

The Committee therefore considered John Pettigrew’s
and Nicola Shaw’s performance during the year to
determine whether performance in their respective roles
merited awarding base salary increases above the general
level within the Company. In John Pettigrew’s case the
Committee concluded that he had made a very strong
start in establishing himself as Chief Executive, notably
with regard to evolving National Grid’s purpose, vision
and strategy; delivering a strong set of Group financial
results; establishing National Grid Ventures as a new
business; agreeing with BEIS and Ofgem a sound basis
for the redefined Electricity System Operator (ESO);
achieving an excellent outcome to the 2016/17 employee
survey; achieving good rate case outcomes; and securing
a very good price for the sale of a majority interest in the
UK Gas Distribution business (and associated return
of capital to shareholders).

At a glance

National Grid Annual Report and Accounts 2016/17Corporate GovernanceRegarding Nicola Shaw, the Committee considered that she had
also made a very strong start in her role as Executive Director, UK,
demonstrated in particular by effective leadership both with employees
(as evidenced by strong employee survey results) and key external
stakeholders; delivering strong results for the UK business; making
a major contribution to the redefinition of the ESO; supporting the
successful sale of a majority interest in the UK Gas Distribution business;
and contributing to a fair outcome from the Mid-Period Review with
Ofgem for National Grid and its customers.

The Committee also took account of pay ratios and National Grid’s
investors’ experience and concluded that it was appropriate to award
John Pettigrew and Nicola Shaw a salary increase of 9% comprising the
UK managerial budgeted increase of 2.6% plus a further 6.4%. Salary
increases to Andrew Bonfield and Dean Seavers, whose salaries are
closer to market levels, are in line with UK and US managerial budgets,
at 2.6% and 2.5%, respectively. We intend to apply the same approach
next year, once again subject to individual performance.

Conclusion
The Committee has given very careful thought to the remuneration
structure for senior executives at National Grid. We believe that the
arrangements set up three years ago, focussed on mainly share-based
incentives, long-term performance and substantial personal shareholdings
in National Grid, remain appropriate and fair. We therefore propose to
make no changes either to the structure or to the maximum amounts
for the APP and LTPP. As I have described above, we propose to make
some minor adjustments to some of the metrics and between the split of
group and regional performance across the APP and LTPP. We believe
these changes will improve alignment and transparency.

For the 2016/17 financial year, the Committee believes that it has correctly
implemented the approved policy and that it has appropriately and
reasonably exercised its discretion as discussed above. Overall the
Committee believes that the remuneration earned last year by senior
executives continues to reflect their performance, the Company’s
performance, and the value generated for National Grid’s shareholders.

Disclosure enhancements
In its review of the remuneration policy, the Committee took note of
evolving best practice regarding detailed disclosure of APP targets.
Accordingly, full details of the retrospective threshold, target and stretch
performance levels for the financial metrics within the APP in respect
of the year ended 31 March 2017 are set out on page 64. These
disclosures complement our current threshold, target and stretch
performance level disclosures in respect of the LTPP.

This year there are two separate remuneration votes – to approve a
binding three-year policy, and to approve the remuneration report for
2016/17. On behalf of the Committee I commend this report to you
and ask for your support for both resolutions at the AGM.

Committee membership
Pierre Dufour joined the Remuneration Committee in February 2017,
and Paul Golby stepped down from the Committee in May 2017.

Jonathan Dawson
Committee chairman

At a glance

Performance
A comparison of the total 2016/17 single figure of remuneration to the maximum remuneration if variable pay had vested in full is set out below for
the four Executive Directors in office for the full year. Due to the transition in vesting schedules, both the 2013 and 2014 LTPPs have been included.

7%
40%

25%

75%

Key

6%
9%
7%
28%

16%

34%

22%

31%

2013 LTPP – share appreciation
and dividend equivalent values
2013 LTPP – face value
2014 LTPP – share appreciation
and dividend equivalent values
2014 LTPP – face value APP
APP
Fixed

Nicola
Shaw

John
Pettigrew

Dean

Seavers

Total remuneration

Executive Director

Andrew Bonfield

John Pettigrew

Dean Seavers

Nicola Shaw

Maximum if
variable pay vested

in full £’000

2016/17 single figure
remuneration £’000

7,050

5,143

4,196

1,362

5,891

4,636

3,165

1,254

13%

19%

8%
31%

12%

17%

Andrew
Bonfield

National Grid Annual Report and Accounts 2016/17

Corporate Governance

Corporate Governance continued

Salary

Annual Performance
Plan (APP)

Long Term
Performance Plan
(LTPP)

Pension and
other benefits

Key features of policy

• Target broadly mid-market against FTSE
11–40 for UK Directors and general
industry and energy services companies
with similar revenue for US 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 over
a three-year performance period
• Shares must be retained until later

of two years from vesting and meeting
shareholding requirement

• Subject to both clawback and malus

• External appointees participate in DC plan
or cash in lieu; internal appointees retain
current benefits, subject to capping of
pensionable pay increases for DB plans,
or can opt for cash in lieu

• Pensionable pay is salary only in UK

and salary and APP in US in alignment
with market

• Other benefits as appropriate

Shareholding
requirement

• 500% of salary for CEO
• 400% of salary for other

Executive Directors

Annual report on remuneration
for 2016/17

• John Pettigrew appointed as CEO from

1 April 2016 on £825,000

• Nicola Shaw appointed as Executive

Director, UK from 1 July 2016 on £450,000

• Salary increases of 2.0% and 2.5% for
Andrew Bonfield and Dean Seavers,
respectively, for 2016/17

• 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, business growth, operational
excellence, customer satisfaction,
community engagement, stakeholder
engagement, Group strategy, and
completion of the partial sale of our
UK Gas Distribution business

• 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

• UK cash allowance (Andrew Bonfield,

John Pettigrew and Nicola Shaw): 30%
of pensionable pay

• US DC (Dean Seavers): 9% of pensionable
pay with additional match of up to 4%
• Other benefits include private medical
insurance, life assurance, and, for
UK-based Executive Directors either
a fully expensed car or a cash alternative
to a car and the use of a car and driver
when required

• Andrew Bonfield has met the
shareholding requirement

• John Pettigrew, Dean Seavers and

Nicola Shaw were appointed to the Board
relatively recently, and therefore have not
yet met the shareholding requirement

At a glanceNational Grid Annual Report and Accounts 2016/17Corporate GovernanceDirectors’ remuneration policy

The following tables provide details of the policy we intend to apply, subject to shareholder approval, for the three years from the date of the 2017
AGM. Following approval it will be displayed on the Company’s website.

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.

The Committee will honour any commitments made to Directors before the policy outlined in this report comes into effect.

Our peer group
The Committee reviews its remuneration policy against appropriate peer groups annually to make sure we remain competitive in the relevant
markets. The primary focus for reward market comparisons 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.

Future 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 car and 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 HMRC (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.

National Grid Annual Report and Accounts 2016/17

Corporate Governance

Corporate Governance continuedPerformance metrics, weighting
and time period applicable

Not applicable.

Pension
Purpose and link to strategy: to reward sustained contribution and assist attraction and retention.

Operation

Pension for an Executive Director will reflect whether they were
internally promoted or externally appointed.

If internally promoted:

•

retention of existing DB benefits without enhancement, with
capping of pensionable pay increases following promotion
to the Board; or
retention of existing UK DC benefits with discretion to enhance
contribution rate to up to 30%; or

• 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.

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 sixtieth 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
up to 30% of salary. Life assurance
provision of four times pensionable
salary and a dependant’s pension
equal to one third of the Director’s
salary are provided on death
in service.

Cash in lieu: annual payments of up
to 30% of salary. Life assurance and
dependant’s pension in line with UK
DC (or UK DB where the Director
was previously a member of a UK
DB scheme).

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: annual contributions of up
to 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.

Operation

Performance metrics and targets are agreed at the start of each
financial year and are aligned with strategic business priorities.
Targets are set with reference to the budget. Awards are paid
in June.

50% of awards are paid in shares, which (after any sales to pay
associated income 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.

Maximum levels

The maximum award is 125%
of salary.

Performance metrics, weighting
and time period applicable

A 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.

Directors’ remuneration policy

National Grid Annual Report and Accounts 2016/17Corporate GovernanceDirectors’ remuneration policy 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 Chief
Executive is 350% of salary and it
is 300% of salary 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.

Participants may receive ordinary dividend equivalents
on vested shares at the discretion of the Committee.

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.

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 2014 and 2016,
the performance measures were:

• Value Growth and Group RoE
(for the Chief Executive and
Finance Director); and

• Value Growth, Group RoE and UK
or US RoE (for the UK and US
Executive Directors respectively).

For awards from 2017, the performance
measures are Value Growth and Group
RoE for all Executive Directors.

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.

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 taking into account those in
companies of similar scale and complexity.

NEDs do not participate in incentive, pension or benefit plans.
However, they are eligible for reimbursement for all company-related
travel expenses. In instances where these 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.

Additionally, 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, and the use of a car and
driver, when required.

NEDs who also sit on National Grid subsidiary boards may
receive additional fees related to service on those boards.

There is no provision for termination payments. NEDs stand
for re-election every year.

National Grid Annual Report and Accounts 2016/17

Corporate Governance

Corporate Governance continuedDirectors’ remuneration policy 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
aims to align their interests.

Executive Directors are required to build up and retain
shares in the Company. The level of holding required
is 500% of salary for the Chief Executive 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 income tax liabilities on shares just vested
or in exceptional circumstances approved by the
Remuneration Committee.

Differences in remuneration policy for all employees
The remuneration policy for the Executive Directors is
designed with regard to the policy for employees across the
Company as a whole. However, there are some differences
in the structure of remuneration policy for the senior
executives. In general, these differences arise from the
development of remuneration arrangements that are market
competitive for our various employee categories. They also
reflect the fact that, in the case of the Executive Directors,
a greater emphasis tends to be placed on performance-
related pay in the market, in particular long-term
performance-related pay.

All employees are entitled to base salary, benefits and
pension contributions. Many employees are eligible for an
APP award based on Company and individual performance.
Eligibility and the maximum opportunity available is based
on market practice for the employee’s job band. In addition,
around 380 senior management employees are awarded
LTPPs annually.

The Company has a number of all-employee share plans
that provide employees with the opportunity to become,
and to think like, a shareholder. These plans include
Sharesave and the Share Incentive Plan (SIP) in the UK and
the 401(k) and 423(b) plans in the US. Further information
is provided on page 58.

Consideration of remuneration policy elsewhere in
the Company
In setting the remuneration policy the Committee considers
the remuneration packages offered to employees across
the Company. As a point of principle, salaries, benefits,
pensions and other elements of remuneration are assessed
regularly to ensure they remain competitive in the markets in
which we operate. In undertaking such assessment our aim
is to be at mid-market level for all job bands, including those
subject to union negotiation.

As would be expected, we have differences in pay and
benefits across the business which reflect individual
responsibility and there are elements of remuneration
policy which apply to all, for example, flexible benefits
and share plans.

When considering annual salary increases, the Committee
reviews the proposals for salary increases for the employee
population generally, as it does for any other changes to
remuneration being considered.

The Company issues an employee engagement survey
each year which includes questions on remuneration. It
does not specifically invite employees to comment on the
Directors’ remuneration policy but any comments made
by employees are noted.

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 the Chief Executive).

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.

Service contracts and 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 contractual 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 not 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

Directors’ remuneration policy

National Grid Annual Report and Accounts 2016/17Corporate GovernanceDirectors’ remuneration policy continued

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. 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. 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, apart from circumstances
in which the award recipient has died, in which case the
awards vest as soon as practicable (based on a forecast
of performance).

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 they are required to stand
down or are not re-elected.

Copies of Directors’ service contracts and letters of
appointment are available for inspection at the Company’s
registered office.

External appointments
The Executive Directors may, with the approval of the
Board, accept one external appointment as a non-executive
director of another company and retain any fees received
for the appointment. Experience as a board member of
another company is considered to be valuable personal
development, that in turn is of benefit to the Company.

Total remuneration opportunity
The total remuneration for each of the Executive Directors that could result from the remuneration policy in 2017 under three different performance
levels (below threshold, when only fixed pay is receivable, on target and maximum) is shown below.

Andrew Bonfield
£’000

£4,334
54%

John Pettigrew
£’000

£5,492
57%

Dean Seavers
£’000

£4,430
55%

Nicola Shaw
£’000

£2,691
55%

£2,695
43%

£3,356
47%

£2,706
45%

£1,649
45%

£1,056
100%

18%

39%

22%

24%

£1,220
100%

17%

36%

21%

22%

£982
100%

19%

36%

23%

22%

£607
100%

18%

37%

23%

22%

Fixed pay On target Maximum

Key

LTPP
APP
Fixed

1. ‘Fixed pay’ consists of salary, pension and benefits-in-kind as provided under the remuneration policy.
2. Salary is that to be paid in 2017/18, taking account of the increases that will be effective from 1 June 2017 shown on page 70. Dean Seavers’ salary has been converted at $1.2949:£1
3. Benefits-in-kind and pension are as shown in the Single Total Figure of Remuneration table for 2016/17 on page 63. Benefits-in-kind for John Pettigrew exclude one-off relocation payments

made in 2016/17 as a result of his appointment as Chief Executive.

4. APP calculations are based on 125% of salary for the period 1 April 2017 to 31 March 2018.
5. LTPP calculations are based on awards with a face value of 350% of 1 June 2017 salary for John Pettigrew and 300% of 1 June 2017 salary for all other Executive Directors. Excludes

changes in share price and dividend equivalents.

6. LTPP and APP payout is 50% for on-target performance and the maximum of 100% is for achieving stretch.

Statement of consideration of shareholder views
The Committee considers all feedback relating to executive remuneration received from shareholders throughout the year. While the committee
understands that not all shareholders’ views will be the same, we consult with our larger shareholders when appropriate to understand expectations
and views regarding executive remuneration.

National Grid Annual Report and Accounts 2016/17

Corporate Governance

Corporate Governance continued

Annual report on remuneration
Statement of implementation of remuneration policy in 2016/17

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 2016/17 were Nora Mead Brownell, Jonathan Dawson (chair), Pierre Dufour (from March), Paul Golby and Mark Williamson.

The Committee’s activities during the year

Meeting

April

May

August

November

December

January

March

Main areas of discussion

Final approval of 2016 LTPP targets
2015/16 individual objectives scoring for Executive Committee
Executive Committee shareholdings and dilution limits
Review of Committee Terms of Reference

2015/16 APP financial outturns and individual performance and confirmation of awards
Annual salary review and LTPP proposals for Executive Committee
Final approval of APP targets for 2016/17 financial year
Final approval of 2016/17 objectives for Executive Committee

Items related to new Executive Committee appointment

2017 Remuneration Policy discussion

Review of ISS Pay for Performance peer group
2017 Remuneration Policy discussion
Items related to new Executive Committee appointment

Discussion of impact of sale of majority stake in UK Gas Distribution business on APP and LTPP metrics

Market data review for Executive Committee remuneration
2017 Directors’ Remuneration Report – reviewed first draft
Discussion of metrics and targets for 2017/18 APP and 2017 LTPP
Review of 2017/18 objectives for Executive Committee

Single Total Figure of Remuneration – Executive Directors (audited information)
The following table shows a single total figure in respect of qualifying service for 2016/17, together with comparative figures for 2015/16:

Salary
£’000

Benefits
in kind
£’000

APP
£’000

2013
LTPP
£’000

2014
LTPP
£’000

Total
LTPP
£’000

Pension
£’000

Other
£’000

Total
£’000

2016/17

2015/16

2016/17

2015/16

2016/17

2015/16

2016/17

2015/16

2016/17

2015/16

2016/17

2015/16

2016/17

2015/16

Andrew Bonfield

Steve Holliday

John Pettigrew

Dean Seavers

Nicola Shaw

749

320

825

800

338

736

1,033

503

678

–

497

–

684

260

762

694

315

865

1,855

2,318

4,173

1,383

1,222

503

649

–

2,490

694

–

1,610

1,501

–

2,490

2,304

1,501

–

2,185

425

–

Total

3,032

2,950

609

155

2,715

3,239

5,039

5,429 10,468

3,993

225

262

248

145

101

981

221

730

143

148

–

1,242

–

485

–

170

–

5,891

3,266

3,344

4,636

3,165

1,254

5,211

1,588

1,684

–

170

18,290

11,749

Notes:
Salary: Base salaries were last increased on 1 June 2016. At this time Andrew Bonfield and Dean Seavers received salary increases of 2.0% and 2.5% respectively, in line with the average
salary increases given to other managerial employees of the Company in the UK and US respectively. Dean Seavers’ salary has been converted at $1.2767:£1 for 2016/17 ($1.4744:£1 for
2015/16). Steve Holliday did not receive a salary increase due to his planned retirement on 22 July 2016, and his salary was only paid to this date. John Pettigrew and Nicola Shaw were
newly appointed as Chief Executive and Executive Director, UK respectively. Nicola Shaw’s base salary was paid from her start date of 1 July 2016.
APP: Steve Holliday’s APP award is based on his prorated salary for the time on the Board in the 2016/17 financial year before he stepped down on his retirement in July 2016. Following
a fatality in the UK that occurred in November 2016, the APP awards have been reduced by 10% for the Executive Directors at that time.
Benefits in kind: Benefits in kind include private medical insurance, life assurance and for UK-based Executive Directors, either a fully expensed car or a cash alternative to a car and
the use of a car and driver when required. For John Pettigrew, this amount includes a reimbursement for costs relating to his relocation to London on appointment as Chief Executive.
Other: For Nicola Shaw, Other includes a £485,000 cash payment to compensate her for the forfeiture of short-term and long-term incentive cash awards at her former employer which
were due to vest in June 2016.
LTPP: Three quarters of the 2013 LTPP award vested in July 2016, and the remaining quarter is due to vest in July 2017. Additionally, the entire 2014 LTPP award is due to vest in July 2017.
The above value for 2016/17 therefore includes all of these amounts, and separate columns have been provided to delineate the two awards. No Executive Director received two LTPP
awards in the same year. For amounts vesting on 1 July 2016, the share price on that date of 1,105.5 pence ($74.36 per ADS) has been applied. For amounts due to vest on 1 July 2017,
the average share price over the three months from 1 January 2017 to 31 March 2017 of 962.75 pence ($59.84 per ADS) has been applied. The 2015/16 LTPP amount has been restated
to reflect the actual amounts that vested on 1 July 2016 for RoE, rather than the estimate shown in last year’s annual report. Due to a higher share price at vesting of 1,105.5 pence ($74.36
per ADS) versus the estimate of 958 pence ($69.23 per ADS), the actual value at vesting was £38,425, £60,700, and £18,882 higher than the estimate for Andrew Bonfield, Steve Holliday
and John Pettigrew respectively. The remaining 25% portion of Steve Holliday’s 2013 LTPP award (with expected vesting of £0.3 million) and the full 2014 LTPP award (with expected
vesting of £2.2 million) will not vest until 1 July 2017, approximately one year after he stepped down from the Board. Therefore the vested amounts will be disclosed in the Payments
to Past Directors section in next year’s Annual Report and Accounts.
Total: The Total remuneration excluding the 2013 LTPP would have been £4.0 million, £0.9 million and £3.9 million for Andrew Bonfield, Steve Holliday and John Pettigrew respectively.
As a result, the Total for all Executive Directors would have been £13.3 million.

Annual report on remuneration

National Grid Annual Report and Accounts 2016/17Corporate GovernanceAnnual report on remuneration continued

Performance against targets for APP 2016/17 (audited information)
APP awards are earned by reference to the financial year and paid in June. 50% of awards are paid in shares which (after any sales to pay income 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 by the Committee 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. The individual objectives
of the Executive Directors reflect the primary focus areas within the Company’s overall strategic priorities:

• safety;
• business growth in the UK and US;
• operational excellence and improvement in overall Company performance and service to customers and communities;
•
• stakeholder engagement, sustainability and the environment; and
• successful completion of the sale of a majority of the UK Gas Distribution business.

the talent pipeline and employee engagement;

The outcomes of APP awards earned in 2016/17 for the four Executive Directors at 31 March and prior to the 10% reduction (described in the note
below), are shown in the tables below:

Adjusted EPS (p/share)

Group RoE (%)

UK RoE
(Percentage points
above average allowed
regulatory return)

US RoE (%)

Proportion
of max

opportunity Threshold
60.0

35%

11.2

2.65

35%

Target
62.5

11.6

2.90

Stretch
65.0

12.0

3.15

Actual
65.1

11.7

3.00

Proportion
of max
achieved
100%

62.5%

70%

8.0

8.2

8.4

8.2

50%

Individual objectives

30%

See adjacent table

78-84%

Notes:
Overall: Group RoE pertains to the Chief Executive and Finance Director, while 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 opportunity.
Adjusted EPS: Adjusted EPS actual is reduced by 7.9 pence to account for the impact of timing, scrip
dividend uptake, currency adjustments and certain actuarial assumptions on pensions, and to remove
the benefit of ceasing to depreciate UK Gas Distribution business assets since December 2016.

Safety and compliance

Business growth

Capability development

Stakeholder relations

Employee engagement

Financial strategy

Operational excellence

Customer experience

Group strategy

Completion of sale of
majority stake in UK
Gas Distribution

Proportion of
maximum achieved

Andrew
Bonfield

John
Pettigrew
•

Dean
Seavers
•

Nicola
Shaw
•

•

81%

84%

82%

78%

Steve Holliday’s APP award for 2016/17 was based on his prorated salary from 1 April until 22 July and reflected target financial performance and
stretch individual performance based on an assessment of his performance against the objective of completing a successful transition between
himself and the newly appointed Chief Executive, John Pettigrew.

Following the fatal incident at the Company’s electricity sub-station in November at East Claydon, Buckinghamshire, UK, the APP awards for the four
Executive Directors on the Board at that time were reduced by 10%. The impact of the reduction is shown in the bar charts below.

2016/17 APP as proportion of base salary
Executive Directors at 31 March 2017

Max

Actual

Max

Actual

Max

Actual

Max

Actual

125.00%

37.50%

125.00%

37.50%

125.00%

37.50%

125.00%

37.50%

101.47%
30.38%

102.59%

31.50%

96.38%

30.75%

43.75%

27.34%

21.88%

103.63%
29.25%

30.63%

Former CEO

Actual

Max
125.00%

37.50%

43.75%

81.25%

37.50%

43.75%

21.87%

Individual
US RoE
UK RoE
Group RoE
Adjusted EPS

21.88%

Andrew Bonfield

John Pettigrew

Dean Seavers

Nicola Shaw

Steve Holliday

£936,604 £760,289

£1,031,250 £846,399 £999,484

£770,602

£421,875

£349,734

APP amount before reduction

£399,949

£259,967

£76,029

£684,260

91.32%

£84,640

£761,759

92.33%

£77,060

£693,542

86.74%

£34,973

10% reduction

£314,761

Final APP amounts

93.26%

Final APP amounts as a
percentage of maximum

–

£259,967

81.25%

National Grid Annual Report and Accounts 2016/17

Corporate Governance

Corporate Governance continued
2016/17 LTPP performance (audited information)
The LTPP value included in the 2016/17 single total figure relates to vesting of the conditional LTPP awards granted in both 2013 and 2014. This arises
from the change to the performance periods as part of the policy implemented in 2014. A visual illustration of this transition is presented below.
No Executive Director received more than one LTPP grant in any year.

1 July 2011

1 July 2012

1 July 2013

1 July 2014

1 July 2015

1 July 2016

1 July 2017

1 July 2018

1 July 2019

2011 LTPP

(shown in single total figure of remuneration table in 2015 report)

2012 LTPP

(shown in single total figure of remuneration table in 2016 report)

2013 LTPP

(shown in single total figure of remuneration table in this report)

2014 LTPP

(shown in single total figure of remuneration table in this report)

2015 LTPP

(to be shown in single total figure of remuneration table in 2018 report)

2016 LTPP

(to be shown in single total figure of remuneration table in 2019 report)

75% TSR and EPS portion

25% RoE portion

100% Value Growth and RoE

2013 LTPP
The 2013 award is determined based on differing performance periods and vesting dates:

• performance over the three years ending 31 March 2016 for the EPS measure (50% weighting) which vested on 1 July 2016;
• performance over the three years ending 30 June 2016 for the TSR measure (25% weighting) which vested on 1 July 2016; and
• performance over the four years ending 31 March 2017 for the UK RoE and US RoE measures (25% weighting overall, split by

Executive Director as shown below) which will vest on 1 July 2017.

The performance achieved against the 2013 LTPP award performance 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

7.72 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 6.7 percentage points

UK RoE (12.5% weighting for the
former CEO and current Finance
Director; 25% weighting for the
former Executive Director, UK)

US RoE (12.5% weighting for the
former CEO and current 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
3.1 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

1.3 percentage points
below the average allowed
regulatory return

Actual/expected
proportion of
maximum achieved

100.0%

80.0%

100.0%

0.0%

The amounts vesting or expected to vest under the 2013 LTPP during the year and included in the 2016/17 single total figure are shown in the table
below. The valuation is based on the following share prices:
• 1,105.5 pence ($74.36 per ADS) on the vesting date of 1 July 2016 for the EPS and TSR elements of the award; and
• average share price over the three months from 1 January 2017 to 31 March 2017 of 962.75 pence ($59.84 per ADS) for the RoE element of the award.

Andrew Bonfield

Steve Holliday

John Pettigrew

Original number
of share awards

in 2013 LTPP
194,798

230,844

63,361

Overall vesting
percentage (including
expected vesting
percentage for RoE
measure)
77.49%

Number of awards
vesting (including
expected
vesting for RoE
measure)
150,959

86.66%

90.00%

200,049

57,021

Dividend
equivalent

shares
20,583

25,214

8,198

Total value of awards
vesting (including
expected vesting for RoE
measure) and dividend
equivalent shares

£’000
1,855

2,490

694

For Steve Holliday, all values reflect the TSR and EPS portions of the award (75% of the total) which vested while he was on the Board. The 25% RoE
portion which is due to vest in July 2017 will be included in the ‘Payments to Past Directors’ section in next year’s Directors’ Remuneration Report.
Dean Seavers and Nicola Shaw were both appointed since the 2013 LTPP was awarded and therefore did not receive any awards under the 2013 LTPP.

Annual report on remuneration

National Grid Annual Report and Accounts 2016/17Corporate GovernanceAnnual report on remuneration continued

No further awards will be made under this LTPP structure, the 2014 structure described below having been adopted at the 2014 AGM.

2014 LTPP
The 2014 award is determined by performance over the three years ending 31 March 2017 of RoE (50% weighting) and Value Growth (50% weighting)
which will vest on 1 July 2017. For the UK and US Executive Directors at that time, the RoE component is split equally between Group RoE and UK
and US RoE respectively. For the Chief Executive at that time and the Finance Director, the entire RoE component is based on Group RoE.

The performance achieved against the 2014 LTPP award performance targets was:

Performance measure

Threshold – 20% vesting

Maximum – 100% vesting

Actual/expected vesting

Group RoE (50% weighting for the
former Chief Executive and Finance
Director, 25% weighting for the
former Executive Director, UK
and the Executive Director, US)

11.0%

12.5% or more

11.93%

UK RoE (25% weighting for the
former Executive Director, UK)

RoE is 1 percentage point
above the average allowed
regulatory return

RoE is 3.5 percentage points
or more above the average
allowed regulatory return

3.3 percentage points above the
average allowed regulatory return

US RoE (25% weighting for
the Executive Director, US)

90% of the average allowed
regulatory return

105% or more of the average
allowed regulatory return

85% of the average allowed
regulatory return

Value Growth
(50% weighting)

10.0%

12.0% or more

12.0%

Actual/expected
proportion of
maximum achieved

69.8%

92.5%

0.0%

100.0%

The Value Growth outturn includes an amount to reflect the value added from the sale of a majority interest in the UK Gas Distribution business.

The amounts expected to vest under the 2014 LTPP for the performance period ended on 31 March 2017 and included in the 2016/17 single total
figure are shown in the table below. The valuation is based on the average share price over the three months from 1 January 2017 to 31 March 2017
of 962.75 pence ($59.84 per ADS).

Andrew Bonfield

John Pettigrew

Dean Seavers (ADSs)

Original number
of share awards in
2014 LTPP
248,470

161,720

40,966

Overall vesting
percentage
84.89%

90.58%

67.44%

Number
of awards
vesting
210,923

146,482

27,629

Dividend equivalent
shares
29,828

Total value of awards
vesting and dividend
equivalent shares £’000
2,318

20,715

4,397

1,610

1,501

Nicola Shaw was appointed in July 2016 and therefore did not receive any share awards under the 2014 LTPP.

Last year’s Directors’ Remuneration Report covering remuneration for 2015/16 included an estimated vesting of the US and UK RoE portions of
the 2012 LTPP award. These awards vested on 1 July 2016 and the performance achieved against the performance targets was the same as the
expected vesting disclosed in the 2015/16 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 2015/16 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 2016 was 1,105.5 pence ($74.36 per ADS) rather than the estimate of 958 pence ($69.23 per
ADS) disclosed in the 2015/16 report based on the average price from 1 January 2016 to 31 March 2016. As a result, the actual numbers of dividend
equivalent shares granted for the 2012 LTPP were 23,001, 36,343, and 6,749 and the total values of awards that vested were £1,383,119, £2,185,387
and £424,568 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. Andrew Bonfield, John Pettigrew and Nicola Shaw received a cash
allowance in lieu of participation in a pension arrangement. Dean Seavers participated in Defined Contribution pension arrangements in the US.
Steve Holliday participated in a Defined Benefit pension arrangement, under a salary sacrifice scheme in which the individual’s salary is reduced
by the employee pension contribution. An equivalent contribution is paid by the employer to the pension arrangement. There are no additional
benefits on early retirement.

Total
contributions
to DC
arrangement

£’000
–

–

145

–

Cash in lieu of
pension
contributions
£’000
225

–

248

–

101

Accrued
DB pension at
31 March 2017

£’000 pa
–

606

–

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
225

262

248

145

101

Normal
retirement

date
n/a

26/10/2016

26/10/2031

30/08/2025

n/a

Andrew Bonfield

Steve Holliday

John Pettigrew

Dean Seavers

Nicola Shaw

Notes:
Steve Holliday: In addition to the pension shown above, there was an accrued lump sum entitlement of £129,000. The increase to the lump sum over the year, net of inflation, was £647.
The increase to the pension over the year, net of inflation, was £14,349. The total accrued pension and lump sum was split between two pension arrangements. A transfer payment from
one of the pension arrangements was made in July 2016, leaving a remaining pension of £521,709 pa and a lump sum of £6,717. This pension and lump sum entered payment on the
normal retirement date listed above.
John Pettigrew: John Pettigrew opted out of a DB pension arrangement on 31 March 2016 with a deferred pension and lump sum payable from a normal retirement date of 26 October 2031.
There was no increase to these benefits over the period, net of inflation.

National Grid Annual Report and Accounts 2016/17

Corporate Governance

Corporate Governance continuedDean Seavers: The average exchange rate for 2016/17 was $1.2767:£1. Through his participation in the 401(k) plan in the US (a DC arrangement) the Company made contributions worth
£21,197. The Company also made contributions worth £123,983 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 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 reflects 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, John Pettigrew, Nicola Shaw and Dean Seavers is calculated as the aggregate of contributions
made to a DC-type pension plan and cash in lieu of contributions to a DC-type pension plan. In accordance with BIS disclosure regulations, the pension benefit for Steve Holliday is calculated
as the increase in accrued DB-type pension over the year multiplied by 20 plus the increase in the lump sum, less the reduction in salary due to salary sacrifice. Each element is calculated
separately and rounded to produce the numbers in the table on the previous page.

Single total figure of remuneration – Non-executive Directors (audited information)
The following table shows a single total figure in respect of qualifying service for 2016/17, together with comparative figures for 2015/16:

Nora Mead Brownell

Jonathan Dawson

Pierre Dufour

Therese Esperdy

Sir Peter Gershon

Paul Golby

Ruth Kelly

Mark Williamson

Total

Fees
£’000

2016/17
96

102

133

499

105

124

2015/16
94

–

128

494

103

121

1,154

1,121

Other emoluments
£’000

2016/17
–

2015/16
–

Total
£’000

2016/17
96

–

2015/16
94

–

128

509

103

121

102

133

567

105

124

1,222

1,136

Therese Esperdy: Fees for 2016/17 include £25,000 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 car and 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 these 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 £19.5 million (2015/16: £12.8 million), though this figure includes
two years’ worth of LTPPs to the Executive Directors for 2016/17. Excluding the 2013 LTPP, the total emoluments would be £14.5 million.

LTPP (conditional award) granted during the financial year (audited information)
The face value of the awards is calculated using the volume weighted average share price at the date of grant. For Andrew Bonfield, John Pettigrew
and Dean Seavers this is 28 June 2016 at a price of £10.21 per share and $69.1825 per ADS. For Nicola Shaw this is 12 July 2016 at a price of
£11.05 per share.

LTPP
Andrew Bonfield

John Pettigrew

Dean Seavers

Nicola Shaw

Basis of award
300% of salary

350% of salary

300% of salary

Face value ’000
£2,255

Proportion vesting at
threshold performance
20%

£2,888

$3,075

£1,350

20%

Number of shares
220,883

282,810

44,447 (ADSs)

122,164

Performance

period end date
March 2019

March 2019

Performance period end date: The normal vesting date is in June 2019, following the performance period end.

Performance conditions for LTPP awards granted during the financial year (audited information)

Performance measure
Group RoE

Andrew Bonfield
50%

John Pettigrew
50%

Dean Seavers
25%

Weighting

UK RoE

US RoE

Value Growth

50%

25%

50%

Nicola Shaw
25%

25%

Conditional share awards granted – 2016
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

90% of the average
allowed regulatory return

105% or more of the
average allowed
regulatory return

50%

10.0%

12.0% or more

Payments for loss of office (audited information)
Steve Holliday stepped down from the Board and retired from the Company on 22 July 2016.

Since his departure was due to retirement, which qualifies as ‘good leaver’ status, he is eligible to receive a prorated number of shares under the
outstanding LTPPs. Awards for 261,506 remain outstanding after the prorating calculation for time served during the respective performance periods.
Awards remain subject to performance conditions, measured at the normal performance measurement date. The prorated number of shares he
is due to receive under the remaining portion of the 2013 LTPP and the full 2014 LTPP on 1 July 2017 will be disclosed in the ‘Payments to past
Directors’ section next year, along with those vesting for Nick Winser and Tom King at that time.

Annual report on remuneration

National Grid Annual Report and Accounts 2016/17Corporate GovernanceAnnual report on remuneration continued

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. Both Mr Winser and Mr King held awards over shares and ADSs, respectively, that were prorated 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 in July 2016 and pertain to the RoE portion of the 2012 LTPP and the TSR and EPS portions of the 2013 LTPP.

Prorated number of share
awards in 2012 (RoE
portion) and 2013 (EPS and
TSR portion) LTPPs
25,703

109,293

Tom King (ADSs)

Nick Winser

Overall vesting

percentage
60.81%

90.50%

Number of

awards vesting
15,629

98,914

Dividend equivalent
shares
2,105

Total value of awards
vesting and dividend
equivalent shares £’000
1,033

13,760

1,246

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 2017, had headroom of
4.08% and 7.98% respectively.

Statement 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 2017 price, which was
1,012.51 pence per share ($63.39 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 2017 and the salary used to calculate the value of the shareholding is the gross annual salary as at 31 March 2017.
Andrew Bonfield has met the shareholding requirement. As John Pettigrew, Dean Seavers and Nicola Shaw were relatively new in post, they have not
yet met the requirement, but are expected to do so in 2020, 2020 and 2023 respectively, and will not be allowed to sell shares until this requirement is
met. Non-executive Directors do not have a shareholding requirement.

The normal vesting dates for the conditional share awards subject to performance conditions are 1 July 2017, 1 July 2017, 1 July 2018, and 1 July
2019 for the LTPP 2013, LTPP 2014, LTPP 2015 and LTPP 2016 respectively. In each of April and May 2017 a further 15 shares were purchased on
behalf of John Pettigrew. In April 2017 a further 15 shares were purchased on behalf of Andrew Bonfield and 14 shares in May 2017. The shares were
purchased 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 2017 and 17 May 2017.

Directors
Executive Directors
Andrew Bonfield

John Pettigrew

Dean Seavers (ADSs)

Nicola Shaw

Non-executive Directors
Nora Mead Brownell (ADSs)

Jonathan Dawson

Pierre Dufour

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)

Value 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 2013,
2014, 2015 and 2016)

Conditional share
awards subject to
continuous
employment
(DSP 2014)

400%

500%

400%

–

460,511

253,060

5,905

–

5,000

38,268

–

1,646

87,194

2,500

800

4,726

620%

311%

37%

–

n/a

3,230

4,286

–

777,720

639,442

130,214

122,164

–

47,048

14,350

–

Notes:
Overall: 2014 DSP relates to the Deferred Share Plan under which 50% of APP awards were deferred into shares. This plan was discontinued from the 2014/15 APP in lieu of 50% payment
via shares with a two-year holding period.
Andrew Bonfield: On 31 March 2017 Andrew Bonfield held 3,230 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 2013: 48,699; LTPP 2014: 248,470; LTPP 2015: 259,668;
LTPP 2016: 220,883. The number of conditional share awards subject to continuous employment is as follows: DSP 2014: 47,048.
John Pettigrew: On 31 March 2017 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 2013: 15,840; LTPP 2014: 161,720; LTPP 2015:
179,072; LTPP 2016: 282,810. The number of conditional share awards subject to continuous employment is as follows: 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; LTPP 2016: 44,447.
Nicola Shaw: The number of conditional share awards subject to performance conditions is as follows: LTPP 2016: 122,164.
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.

National Grid Annual Report and Accounts 2016/17

Corporate Governance

Corporate Governance continuedExternal 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 2017:

Andrew Bonfield

Nicola Shaw

Company
Kingfisher plc

Ellevio AB

Retained fees
£82,400

£44,646 (517,000 SEK)

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, and amounts relating to the UK Gas
Distribution business.

Performance graph and table
This chart shows National Grid plc’s eight-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 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.

+12%

3,735

3,327

+18%

-4%

1,578

1,637

1,572

1,337

+10%

604

666

+20%

1,029

856

Payroll costs

Dividends

Tax

Net interest

Capital expenditure

2015/16 £m

2016/17 £m

Total shareholder return

350

300

250

200

150

100

155.79

167.17

100.00

123.65

131.11

197.94

190.98

173.94

155.42

289.19

309.95

248.64

223.74

211.45

227.33

211.21

262.78

31/03/09 31/03/10 31/03/11 31/03/12 31/03/13 31/03/14 31/03/15 31/03/16 31/03/17

National Grid plc

FTSE 100 Index

Source: Thomson Reuters

Chief Executive’s pay in the last eight financial years
Steve Holliday was the Chief Executive throughout the seven-year period from 1 April 2010 to 31 March 2016. John Pettigrew became Chief Executive
on 1 April 2016. His outcomes have been shown for the year 2016/17 in two ways, one to reflect the full total single figure of remuneration which
includes the vesting outcomes of both the 2013 and 2014 LTPP awards, and the other to reflect the total single figure of remuneration using just
the 2014 LTPP award to reflect his annualised total remuneration.

Total single figure of remuneration (£’000)

Total single figure of remuneration – including only 2014 LTPP (£’000)

Steve Holliday

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

John
Pettigrew

2016/17
4,636

3,942

APP (proportion of maximum awarded)

95.33% 81.33%

68.67% 55.65% 77.94% 94.80% 94.60% 73.86%

PSP/LTPP (proportion of maximum vesting including expected vesting
for RoE measure)

100.00% 65.15%

49.50% 25.15% 76.20% 55.81% 63.45%

90.41%

Total single figure of remuneration: The figure for 2016/17 includes both the 2013 and 2014 LTPP awards due to the transition from a four-year to a three-year period before all portions
vest between the 2013 and 2014 LTPP grants, resulting in a one-time overlapping of vesting periods.
Total single figure of remuneration – including only 2014 LTPP: The total single figure of remuneration is restated for 2016/17 to include only the 2014 LTPP award in order to capture one
year’s worth of remuneration for comparison purposes.
PSP/LTPP: This vesting proportion for 2016/17 reflects combined vesting outcomes for the 2013 (90.00%) and 2014 (90.58%) LTPP awards.

Percentage change in Chief Executive’s remuneration
The table below shows how the percentage change in the Chief Executive’s salary, benefits and APP between 2015/16 and 2016/17 compares with
the percentage change in the average of each of those components of remuneration for non-union employees. The Committee views this group as
the most appropriate comparator group, as it excludes employees represented by trade unions, whose pay and benefits are negotiated with each
individual union.

Chief Executive

Non-union employees (increase per employee)

Salary

Taxable benefits

APP

£’000

2016/17
825

£’000

Increase

2015/16
1,033

(20)%

£’000

2016/17
497

£’000

Increase

2015/16
41

1,112%

£’000

2016/17
762

£’000

Increase

2015/16
1,222

(38)%

Chief Executive: John Pettigrew succeeded Steve Holliday as Chief Executive on 1 April 2016 and therefore the table compares Steve Holliday’s pay from 2015/16 with John Pettigrew’s pay
in 2016/17. Taxable benefits for John Pettigrew in 2016/17 include a one-time relocation benefit.
Non-union employees: Pay data for US employees has been converted at $1.2767:£1 for 2016/17 ($1.4744:£1 for 2015/16).

Annual report on remuneration

National Grid Annual Report and Accounts 2016/17Corporate GovernanceAnnual report on remuneration continued

Statement of implementation of remuneration policy in 2017/18
The remuneration policy for approval at the 2017 AGM will be implemented during 2017/18 as described below.

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).

Andrew Bonfield

John Pettigrew

Dean Seavers

Nicola Shaw

From 1 June 2017
£771,285

£899,250

$1,050,625

£490,500

From 1 June 2016
£751,740

£825,000

$1,025,000

£450,000

Increase
2.6%

9.0%

2.5%

9.0%

APP measures for 2017/18
The APP targets are considered commercially sensitive and consequently will be disclosed after the end of the financial year in the 2017/18
annual report on remuneration.

Andrew Bonfield and John Pettigrew
Adjusted EPS
Group RoE

Individual objectives

Dean Seavers and Nicola Shaw
UK or US Value Added

UK or US RoE

Individual objectives

Weighting
35%
35%

30%

Weighting
35%

35%

30%

Performance measures for LTPP to be awarded in 2017

Group RoE

Value Growth

Andrew Bonfield
50%

50%

John Pettigrew
50%

50%

Dean Seavers
50%

50%

Nicola Shaw
50%

Threshold – 20% vesting
11.0%

Maximum – 100% vesting
12.5% or more

50%

10.0%

12.0% or more

Fees for NEDs
Committee chair fees are in addition to committee membership fees. Therese Esperdy was appointed as Non-executive Director to the National Grid
USA Board in 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 committees)

From 1 June 2017
£’000
513

From 1 June 2016
£’000
500

78
10.3

19.4

12.5

78
9

12.5

Increase

2.6%

0%
14.4%

2.1%

National Grid Annual Report and Accounts 2016/17

Corporate Governance

Corporate Governance continued
Advisors to the Remuneration Committee
The Committee received advice during 2016/17 from independent remuneration consultants New Bridge Street (NBS), a trading name of Aon Hewitt
Ltd (part of Aon plc). NBS was selected as our advisor 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, advising the Committee in
connection with benchmarking of the total reward packages for the Executive Directors and other senior employees, and facilitating the development
of the proposed 2017 remuneration policy. NBS is a member of the Remuneration Consultants Group and has 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 2017 the Committee paid a total of £148,313 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 (£3,125 paid in 2016/17);
• Linklaters LLP: advice relating to share schemes and to Directors’ service contracts as well as providing other legal advice to the Company

(£31,067 paid in 2016/17); and

• Willis Towers Watson: advice relating to the market assessments of the total reward packages for the Executive Committee, inclusive of the

Executive Directors (£107,040 paid in 2016/17).

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 Chief Executive; and of the Chief Executive 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 Acting
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 2015/16 Annual Remuneration Report at 2016 AGM
The voting figures shown refer to votes cast at the 2016 AGM and represent 60.51% of the issued share capital. In addition, shareholders holding
62 million shares abstained.

Number of votes

Proportion of votes

For
2,305,471,537

97.10%

Against
68,788,657

2.90%

The Directors’ Remuneration Report has been approved by the Board and signed on its behalf by:

Jonathan Dawson
Chairman of the Remuneration Committee
17 May 2017

Annual report on remuneration

National Grid Annual Report and Accounts 2016/17Corporate GovernanceFinancial Statements contents

Introduction to the Financial Statements

Directors’ statement and independent auditors’ report
74 Statement of Directors’ responsibilities
75
83 Report of Independent Registered Public Accounting Firm

Independent auditors’ report

Consolidated financial statements under IFRS
Primary statements
84 Consolidated income statement
86 Consolidated statement of comprehensive income
87 Consolidated statement of changes in equity
88 Consolidated statement of financial position
90 Consolidated cash flow statement

Notes to the consolidated financial statements –
analysis of items in the primary statements
92

Note 1 – Basis of preparation and recent
accounting developments

95 Note 2 – Segmental analysis
99 Note 3 – Operating costs
101 Note 4 – Exceptional items and remeasurements
103 Note 5 – Finance income and costs
104 Note 6 – Tax
110 Note 7 – Earnings per share (EPS)
111 Note 8 – Dividends
112 Note 9 – Discontinued operations
116 Note 10 – Goodwill
117 Note 11 – Other intangible assets
118 Note 12 – Property, plant and equipment
119 Note 13 – Other non-current assets
120 Note 14 – Financial and other investments
121 Note 15 – Investments in joint ventures and associates
123 Note 16 – Derivative financial instruments
125 Note 17 – Inventories and current intangible assets
126 Note 18 – Trade and other receivables
127 Note 19 – Cash and cash equivalents
127 Note 20 – Borrowings
129 Note 21 – Trade and other payables
129 Note 22 – Other non-current liabilities
129 Note 23 – Pensions and other post-retirement benefits
138 Note 24 – Provisions
140 Note 25 – Share capital
141 Note 26 – Other equity reserves
142 Note 27 – Net debt

Notes to the consolidated financial statements –
supplementary information
144 Note 28 – Commitments and contingencies
145 Note 29 – Related party transactions
145 Note 30 – Financial risk management
153 Note 31 – Borrowing facilities
154 Note 32 – Subsidiary undertakings, joint ventures and associates
157 Note 33 – Sensitivities on areas of estimation and uncertainty
159 Note 34 – Additional disclosures in respect

of guaranteed securities

Company financial statements under FRS 101
Basis of preparation
166 Company accounting policies

Primary statements
168 Company balance sheet
169 Company statement of changes in equity

Notes to the Company financial statements
170 Note 1 – Fixed asset investments
170 Note 2 – Debtors
170 Note 3 – Creditors
171 Note 4 – Derivative financial instruments
171 Note 5 – Investments
171 Note 6 – Borrowings
171 Note 7 – Share capital
171 Note 8 – Shareholders’ equity and reserves
171 Note 9 – Parent Company guarantees
171 Note 10 – Audit fees

National Grid Annual Report and Accounts 2016/17

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 page 14), 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 75) 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
and Accounts. 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 84 to 91.
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 85 to 87, 89, 91, 97 to 98, 108 to 109, 111, 115 and 128.

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial 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.

UK 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. The Directors are also responsible for ensuring
that 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 34 and 35, 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 08–71 and 172–201, was approved by the Board
and signed on its behalf.

Strategic Report
The Strategic Report, comprising pages 02–31, was approved by the
Board and signed on its behalf.

By order of the Board

Alison Kay
Group General Counsel & Company Secretary
17 May 2017
Company number: 4031152

National Grid Annual Report and Accounts 2016/17

Financial Statements

Independent auditors’ report
to the Members of National Grid plc

Report on the financial statements

Our opinion
In our opinion:
• National Grid plc’s Group financial statements and Company financial statements (the ‘financial statements’) give a true and fair view

of the state of the Group’s and of the Company’s affairs as at 31 March 2017 and of the Group’s profit and cash flows for the 12 month
period (the ‘period’) then ended;
the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs)
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 and Accounts, comprise the financial statements and notes on pages 84 to 171
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’ (UK GAAP), and applicable law.

Overview of our audit

Materiality
£175m
(2016: £157m)

Based on 5% of total profit
before tax, exceptional items
and remeasurements.

Scope
82%
(2016: 80%)

In scope coverage of Group
profit before tax, exceptional
items and remeasurements.

Areas of focus

Component

Change in level of
risk year-on-year

Event-driven
Accounting for the disposal of UK Gas Distribution business
Recurring
Accuracy of capital expenditures
Accuracy and valuation of treasury derivative transactions
Accounting for net pension obligations
Valuation of environmental provisions
US financial controls
Revenue recognition

Highlights of what we reported to the Audit Committee

UK & Corporate centre

Increased

UK & US
US & Corporate centre
US & Corporate centre
UK & US
US
UK & US

No change
Increased
Increased
Increased
Decreased
No change

•

the disposal of the UK Gas Distribution business on 31 March 2017 has had a number of significant
accounting and control implications for National Grid, and was a major driver of our audit effort this year;

• while areas for improvement remain, in particular Property, Plant and Equipment (PPE), there has

been progress on improving the US financial control environment;

• although they contain significant judgements, estimates for pensions and environmental provisions
fall within what we consider to be an acceptable range. The significant increase in US environmental
provisions and the sectionalisation of the UK pension scheme this year meant there was increased
risk in these two areas; and

• with respect to revenue, capital expenditures, 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 identifying our audit team for National Grid we focused on continuity and relevant industry experience. The disposal of the UK Gas
Distribution business necessitated additional senior team members for the corporate centre and UK audits, with a new separate team
for the audit of UK Gas Distribution following separation from the UK business in September 2017.

This is my fifth and final year working on the National Grid audit and second 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 US lead partner has had four years of involvement and
our UK lead partner has two years of involvement on the National Grid audit. The UK and 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 79% 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 the completion, on 31 March 2017, of the partial disposal of the UK Gas Distribution
business. This was a complex transaction with significant accounting and control implications for the Group.

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial StatementsIndependent auditors’ report
to the Members of National Grid plc continued

How we tailored the audit scope
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 businesses required an audit of their
complete financial information due to their size. In respect of the UK Gas Distribution business, as a result of the hive out into a separate legal
entity on 1 October 2016, we have determined that it is appropriate to treat it as two separate components for the 2016/17 audit. This is
consistent with the way in which we will perform stand-alone audits of UK Gas Distribution and the way in which its results will be reported
within the Group consolidation.

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 the 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 our audit areas of focus,
the Group team visited both the UK and US component teams 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 in scope coverage
obtained from the territories and functions where we performed our audit work.

Materiality
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together
with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on
the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial
statements as a whole.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Area

Commentary

Overall Group materiality
£175m (2016: £157m)

Rationale for benchmark applied
5% of total profit before tax, exceptional
items and remeasurements

Component performance materiality

£175 million (2016: £157 million) is 5% of profit before tax, exceptional items and
remeasurements (‘adjusted profit before tax’). While 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.

We have chosen total adjusted profit before tax because it is the consistent year-on-year
measure of performance used by management and excludes the non-recurring disproportionate
impact of exceptional items and remeasurements. We also considered this measure to be
suitable having compared it to other benchmarks: our materiality is 6.0% of total statutory
profit before tax, 0.3% of total assets and 0.9% of net assets.

Given the disposal of the UK Gas Distribution business, we considered whether a change
to materiality was required in order to reflect only continuing operations. As the transaction
completed on the final day of the year, we did not consider this appropriate as in total income
statement terms there has been no change in the Group comparing 2016/17 and 2015/16.

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:

US Regulated (full scope audit)
UK Electricity Transmission (full scope audit)
UK Gas Transmission (full scope audit)
UK Gas Distribution (full scope audit) 2015/16

First half of 2016/17
Second half of 2016/17

Corporate activities

UK treasury
UK tax
UK pensions

2017
£m
83
38
30

23
22

83
75
124

2016
£m
65
38
30
39

68
68
83

Reporting level
£9m (2016: £7m)

We agreed with the Audit Committee that we would report to them misstatements identified
during our audit above £9 million (2016: £7 million) as well as misstatements below that
amount that, in our view, warranted reporting for qualitative reasons.

National Grid Annual Report and Accounts 2016/17

Financial Statements

Proﬁt before tax after exceptionals

Total assets

Total revenue

Full scope audit
Other procedures

82%
18%

Full scope audit
Other procedures

85%
15%

Full scope audit
Other procedures

96%
4%

The scope of our audit and our areas of focus
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (‘ISAs (UK & Ireland)’).

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.

The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified
as ‘areas of focus’ in the table below. 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.
This is not a complete list of all risks identified by our audit.

Area of focus

How our audit addressed the area of focus and what we reported to the Audit Committee

Accounting for the disposal of the UK Gas Distribution
business
National Grid’s disposal of a 61% majority stake in the UK Gas
Distribution business on 31 March 2017 was a significant transaction
for the Group.

The key financial reporting implications of the disposal included
the following:

• accounting for the legal separation of the UK Gas Distribution
business, including a Group and Gas Distribution re-financing
exercise and an assessment of any tax implications;

• sectionalisation of the National Grid UK Pension Scheme

prior to sale;

• calculation of the net gain on sale of £5.3 billion, including
consideration of costs associated with the transaction;
loss of control and deconsolidation of UK Gas Distribution
under IFRS 10;

•

• classification of the retained interest as an investment in associate,
and the determination of the investment fair value and provisional
purchase price allocation;
the design, implementation and operation of internal controls
specific to the key steps of the transaction; and

•

• disclosure within the financial statements, including presenting

the results of the UK Gas Distribution business as ‘discontinued’
and key judgements applied to the restatement of comparative
information.

Change in level of risk year-on-year: Increased
Because of the completion of the transaction in the current period.

The disposal had a significant impact on our audit for 2016/17. To
address this area of focus, our procedures included, among others:

•

testing of the design and operating effectiveness of internal
controls over the separation of the UK Gas Distribution business;
testing of controls and underlying transaction data relating to the
UK Gas Distribution business for the period up until disposal and
assessment of the approach taken by management to restate
prior periods to separately present the UK Gas Distribution
business as a discontinued operation;

• validating the accuracy of the net gain on sale of £5.3 billion

•

presented within discontinued operations;
involvement of our tax specialists to assess the tax implications
of the disposal;

• consideration of the classification as an associate and valuation
of the retained investment in the UK Gas Distribution business
as an associate, including involving our valuation specialists; and

• assessing the adequacy of the Group’s financial statement

disclosures relating to discontinued operations, exceptional items,
and investments in joint ventures and associates.

We noted no material issues arising from this testing.

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial StatementsIndependent auditors’ report
to the Members of National Grid plc continued

Area of focus

How our audit addressed the area of focus and what we reported to the Audit Committee

Accuracy of capital expenditures
A key focus for National Grid is network investment with total
capital expenditures across the Group of £4.3 billion during 2016/17
(2015/16: £3.9 billion).

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 judgement, for
example in determining whether activities or items are adding value
or maintaining existing assets.

Specifically in relation to the US, following matters arising last year,
management have implemented new review controls in order to
reduce the risk of misstatement, however there is a continuing risk
that the controls over:

•

the classification of costs between PPE and expenses
in relation to small value work orders; and
the transfer of assets under construction to assets in service

may not have been working effectively throughout the period.
In addition, there are complex adjustments required to translate
local PPE accounting records prepared under generally accepted
accounting principles in the United States (US GAAP) to comply
with IFRS.

Change in level of risk year-on-year: No change
Due to the volume and complexity of transactions.

Accuracy and valuation of treasury derivative transactions
In order to fund its activities, at 31 March 2017 National Grid had
total borrowings of £28.6 billion, of which £6.8 billion is denominated
in currencies other than Sterling or US Dollars, which exposes the
Group to foreign exchange and interest rate risk.

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 and exchange
rates, and determination of appropriate discount rates to apply
to future cash flows.

Change in level of risk year-on-year: Increased
There was a significant increase in transactional activity as a
result of the refinancing exercise related to the disposal of the
UK Gas Distribution business, which increased the level of risk.

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 stratification of the work orders into populations with
similar risks, such as low value and aged, with testing designed
to provide a high level of assurance.

With respect to the IFRS adjustments to US GAAP reporting, we
tested the analysis to underlying accounting records, recalculations
and supporting documentation. Our testing of plant capitalisation and
IFRS adjustments to plant identified potential misstatements which
were reported to the Audit Committee but which were considered
immaterial for adjustment.

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 judgements
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. We found one classification adjustment between
PPE categories which was adjusted by management.

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.

In respect of the refinancing exercise undertaken as part of the
disposal of the UK Gas Distribution business, we substantively tested
to third-party documentation the transactions undertaken, including
the buyback, novation and new issuance of debt, and changes in the
associated hedges. We also audited related accounting judgements
including the discontinuance of hedge relationships and valuation.
We challenged management as to the treatment of the £1.3 billion
related costs as part of the net gain on sale, and from reviewing
minutes of meetings, financial strategy papers and presentations
we found no evidence to suggest these costs were not related to
the transaction. We had no material issues arising from this work.

National Grid Annual Report and Accounts 2016/17

Financial Statements

Area of focus

How our audit addressed the area of focus and what we reported to the Audit Committee

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 2017, National Grid’s gross defined benefit
obligation is £26.3 billion which is offset by scheme assets of
£24.4 billion 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: Increased
The significance of a number of inputs to the valuation coupled
with the sectionalisation of the pension scheme means there is
increased risk around the Group’s pension accounting in 2016/17.

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 2017 the total liability in respect of environmental
provisions is £1.7 billion, of which £1.5 billion 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: Increased
The level of risk has increased due to the increase in US provisions
during the period.

We have tested the significant judgements made by National
Grid’s third-party actuaries and assessed their independence
and competence as set out below and 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.

The major accounting impact of sectionalisation of the National
Grid UK Pension Scheme is on the individual subsidiaries within
the National Grid Group. For Group purposes, the key consequence
of sectionalisation was the need to determine the value of the section
disposed of with the UK Gas Distribution business. In this regard,
we confirmed that the assets and liabilities had been split in
accordance with the Deed of Sectionalisation, by obtaining evidence
of the Trustees’ expert independent verification of these splits. In
addition, we reviewed the accounting for one-off payments to the
scheme. We had no material issues arising from this work.

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 key assumptions
underlying the calculations. Where possible we confirmed other
inputs into the calculations 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. Following
discussion with management the rates were adjusted with no
material impact on the financial statements.

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial StatementsIndependent auditors’ report
to the Members of National Grid plc continued

Area of focus

How our audit addressed the area of focus and what we reported to the Audit Committee

US financial controls
National Grid’s US business is going through a continuing programme
of process and control improvements. In this period of change there
is higher risk of error in the financial information reported by the
US Regulated business.

Change in level of risk year-on-year: Decreased
We are seeing progress on control remediation and additional
focus on the control environment. We have considered the control
implications of US plant accounting separately within the accuracy
of capital expenditures area of focus.

Whilst there has been progress on remediation, US financial control
continues to be an area of focus for the Audit Committee and our
audit team. Our audit response is summarised below.

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 requiring reporting to the Audit Committee arising.

Revenue recognition
During 2016/17 National Grid has recognised revenue of £15.0 billion;
£14.3 billion of which is 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, which combined
with the application of IFRS means that revenue recognition involves
limited judgement. The majority of revenue is derived from a small
number of customers who settle within agreed terms.

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 payment 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 a sample of balances 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 92, 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 2016/17

Financial Statements

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.

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.

Other Companies Act 2006 reporting
Under the Companies Act 2006 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 and compliance
with applicable requirements
Companies Act 2006 reporting
In our opinion, based on the work undertaken in the course
of the audit:

•

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; and
the Strategic Report and the Directors’ Report have been
prepared in accordance with applicable legal requirements.

In addition, in light of the knowledge and understanding of the Group,
the Company and their environment obtained in the course of the
audit, we are required to report if we have identified any material
misstatements in the Strategic Report and the Directors’ Report.

We have nothing to report in this respect.

ISAs (UK & Ireland) reporting
Under ISAs (UK & Ireland) we are required to report to you if,
in our opinion:

•

the information in the Annual Report and Accounts 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 74, in accordance
with provision C.1.1 of the UK Corporate Governance Code
(the ‘Code’), that they consider the Annual Report and Accounts
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 and Accounts on pages 36 to 44,
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 52 of the Annual Report and
Accounts, 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 and Accounts that
describe those risks and explain how they are being managed
or mitigated; or
the Directors’ explanation on page 52 of the Annual Report and
Accounts, 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.

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial 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 Statement of Directors’ responsibilities
set out on page 74, 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 and Accounts 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. With
respect to the Strategic Report and Directors’ Report, we consider
whether those reports include the disclosures required
by applicable legal requirements.

Michael Timar (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
17 May 2017

National Grid Annual Report and Accounts 2016/17

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
17 May 2017

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 2017 and 31 March 2016, and
the results of their operations and their cash flows for each of the
three years in the period ended 31 March 2017 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 2017, 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 180 of the 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 2016/17Financial StatementsConsolidated income statement
for the years ended 31 March

Continuing operations
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 from continuing operations
Before exceptional items and remeasurements
Exceptional items and remeasurements
Profit after tax from continuing operations

Profit after tax from discontinued operations
Before exceptional items and remeasurements
Exceptional items and remeasurements
Gain on disposal of UK Gas Distribution after tax
Profit after tax from discontinued operations

Total profit for the year (continuing and discontinued)
Before exceptional items and remeasurements
Exceptional items and remeasurements
Gain on disposal of UK Gas Distribution after tax
Total profit for the year

Attributable to:
Equity shareholders of the parent
From continuing operations
From discontinued operations

Non-controlling interests

From continuing operations
From discontinued operations

Earnings per share2
Basic

From continuing operations
From discontinued operations
Gain on disposal of UK Gas Distribution

Diluted

From continuing operations
From discontinued operations
Gain on disposal of UK Gas Distribution

Notes

2017
£m

2016
Re-presented1
£m

2015
Re-presented1
£m

2(a)
3

2(b)
4

2(b)

5
4,5

5
15

2(b)
4

2(b)

6
4,6

9
9
9
9

7(a)
7(a)
7(a)
7(a)

7(b)
7(b)
7(b)
7(b)

15,035
(11,827)

3,208

(1,140)
63

13,212
(9,987)

3,225

(977)
59

3,214
11

(878)
(99)

2,417
(88)

13,357
(10,406)

2,951

(1,073)
46

3,034
(83)

(908)
(165)

2,208
(248)

2,184

2,329

1,960

(604)
177

(543)
76

(374)

(427)

(467)

1,813
89

1,665
(172)

1,810

1,902

1,493

576
116
–

516
2
–

5,984

692

518

2,389
205
–

2,181
(170)
–

7,794

2,594

2,011

1,901
690

1,503
516

7,795

2,591

2,019

1
2

(10)
2

(1)

(8)

207.1p

50.4p
18.3p
–

50.2p
18.2p
–

68.7p

39.4p
13.5p
–

39.2p
13.5p
–

52.9p

206.2p

68.4p

52.7p

3,773
(565)

(1,082)
(58)

2,807
(623)

(666)
292

2,141
(331)

606
57
5,321

2,747
(274)
5,321

1,810
5,985

–
(1)

48.1p
17.6p
141.4p

47.9p
17.5p
140.8p

National Grid Annual Report and Accounts 2016/17

Financial Statements

Adjusted earnings and EPS from continuing operations
Adjusted earnings and EPS, which exclude exceptional items
and remeasurements, are provided to reflect results of the Group
on a ‘business performance’ basis, described further in note 4.
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 195 for a reconciliation
of adjusted basic EPS to EPS.

Adjusted earnings and adjusted EPS from continuing operations1

£1,675m

43.9p

£1,812m

48.0p

£2,141m

56.9p

£1,451m

£1,465m

38.4p

38.1p

2012/13

2013/14

2014/15

2015/16

2016/17

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 2016/17 of 8.9p (19%).

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 (statement of financial position)

2016/17
1.28
1.25

2015/16
1.47
1.44

% change
(13)%
(13)%

The movement in foreign exchange during 2016/17 has resulted
in a £1,175 million increase in revenue, a £187 million increase
in adjusted operating profit and a £189 million increase in
operating profit.

Unaudited commentary on the consolidated income statement

The consolidated income statement shows income earned and
expenditure for the year, with the difference being the overall
profit for the year.

As a result of the sale of a 61% controlling interest in UK Gas
Distribution, we are required to report our earnings for the
Group excluding UK Gas Distribution (‘continuing operations’)
separately from the results of that business, which we report
within ‘discontinued operations’. Further information is included
in note 9.

The commentary below relates to continuing operations only.

Revenue
Revenue for the year ended 31 March 2017 increased by
£1,823 million to £15,035 million. This increase was driven by
higher revenues in both our UK and US Regulated businesses.
US Regulated revenues were £1,438 million higher year-on-year
including favourable impact from foreign exchange, increased
regulatory revenue allowances and favourable timing of recoveries.
UK regulated revenues increased by £495 million, including
increased regulatory allowances, timing over-recoveries and
increased system balancing revenues. Revenue from Other activities
decreased, including lower interconnector and metering income.

Operating costs
Operating costs for the year ended 31 March 2017 of
£11,827 million were £1,840 million higher than the prior year.
This increase in costs included a £576 million increase in exceptional
items and remeasurements, which is discussed below. Excluding
exceptional items and remeasurements, operating costs were
£1,264 million higher, principally due to the impact of foreign
exchange rates alongside increased balancing services costs
in the UK and higher depreciation as a result of newly
commissioned assets.

Net finance costs
For the year ended 31 March 2017, net finance costs before
exceptional items and remeasurements were £173 million higher
than 2015/16 at £1,029 million, mainly as a result of the impact
of the stronger US dollar, higher UK RPI inflation and increased
levels of average net debt in continuing operations.

Tax
The tax charge on profits before exceptional items and
remeasurements was £62 million higher than 2015/16. This was
mainly a result of increased taxable profits in the year. The effective
tax rate for the year decreased to 23.7% (2015/16: 25.0%) reflecting
settlements relating to prior years partially offset by an increased
proportion of profits before tax being generated in the US.

Exceptional items and remeasurements
Operating costs for the year ended 31 March 2017 included
a £68 million gain on remeasurements of commodity contracts,
together with £633 million exceptional costs associated with
environmental charges and gas holder decommissioning.
In the previous year, operating costs included a net £11 million
gain on remeasurements of commodity contracts.

Finance costs for the year ended 31 March 2017 included a
loss of £58 million on financial remeasurements, relating to net
losses on derivative financial instruments. For the previous year
ended 31 March 2016, we incurred a loss of £99 million on financial
remeasurements. Exceptional tax for 2016/17 was a credit of
£292 million 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 applicable from April 2020 from 18% to 17%.

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial StatementsConsolidated statement of comprehensive income
for the years ended 31 March

Profit after tax from continuing operations

Other comprehensive income/(loss) from continuing operations
Items from continuing operations that will never be reclassified to profit or loss:

Remeasurement gains/(losses) of pension assets and post-retirement benefit obligations
Tax on items that will never be reclassified to profit or loss

Total items from continuing operations that will never be reclassified to profit or loss
Items from continuing operations 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 from continuing operations that may be reclassified subsequently to profit or loss

Other comprehensive income/(loss) for the year, net of tax from continuing operations
Other comprehensive income/(loss) for the year, net of tax from discontinued operations
Other comprehensive income/(loss) for the year, net of tax

Total comprehensive income for the year from continuing operations
Total comprehensive income for the year from discontinued operations
Total comprehensive income for the year

Notes

23
6

Attributable to:

Equity shareholders of the parent
From continuing operations
From discontinued operations

Non-controlling interests
From continuing operations
From discontinued operations

2017
£m
1,810

2016
Re-presented1
£m
1,902

2015
Re-presented1
£m
1,493

423
(277)
146

346
70
(6)
81
(25)
(34)
432

578
42
620

2,388
6,026
8,414

2,389
6,026
8,415

(1)
–
(1)

410
(95)
315

69
88
26
43
–
(39)
187

502
71
573

2,404
763
3,167

2,403
761
3,164

1
2
3

(758)
296
(462)

175
(86)
11
41
(8)
3
136

(326)
(68)
(394)

1,167
450
1,617

1,176
448
1,624

(9)
2
(7)

1. Comparative amounts have been re-presented to reflect the classification of the UK Gas Distribution business as a discontinued operation. Further information is provided in note 2.

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 defined benefit 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.

Remeasurement gains/(losses) of pension assets and post-retirement benefit obligations
We had a net gain after tax of £146 million (2015/16: net gain of £315 million; 2014/15: net loss of £462 million) 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 £346 million (2015/16: £69 million gain; 2014/15: £175 million 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 £70 million (2015/16: £88 million gain; 2014/15: £86 million loss).

National Grid Annual Report and Accounts 2016/17

Financial Statements

Consolidated statement of changes in equity
for the years ended 31 March

At 1 April 2014
Profit/(loss) for the year
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 payments
Tax on share-based payments
At 31 March 2015
Profit for the year
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 payments
Tax on share-based payments
At 31 March 2016
Profit/(loss) for the year
Other comprehensive 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 payments
Tax on share-based payments

At 31 March 2017

Share
capital
£m
439
–
–
–
–
4
–
–
–
–
–
–
443
–
–
–
–
4
–
–
–
–
–
–
447
–
–
–
–
2
–
–
–
–
–
–

449

Share
premium
account
£m
1,336
–
–
–
–
(5)
–
–
–
–
–
–
1,331
–
–
–
–
(5)
–
–
–
–
–
–
1,326
–
–
–
–
(2)
–
–
–
–
–
–

1,324

Retained
earnings
£m
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
16,305
7,795
84
7,879
(1,463)
–
(189)
18
(6)
–
35
3

22,582

Other equity
reserves1
£m
(4,759)
–
77
77
–
–
–
–
–
–
–
–
(4,682)
–
159
159
–
–
–
–
–
–
–
–
(4,523)
–
536
536
–
–
–
–
–
–
–
–

Total
shareholders’
equity
£m
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
13,555
7,795
620
8,415
(1,463)
–
(189)
18
(6)
–
35
3

Non-
controlling
interests
£m
8
(8)
1
(7)
–
–
–
–
–
11
–
–
12
3
–
3
–
–
–
–
–
(5)
–
–
10
(1)
–
(1)
–
–
–
–
–
7
–
–

Total
equity
£m
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
13,565
7,794
620
8,414
(1,463)
–
(189)
18
(6)
7
35
3

(3,987)

20,368

20,384

1. For further details of other equity reserves, see note 26.
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 29.10 pence per share, bringing the total dividend for the year to 44.27 pence per share,
a 2.1% increase on 2015/16. The Directors intend to target increasing the annual dividend per share by at least the rate of RPI inflation
for the foreseeable future.

Special dividend
Following completion of the sale of the majority interest in UK Gas Distribution, on 19 April 2017, the Directors approved a special interim
dividend of 84.375 pence per existing ordinary share ($5.4224 per existing American Depositary Share).

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial 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
Current tax assets
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
Total shareholders’ equity
Non-controlling interests
Total equity

Notes

10
11
12
13
23
14
15
16

17
18

14
16
19

20
16
21

20
16
22
6
23
24

2017
£m

6,096
923
39,825
121
603
1,100
2,083
1,515
52,266

403
2,782
317
8,741
192
1,139
13,574
65,840

(5,496)
(1,054)
(3,438)
(107)
(416)
(10,511)

(23,142)
(1,169)
(1,447)
(4,479)
(2,536)
(2,172)
(34,945)
(45,456)
20,384

449
1,324
22,582
(3,987)
20,368
16
20,384

2016
£m

5,315
887
43,364
82
410
482
397
1,685
52,622

437
2,395
77
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

The consolidated financial statements set out on pages 84 to 165 were approved by the Board of Directors on 17 May 2017 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 2016/17

Financial Statements

Unaudited commentary on consolidated statement of 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.

Provisions and other non-current liabilities
Provisions (both current and non-current) and other non-current
liabilities increased by £245 million to £4,035 million as at
31 March 2017.

As at 31 March 2017, the Group’s statement of financial position
no longer includes the assets and liabilities of UK Gas Distribution
(see note 9). The disposal of these assets and liabilities is referred
to as ‘disposals’ in the commentaries below.

Goodwill and other intangible assets
Goodwill and intangibles increased by £817 million to £7,019 million
as at 31 March 2017. This increase primarily relates to foreign
exchange movements of £843 million and software additions
of £234 million, partially offset by software amortisation of
£164 million and disposals of £89 million.

Property, plant and equipment
Property, plant and equipment decreased by £3,539 million to
£39,825 million as at 31 March 2017. This was principally due to
capital expenditure of £4,089 million on the renewal and extension
of our regulated networks and foreign exchange movements of
£2,669 million, offset by depreciation of £1,535 million in the year
and disposals of £8,700 million. See page 22 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
£2,343 million to £3,304 million. This is primarily due to our
39% retained interest in UK Gas Distribution of £1,611 million
(classified as an associate) and the related shareholder loan
of £429 million, an increase in investments in joint ventures
of £137 million, together with an increase in other investments
of £95 million and foreign exchange movements of £115 million,
offset by disposals of £44 million.

Inventories and current intangible assets, trade and
other receivables and current tax assets
Inventories and current intangible assets, and trade and other
receivables and current tax assets have increased by £593 million
to £3,502 million as at 31 March 2017. This is primarily due to
a net increase in trade and other receivables of £617 million
(including a foreign exchange movement of £252 million) less
disposals of £230 million and a £240 million increase in tax
receivables. The increase in trade and other receivables reflects
the colder winter, higher gas costs and BSIS cost recoveries.
This is partly offset by a decrease in inventories and current
intangible assets of £34 million.

Trade and other payables
Trade and other payables have increased by £153 million
to £3,438 million, primarily due to a foreign exchange impact
of £220 million and movements in the US related to colder
weather and increased level of accruals offset by disposals
of £423 million.

Current tax balances
Net current tax liability has changed by £385 million to a net
current tax asset of £210 million. This is primarily due to a number
of prior year settlements, reclassification from deferred tax of US
net operating losses to offset against US current tax liabilities
and cash payments exceeding tax liabilities following the
additional costs incurred in relation to the disposal of the
UK Gas Distribution business.

Deferred tax balances
Deferred tax balances have decreased by £155 million to
£4,479 million as at 31 March 2017. This is primarily due to
the disposal of the UK Gas Distribution business offset by
the deferred tax charge on actuarial gains in reserves and
foreign exchange movements.

Total provisions increased by £869 million in the year. The
underlying movements include additions of £633 million, primarily
relating to an exceptional increase to the provision for estimated
environmental restoration and remediation costs and other
increases of £382 million as shown in note 24, together with foreign
exchange movements of £188 million, offset by utilisation of
£227 million in relation to all classes of provisions and disposals
of £94 million. Other non-current liabilities reduced, principally
due to £910 million of deferred income within UK Gas Distribution.

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 90.

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 2016
Exchange movements
Current service cost
Net interest cost
Curtailments and other
Disposal of UK Gas Distribution
Actuarial gains/(losses)
– on plan assets
– on plan liabilities
Employer contributions
As at 31 March 2017
Represented by:
Plan assets
Plan liabilities

UK
£m
(15)
–
(76)
–
(18)
(34)

2,890
(3,431)
528
(156)

US
£m
(2,570)
(345)
(156)
(105)
(35)
–

444
445
545
(1,777)

Total
£m
(2,585)
(345)
(232)
(105)
(53)
(34)

3,334
(2,986)
1,073
(1,933)

15,489
(15,645)
(156)

8,886
(10,663)
(1,777)

24,375
(26,308)
(1,933)

The principal movements in net obligations during the year include
net actuarial gains of £348 million and employer contributions of
£1,073 million. Net actuarial gains include gains of £3,334 million
arising on plan assets resulting from actual asset returns being
greater than assumed returns which is based upon the discount
rate at the start of the year. This is partially offset by actuarial losses
on plan liabilities of £2,986 million arising as a consequence of
a decrease in the real discount rate giving an actuarial loss of
£3,431 million in the UK and an increase in the nominal discount
rate resulting in actuarial gains of £445 million in the US.

Further information on our pension and other post-retirement
obligations can be found in note 23 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 28.

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.

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial StatementsConsolidated cash flow statement
for the years ended 31 March

Cash flows from operating activities
Total operating profit from continuing operations
Adjustments for:

Exceptional items and remeasurements
Depreciation, amortisation and impairment
Share-based payments 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 – continuing operations
Tax paid
Net cash inflows from operating activities – continuing operations
Net cash inflows from operating activities – discontinued operations
Cash flows from investing activities
Acquisition of investments
Proceeds from sale of investments in subsidiaries
Purchases of intangible assets
Purchases of property, plant and equipment
Disposals of property, plant and equipment
Dividends received from joint ventures and associates
Interest received
Net movements in short-term financial investments2
Net cash flow used in investing activities – continuing operations
Net cash flow used in investing activities – discontinued operations
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 – continuing operations
Net cash flow from/(used in) financing activities – discontinued operations3
Net increase/(decrease) in cash and cash equivalents
Disposal of bank overdraft in UK Gas Distribution
Exchange movements
Net cash and cash equivalents at start of year
Net cash and cash equivalents at end of year 4

2016
Re-presented1
£m

2015
Re-presented1
£m

2017
£m

3,208

3,225

2,951

565
1,481
32
–
151
(181)
(768)
(36)
4,452
(132)
4,320
909

(137)
5,454
(223)
(3,296)
18
99
51
(5,600)
(3,634)
(680)

(189)
18
(6)
2,463
(1,616)
90
(839)
–
(1,463)
(1,542)
1,611
984
15
16
124
1,139

(11)
1,311
21
(49)
416
(58)
(293)
(40)
4,522
(230)
4,292
1,076

(116)
–
(196)
(2,855)
4
72
23
(391)
(3,459)
(577)

(267)
16
(6)
2,726
(896)
(730)
(711)
–
(1,337)
(1,205)
(123)
4
–
4
116
124

83
1,202
18
–
311
(41)
(235)
(17)
4,272
(251)
4,021
986

–
–
(171)
(2,578)
9
79
37
1,157
(1,467)
(534)

(338)
23
(7)
1,534
(2,839)
623
(700)
(152)
(1,271)
(3,127)
(126)
(247)
–
24
339
116

Notes

2(b)

27(a)

1. Comparative amounts have been re-presented to reflect the classification of the UK Gas Distribution business as a discontinued operation. Further information is provided in note 2.
2. Includes the impact of proceeds from the sale of UK Gas Distribution being transferred to short-term financial investments on 31 March 2017.
3. Included within net cash flows used in financing activities – discontinued operations are cash flows relating to the liability management programme, comprising £4.8 billion of debt

issued and term debt raised, offset by £3.2 billion in respect of bond buybacks.

4. Net of bank overdrafts of £nil (2016: £3 million; 2015: £3 million).

National Grid Annual Report and Accounts 2016/17

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
and the disposal of UK Gas Distribution (Investing activities); and
the cash raised from debt, share issues or share buybacks,
restructuring of borrowings for the disposal of UK Gas Distribution
and other loan borrowings or repayments (Financing activities).

Reconciliation of cash flow to net debt

Cash generated from continuing operations
Cash generated from discontinued operations

Net capital investment – continuing operations
Net capital investment – discontinued operations

Business net cash flow

Net interest paid – continuing operations
Net interest paid – discontinued operations

Tax paid – continuing operations
Tax paid – discontinued operations

Dividends paid
Disposal of UK Gas Distribution
Other cash movements
Non-cash movements
Decrease/(increase) in net debt
Opening net debt
Closing net debt

2017
£m
4,452
987
5,439

(3,638)
(605)
(4,243)
1,196

(788)
(1,167)
(1,955)

(132)
(78)
(210)

2016
£m
4,522
1,138
5,660

(3,163)
(577)
(3,740)
1,920

(688)
(123)
(811)

(230)
(62)
(292)

(1,463)
11,344
(79)
(2,782)
6,051
(25,325)
(19,274)

(1,337)
–
(185)
(705)
(1,410)
(23,915)
(25,325)

Cash generated from operations (Total)

Cash generated from operations (£m)

4,037

4,419

5,350

5,660

5,439

2012/13

2013/14

2014/15

2015/16

2016/17

Cash flows from our operations are largely stable when viewed
over the longer term. Our electricity and gas transmission
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 2017, cash flow from continuing
operations decreased by £70 million to £4,452 million. Cash inflows
due to changes in working capital decreased by £265 million over
the prior year, principally in the US due to the collection of high
winter 2015 billings last year. The outflow of £768 million from
changes in pensions and other post-retirement obligations was
£475 million higher than 2015/16 due to higher levels of
contributions into the UK and US schemes.

Cash flow from discontinued operations decreased by £151 million
to £987 million mainly due to £139 million of exceptional
transaction costs incurred in relation to the disposal of the
UK Gas Distribution business.

Net capital investment
Net capital investment for continuing operations in the year of
£3,638 million was £475 million higher than the prior year. This
was a result of higher spend in our US Regulated business and
favourable exchange rates of £280 million, partially offset by lower
spend in UK Electricity Transmission. Further details of our capital
investment can be seen on page 22. Net capital investment
for discontinued operations of £605 million was £28 million
higher than 2015/16.

Net interest paid (including exceptional interest)
Net interest paid for continuing operations was £788 million,
£100 million higher than 2015/16 primarily due to the impact
of exchange rates on our US dollar denominated finance costs.
Net interest paid and exceptional finance costs for discontinued
operations in 2016/17 were £1,167 million, £1,044 million higher
than 2015/16 primarily due to £1,052 million of debt buyback costs
incurred as part of the Group’s liability management programme
in relation to the disposal of the UK Gas Distribution business.

Tax paid
Tax paid for continuing operations in the year to 31 March 2017
was £132 million, £98 million lower than the prior year. This was
primarily due to lower taxable profits as a result of costs incurred
in relation to the disposal of the UK Gas Distribution business.

Dividends paid
Dividends paid in the year ended 31 March 2017 amounted to
£1,463 million. This was £126 million higher than 2015/16, reflecting
the increase in the final dividend paid in August 2016, together with
a lower average scrip dividend take-up in the year.

Disposal of UK Gas Distribution
This reflects the cash proceeds received of £5,454 million and
the £5,890 million of net debt deconsolidated on disposal of UK
Gas Distribution (see note 27).

Other cash movements
Other cash flows principally arise from movements in treasury
shares, including the cost of repurchasing shares as part
of the scrip buyback programme of £189 million (2015/16:
£267 million), partly offset by dividends from joint ventures
and associates of £99 million, £27 million higher than 2015/16.

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 $1.44 at 31 March 2016 to $1.25 at 31 March 2017.
Other non-cash movements primarily arise from changes in fair values
of financial assets and liabilities and interest accretions and accruals.

Net debt

Net debt at 31 March (£m)

21,429

21,190

23,915

25,325

19,274

2013

2014

2015

2016

2017

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial StatementsNotes 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 2018
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 17 May 2017.

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 2017
and in accordance with the Companies Act 2006 applicable to
companies reporting under IFRS and Article 4 of the EU IAS
Regulation. The comparative financial information has also been
prepared on this basis.

The consolidated financial statements have been prepared on a
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 financial information relating to prior years has been re-presented
as a result of the disposal of the UK Gas Distribution business, as
described in C below. The notes to the financial statements have
been prepared on a continuing basis unless otherwise stated.

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 E).

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 (other than relating to UK Gas Distribution
as described in C below), 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.

C. Disposal of UK Gas Distribution
As described further in note 9, on 8 December 2016, the Group
entered into a sale and purchase agreement to dispose of a 61%
controlling stake in the UK Gas Distribution business. The disposal
completed on 31 March 2017 and the Group has retained a 39%
interest in the business. As a result all assets and liabilities of
UK Gas Distribution were deemed to be disposed and a 39%
interest reacquired. The 39% retained interest is classified as an
associate on the basis that the Group retains significant influence
over the business through its retained stake. The Group has the
ability to appoint 4 of the 12 directors to the Board of
Quadgas HoldCo Limited.

In addition, the Group entered into a ‘Further Acquisition Agreement’
over a further 14% interest. Refer to note 9 for further details.

The Group classified UK Gas Distribution as held for sale as of
8 December 2016, when it became highly probable that the value
of the business to the Group would be recovered through sale
rather than continuing ownership. As UK Gas Distribution represents
a separate major line of business, the business is classified as a
discontinued operation in the consolidated income statement. This
has resulted in the re-presentation of comparative financial information
in the consolidated income statement and the consolidated statement
of comprehensive income, as well as earnings per share (EPS) split
between continuing and discontinued operations.

National Grid Annual Report and Accounts 2016/17

Financial Statements

1. Basis of preparation and recent accounting developments continued

D. 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 16.

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 within other equity reserves – note 26.

E. 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:

• Concerning the sale of UK Gas Distribution – note 9:

– the date from which the business was classified as held

for sale;

– the classification of the retained interest in the business,

and the fair value attributable to it;

– the accounting implications of the Further Acquisition
Agreement (FAA) and the embedded put/call options;
– the allocation of financing costs between the continuing

Group and discontinued operations; and

– the identification and classification of costs associated

with the disposal.

• 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 28; and

• Recognition of surpluses in respect of defined benefit pension

schemes – note 23.

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 11 and 12;

• estimation of liabilities for pensions and other post-retirement

benefits – note 23;

• valuation of financial instruments and derivatives – notes 16

and 30; and

• environmental and decommissioning provisions – note 24.

Concerning the sale of UK Gas Distribution, the principal estimate
concerns the fair value of the retained interest, which is described
further in note 9.

In order to illustrate the impact that changes in assumptions could
have on our results and financial position, we have included sensitivity
analyses in note 33.

New IFRS accounting standards effective for the year ended
31 March 2017
The Group has adopted the following amendments to standards:

• Annual improvements to IFRSs 2012-2014 Cycle;
• Amendments to IFRS 11 ‘Joint Arrangements’;
• Amendments to IAS 1 ‘Presentation of Financial Statements’;
• Amendments to IAS 16 ‘Property, Plant and Equipment’; and
• Amendments to IAS 38 ‘Intangible Assets’.

The adoption of these amendments has had no material impact
on the Group’s results or financial statement disclosures.

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements1. Basis of preparation and recent accounting developments continued

New IFRS accounting standards and interpretations
not yet adopted
The Group enters into a significant number of transactions that
fall within the scope of IFRS 9 ‘Financial Instruments’, IFRS 15
‘Revenue from Contracts with Customers’ and IFRS 16 ‘Leases’.
We are assessing the likely impact of these standards on the
Group’s financial statements.

i) IFRS 9 ‘Financial Instruments’
IFRS 9 ‘Financial Instruments’ (IFRS 9) is effective for National Grid
in the year ending 31 March 2019. The changes to IFRS 9 principally
impact the accounting for the classification of financial instruments,
impairment of financial instruments and hedge accounting. The
key change influences the future assessment of impairments using
an ‘expected loss’ method rather than the current ‘incurred loss’
method; this will result in impairments typically being recorded earlier.

To date we have not identified any significant changes to the
accounting for financial liabilities, the impact on accounting
for financial assets and derivatives is anticipated to be limited.

We are currently evaluating the impact of the hedge accounting
guidance in the new standard. It is possible that changes
in requirements will allow the opportunity to apply hedge
accounting in a wider range of scenarios.

ii) IFRS 15 ‘Revenue from Contracts with Customers’
IFRS 15 ‘Revenue from Contracts with Customers’ (IFRS 15)
is effective for National Grid in the year ending 31 March 2019.
The new standard provides enhanced detail and a five step
revenue recognition approach to reflect the transfer of goods
and services to customers.

The core principle of IFRS 15 is that an entity recognises revenue
related to the transfer of promised goods or services when control
of the goods or services passes to customers. The amount of
revenue recognised should reflect the consideration to which
the entity expects to be entitled in exchange for those goods
or services.

This differs from the principle under the current revenue standard
that requires an assessment of when risks and rewards of goods
and services are transferred rather than control of those goods
or services.

Detailed reviews of revenue arrangements in the UK and US
are under way and will continue into 2017/18 as we finalise our
assessment of the impact of the new standard. Based on work
to date we have identified four key areas that require further
analysis to determine the impact on the Group:

We plan to apply IFRS 15 using the modified retrospective approach,
whereby comparatives will not be restated on adoption of the new
standard but instead a cumulative adjustment will be reflected in
retained earnings.

iii) IFRS 16 ‘Leases’
IFRS 16 ‘Leases’ (IFRS 16) is effective for National Grid in the year
ending 31 March 2020, subject to EU endorsement. The Group
enters into a significant number of operating lease transactions
as well as certain power purchase arrangements. Under IFRS 16,
our operating leases will be accounted for on the balance sheet
as ‘right-of-use’ assets. This treatment will increase both our assets
and liabilities and subsequently, an increase to finance costs and
depreciation and a reduction in rental costs. The outcome of our
conclusions will have an impact on how we account for our operating
leases and power purchase arrangements. We are also performing
an assessment of our revenue and service contracts to determine
whether we have the right to use assets under those contracts
and whether they fall within the scope of IFRS 16. We plan
to apply IFRS 16 using the modified retrospective approach,
whereby comparatives will not be restated on adoption of the
new standard but instead a cumulative adjustment will be
reflected in retained earnings.

iv) Other
In addition, the following new accounting standards and amendments
to existing standards have been issued but are not yet effective or
have not yet been endorsed by the EU:

• Amendments to IAS 12 ‘Income Taxes’;
• Amendments to IFRS 2 ‘Share Based Payments’;
• Amendments to IAS 7 ‘Statement of Cash Flows’;
• Annual Improvements to IFRS Standards 2014-2016 Cycle;
IFRIC 22 ‘Foreign Currency Transactions and Advance
•
Consideration’;

• Amendments to IAS 40 ‘Investment Property’.

Effective dates remain subject to the EU endorsement process.

The Group is currently assessing the impact of the above standards,
but they are not expected to have a material impact. The Group has
not early adopted any other standard, amendment or interpretation
that was issued but is not yet effective.

•

• whether we act as principal or as agent for revenues collected
on behalf of the Scottish and Offshore transmission operators.
This is a gross versus net presentational issue that does not
have an impact on earnings;
the timing of recognition of customer contributions for
connections in the UK and US. In our electricity business in the
UK we currently recognise customer contributions over time as
we have an ongoing licence condition to maintain that connection
over its life. In our gas business in the UK, we recognise customer
contributions when the connection is completed (the licence
conditions do not require connections to be maintained over the
life of the connection and therefore do not have deferred revenue
for connections). In the US, revenue for customer contributions
is recognised once work on connections is completed. IFRS 15
requires revenue to be recognised as control over the distinct
and separable service is transferred to our customers. We are
assessing whether this has an impact on the timing of our
revenue recognition;
the timing of recognition of revenue in our metering business; and

•
• accounting for certain trade receivables in the US where there is

historical evidence of irrecoverability.

National Grid Annual Report and Accounts 2016/17

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued2. 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 lower 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 174 to 179.

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 earnings performance of operations on the basis of operating profit before exceptional items and remeasurements (see note 4).

There has been no change to the way in which our businesses have reported internally during the year. However, for the purposes of this note,
the reporting structure for the year ended 31 March 2017 has been updated to show the UK Gas Distribution segment within discontinued
operations together with the results of our interest in Xoserve Limited, which was previously included within Other activities. Discontinued
operations are solely within the UK geographical area. National Grid Ventures formed on 1 April 2017 and the impact of this change will
be reflected in 2017/18.

The following table describes the main activities for each operating segment:

UK Electricity Transmission
UK Gas Transmission
US Regulated

High voltage electricity transmission networks in Great Britain.
The gas transmission network in Great Britain and UK LNG storage activities.
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; 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
US Regulated

Other activities
Total from continuing operations
Discontinued operations – UK geographical area (note 9)

Split by geographical areas – continuing operations:

UK
US

2017

Sales
between
segments
£m

Total
sales
£m

4,439
1,080
8,931
713
15,163
1,902
17,065

(29)
(99)
–
–
(128)
(15)
(143)

Sales
to third
parties
£m

4,410
981
8,931
713
15,035
1,887
16,922

6,064
8,971
15,035

2016 Re-presented1

2015 Re-presented1

Total
sales
£m

Sales
between
segments
£m

Sales
to third
parties
£m

Total
sales
£m

Sales
between
segments
£m

Sales
to third
parties
£m

3,754
1,022
7,986
714
13,476
1,886
15,362

(12)
(107)
–
–
(119)
(42)
(161)

3,977
1,047
7,493
824
13,341
1,949
15,290

(20)
(109)
–
–
(129)
(46)
(175)

3,957
938
7,493
824
13,212
1,903
15,115

5,619
7,593
13,212

1. Comparative amounts have been re-presented to reflect the classification of the UK Gas Distribution business as a discontinued operation.

3,742
915
7,986
714
13,357
1,844
15,201

5,347
8,010
13,357

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial 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 – continuing operations:

UK Electricity Transmission
UK Gas Transmission
US Regulated

Other activities
Total from continuing operations
Discontinued operations – UK geographical area (note 9)
Segment result

Split by geographical area – continuing operations:

UK
US

Reconciliation to profit before tax:

Operating profit from continuing operations
Finance income
Finance costs
Share of post-tax results of joint ventures and associates

Profit before tax from continuing operations
Profit before tax from discontinued operations (note 9)

Before exceptional items
and remeasurements

2016
Re-presented1
£m

2015
Re-presented1
£m

2017
£m

After exceptional items
and remeasurements

2016
Re-presented1
£m

2015
Re-presented1
£m

2017
£m

1,372
511
1,713
177
3,773
894
4,667

2,118
1,655
3,773

3,773
53
(1,082)
63
2,807
748
3,555

1,173
486
1,185
370
3,214
882
4,096

2,007
1,207
3,214

3,214
22
(878)
59
2,417
725
3,142

1,237
437
1,164
196
3,034
829
3,863

1,991
1,043
3,034

3,034
36
(908)
46
2,208
668
2,876

1,361
507
1,278
62
3,208
894
4,102

1,988
1,220
3,208

3,208
53
(1,140)
63
2,184
742
2,926

1,173
486
1,196
370
3,225
860
4,085

2,007
1,218
3,225

3,225
22
(977)
59
2,329
703
3,032

1,237
437
1,081
196
2,951
829
3,780

1,991
960
2,951

2,951
36
(1,073)
46
1,960
668
2,628

1. Comparative amounts have been re-presented to reflect the classification of the UK Gas Distribution business as a discontinued operation.

Operating segments:

UK Electricity Transmission
UK Gas Transmission
US Regulated

Other activities
Total from continuing operations
Discontinued operations
– UK geographical area

Split by geographical area
– continuing operations:
UK
US

Asset type:

Property, plant and equipment
Non-current intangible assets
Total from continuing operations
Discontinued operations

Net book value of property, plant and
equipment and other intangible assets

Capital expenditure

Depreciation and amortisation

2016
Re-presented1
£m

2015
Re-presented1
£m

2017
£m

2016
Re-presented1
£m

2015
Re-presented1
£m

2017
£m

2016
Re-presented1
£m

2015
Re-presented1
£m

2017
£m

12,515
4,165
21,638
2,430
40,748

–
40,748

18,102
22,646
40,748

39,825
923
40,748
–
40,748

11,907
4,140
17,490
2,291
35,828

8,423
44,251

17,491
18,337
35,828

35,074
754
35,828
8,423
44,251

11,276
4,132
15,664
2,290
33,362

8,163
41,525

16,910
16,452
33,362

32,713
649
33,362
8,163
41,525

1,027
214
2,247
247
3,735

588
4,323

1,357
2,378
3,735

3,507
228
3,735
588
4,323

1,084
186
1,856
201
3,327

566
3,893

1,386
1,941
3,327

3,130
197
3,327
566
3,893

1,074
184
1,501
199
2,958

512
3,470

1,352
1,606
2,958

2,786
172
2,958
512
3,470

(421)
(186)
(642)
(232)
(1,481)

(217)
(1,698)

(753)
(728)
(1,481)

(1,348)
(133)
(1,481)
(217)
(1,698)

(390)
(178)
(535)
(208)
(1,311)

(303)
(1,614)

(715)
(596)
(1,311)

(1,207)
(104)
(1,311)
(303)
(1,614)

(376)
(172)
(452)
(190)
(1,190)

(292)
(1,482)

(691)
(499)
(1,190)

(1,115)
(75)
(1,190)
(292)
(1,482)

1. Comparative amounts have been re-presented to reflect the classification of the UK Gas Distribution business as a discontinued operation.

Total non-current assets other than financial instruments and pension assets located in the UK and US were £20,045 million
and £29,003 million respectively as at 31 March 2017 (31 March 2016: UK £26,261 million, US £23,784 million; 31 March 2015:
UK £25,278 million, US £21,790 million).

National Grid Annual Report and Accounts 2016/17

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 – continuing operations

As a business, we have three measures of operating profit (from
continuing operations) that are used on a regular basis and disclosed
in this Annual Report. The disposal of UK Gas Distribution is analysed
separately in note 9.

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 96.

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 101.

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 194. Reconciliations between adjusted
operating profit and regulated financial performance for UK
Electricity Transmission and UK Gas Transmission can be
found on page 98.

Commentary on segmental adjusted operating profit results
– continuing operations

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 2017, revenue in the UK Electricity
Transmission segment increased by £462 million to £4,439 million
and adjusted operating profit increased by £199 million to
£1,372 million.

The revenue growth of £462 million principally reflected the recovery
of higher pass-through costs such as system balancing costs,
increased regulated revenue allowances and the impact of higher
volumes. Net revenue after deducting pass-through costs was
£199 million higher. Regulated controllable costs were £25 million
lower reflecting reduced environmental costs. Depreciation and
amortisation was £31 million higher, reflecting the continued
capital investment programme. Other costs were £6 million
lower than prior year including lower asset disposal costs.

Capital expenditure decreased by £57 million compared with
last year to £1,027 million.

UK Gas Transmission
Revenue in the UK Gas Transmission segment increased by
£33 million to £1,080 million and adjusted operating profit
increased by £25 million to £511 million.

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

Capital expenditure increased to £214 million, £28 million higher
than last year.

US Regulated
Revenue in our US Regulated business increased by £1,438 million
to £8,931 million and adjusted operating profit increased by
£528 million to £1,713 million.

The stronger US dollar increased revenue and operating profit in
the year by £1,160 million and £184 million respectively. Excluding
the impact of foreign exchange rate movements, revenue increased
by £278 million. Increased revenue allowances under new rate
cases, the benefit of capex trackers and over-recovery of allowed
revenues due to cold weather were partly offset by lower
commodity cost recoveries. Overall pass-through costs reduced
by £231 million (excluding the impact of foreign exchange) resulting
in an increase in net regulated revenue of £509 million at constant
currency. Regulated controllable costs increased by £152 million
at constant currency, partly as a result of increased information
systems costs, write-offs of prior years’ capital costs and higher
costs of health care and other benefits. These were partly offset
by a £32 million decrease in bad debt costs. Depreciation and
amortisation was £24 million higher this year at constant currency
as a result of ongoing investment in our networks. Other operating
costs were £21 million higher at constant currency, reflecting
increased operating taxes and cost of removal of existing assets.

Our capital expenditure in the US continued to increase with
£2,247 million of expenditure in the year, £391 million more than
in 2015/16. At constant currency, this represented a £104 million
increase in investment driven by higher investment in new and
replacement gas mains.

Other activities
Revenue in Other activities decreased by £111 million to
£713 million and adjusted operating profit decreased by
£193 million to £177 million.

In the US, adjusted operating profit was £80 million lower (including
£3 million of foreign exchange benefit) partly reflecting higher
US project development costs. In addition, 2015/16 included a
£49 million gain on disposal of the Iroquois pipeline. In the UK,
adjusted operating profit was £113 million lower including lower
auction revenues from the French Interconnector and increased
business change costs. Capital expenditure in our Other activities
was £46 million higher than last year at £247 million.

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial StatementsUnaudited commentary on the results of our principal operations by segment – continuing operations 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 may 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 by 1% to £1,184 million from £1,195 million, principally
reflecting the lower achieved operational return, driven by lower
totex outperformance.

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

2017
£m
1,372
(288)
62

356
(379)
34
(47)
74
1,184

2016
£m
1,173
(147)
80

339
(368)
92
(54)
80
1,195

%
change
17

(1)

UK Gas Transmission
Regulated financial performance for UK Gas Transmission
decreased to £499 million from £535 million, down 7%. This
reflected a lower operational return on equity, mainly as a result
of the reduction in legacy incentives income.

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

2017
£m
511
(120)
39

168
(21)
(14)
(53)
(11)
499

2016
£m
486
(80)
45

166
(18)
18
(77)
(5)
535

%
change
5

(7)

National Grid Annual Report and Accounts 2016/17

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 from continuing operations. These include a breakdown
of payroll costs (including disclosure of amounts paid to key management personnel) and fees paid to our auditors.

Rentals under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease.

Before exceptional items
and remeasurements

Exceptional items
and remeasurements

2017
£m
1,481
1,578
1,143
1,241
1,042

1,120

1,008
2,649
11,262

2016
Re-presented1
£m
1,311
1,337
1,304
986
899

2015
Re-presented1
£m
1,190
1,292
1,615
1,379
856

907

874

971
2,283
9,998

801
2,316
10,323

2016
Re-presented1
£m
–
–
8
(19)
–

2015
Re-presented1
£m
–
–
70
13
–

–

–
–
(11)

–

–
–
83

2017
£m
–
–
46
22
–

–

–
497
565

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

1. Comparative amounts have been re-presented to reflect the classification of the UK Gas Distribution business as a discontinued operation.

(a) Payroll costs

Wages and salaries2
Social security costs
Other pension costs (note 23)
Share-based payments
Severance costs (excluding pension costs)

Less: payroll costs capitalised
Total payroll costs

Total

2016
Re-presented1
£m
1,311
1,337
1,312
967
899

2015
Re-presented1
£m
1,190
1,292
1,685
1,392
856

907

971
2,283
9,987

274
91

874

801
2,316
10,406

339
89

2017
£m
1,481
1,578
1,189
1,263
1,042

1,120

1,008
3,146
11,827

296
98

2017
£m
1,852
145
209
32
5
2,243
(665)
1,578

2016
Re-presented1
£m
1,553
120
201
21
4
1,899
(562)
1,337

2015
Re-presented1
£m
1,436
112
190
18
3
1,759
(467)
1,292

1. Comparative amounts have been re-presented to reflect the classification of the UK Gas Distribution business as a discontinued operation.
2. Included within wages and salaries are US other post-retirement benefit costs of £53 million (2016: £52 million; 2015: £39 million). For further information refer to note 23.

(b) Number of employees

UK
US
Total number of employees

31 March
2017
6,265
15,867
22,132

Monthly
average
2017
6,291
15,752
22,043

31 March
2016
Re-presented1
6,224
14,830
21,054

Monthly
average 2016
Re-presented1
6,067
14,775
20,842

31 March
2015
Re-presented1
5,882
14,573
20,455

Monthly
average 2015
Re-presented1
5,830
14,434
20,264

1. Comparative amounts have been re-presented to reflect the classification of the UK Gas Distribution business as a discontinued operation.

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 of gas or the transmission
of electricity. At 31 March 2017, there were 1,858 (2016: 1,865; 2015: 1,766) employees in other operations, excluding shared services.

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements3. Operating costs continued

Short-term employee benefits
Post-employment benefits
Share-based payments
Total key management compensation

2017
£m
8
1
6
15

2016
£m
9
1
4
14

2015
£m
10
9
4
23

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 63 and those of
Non-executive Directors on page 67.

(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 fees payable to the parent Company’s auditors and their associates in respect of:
Audit of the parent Company’s individual and consolidated financial statements1
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 fees:

Other assurance services5
Services relating to corporate finance transactions not covered above6
Other non-audit services not covered above7

Total auditors’ remuneration

2017
£m

1.5
13.7
4.6
19.8

0.4
0.1

4.6
5.9
6.3
17.3
37.1

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

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 2017, 2016 and 2015, and the review

of interim financial statements for the six month periods ended 30 September 2016, 2015 and 2014 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 and tax advice.
5. Principally amounts relating to assurance services provided in relation to the sale of UK Gas Distribution and data assurance work in respect of financial information included in US rate filings.
6. Vendor due diligence and other transaction services in relation to the sale of UK Gas Distribution.
7. Fees for other non-audit services – principally assisting the Company with separation activities in relation to the sale of UK Gas Distribution.

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 (until 31 March 2017), 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 £0.4 million were incurred in 2017 in relation to the audits of the pension schemes of the Company (2016: £0.1 million;
2015: £0.2 million).

The Audit Committee considers and makes recommendations to the Board, to be put to shareholders for approval at each AGM, in relation
to the appointment, re-appointment, removal and oversight of the Company’s independent auditors. The Board of Directors, in accordance
with a resolution approved at the 2016 AGM, is authorised to agree the auditors’ remuneration. The Audit Committee considers and approves
the audit fees on behalf of the Board in accordance with the Competition and Market Authority Audit Order 2014. The Board of Directors will
seek to renew this authority at the 2017 AGM. Details of our policies and procedures in relation to non-audit services to be provided by the
independent auditors are set out within page 44 of the Corporate Governance Report.

Certain services are prohibited from being performed by the external auditors under the Sarbanes-Oxley Act. Of the above services,
none were prohibited.

100

National Grid Annual Report and Accounts 2016/17

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.

Exceptional items and remeasurements from continuing operations

2016
Re-presented1
£m

2015
Re-presented1
£m

2017
£m

Included within operating profit
Exceptional items:

Environmental charges
Gas holder demolition costs

Remeasurements – commodity contracts

Included within finance costs
Exceptional items:

Debt redemption costs

Remeasurements – net losses on derivative financial instruments

Total included within profit before tax
Included within tax
Exceptional credits arising on items not included in profit before tax:

Deferred tax credit arising on the reduction in the UK corporation tax rate

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

1. Comparative amounts have been re-presented to reflect the classification of the UK Gas Distribution business as a discontinued operation.

(526)
(107)
(633)
68
(565)

–
(58)
(58)
(623)

94
227
(29)
292
(331)

(312)
(19)
(331)

–
–
–
11
11

–
(99)
(99)
(88)

162
–
15
177
89

162
(73)
89

–
–
–
(83)
(83)

(131)
(34)
(165)
(248)

4
28
44
76
(172)

(99)
(73)
(172)

101

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements4. Exceptional items and remeasurements continued

Further detail of operating exceptional items specific to 2016/17
In the US, the Group’s most significant environmental liabilities relate to former manufacturing gas plant (MGP) facilities formerly owned or
operated by the Company. The sites are subject to both state and federal law in the US. Environmental reserves are re-evaluated at each
reporting period. The expenditure is expected to be largely recoverable from rate payers but under IFRS, no asset can be recorded for this.
During the second half of 2016/17, the Group updated its assessment of the gross remediation costs at three key sites in New York, resulting
in an increase of £481 million on an undiscounted basis.

The charge booked reflects the Group’s best estimate of future cash outflow, based on notices received from state and federal authorities, and
plans developed in response, supported by external consultants where appropriate. In some cases, judgement is also required regarding the
Group’s share of the estimated cost, principally at sites where other parties are also potentially liable but where no cost sharing agreement exists.

A provision of £107 million has been made for the demolition of certain non-operational gas holders in the UK. Following the disposal of UK
Gas Distribution, the land on which the gas holders are sited was transferred to the Group’s UK property division. The Group’s property
division maximises our return from our land portfolio and therefore a constructive obligation exists to demolish the gas holders.

Also included within the above are charges relating to the impact of a change in the real discount rate from 2% to 1% on our provisions.

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 or gains on derivative financial instruments comprise losses or 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.

Items included within tax
The Finance Act 2016 which was enacted on 15 September 2016 reduced the main rate of UK corporation tax to 17% with effect from
1 April 2020. Deferred tax balances have been calculated at this rate.

Deferred taxes at the reporting date have been measured using these enacted tax rates and reflected in these financial statements,
resulting in a deferred tax credit. This credit is presented as exceptional, reflecting its nature.

102

National Grid Annual Report and Accounts 2016/17

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued5. 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, significant debt redemption costs are
typically treated as exceptional (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 capitalised2

Exceptional items
Debt redemption costs
Remeasurements
Net gains/(losses) on derivative financial instruments included in remeasurements3:

Ineffectiveness on derivatives designated as:

Fair value hedges4
Cash flow hedges
Net investment hedges
Net investment hedges – undesignated forward rate risk

Derivatives not designated as hedges or ineligible for hedge accounting

2016
Re-presented1
£m

2015
Re-presented1
£m

2017
£m

28
25
53

(107)

(59)
(927)
(8)
(73)
(17)
109
(1,082)

–

33
(12)
–
60
(139)
(58)
(1,140)

22
–
22

(111)

(28)
(792)
37
(69)
(27)
112
(878)

–

39
(15)
–
(34)
(89)
(99)
(977)

28
8
36

(98)

(35)
(836)
51
(67)
(7)
84
(908)

(131)

36
(13)
2
33
(92)
(165)
(1,073)

Net finance costs from continuing operations

(1,087)

(955)

(1,037)

1. Comparative amounts have been re-presented to reflect the classification of the UK Gas Distribution business as a discontinued operation.
2. Interest on funding attributable to assets in the course of construction in the current year was capitalised at a rate of 3.4% (2016: 3.3%; 2015: 3.8%). In the UK, capitalised interest

qualifies for a current year tax deduction with tax relief claimed of £18 million (2016: £19 million; 2015: £24 million). In the US, capitalised interest is added to the cost of plant and qualifies
for tax depreciation allowances.

3. Includes a net foreign exchange loss on financing activities of £264 million (2016: £407 million loss; 2015: £636 million gain) offset by foreign exchange gains and losses on derivative

financial instruments measured at fair value.

4. Includes a net loss on instruments designated as fair value hedges of £27 million (2016: £34 million gain; 2015: £219 million gain) and a net gain of £60 million (2016: £5 million gain;

2015: £162 million loss) arising from fair value adjustments to the carrying value of debt.

103

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements6. 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 – continuing operations

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 from continuing operations

1. Comparative amounts have been re-presented to reflect the classification of the UK Gas Distribution business as a discontinued operation.

Tax as a percentage of profit before tax

Before exceptional items and remeasurements – continuing operations
After exceptional items and remeasurements – continuing operations

1. Comparative amounts have been re-presented to reflect the classification of the UK Gas Distribution business as a discontinued operation.

2016
Re-presented1
£m
604
(162)
(15)
(177)
427

2015
Re-presented1
£m
543
(4)
(72)
(76)
467

2017
£m
666
(94)
(198)
(292)
374

2016
Re-presented1
%
25.0
18.3

2015
Re-presented1
%
24.6
23.8

2017
%
23.7
17.1

104

National Grid Annual Report and Accounts 2016/17

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued6. Tax continued

The tax charge for the year can be analysed as follows:

Current tax
UK corporation tax at 20% (2016: 20%; 2015: 21%)
UK corporation tax adjustment in respect of prior years

Overseas corporation tax
Overseas corporation tax adjustment in respect of prior years

Total current tax from continuing operations
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 from continuing operations

Total tax charge from continuing operations

1. Comparative amounts have been re-presented to reflect the classification of the UK Gas Distribution business as a discontinued operation.

Tax charged/(credited) to other comprehensive income and equity

Current tax
Share-based payments
Available-for-sale investments
Deferred tax
Available-for-sale investments
Cash flow hedges
Share-based payments
Remeasurements of net retirement benefit obligations

Total tax recognised in the statement of comprehensive income from continuing operations
Total tax recognised in the statement of comprehensive income from discontinued operations
Total tax relating to share-based payments recognised directly in equity from continuing operations
Total tax relating to share-based payments recognised directly in equity from discontinued operations

1. Comparative amounts have been re-presented to reflect the classification of the UK Gas Distribution business as a discontinued operation.

2016
Re-presented1
£m

2015
Re-presented1
£m

2017
£m

225
(47)
178
–
1
1
179

(9)
(18)
(27)
224
(2)
222
195

374

239
(5)
234
38
(19)
19
253

(80)
24
(56)
229
1
230
174

427

218
(7)
211
51
(62)
(11)
200

69
7
76
138
53
191
267

467

2016
Re-presented1
£m

2015
Re-presented1
£m

2017
£m

(4)
6

8
20
1
277
308
311
10
(3)
–
318

(1)
5

12
22
–
95
133
134
23
(1)
(1)
155

(6)
5

2
(10)
1
(296)
(304)
(299)
(11)
(5)
1
(314)

105

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements6. Tax continued

The tax charge for the year after exceptional items and remeasurements, for the continuing business, is lower (2016: lower; 2015: higher)
than the standard rate of corporation tax in the UK of 20% (2016: 20%; 2015: 21%):

Profit before tax from continuing operations
Before exceptional items and remeasurements
Exceptional items and remeasurements
Profit before tax from continuing operations
Profit before tax from continuing operations

multiplied by UK corporation tax rate of 20%
(2016: 20%; 2015: 21%)

Effect of:

Adjustments in respect of prior years2
Expenses not deductible for tax purposes3
Non-taxable income3
Adjustment in respect of foreign tax rates
Impact of share-based payments
Deferred tax impact of change in UK

and US tax rates

Other4

Total tax charge from continuing operations

Effective tax rate – continuing operations

Before
exceptional
items and
remeasurements
2017
£m

After
exceptional
items and
remeasurements
2017
£m

Before
exceptional
items and
remeasurements
2016
Re-presented1
£m

After
exceptional
items and
remeasurements
2016
Re-presented1
£m

Before
exceptional
items and
remeasurements
2015
Re-presented1
£m

After
exceptional
items and
remeasurements
2015
Re-presented1
£m

2,807
–
2,807

561

(67)
35
(24)
180
1

–
(20)
666

%
23.7

2,807
(623)
2,184

437

(67)
442
(425)
104
1

(94)
(24)
374

%
17.1

2,417
–
2,417

483

2
25
(25)
124
(1)

–
(4)
604

2,417
(88)
2,329

465

1
114
(112)
129
(1)

(162)
(7)
427

2,208
–
2,208

464

(8)
26
(20)
91
(4)

–
(6)
543

2,208
(248)
1,960

412

(9)
322
(320)
77
(4)

(4)
(7)
467

Re-presented1
%
25.0

Re-presented1
%
18.3

Re-presented1
%
24.6

Re-presented1
%
23.8

1. Comparative amounts have been re-presented to reflect the classification of the UK Gas Distribution business as a discontinued operation.
2. Prior year adjustment is primarily due to agreement of prior period tax returns.
3. The post exceptional adjustments primarily represent the impact of the Group’s net investment hedging following significant currency fluctuations in the dollar.
4. Other primarily comprises of the benefit due to enhanced deduction available for land remediation expenditure and the presentation of the tax on joint ventures and associates.

Factors that may affect future tax charges
The Finance Act 2016 which was enacted on 15 September 2016 reduced the main rate of UK corporation tax to 17% with effect from
1 April 2020. Deferred tax balances have been calculated at this rate.

Continuing focus on tax reform during 2016/17, specifically the Organisation for Economic Co-operation and Development’s (OECD’s)
Base Erosion and Profit Shifting (BEPS) project to address mismatches in international rules resulted in draft legislation on areas such
as interest deductibility being issued during the year. We will continue to monitor developments and assess the potential impact for
National Grid of these and any further initiatives.

While the UK remains part of the EU, the evolution of the application of EU tax competition regulations continues to create uncertainty
over tax legislation and at this stage it is not possible to quantify any potential impact on the financial statements.

As the Group’s presence is mainly in the UK and US, we do not envisage a significant impact on the Group following the UK government’s
decision to invoke Article 50 to leave the EU.

In the US, there is a possibility of ‘Tax Reform’ which, if enacted, will likely include substantial changes to the federal taxation system.
The changes under consideration include a significant reduction in the statutory corporate tax rate, deductibility of capital expenditures
and elimination of many established business tax deductions. The Company continues to monitor various legislative proposals and
developments impacting corporate taxation.

106

National Grid Annual Report and Accounts 2016/17

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued6. 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 2015
Deferred tax liabilities at 31 March 2015
At 1 April 2015
Exchange adjustments
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
At 1 April 2016
Exchange adjustments and other1
Charged/(credited) to income statement
Charged to other comprehensive income and equity
Disposal of UK Gas Distribution
At 31 March 2017
Deferred tax assets at 31 March 2017
Deferred tax liabilities at 31 March 2017

Accelerated
tax
depreciation
£m

Share-
based
payments
£m

Pensions
and other
post-
retirement
benefits
£m

Financial
instruments
£m

Other net
temporary
differences
£m

(1)
6,657
6,656
141
266
–
7,063
(1)
7,064
7,063
681
402
–
(1,072)
7,074
(1,093)
8,167
7,074

(18)
–
(18)
1
3
–
(14)
(14)
–
(14)
1
–
1
–
(12)
(12)
–
(12)

(1,337)
160
(1,177)
(33)
47
125
(1,038)
(1,201)
163
(1,038)
(144)
177
264
(6)
(747)
(1,036)
289
(747)

(64)
5
(59)
(1)
(6)
13
(53)
(66)
13
(53)
(7)
23
46
–
9
(10)
19
9

(1,186)
81
(1,105)
(30)
(203)
14
(1,324)
(1,408)
84
(1,324)
(50)
(481)
5
5
(1,845)
(1,943)
98
(1,845)

Total
£m

(2,606)
6,903
4,297
78
107
152
4,634
(2,690)
7,324
4,634
481
121
316
(1,073)
4,479
(4,094)
8,573
4,479

1. Exchange adjustments and other comprises of foreign exchange arising on translation of the US dollar deferred tax balances together with a reclassification of £143 million being the opening

deferred tax balance in respect of US net operating losses to offset against US current tax liabilities.

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 £4,479 million (2016: £4,634 million). Deferred tax asset of £798 million (2016: £667 million) 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
Re-presented1
£m
232
5
–

2017
£m
362
4
9

1. Comparative amounts have been re-presented to reflect the classification of the UK Gas Distribution business as a discontinued operation.

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 can be carried forward for up to 20 years.

The aggregate amount of temporary differences associated with the unremitted earnings of overseas subsidiaries, joint ventures and
associates for which deferred tax liabilities have not been recognised at the reporting date is approximately £1,101 million (2016: £502 million).
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.

107

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial StatementsUnaudited 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 (continuing and discontinued
operations combined)
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.

The most significant amounts making up the 2016/17 total tax
contribution are shown in the charts below:

For 2016/17 our total tax contribution to the UK Exchequer was
£1.5 billion (2015/16: £1.6 billion). Taxes borne in 2016/17 were
£644 million, a decrease of 8.4% on taxes borne in 2015/16 of
£703 million primarily due to lower corporation tax payments in
the current year. The main reason for this is the impact of our debt
redemption costs during the year ended 31 March 2017, which
reduced corporation tax instalment payments due for that year.
Our taxes collected were £887 million, a reduction of 1.3% on
2015/16 of £899 million. We anticipate our total tax contribution
to fall next year following the sale of the UK Gas Distribution
business on 31 March 2017.

Our 2015/16 total tax contribution of £1.6 billion resulted in National
Grid being the 15th highest contributor of UK taxes based on the
results of the Hundred Group’s 2016 Total Tax Contribution Survey,
a position commensurate with the size of our business and
capitalisation relative to other contributors to the Survey. In 2015,
we were in 13th position. In 2016 we ranked 9th in respect of
taxes borne; in 2015, we were in 7th position.

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 2016 Total Tax Contribution Survey ranks
National Grid in 3rd place in respect of UK capital expenditure on
fixed assets, up from 5th place in 2015. National Grid’s economic
contribution also supports a significant number of UK jobs in our
supply chain.

UK total tax contribution 2016/17 (continuing and discontinued operations combined)
Taxes borne

Taxes collected

1. VAT
2. PAYE and NIC
3. UK corporation tax
4. Business rates
5. Other
Total

£m
1
67
207
351
18
644

1. VAT
2. PAYE and NIC
3. Other
Total

£m
725
161
1
887

108

National Grid Annual Report and Accounts 2016/17

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued

Unaudited commentary on tax continued

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 2016/17.

The tax charge for the Group from continuing operations as reported
in the income statement is £374 million (2015/16: £427 million1).
The UK tax charge is £151 million (2015/16: £178 million1) and UK
corporation tax paid was £129 million (2015/16: £223 million1), with
the principal differences between these two measures as follows:

Tax losses
We have total unrecognised deferred tax assets in respect of
losses of £375 million (2015/16: £237 million) of which £362 million
(2015/16: £232 million) are capital losses in the UK as set out on
page 107. 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.

Year ended 31 March

2016
Re-presented1
£m

2017
£m

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.

Reconciliation on continuing operations of
UK total tax charge to UK corporation tax paid
Total UK tax charge (current tax £178m

(2016: £234m1) and deferred tax credit £27m
(2016: credit £56m1))

Adjustment for non-cash deferred tax credit
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

151
27

47
225

(216)

120
129

178
56

5
239

(95)

79
223

1. Comparative amounts have been re-presented to reflect the classification of the UK Gas

Distribution business as a discontinued operation.

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 the Hundred Group. 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. We undertake similar activities in the US,
where the Company is an active member in the Edison Electric
Institute, the American Gas Association and the Organization
for International Investment.

109

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements7. 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 from continuing operations
Exceptional items after tax from continuing operations
Remeasurements after tax from continuing operations
Earnings from continuing operations
Adjusted earnings from discontinued operations
Exceptional items after tax from discontinued operations
Remeasurements after tax from discontinued operations
Gain on disposal of UK Gas Distribution
Earnings from discontinued operations
Total adjusted earnings
Total exceptional items after tax
Total remeasurements after tax
Gain on disposal of UK Gas Distribution
Total earnings

Weighted average number of shares – basic2

Earnings
2017
£m
2,141
(312)
(19)
1,810
607
62
(5)
5,321
5,985
2,748
(250)
(24)
5,321
7,795

Earnings
per share
2017
pence
56.9
(8.3)
(0.5)
48.1
16.1
1.6
(0.1)
141.4
159.0
73.0
(6.7)
(0.6)
141.4
207.1

2017
millions
3,763

Earnings
20161
£m
1,812
162
(73)
1,901
574
116
–
–
690
2,386
278
(73)
–
2,591

1. Comparative amounts have been re-presented to reflect the classification of the UK Gas Distribution business as a discontinued operation.
2. Comparative amounts have been restated to reflect the impact of additional shares issued as scrip dividends.

(b) Diluted earnings per share

Weighted average number of shares – diluted2

Earnings
2017
£m
2,141
(312)
(19)
1,810
607
62
(5)
5,321
5,985
2,748
(250)
(24)
5,321
7,795

Earnings
per share
2017
pence
56.7
(8.3)
(0.5)
47.9
16.0
1.6
(0.1)
140.8
158.3
72.7
(6.7)
(0.6)
140.8
206.2

2017
millions
3,780

Earnings
20161
£m
1,812
162
(73)
1,901
574
116
–
–
690
2,386
278
(73)
–
2,591

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.

2017
millions
3,763
17
3,780

110

National Grid Annual Report and Accounts 2016/17

Financial Statements

Earnings
per share
2016
(restated)1,2
pence
48.0
4.3
(1.9)
50.4
15.2
3.1
–
–
18.3
63.2
7.4
(1.9)
–
68.7

2016
millions
3,774

Earnings
per share
2016
(restated)1,2
pence
47.8
4.3
(1.9)
50.2
15.1
3.1
–
–
18.2
63.0
7.3
(1.9)
–
68.4

2016
millions
3,790

2016
(restated)1
millions
3,774
16
3,790

Earnings
20151
£m
1,675
(99)
(73)
1,503
514
2
–
–
516
2,189
(97)
(73)
–
2,019

Earnings
per share
2015
(restated)1,2
pence
43.9
(2.6)
(1.9)
39.4
13.4
0.1
–
–
13.5
57.3
(2.5)
(1.9)
–
52.9

2015
millions
3,817

Earnings
per share
2015
(restated)1,2
pence
43.7
(2.6)
(1.9)
39.2
13.4
0.1
–
–
13.5
57.1
(2.5)
(1.9)
–
52.7

2015
millions
3,834

2015
(restated)1
millions
3,817
17
3,834

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

2017

Cash
dividend
paid
£m
540
923
1,463

Pence
per share
15.17
28.34
43.51

Scrip
dividend
£m
32
151
183

Pence
per share
15.00
28.16
43.16

2016

Cash
dividend
paid
£m
532
805
1,337

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

Following completion of the sale of the majority interest in UK Gas Distribution, on 19 April 2017, the Directors declared that an aggregate
of approximately £3.2 billion would be returned to shareholders through a special dividend of 84.375p per existing ordinary share ($5.4224 per
existing American Depositary Share). The special dividend is to be paid to those shareholders on the register of members at 19 May 2017.

The Directors are proposing a final dividend for the year ended 31 March 2017 of 29.10p per share that will absorb approximately £1 billion
of shareholders’ equity (assuming all amounts are settled in cash). It will be paid on 16 August 2017 to shareholders who are on the register
of members at 2 June 2017 (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 per share growing at least in line with RPI inflation for the
foreseeable future, while continuing to invest as required in our
regulated assets.

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.

111

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements9. Discontinued operations

As a result of the sale of a 61% controlling interest in UK Gas Distribution, we are required to report our earnings for the Group excluding
UK Gas Distribution (‘continuing operations’) separately from the results of that business, which we report within ‘discontinued operations’.

The gain recognised by the Group on sale is analysed in the detail of the note below. All costs associated with the transaction, including
those associated with separation and setting up UK Gas Distribution are shown as a deduction from the proceeds received.

Our results and cash flows of significant assets or businesses sold during the year are shown separately from our continuing operations.
Assets and businesses are classified as held for sale when their carrying amounts are recovered through sale rather than through continuing
use. It only meets the held for sale condition when the assets are ready for immediate sale in their present condition, management is
committed to the sale and it is highly probable that the sale will complete within one year. Depreciation ceases on assets and businesses when
they are classified as held for sale and the assets and businesses are impaired if the proceeds less sale costs fall short of the carrying value.

Disposal of UK Gas Distribution
On 8 December 2016 the Group entered into a sale agreement with a consortium of long term infrastructure investors, to dispose of a 61%
equity interest in the UK Gas Distribution business, principally comprising the Group’s equity and debt interests in National Grid Gas
Distribution Limited together with certain other assets (principally property and a 45% interest in Xoserve Limited). The Consortium comprises
Macquarie Infrastructure and Real Assets (MIRA), Allianz Capital Partners, Hermes Investment Management, CIC Capital Corporation, Qatar
Investment Authority, Dalmore Capital and Amber Infrastructure Limited/International Public Partnerships.

The transaction was contingent on merger clearance from the European Commission, which was received on 16 March 2017, and the
transaction completed on 31 March 2017. The Group sold its 100% equity interest in UK Gas Distribution to Quadgas HoldCo Limited, a newly
incorporated UK limited company 61% owned by Quadgas Investments Bidco Limited and 39% by the Group’s subsidiary National Grid
Holdings One plc. In exchange, the Group received cash consideration of £3,679 million and has recognised a shareholder loan receivable
of £429 million and a 39% equity interest in Quadgas HoldCo Limited.

In addition, as part of the disposal process, a newly incorporated financing subsidiary of Quadgas HoldCo Limited raised £1,775 million of long
term debt, secured against the shares in National Grid Gas Distribution Limited, and remitted cash received from this transaction to the Group.
This amount has been treated as part of the net cash proceeds from the transaction totalling £5,454 million.

The final amount of consideration remains subject to completion adjustments which may result in a further gain/loss on disposal within
discontinued operations to be reported in 2017/18.

On 31 March 2017, the Group also entered into a Further Acquisition Agreement (FAA) with the Consortium over a 14% interest (relating to both
our equity and the shareholder loan interests), which includes the pricing mechanism, based on the price paid for the initial 61% interest, and
an annualised escalation factor. The FAA contains put and call options for both the Group and the Consortium that can be exercised in the
period between 1 March 2019 and 31 October 2019.

The FAA is a derivative, and the assumptions which will be used to determine fair value are specific to the contract and not readily observable
in active markets. Accordingly, it is classified under IFRS 7 ‘Financial Instruments: Disclosures’ as a level 3 financial instrument. As the FAA was
entered into on an arm’s length basis at the balance sheet date its fair value is nil because the exercise price reflects fair value on 31 March
2017. At future reporting dates, this derivative financial instrument may either be in an asset or a liability position, depending principally on
business performance against the Consortium’s expectations and movements in interest rates that could impact the annualised escalation
factor.

The UK Gas Distribution business met the criteria to be classified as held for sale at 8 December 2016, and depreciation and amortisation
(circa £25 million per month) on tangible and intangible fixed assets ceased from this date. The disposal of UK Gas Distribution resulted in a
£5.3 billion gain on disposal.

The business represents a reportable segment and a separate major line of business and accordingly has been presented as a discontinued
operation in the consolidated income statement, consolidated statement of comprehensive income and the consolidated cash flow statement.
The segmental analysis in note 2 has also been re-presented.

In anticipation of the disposal, a process to separate the business from the other UK operations was undertaken. This involved separation
activities in relation to finance, pensions, human resources, IT, treasury and operational management. These processes took place in the year
leading up to the sale announcement and physical separation of the businesses occurred in early 2017. The UK Gas Distribution business was
hived out from National Grid Gas plc into a newly incorporated statutory entity on 1 October 2016.

With respect to treasury activities, a Group-wide financing exercise was undertaken in order to: a) ensure that the proportion of debt to equity
financing in National Grid Gas Distribution Limited was in line with the requirements of its regulatory licence and the financing structure of the
business more generally; and b) to optimise the mix of debt in the continuing businesses. The financing exercise involved the buyback of debt
and derivatives in both of the Group’s UK regulated subsidiaries (National Grid Gas plc and National Grid Electricity Transmission plc) as well
as the novation of certain instruments to National Grid Gas Distribution Limited, and the issue of new debt by National Grid Gas Distribution
Limited whilst under the Group’s control prior to the sale completion. Since all these activities formed part of a single exercise, which would
not have been undertaken in the absence of the sale, all costs have been allocated to discontinued operations.

112

National Grid Annual Report and Accounts 2016/17

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued9. Discontinued operations continued

The presentation of the 2016/17 income statement is required to be split between continuing and discontinued operations and to re-present
results for previous periods in a comparable manner:

• Revenues, operating expenses and operating profits: Discontinued results are closely aligned to the previously disclosed UK Gas

•

Distribution segment, with the results of Xoserve Limited re-allocated from within Other activities.
Interest costs: Since UK Gas Distribution was not independently financed prior to its sale it is necessary to allocate the Group’s overall
financing cost between continuing and discontinued operations. In doing so, the Group has presented the results of the continuing business
on a basis consistent with how it expects to finance the Group in future periods, to aid comparability in future periods. Interest costs
associated with debt and derivatives which remain in the Group as at 31 March 2017 have been attributed to the continuing Group in full.
Interest cost relating to instruments bought back in the period since the disposal process started, debt novated across, and debt and
derivatives issued by UK Gas Distribution as part of the financing exercise have been included within discontinued operations. The interest
costs in the comparative periods for discontinued operations only includes interest that relates to the debt bought back in 2016/17 and the
debt novated into UK Gas Distribution in 2016/17.

• Tax: Tax follows the amount of revenues, operating costs and interest allocated to discontinued operations. Tax on exceptional items and

remeasurements includes an allocation of tax credits arising from the change in tax rates.

Income statement – discontinued operations
for the years ended 31 March

Revenue
Operating costs
Operating profit
Before exceptional items and remeasurements
Exceptional items and remeasurements1

Total operating profit from discontinued operations

Finance costs
Before exceptional items and remeasurements
Exceptional items and remeasurements2

Total finance costs
Profit before tax from discontinued operations
Before exceptional items and remeasurements
Exceptional items and remeasurements

Total profit before tax from discontinued operations
Tax from discontinued operations
Before exceptional items and remeasurements
Exceptional items and remeasurements

Total tax from discontinued operations
Profit after tax from discontinued operations
Before exceptional items and remeasurements
Exceptional items and remeasurements
Profit after tax from discontinued operations
Gain on disposal of UK Gas Distribution
Tax on gain on disposal of UK Gas Distribution
Gain on disposal of UK Gas Distribution after tax
Total profit after tax from discontinued operations

2017
£m

894
–

(146)
(6)

748
(6)

(142)
63

606
57

5,009
312

2017
£m

1,887
(993)

894

(152)

742

(79)

663

5,321
5,984

2016
£m

882
(22)

(157)
–

725
(22)

(149)
138

576
116

–
–

2016
£m

1,903
(1,043)

2015
£m

1,844
(1,015)

2015
£m

829
–

860

829

(161)
–

668
–

(152)
2

516
2

–
–

(157)

703

(11)

692

–
692

1. 2016 includes sale preparation costs of £22 million in respect of the disposal of the UK Gas Distribution business. Current year costs have been included as part of transaction costs

in determining the gain on disposal.

2. 2017 includes losses in respect of remeasurements of derivative financial instruments.

(161)

668

(150)

518

–
518

113

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements9. Discontinued operations continued

Statement of comprehensive income – discontinued operations
for the years ended 31 March

Profit after tax from discontinued operations

Other comprehensive (loss)/income
Items that will never be reclassified to profit or loss:

Remeasurement (losses)/gains of pension assets and post-retirement benefit obligations
Tax on items that will never be reclassified to profit or loss

Total items from discontinued operations that will never be reclassified to profit or loss
Items that may be reclassified subsequently to profit or loss:

Net losses in respect of cash flow hedges
Transferred to profit or loss in respect of cash flow hedges
Tax on items that may be reclassified subsequently to profit or loss

Total items from discontinued operations that may be reclassified subsequently to profit or loss
Other comprehensive income/(loss) for the year, net of tax from discontinued operations
Total comprehensive income for the year from discontinued operations

Details of the cash flows relating to discontinued operations are set out on page 90.

Gain on disposal of UK Gas Distribution

Notes

23
6

2017
£m
5,984

(75)
13
(62)

(106)
233
(23)
104
42
6,026

2016
£m
692

129
(30)
99

(38)
3
7
(28)
71
763

Assets
Intangible assets
Property, plant and equipment
Cash and cash equivalents
Trade and other receivables
Defined benefit pension asset
Other assets1
Total assets
Liabilities
Borrowings1
Trade and other payables
Provisions
Deferred tax liabilities
Defined benefit pension liability
Deferred income
Other liabilities
Total liabilities
Net assets on disposal

Satisfied by:
Cash proceeds
Loan proceeds
Shareholder loan (note 14)
Associate at fair value2
Total consideration
Less:

Financing costs
Transaction costs
Business restructuring costs

Pre-tax gain on disposal
Tax
Post-tax gain on disposal

1. Net debt disposal of £5,890 million principally comprises £5,961 million of borrowings net of £71 million of other financial assets.
2. Details of the basis on which the fair value of the retained interest in the business has been determined are in note 15.

114

National Grid Annual Report and Accounts 2016/17

Financial Statements

2015
£m
518

(13)
3
(10)

(68)
2
8
(58)
(68)
450

2017
£m

89
8,700
5
274
37
83
9,188

(5,961)
(488)
(94)
(1,073)
(3)
(915)
(6)
(8,540)
648

3,679
1,775
429
1,611
7,494

(1,334)
(305)
(198)
5,009
312
5,321

Notes to the consolidated financial statements– analysis of items in the primary statements continued9. Discontinued operations continued

Costs included in the gain on disposal total £1,837 million. These include the direct costs of selling UK Gas Distribution (‘transaction costs’),
the costs for activities undertaken to prepare and structure the disposal (‘business set-up costs’) and business restructuring costs:

• £1,334 million of these costs relate to the financing exercise undertaken to ensure an appropriate amount of debt was placed in UK Gas
Distribution. This includes the costs associated with buybacks of debt from the continuing Group, losses on loans novated at fair value
from the continuing Group to UK Gas Distribution as well as losses from closing out derivatives previously designated as cash flow hedges.
• On 8 December 2016, we announced that a voluntary distribution of £150 million would be made for the benefit of energy consumers on the
successful sale of UK Gas Distribution. This is a constructive obligation that was triggered on sale of UK Gas Distribution and is included
within transaction costs.

• Transaction costs also include professional services fees for the various accounting, legal and consulting work associated with the activities

to prepare and structure the disposal of UK Gas Distribution.

• Business restructuring costs principally includes severance costs and costs associated with onerous contracts as a result of the disposal

of UK Gas Distribution.

The gain on sale is subject to the substantial shareholder exemption. A tax credit on the gain on disposal arises principally from costs
associated with the financing exercise.

Unaudited commentary on the results of discontinued operations

Discontinued operations
Discontinued operations comprise primarily the UK Gas Distribution
and Xoserve businesses. Adjusted operating profit for discontinued
operations increased by £12 million to £894 million. Operating
profit from Xoserve decreased by £8 million, reflecting system
implementation costs. In UK Gas Distribution, adjusted operating
profit was £20 million higher. Revenue was £36 million lower.
This primarily reflects the non-recurrence of last year’s revenue
over-recovery compared to allowance. Pass-through costs were
£2 million lower and regulated controllable costs were £13 million
higher including costs resulting from an increase in the number of
employees. Depreciation and amortisation costs were £84 million
lower reflecting the cessation of depreciation from 8 December
2016, being the point at which the business was determined to
be held for sale. Other costs were £17 million higher this year.

UK Gas Distribution
Regulated financial performance for UK Gas Distribution increased
to £864 million from £819 million, up 5%. This reflects an increase
in achieved operational return on equity year-on-year, driven by
improved totex performance.

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

2017
£m
898
16
(24)

260
(199)
(121)
(13)
47
864

2016
£m
878
(35)
(34)

255
(104)
(168)
(13)
40
819

%
change
2

115

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements10. 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 2015
Exchange adjustments
Net book value at 31 March 2016
Exchange adjustments
Net book value at 31 March 2017

Total
£m
5,145
170
5,315
781
6,096

The cost of goodwill at 31 March 2017 was £6,112 million (2016: £5,327 million) with an accumulated impairment charge of £16 million
(2016: £12 million).

The amounts disclosed above as at 31 March 2017 include balances relating to the following cash-generating units: New York £3,512 million
(2016: £3,061 million); Massachusetts £1,313 million (2016: £1,145 million); Rhode Island £488 million (2016: £426 million); and Federal
£783 million (2016: £683 million).

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 maintained at 2% (2016: 2%). 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 9% (2016: 8%). 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.

116

National Grid Annual Report and Accounts 2016/17

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued11. 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 2015
Exchange adjustments
Additions
Disposals
Reclassifications1
Cost at 31 March 2016
Exchange adjustments
Additions
Disposals
Disposal of UK Gas Distribution
Reclassifications1
Cost at 31 March 2017
Accumulated amortisation at 1 April 2015
Exchange adjustments
Amortisation charge for the year
Reclassifications1
Accumulated amortisation at 31 March 2016
Exchange adjustments
Amortisation charge for the year
Reclassifications1
Accumulated amortisation of disposals
Disposal of UK Gas Distribution
Accumulated amortisation at 31 March 2017
Net book value at 31 March 2017
Net book value at 31 March 2016

1. Reclassifications includes amounts transferred (to)/from property, plant and equipment (see note 12), reclasses between cost and accumulated amortisation of £nil (2016: £nil).

Years
3 to 10

Software
£m
1,504
22
220
(3)
1
1,744
105
234
(43)
(304)
(4)
1,732
(702)
(8)
(147)
–
(857)
(43)
(164)
–
40
215
(809)
923
887

117

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements12. 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.

Impairments are recognised in the income statement and if material are disclosed separately.

Any assets which suffered impairment in a previous period are reviewed for possible reversal of the impairment at each reporting date.

118

National Grid Annual Report and Accounts 2016/17

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued12. Property, plant and equipment continued

Cost at 1 April 2015
Exchange adjustments
Additions
Disposals
Reclassifications1
Cost at 31 March 2016
Exchange adjustments
Additions
Disposals2
Disposal of UK Gas Distribution
Reclassifications1
Cost at 31 March 2017
Accumulated depreciation at 1 April 2015
Exchange adjustments
Depreciation charge for the year3
Disposals
Reclassifications1
Accumulated depreciation at 31 March 2016
Exchange adjustments
Depreciation charge for the year3
Disposals2
Disposal of UK Gas Distribution
Reclassifications1
Accumulated depreciation at 31 March 2017
Net book value at 31 March 2017
Net book value at 31 March 2016

Assets
in the
course of
construction
£m
4,515
20
2,686
(78)
(3,269)
3,874
93
3,080
(70)
(88)
(2,938)
3,951
–
–
–
–
–
–
–
–
–
–
–
–
3,951
3,874

Plant and
machinery
£m
50,635
669
801
(393)
3,060
54,772
3,157
822
(572)
(11,861)
2,913
49,231
(16,713)
(168)
(1,273)
386
(60)
(17,828)
(780)
(1,338)
545
3,425
(20)
(15,996)
33,235
36,944

Motor
vehicles
and office
equipment
£m
984
23
126
(62)
100
1,171
76
132
(204)
(300)
(41)
834
(678)
(10)
(116)
61
–
(743)
(44)
(113)
203
207
–
(490)
344
428

Land and
buildings
£m
2,510
41
60
(26)
173
2,758
196
55
(22)
(112)
104
2,979
(530)
(32)
(79)
6
(5)
(640)
(29)
(84)
42
29
(2)
(684)
2,295
2,118

Total
£m
58,644
753
3,673
(559)
64
62,575
3,522
4,089
(868)
(12,361)
38
56,995
(17,921)
(210)
(1,468)
453
(65)
(19,211)
(853)
(1,535)
790
3,661
(22)
(17,170)
39,825
43,364

1. Represents amounts transferred between categories, (to)/from other intangible assets (see note 11), reclasses from inventories and reclasses between cost and accumulated depreciation

of £21 million (2016: £64 million).

2. Includes the reversal of assets with cost of £107 million and accumulated depreciation of £107 million disposed in previous years that remain in use in the Group.
3. Includes amounts in respect of capitalised depreciation of £1 million (2016: £1 million).

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

13. Other non-current assets

2017
£m

1,749
289
98

89
839

2016
£m

1,622
226
87

47
1,649

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 2018.

Commodity contract assets
Other receivables
Prepayments and accrued income

2017
£m
52
45
24
121

2016
£m
10
37
35
82

119

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements14. Financial and other investments

Financial and other investments include three 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 comprises long-term loans
to our associates and joint ventures. The third category is other 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
Loans to associates and joint ventures1

Current
Available-for-sale investments
Other loans and receivables

Financial and other investments include the following:

Investments in short-term money funds2
Managed investments in equity and bonds3
Cash surrender value of life insurance policies
Other loans and receivables
Restricted balances:

Collateral4
Other

2017
£m

605
495
1,100

7,432
1,309
8,741
9,841

6,899
939
202
495

1,262
44
9,841

2016
£m

482
–
482

1,951
1,047
2,998
3,480

1,516
615
160
–

999
190
3,480

1. Comprises £434 million relating to shareholder loans to Quadgas HoldCo Limited, and amounts loaned to joint ventures.
2. Includes £14 million (2016: £8 million) held by insurance captives and therefore restricted.
3. Includes restricted amounts of £434 million (2016: £434 million) held by insurance captives and £225 million (2016: £181 million) relating to US non-qualified plan investments.
4. 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. The carrying value of loans and receivables is approximate to their fair value, due to
short-dated maturities or transactions entered into on 31 March 2017 at market terms. 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.

Unaudited commentary on financial and other investments
Current available-for-sale investments at 31 March 2017 were £5,481 million higher than at 31 March 2016, primarily reflecting the proceeds
received on 31 March 2017 relating to the sale of the UK Gas Distribution business.

120

National Grid Annual Report and Accounts 2016/17

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued15. 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
Acquisition of stake in Quadgas HoldCo Limited
Disposals
Share of post-tax results for the year
Dividends received
Other movements
Share of net assets at 31 March

Associates
£m
84
16
74
1,611
–
15
(24)
–
1,776

2017

Joint
ventures
£m
313
19
63
–
–
48
(75)
(61)
307

Total
£m
397
35
137
1,611
–
63
(99)
(61)
2,083

Associates
£m
128
4
9
–
(52)
13
(24)
6
84

2016

Joint
ventures
£m
190
17
107
–
–
46
(48)
1
313

Total
£m
318
21
116
–
(52)
59
(72)
7
397

A list of joint ventures and associates including the name and proportion of ownership is provided in note 32.

Further information on the Group’s acquisition of a minority stake in Quadgas HoldCo Limited is provided in note 9 and overleaf.

On 10 January 2017 the Group announced it had entered into an arrangement with San Francisco-based Sunrun Neptune Investor 2016 LLC,
a leading US provider of residential solar energy systems to provide investment capital. In the period to 31 March 2017, the Group invested
£41 million alongside Sunrun into a newly incorporated partnership vehicle. The investment is classified as an associate as the Group has
significant influence over the activities of the partnership vehicle.

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 £235 million
(2016: £305 million) in relation to joint ventures.

Outstanding balances with joint ventures and associates are shown in note 29.

At 31 March 2017, the Group had one material joint venture, in respect of its 50% equity stake in BritNed Development Limited, and one
material associate in respect of its 39% equity stake in Quadgas HoldCo Limited.

BritNed Development Limited (joint venture)
BritNed Development Limited is a joint venture with transmission system operator TenneT and operates the subsea electricity link between
Great Britain and the Netherlands, commissioned in 2011.

BritNed Development Limited has a reporting period end of 31 December with monthly management reporting information provided to
National Grid. Summarised financial information of this joint venture, as at 31 March, 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%)

2017
£m

392
45
1
(10)
(20)
408

204

2016
£m

376
77
3
(8)
(30)
418

209

121

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements15. Investments in joint ventures and associates continued

Income statement – BritNed Development Limited
Revenue
Depreciation and amortisation
Other costs
Operating profit
Income tax expense
Profit for the year

Group’s share in profit (National Grid ownership 50%)

2017
£m

399
(13)
(257)
129
(23)
106

2016
£m

198
(11)
(56)
131
(32)
99

Quadgas HoldCo Limited (associate)
As set out in note 9, on disposal of the Group’s interest in the UK Gas Distribution business, the Group retains an equity interest in UK Gas
Distribution through its parent, Quadgas HoldCo Limited and a shareholder loan asset of £0.4 billion (see note 14).

The Group has the power to appoint 4 of the 12 members of the board of Quadgas HoldCo Limited, which confers significant influence,
but not joint control. In general, the key strategic, operational and financial decisions can be effected by a simple majority of votes. However,
in certain limited circumstances, certain decisions require the consent of both parties. While these circumstances are not expected to occur
regularly, given the rights conferred, and in view of the Group’s equity stake, the investment has been accounted for as an equity investment
in an associate.

The Group is required to recognise its 39% interest in Quadgas HoldCo Limited initially at fair value, being the market price of the investment
as at 31 March 2017. As described in note 9, a Further Acquisition Agreement (FAA) was signed concerning a 14% interest in Quadgas HoldCo
Limited structured as a put/call option. National Grid can deliver a sell notice to sell the shares in Quadgas HoldCo Limited with at least six
months’ notice, for closing between 1 March 2019 and 30 June 2019. The Consortium can deliver, a purchase notice to acquire the shares
in Quadgas HoldCo Limited from 1 July 2019 to 31 October 2019. Since the FAA contains derivative features in the form of put/call options,
it is required to be accounted for at fair value through profit and loss. On the basis that no premium was paid or received for entering into this
arrangement, and further that, for the reasons set out in note 9, the arrangement was on market terms at 31 March 2017, the fair value of the
contract is considered to be zero at year end.

Quadgas HoldCo Limited is an unlisted entity, and so no quoted price exists. The fair value has been determined with reference to the
equity value of the business implicit in the sale transaction, adjusted to reflect a deduction for the estimated premium paid for control by
the Consortium. In assigning value to the retained interests, the Group has valued 14% of its 39% interest based on the price implied by
the FAA. The deduction for control premium has been applied to the residual 25% interest.

The Group is required to complete a purchase price allocation exercise for its interest in Quadgas HoldCo Limited. However, this is not required
to be finalised until 31 March 2018. In view of the limited time elapsed since 31 March 2017, amounts disclosed below remain provisional.

Summarised financial information of this associate (reflecting provisional fair values) together with the carrying amount of the investment in the
consolidated financial statements is as follows:

Statement of financial position – Quadgas HoldCo Limited
Non-current assets
All other current assets
Non-current liabilities
Current liabilities
Equity
Proportion of the Group’s ownership interest in associate
Discount for non-controlling interest
Carrying amount of the Group’s interest in associate (National Grid ownership 39%)

2017
£m

15,559
299
(10,408)
(519)
4,931
1,923
(312)
1,611

The sale of the previously owned subsidiary and subsequent acquisition of 39% equity interest occurred (note 9) on 31 March 2017. As such,
no profit or loss impact noted for the current financial year outside of the amounts disclosed as discontinued operations.

122

National Grid Annual Report and Accounts 2016/17

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued16. 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

Assets
£m
849
676
160
7
15
1,707

2017
Liabilities
£m
(657)
(909)
(113)
(529)
(15)
(2,223)

Assets
£m

2017
Liabilities
£m

192
192

199
122
39
419
736
1,515
1,707

(1,054)
(1,054)

(305)
(160)
(83)
(36)
(585)
(1,169)
(2,223)

Total
£m
192
(233)
47
(522)
–
(516)

Total
£m

(862)
(862)

(106)
(38)
(44)
383
151
346
(516)

Assets
£m
1,095
690
159
1
18
1,963

Assets
£m

278
278

31
159
139
32
1,324
1,685
1,963

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

1. The notional contract amounts of derivatives indicate the gross nominal value of transactions outstanding at the reporting date.

2016
Liabilities
£m
(908)
(589)
(135)
(420)
(17)
(2,069)

2016
Liabilities
£m

(337)
(337)

(213)
(221)
(159)
(155)
(984)
(1,732)
(2,069)

2017
£m
(9,469)
(8,631)
(8,253)
(1,423)
(1,490)
(29,266)

Total
£m
187
101
24
(419)
1
(106)

Total
£m

(59)
(59)

(182)
(62)
(20)
(123)
340
(47)
(106)

2016
£m
(10,552)
(8,316)
(6,903)
(1,394)
(800)
(27,965)

123

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements16. Derivative financial instruments continued

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:

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 offset 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

2017
£m
548

2016
£m
482

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

2017
£m
(180)
69
–
(111)

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

2017
£m
(544)
(56)
(600)

2016
£m
(46)
47
(151)
(150)

2016
£m
(199)
(100)
(299)

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.

124

National Grid Annual Report and Accounts 2016/17

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued16. 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

2017
£m
135
34
(522)
–
(353)

2016
£m
51
77
(268)
1
(139)

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, unless
the hedged item is no longer expected to occur and then the amounts would be recognised immediately. 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.

17. 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 £26 million against inventories as at 31 March 2017 (2016: £28 million).

2017
£m
101
191
8
103
403

2016
£m
120
203
13
101
437

125

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements18. 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 other than in respect of commodity contract assets, subsequently
measured at amortised cost, less any appropriate allowances for estimated irrecoverable amounts. Commodity contract assets are recorded
at fair value. 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
Other receivables

2017
£m
1,591
811
228
54
98
2,782

2016
£m
1,276
796
212
22
89
2,395

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.

Provision for impairment of receivables

At 1 April
Exchange adjustments
Charge for the year, net of recoveries
Uncollectible amounts written off against receivables
Disposal of UK Gas Distribution
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

2017
£m
349
51
147
(121)
(2)
424

2017
£m
238
67
143
448

2016
£m
294
11
158
(114)
–
349

2016
£m
214
48
142
404

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).

126

National Grid Annual Report and Accounts 2016/17

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued19. 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

2017
£m
199
940
1,139
–
1,139

2016
£m
126
1
127
(3)
124

At 31 March 2017, £2 million (2016: £2 million) of cash and cash equivalents were restricted. This primarily relates to cash held in captive
insurance companies. £940 million (2016: £1 million) comprises short-term money fund deposits.

20. 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 16, 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

2017
£m

1,339
2,209
1,881
66
1
–
5,496

2,343
20,368
242
189
23,142
28,638

2016
£m

1,179
1,282
1,092
53
2
3
3,611

1,816
22,556
190
171
24,733
28,344

127

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements20. 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

2017
£m
5,496
1,941
1,821
2,453
1,921

1,043
13,963
28,638

2016
£m
3,611
1,835
1,816
1,775
2,276

742
16,289
28,344

The fair value of borrowings at 31 March 2017 was £32,239 million (2016: £31,463 million). Where market values were available, fair value of
borrowings (Level 1) was £12,547 million (2016: £13,283 million). Where market values were not available, fair value of borrowings (Level 2) was
£19,692 million (2016: £18,180 million), calculated by discounting cash flows at prevailing interest rates. The notional amount outstanding of the
debt portfolio at 31 March 2017 was £28,310 million (2016: £27,836 million).

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 £440 million at 31 March 2017
(2016: £385 million).

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
£709 million (2016: £610 million) 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

2017
£m

66
213
89
368
(60)
308

66
174
68
308

2016
£m

53
156
75
284
(41)
243

53
137
53
243

As at 31 March 2017, total borrowings of £28,638 million (2016: £28,344 million) including bonds, bank loans, commercial paper, collateral,
finance leases and other debt had increased by £294 million. We expect to repay £5,496 million 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 and surplus
cash. The average long-term debt maturity of the portfolio is 11 years (2016: 12 years). Further information on our bonds can be found in
the debt investor section of our website.

128

National Grid Annual Report and Accounts 2016/17

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued21. 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

2017
£m
2,135
298
93
136
776
3,438

2016
£m
2,038
275
96
159
717
3,285

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.

22. Other non-current liabilities

Other non-current liabilities include deferred income which will not be recognised as income until after 31 March 2018. 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

2017
£m
1,032
77
338
1,447

2016
£m
1,802
39
230
2,071

There is no material difference between the fair value and the carrying value of other non-current liabilities.

23. 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).

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 and the actuarial assumptions used to value the obligations.

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.

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.

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Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements23. 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. 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.

UK pension plans
National Grid’s DB 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 results of the most recent actuarial 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)

NG UKPS1
30 September 20153
Willis Towers Watson
£16,551m
£18,176m
91%
£1,625m
£1,349m

NGEG of ESPS2
31 March 2016
Aon Hewitt
£2,553m
£3,053m
84%
£500m
£415m

1. National Grid UK Pension Scheme.
2. National Grid Electricity Group of the Electricity Supply Pension Scheme.
3. NG UKPS valuation at 30 September 2015 occurred prior to sectionalisation and so the figures above represent the entire scheme (including what is now Section C).

130

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Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued23. Pensions and other post-retirement benefits continued

National Grid UK Pension Scheme
Following the actuarial valuation at 31 March 2013, deficit contributions were paid to the National Grid UK Pension Scheme of £99 million
in 2014/15, £100 million in 2015/16 and £101 million in 2016/17.

The last full actuarial valuation for the National Grid UK Pension Scheme was carried out at 30 September 2015. Based on long-term financial
assumptions, the contribution rate agreed to meet future benefit accrual was 36% of pensionable earnings (currently 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.

With effect from 1 January 2017, sectionalisation of the National Grid UK Pension Scheme was carried out in anticipation of the disposal of
UK Gas Distribution. The National Grid UK Pension Scheme was split into three sections, each of which are legally and actuarially separate.
Section A and Section B are supported by companies within the National Grid Group and Section C is supported by Cadent Gas Limited
(previously National Grid Gas Distribution Limited). The disposal of UK Gas Distribution completed on 31 March 2017 and the figures shown in
these financial statements cover all three sections for amounts recognised in the income statement and the statement of other comprehensive
income. At the reporting date the fair value of plan assets of £6,993 million and fair value of plan obligations of £6,957 million, as calculated on
an IAS 19 basis, had been transferred as they form part of the net assets of UK Gas Distribution sold in the gain on sale calculation in note 9.
The first actuarial valuation for Section A and Section B will be carried out at 31 March 2017 and these valuation processes have commenced.

Section A
National Grid and the Trustees have agreed on a schedule of contributions, under which payments of £212 million were made in 2016/17 after
sectionalisation with effect from 1 January 2017. National Grid has established a security arrangement with a charge in favour of the Trustees.
This amount may change over time or following changes to National Grid plc’s credit rating. At 31 March 2017 the value of this was required
to be £315 million. This was provided via £227 million in letters of credit with the remainder in surety bonds. The assets held as security will be
paid to Section A in the event that National Grid plc or National Grid UK Limited is subject to an insolvency event, if National Grid fails to make
the required contributions in relation to Section A, or if National Grid’s credit rating by two out of three specified agencies falls below certain
agreed levels for a period of 40 days. 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 £72 million (increased in line with RPI) into Section A if National Grid plc’s credit rating by
two out of three specified agencies falls below certain agreed levels for a period of 40 days.

Section B
National Grid and the Trustees have agreed on a schedule of contributions, under which payments of £30 million plus an adjustment for RPI will
be made in 2017/18 and will thereafter rise in line with RPI. National Grid has established a security arrangement with a charge in favour of the
Trustees. This amount may change over time or following changes to National Grid Gas plc’s credit rating. At 31 March 2017 the value of this
was required to be £192 million. This was provided via £200 million in letters of credit. The assets held as security will be paid to Section B in
the event that National Grid Gas plc (NGG) is subject to an insolvency event, if NGG is given notice of less than 12 months that Ofgem intends
to revoke its licence under the Gas Act 1986, if National Grid fails to make the required contributions in relation to Section B, if NGG’s credit
rating by two out of three specified agencies falls below certain agreed levels for a period of 40 days, or if NGG grants any charges over its
assets other than where agreed with the Trustees. 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 £65 million (increased in line with RPI) into Section B if NGG’s credit rating by two out
of three specified agencies falls below certain agreed levels for a period of 40 days.

The 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 last full actuarial valuation for the NGEG was carried out at 31 March 2016. This showed that, based on long-term financial assumptions,
the contribution rate required to meet future benefit accrual was 40.7% of pensionable earnings (currently an average of 33.7% by employers
and an average of 7% by employees). The next actuarial valuation is required with an effective date no later than 31 March 2019.

Following the 2016 valuation, National Grid and the Trustees agreed on a recovery plan that would see the funding deficit repaid by 31 March
2027. Under the schedule of contributions, payments of £48 million were made in 2016/17, and will rise in line with RPI until 2026/27. As part of
the agreement, National Grid has established security arrangements with a charge in favour of the Trustees. At 31 March 2017 the value of this
was required to be £212 million. This was provided via £212 million in letters 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, if NGET fails to make the required
contributions in relation to the scheme, or if NGET 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 £500 million 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.

131

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements23. Pensions and other post-retirement benefits continued

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 determined under these regulations can vary significantly depending
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 multiple 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 the majority 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 healthcare and life insurance 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.

Amounts recognised in the statement of financial position

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

2017
£m
(25,890)
24,375
(1,515)
(340)
(78)
(1,933)

2016
£m
(28,648)
26,434
(2,214)
(304)
(67)
(2,585)

2015
£m
(29,292)
26,408
(2,884)
(300)
(74)
(3,258)

(2,536)
603
(1,933)

(2,995)
410
(2,585)

(3,379)
121
(3,258)

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

2017
£m
(15,565)
15,489
(76)
(80)
–
(156)

UK pensions
2016
£m
(19,341)
19,401
60
(75)
–
(15)

2015
£m
(20,053)
19,453
(600)
(72)
–
(672)

US pensions
2016
£m
(5,916)
5,136
(780)
(229)
–
(1,009)

2017
£m
(6,790)
6,322
(468)
(260)
–
(728)

(536)
380
(156)

(300)
285
(15)

(672)
–
(672)

(951)
223
(728)

(1,134)
125
(1,009)

2015
£m
(5,827)
5,052
(775)
(228)
–
(1,003)

(1,124)
121
(1,003)

US other post-retirement benefits

2017
£m
(3,535)
2,564
(971)
–
(78)
(1,049)

(1,049)
–
(1,049)

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)

1. Present value of funded obligations split approximately as follows:

• UK pensions at 31 March 2017: 12% active members (2016: 12%; 2015: 12%); 19% deferred members (2016: 18%; 2015: 18%); 69% pensioner members (2016: 70%; 2015: 70%)
• US pensions at 31 March 2017: 38% active members (2016: 39%; 2015: 38%); 9% deferred members (2016: 9%; 2015: 9%); 53% pensioner members (2016: 52%; 2015: 53%)
• US other post-retirement benefits at 31 March 2017: 39% active members (2016: 41%; 2015: 38%); 0% deferred members (2016: 0%; 2015: 0%); 61% pensioner members

(2016: 59%; 2015: 62%)

These figures reflect legal and actuarial advice that we have taken regarding recognition of surpluses under IFRIC 14 in both the UK and US.

132

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Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued

23. 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 cost – augmentations
Past service (credit)/cost – redundancies
Past service cost – plan amendments
Special termination benefit cost – redundancies

Included within finance income and costs
Net interest cost
Included within gain on disposal of discontinued operations
Administration costs
Disposal of UK Gas Distribution

Total included in income statement1
Remeasurement gains/(losses) of pension assets and post-retirement benefit obligations
Exchange adjustments
Total included in the statement of other comprehensive income2

2017
£m

2016
£m

2015
£m

232
1
(1)
–
7
308

221
3
(1)
–
11
290

105

112

186
7
1
1
20
263

101

5
34
39
468
348
(345)
3

2
–
2
420
539
(81)
458

–
–
–
378
(771)
(236)
(1,007)

1. Amounts recognised in the income statement include operating costs of £1 million (2016: £1 million; 2015: £1 million); payroll costs of £46 million (2016: £37 million; 2015: £34 million);

and net interest income of £2 million (2016: £1 million cost; 2015: £3 million cost) presented within profit from discontinued operations. These amounts all relate to UK pensions.

2. Amounts recognised in the statement of other comprehensive income include remeasurements of pension assets and post-retirement benefit obligations of £75 million loss

(2016: £129 million gain; 2015: £13 million loss) presented within discontinued operations. These amounts all relate to UK pensions.

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 cost – augmentations
Past service (credit)/cost – redundancies
Past service cost – plan amendments
Special termination benefit cost – redundancies

Included within finance income and costs
Net interest cost
Included within gain on disposal of discontinued operations
Administration costs
Disposal of UK Gas Distribution

Total included in income statement
Remeasurement (losses)/gains of pension assets

and post-retirement benefit obligations

Exchange adjustments
Total included in the statement of other

comprehensive income

UK pensions
2016
£m

2017
£m

76
1
(1)
–
7
120

–

5
34
39
165

(541)
–

(541)

74
3
(1)
–
11
118

2
–
2
147

534
–

534

2015
£m

70
7
1
–
20
124

–
–
–
157

(46)
–

(46)

US pensions
2016
£m

2017
£m

US other post-retirement benefits

2015
£m

2017
£m

2016
£m

2015
£m

103
–
–
–
–
135

–
–
–
187

95
–
–
–
–
120

–
–
–
162

77
–
–
1
–
100

–
–
–
132

319
(140)

(67)
(33)

(408)
(88)

–

53
–
–
–
–
53

–
–
–
116

570
(205)

179

(100)

(496)

365

–

52
–
–
–
–
52

–
–
–
111

72
(48)

–

39
–
–
–
–
39

–
–
–
89

(317)
(148)

(465)

133

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements23. 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 and foreign exchange 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:

Opening net defined benefit liability
Cost recognised in the income statement
Remeasurement and foreign exchange effects recognised

in the statement of other comprehensive income

Employer contributions
Other movements
Closing net defined benefit liability

UK pensions
2016
£m
(672)
(116)

534
239
–
(15)

2017
£m
(15)
(128)

(541)
528
–
(156)

2015
£m
(753)
(131)

(46)
258
–
(672)

US pensions
2016
£m
(1,003)
(137)

2017
£m
(1,009)
(155)

179
257
–
(728)

(100)
231
–
(1,009)

2015
£m
(523)
(110)

(496)
126
–
(1,003)

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 gains/(losses) – demographic assumptions
Actuarial (losses)/gains – financial assumptions
Past service credit/(cost) – redundancies
Special termination benefit cost – redundancies
Past service cost – augmentations
Past service cost – plan amendments
Medicare subsidy received
Obligations transferred on disposal of UK Gas Distribution
Employee contributions
Benefits paid
Exchange adjustments
Closing defined benefit obligations

2017
£m
(2,585)
(399)
3
1,073
(25)
(1,933)

2016
£m
(3,258)
(364)
458
587
(8)
(2,585)

2015
£m
(2,411)
(330)
(1,007)
508
(18)
(3,258)

US other post-retirement benefits

2017
£m
(1,561)
(116)

365
288
(25)
(1,049)

2017
£m
(28,952)
(232)
(1,057)
166
225
(3,377)
1
(7)
(1)
–
(14)
6,970
(1)
1,443
(1,394)
(26,230)

2016
£m
(1,583)
(111)

24
117
(8)
(1,561)

2016
£m
(29,592)
(221)
(1,026)
659
–
218
1
(11)
(3)
–
(15)
–
(2)
1,348
(308)
(28,952)

2015
£m
(1,135)
(89)

(465)
124
(18)
(1,583)

2015
£m
(25,594)
(186)
(1,127)
163
(342)
(2,746)
(1)
(20)
(7)
(1)
(19)
–
(2)
1,268
(978)
(29,592)

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 gains/(losses) – demographic assumptions
Actuarial (losses)/gains – financial assumptions
Past service credit/(cost) – redundancies
Special termination benefit cost – redundancies
Past service cost – augmentations
Past service cost – plan amendments
Medicare subsidy received
Obligations transferred on disposal of UK Gas Distribution
Employee contributions
Benefits paid
Exchange adjustments
Closing defined benefit obligations

2017
£m
(19,416)
(76)
(615)
106
214
(3,751)
1
(7)
(1)
–
–
6,970
(1)
931
–
(15,645)

UK pensions
2016
£m
(20,125)
(74)
(649)
552
–
–
1
(11)
(3)
–
–
–
(2)
895
–
(19,416)

2015
£m
(18,162)
(70)
(762)
100
(95)
(1,980)
(1)
(20)
(7)
–
–
–
(2)
874
–
(20,125)

US pensions
2016
£m
(6,055)
(95)
(242)
15
–
120
–
–
–
–
–
–
–
310
(198)
(6,145)

2017
£m
(6,145)
(103)
(285)
(2)
2
37
–
–
–
–
–
–
–
349
(903)
(7,050)

2015
£m
(4,752)
(77)
(235)
(22)
(125)
(486)
–
–
–
(1)
–
–
–
269
(626)
(6,055)

US other post-retirement benefits

2017
£m
(3,391)
(53)
(157)
62
9
337
–
–
–
–
(14)
–
–
163
(491)
(3,535)

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)

134

National Grid Annual Report and Accounts 2016/17

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued23. 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 greater/(less) than assumed
Administration costs
Employer contributions
Employee contributions
Benefits paid
Exchange adjustments
Assets transferred on disposal of UK Gas Distribution
Closing fair value of plan assets
Actual return on plan assets
Expected contributions to plans in the following year

2017
£m
26,434
952
3,334
(21)
1,073
1
(1,443)
1,049
(7,004)
24,375
4,286
491

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

The geographical split of pensions and other post-retirement benefits is as shown below:

UK pensions
2016
£m
19,453
631
(18)
(11)
239
2
(895)
–
–
19,401
613
228

2017
£m
19,401
615
2,890
(11)
528
1
(931)
–
(7,004)
15,489
3,505
128

2015
£m
17,409
735
1,929
(6)
258
2
(874)
–
–
19,453
2,664
225

US pensions
2016
£m
5,052
206
(202)
(6)
231
–
(310)
165
–
5,136
4
220

2017
£m
5,136
242
282
(9)
257
–
(349)
763
–
6,322
524
229

2015
£m
4,229
210
225
(7)
126
–
(269)
538
–
5,052
435
204

US other post-retirement benefits

2017
£m
1,897
95
162
(1)
288
–
(163)
286
–
2,564
257
134

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

135

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements23. 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
2,624
3,526
5,406
90
250
1,162
63
13,121

2017
Unquoted
£m
596
–
–
708
628
–
436
2,368

Total
£m
3,220
3,526
5,406
798
878
1,162
499
15,489

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

1. Included within equities at 31 March 2017 were ordinary shares of National Grid plc with a value of £2 million (2016: £7 million; 2015: £14 million).
2. Included within corporate bonds at 31 March 2017 was an investment in a number of bonds issued by subsidiary undertakings with a value of £nil (2016: £70 million; 2015: £80 million).
3. Includes return seeking non-conventional asset classes.
4. Includes liability-driven investment vehicles.
5. Includes cash and cash type instruments.

US pensions

Equities
Corporate bonds
Government securities
Property
Diversified alternatives1
Other

1. Includes return seeking non-conventional asset classes.

US other post-retirement benefits

Equities
Corporate bonds
Government securities
Diversified alternatives1
Other

1. Includes return seeking non-conventional asset classes.

Quoted
£m
698
1,130
872
–
209
31
2,940

2017
Unquoted
£m
1,915
537
71
335
433
91
3,382

Quoted
£m
405
19
520
166
–
1,110

2017
Unquoted
£m
1,162
–
1
149
142
1,454

Total
£m
2,613
1,667
943
335
642
122
6,322

Total
£m
1,567
19
521
315
142
2,564

Quoted
£m
625
954
711
–
163
–
2,453

2016
Unquoted
£m
1,508
483
–
276
334
82
2,683

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

136

National Grid Annual Report and Accounts 2016/17

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued23. Pensions and other post-retirement benefits continued

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 2017 is as follows:

Equities
Other

UK pensions
%
22
78
100

US pensions
%
40
60
100

US other
post-retirement
benefits
%
65
35
100

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
2016
%
3.3
3.2
2.9
n/a
n/a

2017
%
2.4
3.5
3.2
n/a
n/a

2015
%
3.3
3.2
2.9
n/a
n/a

US pensions
2016
%
4.3
3.5
n/a
n/a
n/a

2017
%
4.3
3.5
n/a
n/a
n/a

2015
%
4.1
3.5
n/a
n/a
n/a

US other post-retirement benefits

2017
%
4.3
3.5
n/a
7.0
4.5

2016
%
4.3
3.5
n/a
7.5
4.5

2015
%
4.1
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 2.2% (2016: 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 3.2% (2016: 2.9%; 2015: 2.9%)

for increases in pensions in payment and 3.2% (2016: 2.9%; 2015: 2.9%) 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

2017

UK
years

US
years

2016

UK
years

22.9
24.7

25.1
27.1

21.9
24.1

23.6
25.7

22.8
25.2

25.1
27.6

US
years

21.8
24.0

23.5
25.6

2015

UK
years

22.7
25.1

24.9
27.4

US
years

21.7
23.9

23.4
25.6

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 15 years for US other post-retirement benefits.

137

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements24. 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 2015
Exchange adjustments
Additions
Unused amounts reversed
Unwinding of discount
Utilised
At 31 March 2016
Exchange adjustments
Additions
Unused amounts reversed
Unwinding of discount
Utilised
Disposal of UK Gas Distribution
At 31 March 2017

Current
Non-current

Environmental
£m
1,164
29
30
(15)
58
(97)
1,169
137
572
(75)
60
(110)
(32)
1,721

Decommissioning
£m
137
3
22
(8)
4
(17)
141
13
107
–
–
(19)
(21)
221

Restructuring
£m
39
–
10
(1)
1
(19)
30
–
16
(5)
1
(25)
–
17

Emissions
£m
23
1
1
–
–
(7)
18
2
12
–
–
–
–
32

Other
£m
372
9
33
(3)
10
(60)
361
36
308
(6)
12
(73)
(41)
597

2017
£m
416
2,172
2,588

Total
provisions
£m
1,735
42
96
(27)
73
(200)
1,719
188
1,015
(86)
73
(227)
(94)
2,588

2016
£m
236
1,483
1,719

138

National Grid Annual Report and Accounts 2016/17

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued24. 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

2017

2016

Discounted
£m

Undiscounted
£m

242
1,479
1,721

270
1,619
1,889

Real
discount
rate

1%
1%

Discounted
£m

Undiscounted
£m

280
889
1,169

348
1,031
1,379

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 2017 and 2077. 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 real 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 2017 and 2071. The increase in the US provision principally relates
to the reduction in real discount rate and expected expenditure in relation to three industrial sites located on or near waterways in New York
that are subject to both state and federal law in the US. Refer to note 4 for further details. 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 £78 million (2016: £66 million) of expenditure relating to asset retirement obligations estimated to
be incurred until 2095, and £107 million (2016: £nil) of expenditure relating to the demolition of gas holders estimated to be incurred until 2026.
It also includes the net present value of the estimated expenditure (discounted at a real rate of 1%) expected to be incurred until 2033 in respect
of the decommissioning of certain US nuclear generating units that National Grid no longer owns. A pre-existing decommissioning provision
formed part of the net assets sold as part of the UK Gas Distribution transaction.

Restructuring provision
The restructuring provision principally relates to business reorganisation costs in the UK and is expected to be incurred until 2023.

Other provisions
Included within other provisions at 31 March 2017 are the following amounts in respect of the disposal of UK Gas Distribution:

• £150 million voluntary distribution to be made for the benefit of energy customers on the successful sale of UK Gas Distribution.

We anticipate this expenditure being incurred over three years; and

• £143 million in respect of business set up costs and business restructuring costs (as disclosed in note 9). We expect the majority

of this provision to be utilised within one year.

Other provisions also include:

• Amounts provided in respect of onerous lease commitments and rates payable on surplus properties of £84 million (2016: £100 million)

with expenditure expected to be incurred until 2039;

• £166 million (2016: £190 million) 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; and

• £13 million (2016: £13 million) in respect of obligations associated with investments in joint ventures and associates.

139

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements25. 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 actively manage share issuances under
the scrip dividend scheme and to satisfy employee share option plan liabilities.

Share capital is accounted for as an equity instrument. An equity instrument is any contract that includes a residual interest in the consolidated
assets of the Company after deducting all its liabilities and is recorded at the proceeds received, net of direct issue costs, with an amount equal
to the nominal amount of the shares issued included in the share capital account and the balance recorded in the share premium account.

At 1 April 2015
Issued during the year in lieu of dividends1
At 31 March 2016
Issued during the year in lieu of dividends1
At 31 March 2017

Allotted, called up and fully paid

million
3,892
32
3,924
19
3,943

£m
443
4
447
2
449

1. The issue of shares under the scrip dividend scheme 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.

On 19 April 2017, the Company announced that its Board had approved a special interim dividend of 84.375 pence per existing ordinary
share ($5.4224 per existing ADS) following completion of the sale of the majority interest in UK Gas Distribution. In order to maintain the
comparability of the Company’s share price before and after the special dividend, the Company plans to undertake a share consolidation.
The share consolidation will replace every 12 existing ordinary shares with 11 new ordinary shares. The Company has published a notice
of general meeting and explanatory circular to shareholders regarding the share consolidation and related resolutions which will be subject
to shareholder approval at the General Meeting of the Company being held on 19 May 2017.

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 2017, the Company held 193 million (2016: 179 million) of its own shares. The market value of these shares as at 31 March 2017
was £1,958 million (2016: £1,767 million).

The Company made the following transactions in respect of its own shares during the year ended 31 March 2017:

1. During the year, the Company, as part of management of the dilutive effect of share issuances under the scrip dividend scheme,

repurchased 20 million (2016: 31 million) ordinary shares for aggregate consideration of £189 million (2016: £267 million), including
transaction costs. The shares repurchased have a nominal value of £2 million (2016: £4 million) and represented approximately 1%
(2016: 1%) of the ordinary shares in issue as at 31 March 2017.

2. During the year, 3 million (2016: 2 million) treasury shares were gifted to National Grid Employee Share Trusts and 3 million (2016: 3 million)

treasury shares were re-issued in relation to employee share schemes, in total representing approximately 0.2% (2016: 0.1%) of the ordinary
shares in issue as at 31 March 2017. The nominal value of these shares was £1 million (2016: £1 million) and the total proceeds received
were £18 million (2016: £16 million).

3. During the year the Company made payments totalling £6 million (2016: £6 million) 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 194 million ordinary shares (2016: 179 million) representing approximately
4.9% (2016: 4.6%) of the ordinary shares in issue as at 31 March 2017 and having a nominal value of £22 million (2016: £20 million).

140

National Grid Annual Report and Accounts 2016/17

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued26. 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 D in note 1), cash flow hedge reserve (see note 16), available-for-
sale reserve (see note 14), 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 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
Exchange adjustments
Net (losses)/gains taken to equity
Transferred to/(from) profit or loss
Tax
At 31 March 2017

Translation
£m
305
174
–
–
–
479
69
–
–
–
548
346
–
–
–
894

Cash flow
hedge
£m
14
–
(154)
13
18
(109)
–
50
29
(15)
(45)
–
(36)
227
(43)
103

Available-
for-sale
£m
68
–
41
(8)
(7)
94
–
43
–
(17)
120
–
81
(25)
(14)
162

Capital
redemption
£m
19
–
–
–
–
19
–
–
–
–
19
–
–
–
–
19

Merger
£m
(5,165)
–
–
–
–
(5,165)
–
–
–
–
(5,165)
–
–
–
–
(5,165)

Total
£m
(4,759)
174
(113)
5
11
(4,682)
69
93
29
(32)
(4,523)
346
45
202
(57)
(3,987)

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 transferred to the income statement until the committed future cash flows from borrowings and capital
projects (as described in note 16) are paid. The amount due to be released from reserves to the income statement next year is a gain of
£22 million (pre-tax). The remainder will be released based on the maturity profile of borrowings due after more than one year and on the
stage of completion of existing capital projects.

141

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial Statements27. 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 180 and in
note 30 to the consolidated financial statements on pages 145 to 152.

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
Disposal of UK Gas Distribution
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

2017
£m
984
5,675
(3,715)
1,955
4,899
(2,273)
(2,401)
5,890
(64)
6,051
(25,325)
(19,274)

2016
£m
4
391
(1,100)
810
105
(515)
(913)
–
(87)
(1,410)
(23,915)
(25,325)

2017
£m
9,880
(28,638)
(516)
(19,274)

2016
£m
3,125
(28,344)
(106)
(25,325)

2015
£m
(247)
(1,157)
682
925
203
(1,777)
(1,068)
–
(83)
(2,725)
(21,190)
(23,915)

2015
£m
2,678
(25,910)
(683)
(23,915)

1. An exceptional charge of £1,313 million (2016: £nil; 2015: £131 million) is included in net interest charge on the components of net debt and an exceptional cash outflow of £1,052 million

(2016: £nil; 2015: £152 million) is included in net interest paid on the components of net debt.

142

National Grid Annual Report and Accounts 2016/17

Financial Statements

Notes to the consolidated financial statements– analysis of items in the primary statements continued27. Net debt continued

(b) Analysis of changes in net debt

At 1 April 2014
Cash flow
Fair value gains and losses and exchange movements
Interest income/(charges)
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
Cash flow
Fair value gains and losses and exchange movements
Interest income/(charges)2
Other non-cash movements
Disposal
At 31 March 2017
Balances at 31 March 2017 comprise:
Non-current assets
Current assets
Current liabilities
Non-current liabilities

Cash
and cash
equivalents
£m
354
(259)
24
–
–
119
4
4
–
–
127
1,001
16
–
–
(5)
1,139

–
1,139
–
–
1,139

Bank
overdrafts
£m
(15)
12
–
–
–
(3)
–
–
–
–
(3)
(17)
–
–
–
20
–

Net cash and
cash
equivalents £m
339
(247)
24
–
–
116
4
4
–
–
124
984
16
–
–
15
1,139

–
–
–
–
–

–
1,139
–
–
1,139

Financial
investments
£m
3,599
(1,194)
118
36
–
2,559
368
49
22
–
2,998
5,624
141
53
–
(75)
8,741

–
8,741
–
–
8,741

Borrowings
£m
(25,935)
1,721
(451)
(1,160)
(82)
(25,907)
(631)
(739)
(978)
(86)
(28,341)
(2,196)
(1,527)
(2,221)
(294)
5,941
(28,638)

–
–
(5,496)
(23,142)
(28,638)

Derivatives
£m
807
(77)
(1,468)
56
(1)
(683)
364
171
43
(1)
(106)
487
(903)
(233)
230
9
(516)

1,515
192
(1,054)
(1,169)
(516)

Total1
£m
(21,190)
203
(1,777)
(1,068)
(83)
(23,915)
105
(515)
(913)
(87)
(25,325)
4,899
(2,273)
(2,401)
(64)
5,890
(19,274)

1,515
10,072
(6,550)
(24,311)
(19,274)

1. Includes accrued interest at 31 March 2017 of £210 million (2016: £243 million; 2015: £230 million).
2. An exceptional expense of £1,313 million (2016: £nil; 2015: £131 million) is included in net interest charge on the components of net debt and an exceptional cash outflow of £1,052 million

(2016: £nil; 2015: £152 million) is included in net interest paid on the components of net debt.

143

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial 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 uncertainty 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.

28. 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 2017)
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)
Guarantees of certain obligations of St William Homes LLP (various expiry dates)
Guarantees of certain obligations for construction of IFA 2 SAS (expected expiry 2021)
Other guarantees and letters of credit (various expiry dates)

2017
£m

2016
£m

2,571

2,616

95
82
58
56
54
274
619

1,325
744
587
507
436
2,100
5,699

225
100
281
140
1,059
147
354
474
2,780

92
86
72
54
52
286
642

1,096
598
454
362
315
1,477
4,302

219
113
415
166
1,038
96
–
344
2,391

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 £15 million (2016: £21 million).

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 2016/17

Financial Statements

29. 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
Sales: Goods and services supplied to joint ventures1
Sales: Goods and services supplied to associates
Purchases: Goods and services received from joint ventures2
Purchases: Goods and services received from associates2

Receivable from joint ventures3
Receivable from associates3
Payable to joint ventures4
Payable to associates

Dividends received from joint ventures5
Dividends received from associates

2017
£m
3
78
–
168
169

64
457
84
27

75
24

2016
£m
3
9
4
183
83

7
–
96
7

48
24

2015
£m
3
9
40
68
52

4
–
2
4

49
30

1. During the year the Company sold property sites to joint venture St William Homes LLP.
2. During the year the Company received goods and services from a number of US associates, both for the transportation of gas and for pipeline services in the US. Additionally, goods

and services were received from UK joint ventures for the construction of a transmission link in the UK.

3. Amounts receivable from associates includes a loan receivable balance from Quadgas HoldCo Limited of £434 million as a result of the sale of the UK Gas Distribution business (see note 9

for additional information) and a loan receivable balance of £61 million from Nemo Link Limited.

4. Amounts payable to joint ventures include deposits received for National Grid property sites from St William Homes LLP.
5. Dividends in respect of joint ventures were received from BritNed Development Limited.

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 note 23. For details of Directors’ and key management remuneration, refer to the audited section
of the Remuneration Report and note 3(c). Information regarding the disposal of UK Gas Distribution is included in note 9.

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.

145

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial StatementsNotes to the consolidated financial statements
– supplementary information continued

30. Financial risk management continued

(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 2017, 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
326
1,113 to 1,680
1,680
665 to 837
229 to 326

Long-term limit
£m
Unlimited
277
560 to 878
878
338 to 418
116 to 167

As at 31 March 2016 and 2017, 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 US-based commodity transactions is owned by the Finance Committee to the Board, which establishes controls and
procedures to determine, monitor and minimise the credit exposure to counterparties. Authority to administer the policy has been delegated
to the Energy Procurement Risk Management Committee by the Board and the Executive Committee.

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 18.

146

National Grid Annual Report and Accounts 2016/17

Financial Statements

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 2017
Assets
Derivative financial instruments
Commodity contracts

Liabilities
Derivative financial instruments
Commodity contracts

At 31 March 2016
Assets
Derivative financial instruments
Commodity contracts

Liabilities
Derivative financial instruments
Commodity contracts

Gross
carrying
amounts
£m

Gross
amounts
offset1
£m

Net amount
presented in
statement
of financial
position
£m

1,707
106
1,813

(2,223)
(170)
(2,393)

(580)

–
–
–

–

1,707
106
1,813

(2,223)
(170)
(2,393)

(580)

Gross
carrying
amounts
£m

Gross
amounts
offset1
£m

Net amount
presented in
statement of
financial
position
£m

Related amounts
available to be offset but
not offset in statement
of financial position

Financial
instruments
£m

Cash
collateral
received/
pledged
£m

(718)
(25)
(743)

718
25
743

–

(692)
–
(692)

1,230
18
1,248

556

Related amounts
available to be offset but
not offset in statement
of financial position

Financial
instruments
£m

Cash
collateral
received/
pledged
£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)

(209)

(997)
(4)
(1,001)

997
4
1,001

–

(597)
–
(597)

932
20
952

355

Net amount
£m

297
81
378

(275)
(127)
(402)

(24)

Net amount
£m

369
28
397

(140)
(111)
(251)

146

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.

147

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial StatementsNotes to the consolidated financial statements
– supplementary information continued

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 28 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 2017
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 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

Less than
1 year
£m

(5,142)
(767)
(66)
(2,989)

571
(1,551)
(15)
(9,959)

Less than
1 year
£m

(3,225)
(839)
(53)
(2,755)

314
(389)
(104)
(7,051)

1 to 2
years
£m

(1,864)
(707)
(58)
(260)

961
(959)
(18)
(2,905)

1 to 2
years
£m

(1,777)
(806)
(58)
(230)

487
(964)
(32)
(3,380)

2 to 3
years
£m

More than
3 years
£m

(1,750)
(670)
(61)
–

572
(304)
(8)
(2,221)

(19,245)
(12,975)
(183)
–

234
(610)
–
(32,779)

2 to 3
years
£m

More than
3 years
£m

(1,760)
(746)
(43)
–

846
(855)
(9)
(2,567)

(20,831)
(13,549)
(130)
–

811
(914)
1
(34,612)

Total
£m

(28,001)
(15,119)
(368)
(3,249)

2,338
(3,424)
(41)
(47,864)

Total
£m

(27,593)
(15,940)
(284)
(2,985)

2,458
(3,122)
(144)
(47,610)

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 20 sets out the carrying amount, by contractual maturity, of borrowings that are exposed to interest rate risk before taking
into account interest rate swaps.

148

National Grid Annual Report and Accounts 2016/17

Financial Statements

30. Financial risk management continued

(c) Interest rate risk continued
During 2017 and 2016, 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
940
44
(17,681)
(16,697)
1,424
(15,273)

Floating
rate
£m
199
8,691
(3,917)
4,973
(1,785)
3,188

2017
Inflation
linked
£m
–
–
(7,040)
(7,040)
(155)
(7,195)

Other1
£m
–
6
–
6
–
6

Total
£m
1,139
8,741
(28,638)
(18,758)
(516)
(19,274)

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)

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 2017/18 (2016: 2016/17) 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 2017 and 2016, 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
1,110
6,824
(11,099)
(3,165)
2,310
(855)

Euro
£m
–
98
(5,373)
(5,275)
6,241
966

2017

Dollar
£m
29
1,753
(10,729)
(8,947)
(10,708)
(19,655)

Other
£m
–
66
(1,437)
(1,371)
1,641
270

Total
£m
1,139
8,741
(28,638)
(18,758)
(516)
(19,274)

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)

The exposure to dollars largely relates to our net investment hedge activities; exposure to euros largely relates to hedges for our future
non-sterling capital expenditure as described in note 16.

The currency exposure on other financial instruments is as follows:

Trade and other receivables
Trade and other payables
Other non-current assets

Sterling
£m
83
(1,209)
(100)

Euro
£m
–
–
–

2017

Dollar
£m
1,660
(1,795)
(315)

Other
£m
–
–
–

Total
£m
1,743
(3,004)
(415)

Sterling
£m
220
(1,380)
(17)

2016

Dollar
£m
1,236
(1,471)
(252)

Euro
£m
8
–
–

Other
£m
–
–
–

Total
£m
1,464
(2,851)
(269)

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.

149

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial StatementsNotes to the consolidated financial statements
– supplementary information continued

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 until they are realised. Disclosure of commitments under such contracts is made in note 28.

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:

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:

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

Assets
£m

2017
Liabilities
£m

Total
£m

Assets
£m

2016
Liabilities
£m

–
82

2
11
–
11
106

(10)
(97)

–
(61)
–
(2)
(170)

(10)
(15)

2
(50)
–
9
(64)

–
25

2
2
–
3
32

(26)
(27)

–
(69)
(1)
(12)
(135)

Assets
£m

2017
Liabilities
£m

Total
£m

Assets
£m

2016
Liabilities
£m

54
54

8
7
6
6
25
52
106

(93)
(93)

(36)
(9)
(7)
(5)
(20)
(77)
(170)

(39)
(39)

(28)
(2)
(1)
1
5
(25)
(64)

22
22

8
1
–
–
1
10
32

(96)
(96)

(30)
(9)
–
–
–
(39)
(135)

Total
£m

(26)
(2)

2
(67)
(1)
(9)
(103)

Total
£m

(74)
(74)

(22)
(8)
–
–
1
(29)
(103)

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 six years. The contractual obligations under these contracts are £15 million (2016: £40 million).
2. Forward gas purchases have terms up to four years. The contractual obligations under these contracts are £131 million (2016: £20 million).
3. NYMEX gas futures have been offset with related margin accounts (see note 30(a)).

2017
159 GWh
54m Dth
12,776 GWh
17,793 GWh
1 kWm
83m Dth
9m Dth
3m Dth

2016
481 GWh
44m Dth
11,786 GWh
22,375 GWh
1 kWm
76m Dth
16m Dth
14m Dth

150

National Grid Annual Report and Accounts 2016/17

Financial Statements

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 27). 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 22, 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 2017 was 5.0 (2016: 5.5). 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 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 2017 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
Included in the statement of financial position are financial instruments which have been 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
Investments – available-for-sale
Investments – joint ventures and associates
Derivative financial instruments
Commodity contracts

Liabilities
Derivative financial instruments
Commodity contracts

2017

Level 1
£m

Level 2
£m

Level 3
£m

7,717
–
–
–
7,717

–
–
–
7,717

315
–
1,692
22
2,029

(1,743)
(70)
(1,813)
216

5
41
15
84
145

(480)
(100)
(580)
(435)

Total
£m

8,037
41
1,707
106
9,891

(2,223)
(170)
(2,393)
7,498

Level 1
£m

2,040
–
–
–
2,040

–
–
–
2,040

2016

Level 2
£m

393
–
1,945
5
2,343

(1,855)
(81)
(1,936)
407

Level 3
£m

–
–
18
27
45

(214)
(54)
(268)
(223)

Total
£m

2,433
–
1,963
32
4,428

(2,069)
(135)
(2,204)
2,224

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.

151

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial StatementsNotes to the consolidated financial statements
– supplementary information continued

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 an external valuation is obtained to support each reported fair value. We have reclassified
sterling RPI swaps from level 2 into level 3 due to the long-dated and increased illiquid nature of these instruments, which has been driven
by the lack of market participants for trades with this particular risk profile.

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.

During the year to 31 March 2017, the Group made level 3 investments worth £46 million, consisting of a £41 million joint venture arrangement
with Sunrun Neptune Investor 2016 LLC, accounted at fair value (note 15), and £5 million Series B preferred stocks in Enbala Holdings, Inc.,
accounted as available-for-sale. The Group is also party to the Further Acquisition Agreement which contains put/call options over 14%
of the loan and equity it holds in Quadgas HoldCo Limited. The fair value of the options is considered to be zero at year end (notes 9 and 15).

The changes in value of our level 3 derivative financial instruments are as follows:

At 1 April
Net losses for the year1,2
Purchases3
Settlements
Reclassification into level 34
At 31 March

Derivative financial instruments
2016
£m
(166)
(20)
1
(11)
–
(196)

2017
£m
(196)
(35)
–
–
(234)
(465)

Commodity contracts

2017
£m
(27)
(2)
15
(2)
–
(16)

2016
£m
(42)
(27)
13
29
–
(27)

Investments
2017
£m
–
–
46
–
–
46

2016
£m
–
–
–
–
–
–

Total

2017
£m
(223)
(37)
61
(2)
(234)
(435)

2016
£m
(208)
(47)
14
18
–
(223)

1. Loss of £35 million (2016: £17 million 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 £21 million (2016: £28 million loss) is attributable to commodity contract financial instruments held at the end of the reporting period.
3. Purchases in the year relating to investments consist of £41 million in joint ventures and associates (Sunrun Neptune Investor 2016 LLC) and £5 million attributable to an available-for-sale

investment in Enbala Holdings, Inc.

4. Sterling RPI swaps reclassified from level 2 into level 3.

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 points change in Limited Price Inflation (LPI) market curve3
–20 basis points change in LPI market curve3
+50 basis points change in interest rates4
–50 basis points change in interest rates4

Derivative financial instruments
2016
Income
statement
£m
–
–
–
–
–
–
(83)
80
–
–

2017
Income
statement
£m
–
–
–
–
–
–
(93)
88
–
–

Commodity contracts

2017
Income
statement
£m
1
–
(1)
1
(13)
9
–
–
–
–

2016
Income
statement
£m
4
–
(1)
1
(2)
2
–
–
–
–

Investments
2017
Income
statement
£m
–
–
–
–
–
–
–
–
8
(8)

2016
Income
statement
£m
–
–
–
–
–
–
–
–
–
–

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.
4. The risk free rate and cost of debt were flexed in assessing the cost of carry for the Further Acquisition Agreement valuation sensitivity.

The impacts disclosed above were considered on a contract by contract basis with the most significant unobservable inputs identified.
The level 3 investments were acquired in a recent period on market terms and sensitivity is considered insignificant at 31 March 2017.

152

National Grid Annual Report and Accounts 2016/17

Financial Statements

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 2017, we had bilateral committed credit facilities of £4,938 million (2016: £2,808 million). In addition, we had committed credit
facilities from syndicates of banks of £338 million at 31 March 2017 (2016: £295 million). All committed credit facilities were undrawn in 2017
and 2016. 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

2017
£m

–
1,115
2,388
–
1,773
–
5,276

2016
£m

–
–
1,115
295
–
1,693
3,103

Of the unused facilities at 31 March 2017, £4,938 million (2016: £2,808 million) was held as backup to commercial paper and similar
borrowings, while £338 million (2016: £295 million) is available as backup to specific US borrowings.

In addition to the above, the Group has Export Credit Agreements (ECAs) totalling £600 million, of which £562 million is undrawn.

Further information on our bonds can be found on the debt investor section of our website.

153

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial StatementsNotes to the consolidated financial statements
– supplementary information continued

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 2017 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 within the 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
Registered office: 1–3 Strand, London WC2N 5EH, UK (unless stated otherwise in footnotes).

Beegas Nominees Limited
Birch Sites Limited
Carbon Sentinel Limited
Droylsden Metering Services Limited
Gridcom Limited
Icelink Interconnector Limited
Landranch Limited
Lattice Group Employee Benefit Trust Limited
Lattice Group Limited
Lattice Group Trustees Limited
Natgrid Limited
NatGrid One Limited
NatgridTW1 Limited
National Grid Belgium Limited
National Grid Blue Power Limited
National Grid Carbon Limited
National Grid Commercial Holdings Limited
National Grid Distributed Energy Limited
National Grid Electricity Group Trustee Limited
National Grid Electricity Transmission plc
National Grid Energy Metering Limited
National Grid Four Limited
National Grid Fourteen Limited
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 Metering Limited
National Grid North Sea Link Limited
National Grid Offshore Limited (previously Cadent Services Limited)*
National Grid Property Holdings Limited

1. Registered office: 15 Canada Square, London E14 5GL, UK
* Change of name effective from 2 May 2017
** In liquidation

National Grid Property (Northfleet) Limited1**
National Grid Seventeen Limited
National Grid Smart Limited
National Grid Ten
National Grid Thirty Five Limited
National Grid Thirty Four Limited (previously Cadent Gas Limited)*
National Grid Thirty Six Limited (previously Cadent Finance Limited)*
National Grid Twelve Limited
National Grid Twenty Eight Limited
National Grid Twenty-Five Limited
National Grid Twenty Seven Limited
National Grid Twenty Three Limited
National Grid UK Limited
National Grid UK Pension Services 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 Ventures Limited
National Grid Viking Link Limited
National Grid William Limited
NG Nominees Limited
NGC Employee Shares Trustee Limited
NGG Finance plc
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
Thamesport Interchange Limited
The National Grid Group Quest Trustee Company Limited
The National Grid YouPlan Trustee Limited
Transco Limited

154

National Grid Annual Report and Accounts 2016/17

Financial Statements

32. Subsidiary undertakings, joint ventures and associates continued

Incorporated in the US
Registered office: Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, DE 19808, New Castle County, USA
(unless stated otherwise in footnotes).

Boston Gas Company (including Essex Gas Company)1
British Transco Capital Inc.
British Transco Finance, Inc.
Broken Bridge Corp.2
Colonial Gas Company1
EUA Energy Investment Corporation1
GridAmerica Holdings Inc.
Grid NY LLC3
KeySpan CI Midstream Limited
KeySpan Corporation3
KeySpan Energy Corporation3
KeySpan Energy Services Inc.
KeySpan Gas East Corporation3
KeySpan International Corporation
KeySpan MHK, Inc.
KeySpan Midstream Inc.
KeySpan Plumbing Solutions, Inc.3
KSI Contracting, LLC
KSI Electrical, LLC
KSI Mechanical, LLC
Land Management & Development, Inc.3
Landwest, Inc.3
Massachusetts Electric Company1
Metro Energy, LLC3
Metrowest Realty LLC
Mystic Steamship Corporation
Nantucket Electric Company1
National Grid Algonquin LLC
National Grid Connect Inc.1
National Grid Development Holdings Corp.
National Grid Electric Services, LLC3
National Grid Energy Management, LLC
National Grid Energy Services LLC
National Grid Energy Trading Services LLC3
National Grid Engineering & Survey Inc.3
National Grid Generation LLC3
National Grid Generation Ventures LLC3
National Grid Glenwood Energy Center, LLC
National Grid Green Homes Inc.3
National Grid IGTS Corp.3
National Grid Insurance USA Ltd3

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 LLC1
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.3
National Grid Transmission Services Corporation1
National Grid US 6 LLC
National Grid US LLC
National Grid USA
National Grid USA Service Company, Inc.1
Nees Energy, Inc.1
New England Electric Transmission Corporation2
New England Energy Incorporated1
New England Hydro Finance Company, Inc. (53.704%)1
New England Hydro-Transmission Corporation (53.704%)2
New England Hydro-Transmission Electric Company Inc. (53.704%)1
New England Power Company1
Newport America Corporation4
NGNE LLC
Niagara Mohawk Energy, Inc.
Niagara Mohawk Holdings, Inc.3
Niagara Mohawk Power Corporation3
NM Properties, Inc.3
North East Transmission Co., Inc.
Opinac North America, Inc.
Philadelphia Coke Co., Inc.
Port of the Islands North, LLC3
The Brooklyn Union Gas Company3
The Narragansett Electric Company4
Transgas, Inc.1
Upper Hudson Development Inc.3
Valley Appliance and Merchandising Company4
Vermont Green Line Devco, LLC (90%)
Wayfinder Group, Inc.1

Incorporated in Australia
National Grid Australia Pty Limited
Registered office: Level 7, 330 Collins Street, Melbourne VIC 3000, Australia

Incorporated in Jersey
Registered office: 44 Esplanade, St Helier, Jersey JE4 9WG, UK (unless stated
otherwise in footnotes).

Incorporated in Canada
Keyspan Energy Development Co.
Registered office: 1959 Upper Water St, Ste 800, Halifax NS, Canada B3J 2X2

Incorporated in the Cayman Islands
Registered office: c/o KPMG, PO Box 493, 2nd Floor, Century Yard,
Cricket Square, Grand Cayman KY1-1106, Cayman Islands (unless
stated otherwise in footnotes).

British Transco Finance (No 1) Limited*
British Transco Finance (No 2) Limited*

Incorporated in the Isle of Man
Registered office: Third Floor, St George’s Court, Upper Church Street,
Douglas, IM1 1EE, Isle of Man, UK (unless stated otherwise in footnotes).

Lattice Telecom Finance (No 1) Limited5*
National Grid Insurance Company (Isle of Man) Limited
NGT Holding Company (Isle of Man) Limited

National Grid Jersey Investments Limited
NG Jersey Limited

Incorporated in the Netherlands
British Transco International Finance B.V.
Registered office: Westblaak 89, 3012 KG Rotterdam, P.O. Box 21153, 3001 AD,
Rotterdam, Netherlands

National Grid Holdings B.V.
Registered office: Prins Bernhardplein 200, Amsterdam, 1097 JB, Netherlands

Incorporated in the Republic of Ireland
National Grid Insurance Company (Ireland) Designated Activity Company
Registered office: Third Floor, The Metropolitan Building, James Joyce Street,
Dublin 1, Ireland

1. Registered office: Corporation Service Company, 84 State Street, Boston MA 02109, Suffolk County, USA
2. Registered office: Corporation Service Company, 10 Ferry Street, Suite 313, Concord NH 03301, Merrimack County, USA
3. Registered office: Corporation Service Company, 80 State Street, Albany NY 12207-2543, Albany County, USA
4. Registered office: Corporation Service Company, 222 Jefferson Boulevard, Suite 200, Warwick RI 02888, Kent County, USA
5. Registered office: Heritage Court, 41 Athol Street, Douglas, IM99 1HN, Isle of Man, UK
*

In liquidation

155

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial StatementsNotes to the consolidated financial statements
– supplementary information continued

32. Subsidiary undertakings, joint ventures and associates continued

Joint ventures
A list of the Group’s joint ventures as at
31 March 2017 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.

Associates
A list of the Group’s associates as at
31 March 2017 is given below. All
associates are included in the Group’s
financial statements using the equity
method of accounting. Principal associates
are identified in bold.

Other investments
A list of the Group’s other investments
as at 31 March 2017 is given below.

Incorporated in England and Wales
Energis PLC (33.06%)‡
Registered office: 1 More London Place,
London SE1 2AF, UK

Incorporated in England and Wales
Registered office: 1–3 Strand, London WC2N 5EH,
UK (unless stated otherwise in footnotes).

BritNed Development Limited (50%)*
Joint Radio Company Limited (50%)1**
Nemo Link Limited (50%)
NGET/SPT Upgrades Limited (50%)†
St William Homes LLP (50%)2

Incorporated in the US
Registered office: Corporation Service Company,
2711 Centerville Road, Suite 400, Wilmington,
DE 19808, New Castle County, USA (unless
stated otherwise in footnotes).

Clean Energy Generation, LLC (50%)
East Hampton Energy Storage Center, LLC (50%)
Island Park Energy Center, LLC (50%)
Islander East Pipeline Company, LLC (50%)
LI Energy Storage System, LLC (50%)
LI Solar Generation, LLC (50%)
Montauk Energy Storage Center, LLC (50%)
Swan Lake North Holdings LLC (50%)

Incorporated in England and Wales
Quadgas HoldCo Limited (39%)
Registered office: Ashbrook Court, Prologis Park,
Central Boulevard, Coventry CV7 8PE, UK

Incorporated in the US
Registered office: Corporation Service Company,
2711 Centerville Road, Suite 400, Wilmington,
DE 19808, New Castle County, USA (unless
stated otherwise in footnotes).

Algonquin Gas Transmission, LLC (20%)3
Clean Line Energy Partners LLC (32%)
Connecticut Yankee Atomic Power Company (19.5%)4
Direct Global Power, Inc. (26%)5
Energy Impact Fund LP (33%)6
Maine Yankee Atomic Power Company (24%)7
Millennium Pipeline Company, LLC (26.25%)
New York Transco LLC (28.3%)5
Nysearch RMLD, LLC (22.63%)
Sunrun Neptune Investor 2016 LLC8***
Yankee Atomic Electric Company (34.5%)9

Incorporated in France
IFA2 SAS (50%)
Registered office: 1 Terrasse Bellini, Tour Initiale,
TSA 41000 – 9291, Paris La Defense, CEDEX, France

Incorporated in Belgium
Coreso SA (16.67%)
Registered office: Avenue de Cortenbergh 71,
1000 Brussels, Belgium

1. Registered office: Dean Bradley House, 52 Horseferry Road, London SW1P 2AF, UK
2. Registered office: Berkeley House, 19 Portsmouth Road, Cobham, Surrey, KT11 1JG, UK
3. Registered office: Corporation Trust Company, 1209 Orange, Wilmington DE 19808, New Castle County, USA
4. Registered office: Robert K. Darden, Main Street, Salisbury CT 06068, USA
5. Registered office: Corporation Service Company, 80 State Street, Albany NY 12207-2543, Albany County, USA
6. Registered office: Harvard Business Services, Inc., 16192 Coastal Highway, Lewes DE 19958, Sussex County, USA
7. Registered office: R. Scott Mahoney, 83 Edison Drive, Augusta ME 04336, USA
8. Registered office: 595 Market Street, 29th Floor, San Francisco, CA 94105, USA
9. Registered office: Corporation Service Company, 84 State Street, Boston MA 02109, Suffolk County, USA

* National Grid Interconnector Holdings Limited owns 284,500,000 €0.20 C Ordinary shares and one £1.00 Ordinary A share
** National Grid Gas plc owns all £1.00 A Ordinary shares
*** National Grid Green Homes Inc owns 1,000 Class A Membership Interests
† National Grid Electricity Transmission plc owns 50 £1.00 A Ordinary shares
‡

In administration

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.

156

National Grid Annual Report and Accounts 2016/17

Financial Statements

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 2017 would result in an increase in the
income statement of £58 million 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

2017

Income
statement
£m

70
18

Net
assets
£m

70
18

Estimated future cash flows in respect of provisions, change of 10% (pre-tax)

259

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

(52)
(6)

9
17
8
2
3
2
4
37

58
(862)

28
(29)

1,305
669
1,114
80
51
673
365
510

58
158

28
(29)

2016

Income
statement
£m

Net
assets
£m

79
20

172

(11)
(10)

11
16
9
2
3
2
3
35

58
(123)

22
(22)

79
20

172

(11)
(10)

1,482
640
1,268
87
45
703
295
514

58
36

22
(22)

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.

157

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial StatementsNotes to the consolidated financial statements
– supplementary information continued

33. Sensitivities on areas of estimation and uncertainty continued

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

2017

2016

Income
statement
£m

Other equity
reserves
£m

Income
statement
£m

Other equity
reserves
£m

28
64
61
46

–
35
22
604

31
76
66
57

–
85
17
553

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 £988 million (2016: £788 million)

in the opposite direction if the dollar exchange rate changed by 10%.

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 2017. 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 for continuing operations:

•

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 2017 and 2016
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.

158

National Grid Annual Report and Accounts 2016/17

Financial Statements

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 disclosures in these financial statements.

Summary statements of comprehensive income are presented, on a consolidated basis, for the three years ended 31 March 2017. 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.

159

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial 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 2017 – IFRS

Continuing operations
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 after tax from discontinued operations
Profit for the year
Amounts recognised in other comprehensive income

from continuing operations2

Amounts recognised in other comprehensive income

from discontinued operations2

Total comprehensive income for the year
Attributable to:

Equity shareholders
Non-controlling interests

Parent
guarantor

National
Grid plc
£m

Issuer of notes

Niagara
Mohawk
Power
Corporation
£m

British
Transco
Finance Inc.
£m

Subsidiary
guarantor

National
Grid Gas
plc
£m

Other
subsidiaries
£m

Consolidation
adjustments
£m

National
Grid
consolidated
£m

–

2,388

–
–
–
–
–
–
–
–
–
–
8,177
–
(401)
7,776
19
–
7,795

578

42
8,415

8,415
–
8,415

(193)
(326)
(511)
(140)
(188)
–
–
(435)
(1,793)
595
(101)
–
–
494
(181)
–
313

–

–
313

313
–
313

–

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–1

–

–
–

–
–
–

1,376

11,435

(164)

15,035

(256)
(114)
–
(67)
(101)
–
–
(394)
(932)
444
(253)
–
–
191
16
4,633
4,840

(1,032)
(1,138)
(678)
(1,056)
(753)
(1,120)
(1,008)
(2,481)
(9,266)
2,169
(8,910)
8,100
63
1,422
(228)
1,351
2,545

–
–
–
–
–
–
–
164
164
–
–
(8,100)
401
(7,699)
–
–
(7,699)

(1,481)
(1,578)
(1,189)
(1,263)
(1,042)
(1,120)
(1,008)
(3,146)
(11,827)
3,208
(1,087)
–
63
2,184
(374)
5,984
7,794

114

177

(291)

578

51
5,005

5,005
–
5,005

(62)
2,660

2,661
(1)
2,660

11
(7,979)

(7,979)
–
(7,979)

42
8,414

8,415
(1)
8,414

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.

160

National Grid Annual Report and Accounts 2016/17

Financial Statements

34. Additional disclosures in respect of guaranteed securities continued

Summary statements of comprehensive income for the year ended 31 March 2016 – IFRS

Continuing operations
Revenue
Operating costs:

from continuing operations3

Amounts recognised in other comprehensive income

from discontinued operations3

Total comprehensive income for the year
Attributable to:

Equity shareholders
Non-controlling interests

Parent
guarantor

National
Grid plc
£m

Issuer of notes

Niagara
Mohawk
Power
Corporation
£m

British
Transco
Finance Inc.
£m

Subsidiary
guarantor

National
Grid Gas
plc
Re-presented1
£m

Other
subsidiaries
Re-presented1
£m

Consolidation
adjustments1
£m

National
Grid
consolidated
£m

–

2,027

–
–
–
–
–
–
–
–
–
–
701
–
1,843
2,544
47
–
2,591

502

71
3,164

3,164
–
3,164

(162)
(260)
(484)
(86)
(155)
–
–
(433)
(1,580)
447
(87)
–
–
360
(141)
–
219

(1)

–
218

218
–
218

–

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–2

–

–
–

–
–
–

1,244

10,069

(128)

13,212

(255)
(115)
–
(75)
(101)
–
–
(173)
(719)
525
(132)
–
33
426
(56)
735
1,105

(894)
(962)
(828)
(806)
(643)
(907)
(971)
(1,805)
(7,816)
2,253
(1,437)
620
59
1,495
(277)
(43)
1,175

–
–
–
–
–
–
–
128
128
–
–
(620)
(1,876)
(2,496)
–
–
(2,496)

(1,311)
(1,337)
(1,312)
(967)
(899)
(907)
(971)
(2,283)
(9,987)
3,225
(955)
–
59
2,329
(427)
692
2,594

426

(433)

502

(13)
1,100

1,100
–
1,100

153
1,754

1,751
3
1,754

(140)
(3,069)

(3,069)
–
(3,069)

71
3,167

3,164
3
3,167

1. Amounts have been re-presented to reflect the classification of the UK Gas Distribution business as a discontinued operation.
2. 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.
3. Includes other comprehensive income relating to interest in equity accounted affiliates.

161

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial 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 2015 – IFRS

Continuing operations
Revenue
Operating costs:

Total operating profit
Net finance costs
Dividends receivable
Interest in equity accounted affiliates
Profit before tax
Tax
Profit after tax from discontinued operations
Profit for the year
Amounts recognised in other comprehensive income

from continuing operations3

Amounts recognised in other comprehensive income

from discontinued operations3

Total comprehensive income for the year
Attributable to:

Equity shareholders
Non-controlling interests

Parent
guarantor

National
Grid plc
£m

Issuer of notes

Niagara
Mohawk
Power
Corporation
£m

British
Transco
Finance Inc.
£m

Subsidiary
guarantor

National
Grid Gas
plc
Re-presented1
£m

Other
subsidiaries
Re-presented1
£m

Consolidation
adjustments1
£m

National
Grid
consolidated
£m

–

2,109

–
–
–
–
–
–
–
–
–
–
(223)
–
2,192
1,969
50
–
2,019

(327)

(68)
1,624

1,624
–
1,624

(146)
(256)
(604)
(147)
(146)
–
–
(501)
(1,800)
309
(76)
–
–
233
(98)
–
135

–
136

136
–
136

–

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–2

–

–
–

–
–
–

1,270

10,097

(119)

13,357

(254)
(101)
–
(74)
(99)
–
–
(254)
(782)
488
(246)
–
8
250
(65)
584
769

(790)
(935)
(1,081)
(1,171)
(611)
(874)
(801)
(1,680)
(7,943)
2,154
(492)
700
46
2,408
(354)
(66)
1,988

–
–
–
–
–
–
–
119
119
–
–
(700)
(2,200)
(2,900)
–
–
(2,900)

(1,190)
(1,292)
(1,685)
(1,392)
(856)
(874)
(801)
(2,316)
(10,406)
2,951
(1,037)
–
46
1,960
(467)
518
2,011

(4)

(497)

501

(326)

26
791

791
–
791

81
1,572

1,579
(7)
1,572

(107)
(2,506)

(2,506)
–
(2,506)

(68)
1,617

1,624
(7)
1,617

162

National Grid Annual Report and Accounts 2016/17

Financial Statements

34. Additional disclosures in respect of guaranteed securities continued

Statements of financial position as at 31 March 2017 – IFRS

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

Parent
guarantor

National
Grid plc
£m

–
–
–
–
342
–
17,689
149
18,180

–
–
12,734
5,471
202
1,090
19,497
37,677

(1,120)
(533)
(46)
(12,012)
(3)
–
(13,714)

(1,262)
(272)
–
(2,058)
(3)
–
–
(3,595)
(17,309)
20,368

449
1,324
22,582
(3,987)
20,368

–
20,368

Issuer of notes

Niagara
Mohawk
Power
Corporation
£m

British
Transco
Finance Inc.
£m

Subsidiary
guarantor

National
Grid Gas
plc
£m

Other
subsidiaries
£m

Consolidation
adjustments
£m

National
Grid
consolidated
£m

763
–
6,553
7
–
223
31
–
7,577

38
507
505
29
–
4
1,083
8,660

(55)
–
(353)
–
(156)
–
(564)

(2,345)
–
(350)
–
(1,178)
(889)
(298)
(5,060)
(5,624)
3,036

149
2,431
456
–
3,036

–
3,036

–
–
–
–
239
–
–
–
239

–
–
6
–
–
–
6
245

(5)
–
–
–
–
–
(5)

(239)
–
–
–
–
–
–
(239)
(244)
1

–
–
1
–
1

–
1

–
125
4,358
9
3,426
45
95
813
8,871

20
360
1,965
1,835
51
(9)
4,222
13,093

(833)
(185)
(342)
(2,151)
(9)
(184)
(3,704)

(3,879)
(234)
(204)
(756)
(369)
–
(104)
(5,546)
(9,250)
3,843

45
204
2,268
1,326
3,843

–
3,843

5,333
798
28,914
105
2,576
335
12,429
553
51,043

345
2,232
12,083
1,406
133
54
16,253
67,296

(3,483)
(530)
(2,697)
(13,130)
61
(232)
(20,011)

(15,417)
(663)
(893)
(3,769)
(2,929)
(1,647)
(1,770)
(27,088)
(47,099)
20,197

182
8,033
11,914
52
20,181

16
20,197

–
–
–
–
(6,583)
–
(27,061)
–
(33,644)

–
–
(27,293)
–
(194)
–
(27,487)
(61,131)

–
194
–
27,293
–
–
27,487

–
–
–
6,583
–
–
–
6,583
34,070
(27,061)

(376)
(10,668)
(14,639)
(1,378)
(27,061)

–
(27,061)

6,096
923
39,825
121
–
603
3,183
1,515
52,266

403
3,099
–
8,741
192
1,139
13,574
65,840

(5,496)
(1,054)
(3,438)
–
(107)
(416)
(10,511)

(23,142)
(1,169)
(1,447)
–
(4,479)
(2,536)
(2,172)
(34,945)
(45,456)
20,384

449
1,324
22,582
(3,987)
20,368

16
20,384

163

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial 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 2016 – IFRS

Non-controlling interests
Total equity

Parent
guarantor

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

Issuer of notes

Niagara
Mohawk
Power
Corporation
£m

British
Transco
Finance Inc.
£m

Subsidiary
guarantor

National
Grid Gas
plc
£m

Other
subsidiaries
£m

Consolidation
adjustments
£m

National
Grid
consolidated
£m

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

164

National Grid Annual Report and Accounts 2016/17

Financial Statements

34. Additional disclosures in respect of guaranteed securities continued

Cash flow statements

Parent
guarantor

National
Grid plc
£m

Issuer of notes

Niagara
Mohawk
Power
Corporation
£m

British
Transco
Finance Inc.
£m

Subsidiary
guarantor

National
Grid Gas
plc
£m

Other
subsidiaries
£m

Consolidation
adjustments
£m

National
Grid
consolidated
£m

Year ended 31 March 2017
Net cash flow from operating activities – continuing operations
Net cash flow from operating activities – discontinued operations
Net cash flow from/(used in) investing activities – continuing operations
Net cash flow from/(used in) investing activities – discontinued operations
Net cash flow (used in)/from financing activities – continuing operations
Net cash flow (used in)/from financing activities – discontinued operations
Net increase/(decrease) in cash and cash equivalents in the year
Year ended 31 March 2016
Net cash flow from operating activities – continuing operations
Net cash flow from operating activities – discontinued operations
Net cash flow from/(used in) investing activities – continuing operations
Net cash flow from/(used in) investing activities – discontinued operations
Net cash flow (used in)/from financing activities – continuing operations
Net cash flow (used in)/from financing activities – discontinued operations
Net increase/(decrease) in cash and cash equivalents in the year
Year ended 31 March 2015
Net cash flow from operating activities – continuing operations
Net cash flow from operating activities – discontinued operations
Net cash flow from/(used in) investing activities – continuing operations
Net cash flow from/(used in) investing activities – discontinued operations
Net cash flow (used in)/from financing activities – continuing operations
Net cash flow (used in)/from financing activities – discontinued operations
Net (decrease)/increase in cash and cash equivalents in the year

53
–
4,181
–
(3,146)
–
1,088

57
–
502
–
(555)
–
4

38
–
2,103
–
(2,169)
–
(28)

757
–
(469)
–
(288)
–
–

580
–
(440)
–
(148)
–
(8)

531
–
(393)
–
(145)
–
(7)

–
–
15
–
(15)
–
–

–
–
13
–
(13)
–
–

–
–
–
–
–
–
–

918
450
215
5,618
(8,322)
1,120
(1)

599
1,144
56
(562)
(1,185)
(63)
(11)

489
1,086
(130)
(473)
(889)
(70)
13

2,592
459
(1,118)
(6,298)
3,771
491
(103)

3,056
(68)
(1,721)
(15)
(1,173)
(60)
19

2,963
(100)
(990)
(61)
(1,981)
(56)
(225)

–
–
(6,458)
–
6,458
–
–

–
–
(1,869)
–
1,869
–
–

–
–
(2,057)
–
2,057
–
–

4,320
909
(3,634)
(680)
(1,542)
1,611
984

4,292
1,076
(3,459)
(577)
(1,205)
(123)
4

4,021
986
(1,467)
(534)
(3,127)
(126)
(247)

Cash dividends were received by National Grid plc from subsidiary undertakings amounting to £6,006 million during the year ended 31 March
2017 (2016: £930 million; 2015: £1,355 million).

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

2017
£m

1,120
515
425
–
322
–
2,382

2016
£m

933
–
482
395
–
317
2,127

165

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial 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 company, limited by shares. The Company is
incorporated and domiciled in England, with its registered office
at 1–3 Strand, London, WC2N 5EH.

The financial statements of National Grid plc for the year ended
31 March 2017 were approved by the Board of Directors on
17 May 2017. 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 have been 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 of the Company have been
prepared in accordance with applicable UK accounting and financial
reporting standards and the Companies Act 2006. They have been
prepared on an historical cost basis, except for the revaluation of
financial instruments, and are presented in pounds sterling, which
is the currency of the primary economic environment in which the
Company operates. The 2016 comparative financial information
has also been prepared on this basis.

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 profit and loss account
or statement of comprehensive income as permitted by section 408
of the Companies Act 2006.

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;

• disclosures in respect of capital management; 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 2018.

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.

166

National Grid Annual Report and Accounts 2016/17

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 14, 16, 18, 19, 20 and 21 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 16 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
54 to 71.

167

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial StatementsCompany balance sheet
as at 31 March

Fixed assets
Investments

Current assets
Debtors (amounts falling due within one year)
Debtors (amounts falling due after more than one year)
Investments
Cash at bank and in hand
Total current assets

Creditors (amounts falling due within one year)
Net current assets/(liabilities)
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
Other equity reserves
Profit and loss account
Total shareholders’ equity

Notes

2017
£m

2016
£m

2
2
5

8,880

8,845

12,936
491
5,471
1,090
19,988

(13,714)
6,274
15,154

(3,595)
11,559

449
1,324
11
337
9,438
11,559

11,796
475
1,244
1
13,516

(13,851)
(335)
8,510

(3,538)
4,972

447
1,326
17
302
2,880
4,972

The Company’s profit after tax for the year was £8,197 million (2015/16: £748 million). The financial statements of the Company on pages 168
to 171 were approved by the Board of Directors on 17 May 2017 and were signed on its behalf by:

Sir Peter Gershon Chairman
Andrew Bonfield Finance Director

National Grid plc
Registered number: 4031152

168

National Grid Annual Report and Accounts 2016/17

Financial Statements

Company statement of changes in equity
for the years ended 31 March

At 1 April 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

At 31 March 2016
Profit for the year
Other comprehensive loss for the year

Transferred from equity in respect of cash flow hedges (net of tax)

Total comprehensive (loss)/income 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

At 31 March 2017

1. Included within share premium account are costs associated with scrip dividends.

Share
premium
account
£m
1,331
–

Cash flow
hedge
reserve
£m
17
–

Other
equity
reserves
£m
280
–

Profit
and loss
account
£m
3,726
748

Total
shareholders’
equity
£m
5,797
748

Share
capital
£m
443
–

4
–
–
–
–
–
447
–

–
–

2
–
–
–
–
–

(5)
–
–
–
–
–
1,326
–

–
–

(2)
–
–
–
–
–

–
–
–
–
–
–
17
–

(6)
(6)

–
–
–
–
–
–

–
–
–
–
22
–
302
–

–
–

–
–
–
–
35
–

449

1,324

337

–
(267)
16
(6)
–
(1,337)
2,880
8,197

–
8,197

–
(189)
18
(5)
–
(1,463)

9,438

(1)
(267)
16
(6)
22
(1,337)
4,972
8,197

(6)
8,191

–
(189)
18
(5)
35
(1,463)

11,559

169

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial StatementsNotes to the Company financial statements

1. Fixed asset investments

At 1 April 2015
Additions
At 31 March 2016
Additions
At 31 March 2017

Shares in
subsidiary
undertakings
£m
8,823
22
8,845
35
8,880

During the year there was a capital contribution of £35 million (2016: £22 million) which represents the fair value of equity instruments granted
to subsidiaries’ employees arising from equity-settled employee share schemes.

The Company’s direct subsidiary undertakings as at 31 March 2017 were as follows:
• National Grid Holdings One plc
• National Grid (US) Holdings Limited
• NGG Finance plc.

The names of indirect 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

2017
£m

202
12,734
–
12,936

149
342
491

2016
£m

279
11,516
1
11,796

157
318
475

2017
£m

2016
£m

1,120
533
12,012
3
46
13,714

1,262
272
2,058
3
3,595

933
239
12,633
3
43
13,851

1,194
358
1,982
4
3,538

1. All amounts owed to subsidiary undertakings in 2017 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 2015
Charged to the profit and loss account
At 31 March 2016
Credited to equity
At 31 March 2017

Deferred tax
£m
3
1
4
(1)
3

170

National Grid Annual Report and Accounts 2016/17

Financial Statements

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

Assets
£m
202
149
351

2017
Liabilities
£m
(533)
(272)
(805)

Total
£m
(331)
(123)
(454)

Assets
£m
279
157
436

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
Managed investments in bonds
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
Liabilities
£m
(239)
(358)
(597)

2017
£m

(2,801)
(3,995)
(17,134)
(23,930)

2017
£m

4,981
100
390
5,471

2017
£m

1
–
22
1,097
1,120

1,262
2,382

Total
£m
40
(201)
(161)

2016
£m

(2,442)
(3,537)
(14,361)
(20,340)

2016
£m

1,007
–
237
1,244

2016
£m

–
28
21
884
933

1,194
2,127

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 2017 was £2,357 million (2016: £2,101 million). Further information on significant
borrowings can be found on the debt investors section of our website.

7. Share capital
The called-up share capital amounting to £449 million (2016: £447 million) consists of 3,942,983,447 (2016: 3,924,038,086) ordinary shares.
For further information on share capital, refer to note 25 to the consolidated financial statements.

8. Shareholders’ equity and reserves
At 31 March 2017 the profit and loss account reserve stood at £9,438 million (2016: £2,880 million) of which £86 million (2016: £86 million)
related to gains on intra-group transactions which was not distributable to shareholders. The company had no employees in either the current
or prior year and accordingly bore no employee costs.

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 2017, the sterling equivalent amounted to £2,404 million (2016: £2,674 million).
The guarantees are for varying terms from less than one year to open-ended.

In addition, as part of the sectionalisation of the National Grid UK Pension Scheme, a guarantee of £1 billion has been provided to Section A.
This payment is contingent on insolvency or on failure to pay pensions obligations to Section A and can be claimed against National Grid plc,
National Grid Holdings One plc or Lattice Group Limited (up to £1 billion in total).

10. Audit fees
The audit fee in respect of the parent Company was £29,230 (2016: £28,380). 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.

171

Financial StatementsNational Grid Annual Report and Accounts 2016/17Financial StatementsAdditional Information contents

172 The business in detail
172 Key milestones
173 Where we operate
174 UK regulation
176 US regulation

180 Internal control and risk factors
180 Disclosure controls
180 Internal control over financial reporting
180 Risk factors

184 Shareholder information
184 Articles of Association
185 Depositary payments to the Company
185 Description of securities other than equity
securities: depositary fees and charges

185 Documents on display
185 Events after the reporting period
185 Exchange controls
186 Exchange rates
186 Material interests in shares
186 Share capital
187 Share price
187 Shareholder analysis
187 Taxation

190 Other disclosures
190 All-employee share plans
190 Change of control provisions
190 Code of Ethics
190 Conflicts of interest
190 Corporate governance practices: differences
from New York Stock Exchange (NYSE)
listing standards
191 Directors’ indemnity
191 Employees
191 Human rights
191 Listing Rule 9.8.4 R cross reference table
191 Material contracts
191 Political donations and expenditure
191 Property, plant and equipment
191 Research and development
192 Unresolved SEC staff comments

193 Other unaudited financial information

200 Summary consolidated financial information

202 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
UK wireless infrastructure network acquired from
Crown Castle International Corp

2005
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

2016
National Grid separated the UK Gas Distribution business

2017
National Grid sold a 61% equity interest in its UK Gas
Distribution business

172

National Grid Annual Report and Accounts 2016/17

Additional Information

Where we operate
Our UK network

St. Fergus

Teesside

to/from
Northern Ireland

to Ballylumford

to Dublin
Barrow

to/from Ireland

Burton Point

South Hook

Dragon

Easington

Theddlethorpe

from the
Netherlands

Bacton

to/from
Belgium

BritNed to/from
the Netherlands

Grain LNG

to/from
France

Our US network

Canada

Vermont

Maine

New Hampshire

New York

Massachusetts

Connecticut

Rhode Island

Pennsylvania

New Jersey

UK Transmission1

Scottish electricity transmission system

English and Welsh electricity
transmission system

Approximately 7,200 kilometres (4,474 miles)
of overhead line, 1,500 kilometres (932 miles)
of underground cable and 342 substations.

Gas transmission system

Approximately 7,660 kilometres (4,760 miles)
of high pressure pipe and 24 compressor
stations connecting to 8 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

Following completion of the sale of a 61%
stake in the UK Gas Distribution business
on 31 March 2017, the Group has ceased
to consolidate UK Gas Distribution with effect
from this date. Accordingly, the operating area
relating to the UK Gas Distribution business
will not be included in the map in 2017/18.

Principal offices

Owned ofﬁce space:

Hinckley, Warwick and Wokingham

Leased ofﬁce space:

Solihull, Coventry and London

Leased ofﬁce space totalling 13,714 square
metres (147,616 square feet) with remaining
terms of six to nine years.

The Hinckley and Coventry ofﬁces shown
on the map relate to the UK Gas Distribution
business. Therefore these will not be included
in the map in 2017/18.

US Regulated1

Electricity transmission network

Gas distribution operating area

Electricity distribution area

Gas and electricity distribution
area overlap

An electricity transmission network of
approximately 14,219 kilometres (8,835
miles) of overhead line, 166 kilometres
(103 miles) of underground cable and
377 transmission substations.

An electricity distribution network of
approximately 116,658 circuit kilometres
(72,488 miles) and 763 distribution substations
in New England and upstate New York.

A network of approximately 56,753 kilometres
(35,265 miles) of gas pipeline serving an area
of approximately 25,625 square kilometres
(9,894 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

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.

Leased ofﬁce space totalling approximately
52,676 square metres (567,000 square feet)
with remaining terms of 8 to 12 years.

2 As submitted by the Company in its 2015/16 Gas Distribution Regulatory Reporting Pack.

The business in detail

173

National Grid Annual Report and Accounts 2016/17Additional information

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 make 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:

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
Our regulatory framework is called RIIO (revenue = incentives +
innovation + outputs) and lasts for eight years. The building blocks
of the RIIO price control are broadly similar to the historical price controls
used in the UK. However, there are some significant differences in the
mechanics of the calculations.

How is revenue calculated?
Under RIIO the outputs we deliver are clearly articulated and are integrally
linked to the calculation of our allowed revenue. These outputs have
been determined through an extensive consultation process, which has
given stakeholders a greater opportunity to influence the decisions.

• 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.

As announced on 31 March 2017, a majority interest in the UK Gas
Distribution business was sold to a consortium of investors. The
Consortium comprises Macquarie Infrastructure and Real Assets,
Allianz Capital Partners, Hermes Investment Management, CIC Capital
Corporation, Qatar Investment Authority, Dalmore Capital and Amber
Infrastructure Limited/International Public Partnerships. National Grid
has retained a 39% equity interest in the new separate Gas Distribution
business and will account for the interest as an equity investment in
an associate going forward.

The 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.

There is no impact on the price controls following the sale of a majority
interest of the UK Gas Distribution business. The eight price controls, as
mentioned above, remain in force. National Grid will carry on operating
within four of the price controls (National Grid Electricity Transmission
plc and National Grid Gas plc), and the UK Gas Distribution business
has responsibility for operating within the price controls relating to its
four gas distribution networks.

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 is 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

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.

Within each of these output categories are a number of primary and
secondary deliverables, reflecting what our stakeholders want us to
deliver over the remaining 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 price 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 was a National Grid business until 31 March 2017.

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Additional Information

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.

Allowed revenue to fund totex costs is 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:

Cost of equity (post-tax real)

Cost of debt (pre-tax real)

Notional gearing
Vanilla WACC1

Transmission

Gas Distribution2

Gas
6.8%

Electricity
7.0%

6.7%

iBoxx 10-year simple trailing average index
(2.38% for 2016/17)

62.5%
4.03%

60.0%
4.22%

65.0%
3.89%

During the eight year period of the price control our regulator included
a provision for a potential mid-period review, with scope driven by:

1. Vanilla WACC = cost of debt x gearing + cost of equity x (1-gearing).
2. This was a National Grid business until 31 March 2017.

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.

• 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.

The mid-period review focused on three specific areas, all of which relate
to National Grid’s transmission outputs (both gas and electricity).

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:

Gas Transmission

Electricity Transmission

Gas Distribution4

Transmission
Operator

System
Operator

Transmission
Operator

System
Operator

East of
England

North
West
Repex:
Stepped decline from 50% in 2013/14 to 0% in 2020/21
in seven equal instalments of 7.14% per annum

West
Midlands

London

Fast1

Slow2
Sharing

Baseline3 35.6%
Uncertainty 10% 62.60%

Baseline3 64.4%
Uncertainty 90% 37.40%

15.00%

72.10%

73.90%

73.37%

75.05%

76.53%

Repex:
Stepped increase from 50% in 2013/14 to 100% in 2020/21
in seven equal instalments of 7.14% per annum

85.00%

27.90%

26.10%

26.63%

24.95%

23.47%

44.36%

46.89%

63.04%

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.
4. This was a National Grid business until 31 March 2017.

The business in detail

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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 customers
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 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 commodity 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.

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.

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).

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

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National Grid Annual Report and Accounts 2016/17

Additional Information

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 179.

Below, we summarise significant developments in rate filings and the
regulatory environment during the year. Following the final stabilisation
upgrade to our new financial systems and the availability of 12 months
of historical ‘test year’ data from those financial systems, we concluded
a first round of full rate case filings in fiscal year 2017, with a final rate case
decision for Massachusetts Electric in September 2016, and followed by
approval of three-year rate plans for KEDNY and KEDLI in December
2016. We expect to make a number of additional such filings over the
next two years to update the capital investment allowances and rate
bases across many of our other businesses, including for upstate New
York, Rhode Island and the Massachusetts gas companies in 2017–
2018. 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.

Massachusetts
Massachusetts electric rate case
Subsequent to the Company’s November 2015 general rate case filing,
on 30 September 2016, MADPU issued a final order approving an overall
increase in distribution revenue of approximately $101 million based upon
an authorised return on equity of 9.9% and an authorised equity ratio
of 50.70%. The order also allows for amortisation and recovery over five
years of the $40.6 million of protected customer accounts receivable
outstanding for more than 360 days. Storm recovery allowed in base
rates increased from $4.3 million to $10.5 million. The order allows for
an increase in annual capital investment recovery from $170 million to
$249 million and the inclusion of property taxes related to these
incremental capital additions.

Boston and Colonial rate cases
The Company plans to file a rate case for Boston Gas and Colonial Gas
with MADPU in 2017 with new rates expected to come into effect in
2018. The Massachusetts Gas rate case, the first rate case for Boston
Gas and Colonial Gas since 2010, will update the gas companies’
allowed revenues to more closely reflect their cost of service and bring
their earned RoEs closer to the allowed RoE.

Gas system enhancement programmes
On the gas side, on 5 May 2017, MADPU approved our recovery
of approximately $50.6 million, related to $241 million of anticipated
investments in 2017 under this accelerated pipe replacement program,
through rates effective May 2016 through April 2018. However, due to
the application of the GSEP revenue cap, we are required to defer from
recovery an additional $5.5 million of the 2017 revenue requirement until
such time that we have room under the GSEP revenue cap to recover
the deferred amount or in the next rate case that covers the period
of investment.

Grid modernisation and smart energy solutions
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 $238.6
million to $792.9 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 and hearings are scheduled for May 2017.
The Company also has been operating a Smart Energy Solutions Pilot
with approximately 15,000 customers in Worcester, Massachusetts,
since 1 January 2015. The Pilot has allowed the Company to deploy,
test and learn from technologies similar to those proposed in the
grid modernisation plan, including smart meters, demand response,
an integrated communication system, and advanced distribution
automation. The Pilot was scheduled to end on 31 December 2016, but
the Company has received preliminary approval to continue operating

the Pilot, and has proposed to continue the Pilot until 31 December 2018.
This proposal is under review by MADPU.

Omnibus energy and solar legislation
In April 2016, Massachusetts solar legislation increased the amount of
solar generation that a distribution company can own from 25 MWs to 35
MWs, subject to receipt of MADPU prior approval by 31 December 2016
and provided projects are constructed prior to 31 December 2017.
MADPU approved the Company’s proposal to own an additional 14
MWs on 30 December 2016. The solar legislation also increased the
cap on net metered solar installations and allows electricity distribution
companies to submit proposals for a monthly minimum reliability
contribution to be included on electric bills for accounts that receive
net metering credits subject to MADPU review and approval. The
purpose of the monthly minimum reliability contribution is to ensure
that customers contribute to the fixed costs of ensuring the reliability,
proper maintenance and safety of the electric distribution system.

In August 2016, Massachusetts omnibus energy legislation, among other
new policies, allowed for state mandated energy storage deployment
targets (to be adopted by 1 July 2017) and established requirements
for electricity distribution companies to jointly and competitively solicit
long-term contracting proposals for clean energy generation equal to
approximately 9,450,000 MWh per year by 31 December 2022 and
proposals for offshore wind projects equal to approximately 1,600 MW
of aggregate nameplate capacity by 30 June 2027. The first solicitations
must be no later than 1 April 2017 and 30 June 2017, respectively, and
any contracts must be approved by MADPU. Electricity distributors are
entitled to cost recovery of payments under the contracts and may seek
approval for annual remuneration equal to as much as 2.75% of the
annual payments made under those contracts. The Act also directs
MADPU to open an investigation to establish specific criteria to identify
Grade 3 gas leaks on the gas distribution system that have a significant
environmental impact, to establish a plan to have gas companies repair
these leaks and to provide for recovery of leak repair expenses as part
of the gas system enhancement programmes.

New York
Upstate New York 2017 Rate Filing
On 28 April 2017, the Company filed a one-year rate plan (but submitted
two additional years of data to facilitate a multi-year settlement) for our
upstate New York electricity and gas businesses, to increase electricity
and gas delivery revenue by $326 million and $81 million, respectively,
in the 12 months ending 31 March 2019 (fiscal year 2019). Additionally,
the Company included a proposal to amortise a portion of its deferred
liabilities to offset the Company’s need for rate relief. The filing is based
on an RoE of 9.79% for the one-year rate filing, and includes annual
reconciliation mechanisms for certain non-controllable costs.

The filing, which is expected to take 11 months to review and to conclude
in March 2018, includes investments of $652 million and $171 million of
core investment in the electricity and gas businesses, respectively, in
fiscal year 2019 to modernise our infrastructure and improve safety and
reliability of our networks. New York rate cases often led to multi-year
rate plan settlements, which the Company will pursue through
negotiations in this case.

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 issued an order on 19 May 2016 addressing ratemaking and
utility revenue model policy framework issues under REV, including
ratemaking reform, earnings opportunities (platform service revenues
and earning adjustment mechanisms or EAMs), competitive market-
based earnings, customer data access, non-wires alternative solutions
to displace traditional capital investment, standby service tariff
enhancements, opt-in rate design (time-of-use rates, Smart Home rate
pilots), enhancements to large customer demand charges, scorecard
metrics, and mass market rate design. The Company’s initial Distributed

The business in detail

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National Grid Annual Report and Accounts 2016/17Additional informationThe business in detail continued

System Implementation Plan (DSIP) was filed with NYPSC on
30 June 2016 and identified incremental investments in utility
infrastructure necessary for developing DSP capabilities, market
enablement and operations, advanced metering functionality, grid
modernisation, and cyber security and privacy measures within the first
five years. The DSIP is required to be updated and filed with NYPSC
every two years. The Company rate plan filed in April 2017 incorporated
investments related to advanced metering infrastructure (AMI), grid
modernisation, cyber security, and new electricity and gas products
and services. This rate plan also includes a proposal of outcome-based
EAM to target energy and system efficiency, carbon reductions, and
customer engagement.

Clean Energy Standard (CES)
NYPSC issued an order on 1 August 2016 adopting a CES, consistent
with the State Energy Plan, that 50% of New York’s electricity is to be
generated by renewable sources by 2030 as part of a strategy to reduce
greenhouse gas emissions by 40% by 2030. In particular, the CES
established: obligations on load serving entities (LSEs) to financially
support new renewable generation resources to serve their retail
customers through Renewable Energy Credits (RECs) and to financially
support existing at-risk nuclear generators through the purchase of
zero emissions credits (ZECs). The first REC and ZEC compliance years
under the CES begin 1 January 2017 and 1 April 2017, respectively.

KEDNY and KEDLI rate cases
On 29 January 2016, KEDNY and KEDLI filed base rate cases with
NYPSC. On 16 December 2016, NYPSC issued an order adopting the
terms of a Joint Proposal, establishing a three-year rate plan negotiated
for KEDNY and KEDLI (calendar years 2017–2019). KEDNY’s revenues
under the Joint Proposal will increase by $272 million in 2017. For 2018
and 2019, incremental revenue increases will be $41 million and
$49 million, respectively. KEDLI’s revenues under the Joint Proposal
will increase by $112 million in 2017. For 2018 and 2019, incremental
revenue increases will be $20 million and $27 million, respectively. The
revenue increases are based on a RoE of 9.0% and a 48% equity ratio.
In addition to the revenue increases, the rate plans include funding for
380 new positions and maintain tracker and true-up mechanisms for
property taxes, commodity-related bad debt, and pension/OPEBs,
reconciling mechanisms for city/state construction-related costs and
Site Investigation Remediation (SIR) recovery surcharge/tracker
mechanisms, a gas safety and reliability surcharge to recover the
costs of incremental leak-prone pipe replacement and leak repairs,
and incentive opportunities.

Rhode Island
Rhode Island electricity and gas infrastructure, safety and
reliability (ISR) plans
State law provides our Rhode Island electricity and gas 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 electricity and gas
ISR plans.

RIPUC approved the fiscal year 2018 gas and electric ISR plans on
17 February 2017 and 9 March 2017, respectively. The electric ISR
plan encompasses a $100.6 million spending programme for capital
investment, $9.6 million for cost of removal, and $10.5 million for
operating and maintenance expenses for vegetation management
and inspection and maintenance. The gas ISR plan encompasses
$101.8 million for capital investment and incremental operation and
maintenance expense.

Rhode Island combined gas and electricity rate case
The Company anticipates filing a combined Rhode Island electricity and
gas rate case in late 2017/early 2018, with new rates effective in 2018.
The rate case provides an opportunity to recalibrate base rates to reflect
changes in costs since the last rate case which was effective in February
2013. Rhode Island regulation also allows for proforma and normalising
adjustments to test year data that include forecasts for costs expected
in a future rate year.

Changing distribution system and modernisation of rates
Numerous grid modernisation efforts are on-going in Rhode Island,
including Docket 4600, Systems Integration Rhode Island (SIRI) and
the Power Sector Transformation Initiative. In March 2016, RIPUC
opened Docket 4600 to explore and understand the changing
distribution system and related rate-setting processes through a
stakeholder process. National Grid has been a participant in the Docket
4600 stakeholder process which will conclude in Spring 2017 with a
set of recommendations. In December 2016, the National Governors
Association selected Rhode Island as one of four states to participate in
a 16-month collaborative effort with state agencies and key stakeholders,
including the Company, to develop a state action plan for modernising
the electric power sector and integrating clean energy. This effort,
referred to as the Power Sector Transformation Initiative, builds off of
the SIRI collaborative effort that began in 2014 and resulted in a vision
document released in January 2016.

FERC
Complaints on New England transmission allowed RoE
In September 2011, December 2012, July 2014, and April 2016, a series
of four complaints were filed with FERC against certain transmission
owners, including our New England electricity transmission business,
to lower the base RoE, which FERC had authorised at 11.14% prior to
the first complaint. FERC issued orders resolving only the first complaint,
with the last order in March 2015, lowering the base RoE to 10.57%. A
number of parties, including the Company, appealed FERC’s order on
the first complaint to US federal court. On 14 April 2017, the court
vacated FERC’s order and remanded the first complaint back to FERC,
requiring FERC to reconsider the methodology it adopted in its order. It
is too early to determine when or how FERC will decide the four pending
RoE complaints against the Company in light of the court’s decision.

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. We are currently awaiting a FERC order on our
application. The target 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 the 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.

In January and June 2016, our Massachusetts and Rhode Island
electric utilities, respectively, filed long-term contracts with the Access
Northeast gas pipeline for state regulatory approvals. The Company has
an equity stake in the pipeline. The Company subsequently withdrew
its Massachusetts filing after an August 2016 Massachusetts Supreme
Judicial Court decision that prohibited MADPU from approving such
contracts, and on 13 January 2017, the Company withdrew its
application before RIPUC for approval of a contract with the pipeline.

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Additional Information

Summary of US price controls and rate plans

4
1
0
2

5
1
0
2

6
1
0
2

7
1
0
2

8
1
0
2

9
1
0
2

New York
Public Service
Commission

Rate plan

Niagara Mohawk1, 4
(upstate, electricity)

Niagara Mohawk4
(upstate, gas)

KEDNY (downstate)2

KEDLI (downstate)3

Massachusetts
Department of
Public Utilities

Massachusetts Electric/
Nantucket Electric

Boston Gas5

Colonial Gas5

Rhode Island
Public Utilities
Commission

Narragansett Electric6

Narragansett Gas6

Federal Energy
Regulatory
Commission

Narragansett

Canadian
Interconnector

New England Power

Long Island Generation

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$4,737m 48 : 52

9.3% 8.5%

$1,052m 48 : 52

9.3% 6.6%

$2,722m 48 : 52

9.0% 8.2%

$2,256m 48 : 52

9.0% 9.5%

$2,281m 51 : 49

9.9% 4.3%

$1,830m 50 : 50 9.75% 7.7%

$421m 50 : 50 9.75% 7.4%

$665m 49 : 51

9.5% 6.2%

$640m 49 : 51

9.5% 9.4%

$697m 50 : 50 10.57% 11.4% n/a

$31m 49 : 51 13.0% 13.0% n/a

$1,543m 66 : 34 10.57% 11.1% n/a

$422m 46 : 54

9.9% 12.0% n/a

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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).
4. The chart shows the anticipated date when new rates take effect; the rate

filing may result in a multi-year rate plan settlement.

5. Boston Gas and Colonial Gas anticipate filing a rate case with the MADPU

in 2017 with new rates expected to come into effect in 2018.

6. Narragansett anticipates electric and gas rate case filings in late 2017/early 2018,

with new rates effective in 2018.

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.

The business in detail

179

National Grid Annual Report and Accounts 2016/17Additional 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 2017. 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 Guidance and Transparency Rules
sourcebook 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 2017.

PricewaterhouseCoopers LLP, which has audited our consolidated
financial statements for the year ended 31 March 2017, has also audited
the effectiveness of our internal control over financial reporting. Their
attestation report can be found on page 83.

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 15 to 18. 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.

Safety is a fundamental priority for us and 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.

180

National Grid Annual Report and Accounts 2016/17

Additional Information

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 any changes arising as a
result of the UK’s exit from the European Union), 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)

(ii)

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

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

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.

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 174 to 179, which explain our
regulatory environment in detail.

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.

If we do not meet these targets and standards, or if we are not
able to deliver 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.

Internal control and risk factors

181

National Grid Annual Report and Accounts 2016/17Additional informationInternal control and risk factors continued

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 availability

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 affected by

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.

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.

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.

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.

182

National Grid Annual Report and Accounts 2016/17

Additional Information

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, for example as a result of unexpected political or economic
events. 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 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 181.

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.

Internal control and risk factors

183

National Grid Annual Report and Accounts 2016/17Additional informationShareholder 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 36.

General
The Company is incorporated under the name National Grid plc and
is registered in England and Wales with registered number 4031152.
Under the Companies Act 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 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 per 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 pages 54 to 71).

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
at 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.

184

National Grid Annual Report and Accounts 2016/17

Additional Information

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.

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.

Under the UK Disclosure Guidance and Transparency Rules
sourcebook, there is also an obligation on a person who acquires
or ceases to have a notifiable interest in shares in National Grid to
notify the Company of that fact. The disclosure threshold is 3% and
disclosure is required each time the person’s direct and indirect
holdings reach, exceed or fall below each 1% threshold thereafter.

The UK City Code on Takeovers and Mergers imposes strict disclosure
requirements with regard to dealings in the securities of an offeror or
offeree company, and also on their respective associates, during the
course of an offer period. Other regulators in the UK, US and elsewhere
may have, or assert, notification or approval rights over acquisitions or
transfers of shares.

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 19 May 2016 to 17 May 2017, the Company received a
total of $2,126,791.80 in reimbursements from the Depositary consisting
of $1,420,248.93 and $706,542.87 received in November 2016 and
March 2017 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.

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).

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)

Registration or transfer fees

Expenses of the Depositary

Taxes and other governmental charges
the Depositary or the Custodian has to
pay on any ADS or share underlying an
ADS, for example, stock transfer taxes,
stamp duty or withholding taxes

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 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 2016/17 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 187 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).

Shareholder information

185

National Grid Annual Report and Accounts 2016/17Additional informationShareholder information continued

Exchange rates
The following table shows the history of the exchange rates of one pound
sterling to US dollars for the periods indicated.

April 2017

March 2017

February 2017

January 2017

December 2016

2016/17

2015/16

2014/15

2013/14

2012/13

Dollar equivalent of £1 sterling
Low
1.2392

High
1.2938

1.2570

1.2647

1.2605

1.2712

1.2150

1.2429

1.2065

1.2226
Average1

1.31

1.51

1.61

1.60

1.57

As explained in the Notice of General Meeting issued on 19 April 2017,
it is intended that part of the proceeds from the sale of a majority interest
in the Company’s UK Gas Distribution business will be returned to
shareholders by way of purchase of the Company’s shares. Subject to
shareholder approval at the General Meeting to be held on 19 May 2017
and the 2017 AGM, the Company and the Directors therefore intend
to use this authority in this context to return approximately £835 million
to shareholders by way of on-market purchases of the Company’s
ordinary shares.

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.

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 85.

Material interests in shares
As at 31 March 2017, 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.
The Capital Group
Companies, Inc.
Competrol International
Investments Limited

Number of ordinary shares
226,594,591

% of voting rights1
6.01

145,094,617

137,164,285

3.88

3.65

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)
Maximum number of
shares held in Treasury
during the year

Number

of shares

Total
nominal
value

Percentage
of called up
share capital1

179,045,081 £20,402,811.56

4.54%

19,602,361

£2,233,757.42

0.50%

6,027,564

£686,861.94

0.15%

193,515,250 £22,051,737.79

4.91%

1. This number is calculated in relation to the issued share capital at the time the holding

was disclosed.

As at 17 May 2017, no further notifications have been received.

The rights attached to ordinary shares are detailed on page 184.
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
As at 17 May 2017, the share capital of the Company consists of
ordinary shares of 1117∕43 pence nominal value each and ADSs, which
represent five ordinary shares each. Subject to shareholder approval
of the proposed share consolidation, at the General Meeting of the
Company to be held on 19 May 2017, the nominal value of the
Company’s ordinary shares will be 12204/473 pence with effect from
22 May 2017.

Authority to purchase shares
Shareholder approval was given at the 2016 AGM to purchase up to
10% of the Company’s share capital (being 374,682,662 ordinary shares).
The Directors intend to seek shareholder approval to renew this authority
at the 2017 AGM.

In addition, the authority to purchase shares from the 2016 AGM is
proposed for renewal at a General Meeting of the Company to be held
on 19 May 2017 to cover the period between the date of the General
Meeting and the 2017 AGM. The renewed authority is required due to
the change to the nominal value of the ordinary shares that would result
from the share consolidation proposed at the same General Meeting.

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.

1. Called up share capital of 3,942,983,436 ordinary shares as at the date of this report.
2. From 7 April 2016 to 14 February 2017.
3. Shares purchased for a total cost of £188,922,589.

Of which,
number of
shares
purchased
as part of
publicly
announced
plans

Maximum
value that
may yet be
purchased as
part of
publicly
announced
plans
(£m)

Total
number of
shares
purchased

Average
price paid
per share
(£)

April1 (7 April 2016)
May

June

July

August

September

October
November2
(25–30 Nov 2016)
December2
(5–22 Dec 2016)
January2
(4–27 Jan 2017)
February3
(6–14 Feb 2017)

March

Total

657,000

9.978

657,000

–

1,250,000

9.146

1,250,000

8,200,000

9.139

8,200,000

5,997,044

9.330

5,997,044

3,498,317

9.526

3,498,317

–

19,602,361

9.295

19,602,361

–

Shares were purchased as part of publicly announced plans, as detailed below, which have
expired and under which the Company does not intend to make further purchases:
1. Announced: 23 February 2016 and Expired: 14 April 2016 (Authority for no. of shares:

3,357,000 of which 657,000 during the financial year ended 31 March 2017).

2. Announced: 24 November 2016 and Expired: 21 January 2017 (Authority for no. shares:

15,447,044 ordinary shares).

3. Announced: 6 February 2017 and Expired: 14 February 2017 (Authority for no. shares:

3,498,317 ordinary shares).

No purchases were made in the United States or in respect of the Company’s ADSs.

As at the date of this report, the Company held 188,996,970 ordinary
shares as treasury shares, representing 4.79% of the Company’s called
up share capital.

186

National Grid Annual Report and Accounts 2016/17

Additional Information

Authority to allot shares
Shareholder approval was given at the 2016 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 ADSs held by the trust.

Under the Company’s ADS programme, the right to dividends in relation
to the ordinary shares underlying the ADSs was waived during the year
by the Depositary, under an arrangement whereby the Company pays
the monies to satisfy any dividends separately to the Depositary for
distribution to ADS 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.

US$
105

pence
1,150

1,050

950

850

750

650

Apr 2016
NG/LN Equity (pence)

Aug 2016

Source: Bloomberg

Dec 2016

Mar 2017

NGG US Equity (US$)

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
($)

2016/17

2015/16

2014/15

2013/14

2012/13

2016/17 Q4

2015/16 Q4

April 2017

March 2017

February 2017

January 2017
December 2016

High
1,148.00

998.20

965.00

849.50

770.00

1,022.50

1,114.50

Low
888.90

806.40

806.22

711.00

627.00

906.80

888.90

1,148.00

1,035.50

1,096.00

998.20

968.57

918.90

940.90

1,042.00

1,022.50

983.40

969.30
960.00

945.00

906.10

890.60

806.40

817.20

985.10

909.31

906.80

912.30
888.90

High
74.97

72.53

77.21

70.07

58.33

64.22

71.43

74.97

74.67

72.47

72.53

69.71

72.14

65.33

64.22

61.22

59.54
59.40

Low
56.50

63.75

62.25

55.16

49.55

56.54

56.50

69.05

66.52

64.76

67.31

63.75

64.37

62.85

59.24

57.65

56.54
56.50

Shareholder analysis
The following table includes a brief analysis of shareholder numbers and
shareholdings as at 31 March 2017.

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
159,963

% of
shareholders
18.0110

236,033

386,407

53,761

48,874

2,018

222

418

125

321
888,142

26.5760

43.5073

6.0532

5.5029

0.2272

0.0250

0.0471

0.0141

0.0361
100

Number
of shares
4,561,644

% of

shares
0.1157

16,694,761

0.4234

81,585,725

2.0691

37,453,393

0.9499

121,025,841

3.0694

35,655,682

0.9043

16,330,876

0.4142

102,792,008

2.607

86,652,292

2.1976

3,440,231,225 87.2494
100
3,942,983,447

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:

•

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.

Shareholder information

187

National Grid Annual Report and Accounts 2016/17Additional informationShareholder information continued

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 entities and

investors who elect mark-to-market treatment;

•
•
•

•

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.

US Holders should assume that any cash distribution paid by us with
respect to ADSs or ordinary shares will be reported as dividend income.
While dividend income received from non-US corporations is generally
taxable to a non-corporate US Holder as ordinary income for US federal
income tax purposes, dividend income received by a non-corporate US
Holder from us generally will be taxable at the same favourable rates
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
2017. 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.

188

National Grid Annual Report and Accounts 2016/17

Additional Information

UK 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.

Shareholder information

189

National Grid Annual Report and Accounts 2016/17Additional informationOther 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 2016 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 2017, 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 $54,000.

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 2017, the Company
had undrawn borrowing facilities of £3.7 billion available to it with a
number of banks and a further £2.1 billion of drawn bank loans which,
on a change of control of the Company following a takeover bid, may
alter or terminate. All of 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 2017, no actual or potential
conflicts of interest were identified, which required approval by the Board.
The Board has also considered and noted a number of situations in
relation to which no actual conflict of interest was identified.

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.

190

National Grid Annual Report and Accounts 2016/17

Additional Information

Directors’ indemnity
The Company has arranged, in accordance with the Companies Act
2006 and the Articles, qualifying third-party indemnities against financial
exposure that Directors may incur in the course of their professional
duties. Equivalent qualifying third-party indemnities were, and remain,
in force for the benefit of those directors who stood down from the Board
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 are integral to our ethical business conduct guide
– 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 or
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, the UK Modern Slavery Act 2015 and for
our UK suppliers, the requirements of the Living Wage Foundation.

Listing Rule 9.8.4 R cross reference table
Information required to be disclosed by LR 9.8.4 R
(starting on page indicated):

Interest capitalised

Publication of unaudited financial information

Details of long-term incentive schemes

Waiver of emoluments by a director

Waiver of future emoluments by a director

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

Page 103

Not applicable

Page 187

Not applicable

Material contracts
On 8 December 2016, we agreed to sell a 61% equity interest in our UK
Gas Distribution business to the Consortium pursuant to the terms of
an acquisition agreement of that date. The sale of the 61% interest
completed on 31 March 2017. National Grid and the Consortium have
also entered into an agreement for the potential future sale and purchase
of an additional 14% equity interest in the UK Gas Distribution business.

In addition, each of our Executive Directors has a Service Agreement
and each Non-executive Director has a Letter of Appointment. Apart
from these, no contract (other than contracts entered into in the ordinary
course of business) has been entered into by the Group 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 the
Group has any obligation or entitlement which is material to the Group at
the date of this report.

Political donations and expenditure
At this year’s AGM the Directors will again 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 Companies Act 2006 states
that all-party parliamentary groups are not political organisations for these
purposes, meaning the authority to be sought from shareholders is not
relevant to interactions with such groups. 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 $71,410 (£55,933) 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 12 property, plant
and equipment on pages 118 and 119, note 20 Borrowings on pages 127
and 128 and where we operate on page 173.

Research and development
Investment in research and development during the year for the Group,
including discontinued operations, was £27 million (2015/16: £29 million;
2014/15: £23 million). Throughout 2016/17, innovation funding has
sustained investment across all three of our UK Regulated business
areas: UK ET, UK GT and UK GD. We have continued to challenge
the way we work, collaborating across the industry in search of new
technologies and techniques in our drive to deliver benefits for our
stakeholders. 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 contribute to joint or collaborative projects.

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. Progress has been
made on the design of our new 400kV research centre at Deeside.

We have successfully installed and pressurised the new insulating
gas (Green Gas for Grid g3), a potential replacement for SF6 for new
transmission assets, on two gas insulated busbar sections at our
substation in Sellindge. The equipment passed its High Voltage
test on site and was energised in April 2017.

Research has also progressed our understanding of and ability to predict
and manage the impact of increased levels of distributed and renewable
generation on the system.

Our control room and forecasting team have already been able to use
the initial output from our solar PV monitoring and forecasting work, to
help with balancing the system at times of high levels of solar generation.

NGET’s Transmission & Distribution Interface 2.0 project is an £8 million
Ofgem Network Innovation Competition award announced on
Wednesday 30 November 2016. This is a new regional power market trial
that will improve interaction between National Grid’s System Operator
(SO), UK Power Networks’ role as regional electricity distributor and
renewable energy generators connected to the distribution system.

Other disclosures

191

National Grid Annual Report and Accounts 2016/17Additional informationOther disclosures continued

The market will help renewable energy generators to offer their
services to National Grid’s System Operator via a UK Power
Networks’ Distribution System Operator (DSO) platform. This approach
will also provide additional services to UK Power Networks. Improving
communication, coordination and developing new commercial
frameworks will maximise network capacity by better managing system
constraints, giving National Grid’s System Operator access to previously
unexploited power. It will also introduce new revenue streams for
renewable energy generators. If successful, the regional power market
model could be introduced to 59 other sites and potentially save up
to £412 million for UK consumers by 2050.

We are also working in partnership with Scottish Power Electricity
Networks on their £16 million Phoenix NIC project which aims to
demonstrate how hybrid synchronous compensation could overcome
technical limitations that currently limit the proportion of power generation
from renewable sources and interconnectors that the Great Britain
electricity system can handle. Our innovation portfolio has continued to
develop throughout 2016/17, with a continued focus on new techniques
for safety and risk reduction through projects such as 3D laser scanning
for more accurate pipeline condition assessment and removable
composite transition pieces to access pipelines more easily. Other
projects have explored new techniques for valve sealant lines and
improved techniques for compressor emissions monitoring.
Demonstration of the value delivered to our customers has been a key
priority in 2016/17 and continues to be going forward into 2017/18.

Innovation in UK GD continued to focus on six value areas which reflect
both the RIIO outputs. We continued to develop and refine pipe-lining
technologies to reduce the impact of our pipe replacement activities on
our customers and the environment. In addition, we have made a new
tool available for our engineers to help find underground pipes more
quickly. We also explored how virtual reality technology can improve
the way we train engineers.

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. Below are a few
examples of our RD&D projects:

• 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 futureproof our system to enable a high
penetration of the Distributed Energy Resources on the distribution
system. We are also pre-approved to construct up to 14 MW of
photovoltaic (PV) facilities in conjunction with 7 MW of battery storage
in Massachusetts as part of our ‘Solar Phase III’ programme. The
intent of this project is to demonstrate the value of energy storage in
the system peak load shaving, solar ramp rate control and mitigation
of power quality issues.

• We are engaged with Electric Power Research Institute (EPRI) on
a number of programmes such as Distributed Energy Resources
integration, energy storage and system planning. In February 2017,
National Grid received two EPRI Technology Transfer awards for the
RD&D work on Smart Inverters and distributed energy resources
hosting capacity.

• We are progressing four New York REV pilot projects, which are
1) Fruit Belt Neighbourhood Solar, 2) Community Resilience,
3) Demand Reduction, and 4) Distribution System Platform to test
new technologies and business models in which distributed energy
resources are integrated for grid operations.

• We support several Department of Energy projects under the

SunShot programme, aimed to further the integration and proliferation
of solar PV.

• Lessons learned from the two-year Worcester Smart Energy

Solutions pilot in Massachusetts and the Volt VAR Optimization
and Conservation Voltage Reduction pilot in Rhode Island have
helped shape larger scale grid modernisation proposals in each
of our jurisdictions.

• We demonstrated electric robot and UAS (unmanned aircraft
systems) technologies in our service area, and are working to
integrate these technologies into our operations.

• We are preparing to demonstrate online monitoring technology at

transmission substations in our New England service area in order
to move towards enhanced condition-based asset management.
• We are building equipment test and training labs in order to support
our initial upgrades of transmission substations across our service
area to the IEC 61850 communications standard.

US expenditure for gas research, development and deployment of new
technologies is largely funded through a special Regulatory Order and
customer surcharge mechanism in New York State. Primary investments
were in the areas of enhancements 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 continuing a pilot study
in the use of existing and new technology for methane sensors within
residential properties and working with standards organisations to
enhance safety through the development of revised standards and
specifications for improved detection levels and proper placement and
use of detectors. We are evaluating best practices in automatic shut-off
valves, excess flow valves and developing an integrated system to
provide storm hardening (flood condition detection) with a methane
detector in low pressure areas.

To further advance the safe operation of our systems, ongoing
improvements for condition assessments of the most difficult to inspect
pipelines are being enhanced through robotic inspection platforms with
focus on crack detection sensors, Electromagnetic Acoustic Transducer,
and developing tools to assess smaller diameter unpiggable steel
pipelines. In addition, new tools and techniques are being developed to
increase safety of the workforce, safely stop off mains and services with
less excavation, 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 and to move toward more electronically and
geospatially based records of field operations and construction.

Unresolved SEC staff comments
There are no unresolved SEC staff comments required to
be reported.

192

National Grid Annual Report and Accounts 2016/17

Additional Information

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 101 explains in detail the items which are
excluded from our adjusted profit measures.

Adjusted profit measures have limitations in their usefulness compared
with the comparable total profit measures as they exclude important
elements of our financial performance. However, we believe that by
presenting our financial performance in two components it is easier to
read and interpret financial performance between periods, as adjusted
profit measures are more comparable having removed the distorting
effect of the excluded items. Those items are more clearly understood
if separately identified and analysed.

The presentation of these two components of financial performance
is additional to, and not a substitute for, the comparable total profit
measures presented.

Management uses adjusted profit measures as the basis for
monitoring financial performance and in communicating financial
performance to investors in external presentations and announcements
of financial results.

Internal financial reports, budgets and forecasts are primarily prepared
on the basis of adjusted profit measures, although planned exceptional
items, such as significant restructurings, are also reflected in budgets
and forecasts. We separately monitor and disclose the excluded items
as a component of our overall financial performance.

Other unaudited financial information

Within the annual report a number of financial measures are presented.
These measures have been categorised as either alternative
performance measures (APMs), as per the European Securities and
Markets Authority (ESMA) guidelines, or as other financial information.

An alternative performance measure is a financial measure of historic
or future financial performance, financial position, or cash flows, other
than a financial measure defined under IFRS. The Group uses a range
of these metrics to provide a better understanding of the underlying
performance of the Group. Where appropriate, reconciliations of
alternative performance measures to IFRS measures and/or definitions
are provided.

The Group has defined the following financial measures as APMs: net
revenue (reconciliations below), adjusted operating profit including and
excluding timing (reconciliations below), adjusted earnings per share
including and excluding timing (reconciliations below), net debt (included
in note 27), capital investment (reconciliation below) and value added
(reconciliation and definition on page 21). Adjusted profit and earnings
metrics this year relate to both the continuing business and the Group
as a whole i.e. including discontinued operations.

Other financial information presented includes additional non-IFRS
reconciliations and are identified as follows: funds from operations (FFO)
(reconciliation below), FFO/interest cover (reconciliation below) and
retained cash flow (RCF)/adjusted net debt (reconciliation below).

Other financial information also includes regulatory measures: Group,
UK and US regulatory return on equity (RoE) (reconciliation below),
regulatory asset based growth (reconciliation below), regulatory gearing
(description on page 151) and annual asset growth (reconciliation below).

Alternative performance measures (APMs)
Net revenue
‘Net revenue’ is revenue less pass-through costs, such as payments
to other UK network owners, system balancing costs, and gas and
electricity commodity costs in the US. Pass-through costs are fully
recoverable from our customers and are recovered through separate
charges that are designed to recover those costs with no profit. Any
over- or under-recovery of these costs is returned to, or recovered from,
our customers.

31 March 2017

31 March 2016 Re-presented1

Total
sales

Pass
through
costs

Net
revenue

Total sales

Pass
through
costs

Net
revenue

4,439

(2,293)

2,146

3,977

(2,030)

1,947

1,080

(223)

857

1,047

(221)

826

8,931

(3,411)

5,520

7,493

(3,154)

4,339

713

–

713

824

–

824

1,902

(350)

1,552

1,949

(352)

1,597

UK Electricity
Transmission

UK Gas
Transmission

US
Regulated

Other
activities

Discontinued
operations

Total

17,065

(6,277)

10,788

15,290

(5,757)

9,533

1. Comparative amounts have been re-presented to reflect the

classification of the UK Gas Distribution business as a discontinued
operation.

Other unaudited financial information

193

National Grid Annual Report and Accounts 2016/17Additional informationOther unaudited financial information continued

Continuing, discontinued and total Group profits and earnings
The analysis below combines information from elsewhere in the Annual Report (primarily note 9) to reflect key metrics for the Group as if UK Gas
Distribution was consolidated throughout the year.

Revenue

Operating costs

Adjusted operating profit
Exceptional items and remeasurements

Statutory operating profit

Net finance costs (before exceptionals)

Finance exceptionals and remeasurements

Total net finance costs

Share of result of joint ventures and associates

Profit before tax
Tax

Profit after tax before gain on disposal
Gain on disposal of UK Gas Distribution

Profit after tax including gain on disposal

2017

Including timing
Year ended 31 March
2016

2015

Continuing
operations
15,035

Discontinued
operations
1,887

Total
16,922

Continuing
operations
13,212

Discontinued
operations
1,903

Total
15,115

Continuing
operations
13,357

Discontinued
operations
1,844

Total
15,201

(11,262)

(993)

(12,255)

3,773

(565)

3,208

(1,029)

(58)

(1,087)

2,184

(374)

1,810

–

1,810

894

–

894

(146)

(6)

4,667

(565)

4,102

(1,175)

(64)

(152)

(1,239)

–

742

(79)

663

5,321

5,984

2,926

(453)

2,473

5,321

7,794

(9,998)

3,214

3,225

(856)

(99)

(955)

2,329

(427)

1,902

–

1,902

(1,021)

(11,019)

882

(22)

860

(157)

–

4,096

(11)

4,085

(1,013)

(99)

(157)

(1,112)

–

703

3,032

(11)

(438)

692

2,594

–

692

2,594

(10,323)

3,034

(83)

2,951

(872)

(165)

(1,037)

1,960

(467)

1,493

–

1,493

(1,015)

(11,338)

829

–

829

(161)

–

(161)

–

668

(150)

518

–

518

3,863

(83)

3,780

(1,033)

(165)

(1,198)

2,628

(617)

2,011

–

2,011

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. Reconciliation of adjusted operating
profit to statutory operating profit is included within note 2.

Reconciliation of adjusted operating profit excluding timing
differences to total operating profit
Adjusted operating profit excluding timing differences is discussed
on page 20.

Adjusted operating profit excluding
timing differences

Timing differences from continuing operations

Timing differences from discontinued
operations

Adjusted operating profit
Exceptional items and remeasurements
Total operating profit

Year ended 31 March

2017
£m

4,291

398

(22)

4,667

(565)
4,102

2016
£m

2015
£m

4,071

3,927

(1)

4,096

(11)
4,085

(77)

3,863

(83)
3,780

Reconciliation of adjusted operating profit to adjusted earnings and earnings
Adjusted earnings is presented in note 7 to the consolidated financial statements on page 110.

Continuing operations

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 from continuing operations

Exceptional items after tax

Remeasurements after tax

Earnings from continuing operations

Discontinued operations
Adjusted operating profit

Adjusted net finance costs

Adjusted profit before tax

Adjusted tax

Adjusted profit after tax

Attributable to non-controlling interests

Adjusted earnings from discontinued operations

Exceptional items after tax from discontinued operations

Remeasurements after tax from discontinued operations

Gain on disposal of UK Gas Distribution after tax

Earnings from discontinued operations

Including timing
Year ended 31 March

Excluding timing
Year ended 31 March

2017
£m

3,773

(1,029)

2,807

(666)

2,141

–

2,141

(312)

(19)

1,810

894

(146)

748

(142)

606

607

(5)

5,321

5,985

20161
£m

3,214

(856)

2,417

(604)

1,813

(1)

1,812

162

(73)

1,901

882

(157)

725

(149)

576

(2)

574

116

–

690

20151
£m

3,034

(872)

2,208

(543)

1,665

1,675

(99)

(73)

1,503

829

(161)

668

(152)

516

(2)

514

–

516

2017
£m

3,375

(1,029)

2,409

(547)

1,862

–

1,862

(312)

(19)

1,531

916

(146)

770

(146)

624

625

(5)

5,321

6,003

20161
£m

3,215

(856)

2,418

(619)

1,799

(1)

1,798

162

(73)

1,887

856

(157)

699

(144)

555

(2)

553

116

–

669

20151
£m

3,111

(872)

2,285

(553)

1,732

1,742

(99)

(73)

1,570

816

(161)

655

(150)

505

(2)

503

–

505

194

National Grid Annual Report and Accounts 2016/17

Additional Information

Reconciliation of adjusted operating profit to adjusted earnings and earnings continued

Continuing and discontinued operations

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

Total adjusted earnings

Total exceptional items after tax

Total remeasurements after tax

Gain on disposal of UK Gas Distribution after tax

Total earnings

Including timing
Year ended 31 March

Excluding timing
Year ended 31 March

2017
£m

4,667

(1,175)

3,555

(808)

2,747

2,748

(250)

(24)

5,321

7,795

20161
£m

4,096

(1,013)

3,142

(753)

2,389

(3)

2,386

278

(73)

–

2,591

20151
£m

3,863

(1,033)

2,876

(695)

2,181

2,189

(97)

(73)

–

2,019

2017
£m

4,291

(1,175)

3,179

(693)

2,486

2,487

(250)

(24)

5,321

7,534

20161
£m

4,071

(1,013)

3,117

(763)

2,354

(3)

2,351

278

(73)

–

2,556

1. Comparative amounts have been re-presented to reflect the classification of the UK Gas Distribution business as a discontinued operation.

Reconciliation of adjusted EPS to statutory EPS (including and excluding timing)
Adjusted EPS is presented in note 7 to the consolidated financial statements.

Adjusted EPS from continuing operations
Exceptional items after tax from continuing operations

Remeasurements after tax from continuing operations

EPS from continuing operations

Adjusted EPS from discontinued operations

Exceptional items after tax from discontinued operations

Remeasurements after tax from discontinued operations

Gain on disposal of UK Gas Distribution after tax

EPS from discontinued operations

Total adjusted EPS
Total exceptional items after tax

Total remeasurements after tax

Gain on disposal of UK Gas Distribution after tax

Total EPS

Including timing
Year ended 31 March
20161
pence
48.0

2017
pence
56.9

(8.3)

(0.5)

48.1

16.1

1.6

(0.1)

141.4

159.0

73.0

(6.7)

(0.6)

141.4

207.1

4.3

(1.9)

50.4

15.2

3.1

–

18.3

63.2

7.4

(1.9)

–

68.7

20151
pence
43.9

(2.6)

(1.9)

39.4

13.4

0.1

–

13.5

57.3

(2.5)

(1.9)

–

52.9

Excluding timing
Year ended 31 March
20161
pence
47.6

2017
pence
49.5

(8.3)

(0.5)

40.7

16.6

1.6

(0.1)

141.4

159.5

66.1

(6.7)

(0.6)

141.4

200.2

4.3

(1.9)

50.0

14.7

3.1

–

17.8

62.3

7.4

(1.9)

–

67.8

20151
£m

3,927

(1,033)

2,940

(703)

2,237

2,245

(97)

(73)

–

2,075

20151
pence
45.6

(2.6)

(1.9)

41.1

13.1

0.1

–

13.2

58.7

(2.5)

(1.9)

–

54.3

1. Comparative information has been restated to reflect the classification of the UK Gas Distribution business as a discontinued operation and the additional shares issued as scrip dividends.

Capital investment
‘Capital investment’ or ‘investment’ refer to additions to plant, property and equipment and intangible assets, and contributions to joint ventures and
associates, other than the St William Property Limited joint venture during the period. St William Property Limited is excluded based on the nature of
this joint venture arrangement.

£m
UK Electricity Transmission

UK Gas Transmission
US Regulated
Other activities1
Discontinued operations

Group capital investment

For the year ended 31 March
2017
1,027

2016
1,084

% change
(5%)

214
2,247

374

588

4,450

186
1,856

254

566

3,946

15%
21%

47%

13%

1. Other activities capital investment includes investment in joint ventures, excluding equity contributions to St William Property Limited joint venture.

£m
Capital expenditure

Additions within discontinued operations

Equity and funding contributions to joint ventures and associates

Group capital investment

For the year ended 31 March
2017
3,735

2016
3,327

588

127

4,450

566

3,946

% change
12%

140%

13%

Other unaudited financial information

195

National Grid Annual Report and Accounts 2016/17Additional informationOther unaudited financial information continued

Other financial information
Funds from operations and interest cover
Funds from operations (FFO) is the cash flows generated by the
operations of the Group. Credit rating metrics including FFO are
used as indicators of balance sheet strength.

Retained cash flow (RCF)/adjusted net debt

For the years ended 31 March (£m)
Adjusted funds from operations (FFO)

2017
4,723

2016
4,403

2015
4,180

Hybrid interest reclassified as dividend

(51)

(49)

(55)

Dividends paid to shareholders

(1,463)

(1,337)

(1,271)

For the years ended 31 March (£m)
Interest expense (P&L)
Hybrid interest reclassified as dividend

Capitalised interest

Pensions interest adjustment

Interest on decommissioning liabilities
adjustment

Interest on lease rentals adjustment

Unwinding of discount on provisions

Interest paid (discontinued operations)

Adjusted interest expense

Net cash inflow from operating activities
Interest income on financial instruments

Interest paid on financial instruments

Dividends received

Working capital adjustment

Excess employer pension contributions
Hybrid interest reclassified as dividend

Lease rentals

Difference in net interest expense in income
statement to cash flow

Difference in current tax in income statement
to cash flow

Current tax related to prior periods

Cash flow from discontinued operations

Interest paid (discontinued operations)

(51)

109

(60)

(73)

146

1,172

4,320

(839)

(151)

606

2017
1,082

20161
1,035

20151
1,069

(49)

112

(60)

(73)

–

(55)

(48)

(73)

–

RCF (headline)

Purchase of treasury shares

RCF (net of share buybacks)

Bank overdrafts

Borrowings

Less:

50% hybrid debt

Cash and cash equivalents

Restricted cash

983

1,012

Available-for-sale investments

5,368

5,007

Underfunded pension obligations

(834)

(456)

301
49

(826)

(301)

237
55

Operating leases adjustment

Derivative asset removed from debt

Currency swaps

Nuclear decommissioning liabilities reclassified
as debt

Collateral – cash received under collateral
agreements

Accrued interest removed from short term debt

(170)

(129)

(156)

(47)

(46)

909

(146)

(42)

(26)

–

(64)

–

Adjusted net debt
(includes pension deficit)

FFO/adjusted net debt

RCF (headline)/adjusted net debt

RCF (net of share buybacks)/adjusted
net debt

3,209

(189)

3,020

–

3,017

(267)

2,750

2,854

(338)

2,516

28,638

28,341

25,907

(1,033)

(1,139)

(995)

(127)

(948)

(119)

(7,432)

(1,951)

(1,232)

1,487

526

(709)

(210)

1,434

1,675

544

(183)

(610)

(243)

588

(89)

453

(540)

(230)

20,290

26,308

25,491

23.3%

15.8%

16.7%

11.5%

16.4%

11.2%

14.9% 10.5%

9.9%

Adjusted funds from operations (FFO)

4,723

4,403

4,180

Interest cover (adjusted funds from
operations + adjusted interest
expense/adjusted interest expense)

5.0x

5.5x

5.1x

1. Numbers for 2016 and 2015 reflect the calculations for the total group as based on the

published accounts for the respective years and have not been restated.

196

National Grid Annual Report and Accounts 2016/17

Additional Information

Group return on equity (RoE)
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 restated to the weighted average £/$
exchange rate for the year.

Group RoE calculation
For the year ended 31 March
£m
Regulated financial performance

Operating profit of other activities

Group financial performance

Share of post-tax results of joint ventures
& associates

Non-controlling interests

Adjusted Group interest charge

Group tax charge

Tax on adjustments

Opening rate base/RAV

Opening NBV of non-regulated businesses

Joint ventures & associates

Opening goodwill

Opening capital employed

Opening net debt

Opening equity

Return on Equity

2017
3,906

204

2016
3,663

374

2015
3,741

199

4,110

4,037

3,940

(1,075)

(808)

166

(3)

(922)

(753)

40,435 36,998
1,213

1,579

408

319

5,984

5,182

48,406 43,712
(27,346) (24,024)

(945)

(695)

(14)

2,340

35,237

1,341

358

4,856

41,792

(21,974)

Group financial performance after interest and tax

2,457

2,422

US regulated return on equity (RoE)
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 calculated annually.

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 relevant 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.

Year ended 31 March
%
UK Electricity Transmission

UK Gas Transmission
US Regulated1

Regulatory
Debt:Equity
assumption

Achieved
Return on
equity

Base or
Allowed
Return on
Equity

2017

2016
60/40 13.6% 13.9% 10.2% 10.2%
62.5/37.5 10.8% 12.5% 10.0% 10.0%
Avg. 50/50 8.2% 8.0% 9.5% 9.7%

2016

1. Comparative information for US Regulated segment was calculated for the 2015 calendar year.

Regulated asset base

As at 31 March
(£bn, at constant currency)
UK Electricity Transmission

UK Gas Transmission

US Regulated

Regulated
asset value or
rate base
2017
12.5

2016
11.8

5.8

15.4

5.6

14.6

Total
regulated
assets

2017
12.0

5.7

17.1

2016
11.7

5.7

16.2

Total Group excluding UK Gas Distribution

33.7

32.0

34.8 33.6

21,060 19,688

19,818

UK Gas Distribution

11.7% 12.3%

11.8%

Total Group

8.9

8.7

8.9

8.6

42.6

40.7

43.7

42.2

US rate base and total regulated assets for 31 March 2016 have been
restated in the table above at constant currency. At actual currency the
values were £12.7 billion and £14.1 billion respectively.

Invested capital at 31 March 2017 for Other activities was £2.2 billion
(31 March 2016: £2.0 billion at constant currency).

Regulated asset base growth has been disclosed on page 13.

UK regulated return on equity (RoE)
UK RoEs are measures of how the businesses are 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.

Other unaudited financial information

197

National Grid Annual Report and Accounts 2016/17Additional informationCommentary on consolidated financial statements
for the year ended 31 March 2016

In compliance with SEC rules, we present a summarised analysis
of movements in the income statement, an analysis of movements
in adjusted operating profit (for the continuing group) by operating
segment and a summarised analysis of movements in the statement
of financial position for the year ended 31 March 2016. This should be
read in conjunction with the 31 March 2017 unaudited commentary
included on pages 85, 89, 97 and 98.

Analysis of the income statement for the years ended
31 March 2016 and 31 March 2015
Revenue
Revenue for the year ended 31 March 2016 decreased by £145 million
to £13,212 million. 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 £493 million 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 £223
million, mostly reflecting the recovery of higher pass-through costs such as
payments to other UK network owners and system balancing costs.

Revenue for the year ended 31 March 2015 increased by £416 million
to £13,357 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. Our US
Regulated business revenues were lower, as a result of the end of the LIPA
MSA in the prior 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.

Operating costs
Operating costs for the year ended 31 March 2016 of £9,987 million were
£419 million lower than the prior year. This decrease in costs included a
£94 million impact in exceptional items and remeasurements, which is
discussed below. Excluding exceptional items and remeasurements,
operating costs were £325 million lower, principally due to lower pass-
through costs such as gas and electric commodity costs in the US and
additional costs incurred the year before 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.

Operating costs for the year ended 31 March 2015 of £10,406 million were
£358 million higher than the prior year. This increase in costs included a
£199 million year on year impact of changes in exceptional items and
remeasurements, which is discussed below. Excluding exceptional items
and remeasurements, operating costs were £159 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 the
previous 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 the year.

Exceptional operating items and remeasurements
Operating costs for the year ended 31 March 2016 included an £11 million
gain on remeasurement of commodity contracts.

Operating costs 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 £100 million gain on exceptional items, including a net gain on the
LIPA MSA transition in the US of £254 million and restructuring costs of
£91 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 were no longer required.

Net finance costs
For the year ended 31 March 2016, net finance costs before exceptional
items and remeasurements were £16 million lower than 2014/15 at
£856 million, mainly as a result of lower UK RPI inflation, continued focus
on management of cash balances and the benefit of the prior year’s
debt repurchases, partially offset by increased borrowings and the
impact of the stronger US dollar.

For the year ended 31 March 2015, net finance costs before exceptional
items and remeasurements were £66 million lower than 2013/14 at
£872 million, mainly as a result of lower average gross debt through
the year, lower RPI in the UK and refinancing debt at lower rates.

Exceptional finance costs for the year ended 31 March 2016 included
a loss of £99 million on financial remeasurements, relating to net losses
on derivative financial instruments. The year ended 31 March 2015
included exceptional debt redemption costs of £131 million and a loss
of £34 million on financial remeasurements relating to net losses on
derivative financial instruments. The year ended 31 March 2014 included
a gain of £93 million on financial remeasurements.

Tax
The tax charge on profits before exceptional items and remeasurements
for the year ended 31 March 2016 was £61 million higher than 2014/15.
This was mainly a result of increased taxable profits in the year. The
effective tax rate for the year was 25.0% (2014/15: 24.6%).

The tax charge on profit before exceptional items and remeasurements
for the year ended 31 March 2015 was £126 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.

Exceptional tax for 2015/16 was a credit of £177 million 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%.

Exceptional tax for 2014/15 of £76 million primarily represents tax credits
on the exceptional items and remeasurements described above.

Adjusted earnings and EPS
As a result of the variances described above, adjusted earnings for
the year ended 31 March 2016 were £1,812 million. For the year ended
31 March 2015, adjusted earnings were £1,675 million.

The above earnings performance translated into adjusted EPS growth
in 2015/16 of 4.1 pence (9%) and 5.5 pence (14%) in 2014/15.

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.

Analysis of the adjusted operating profit by segment for the
year ended 31 March 2016
UK Electricity Transmission
For the year ended 31 March 2016, revenue in the UK Electricity
Transmission segment increased by £223 million to £3,977 million,
and adjusted operating profit decreased by £64 million to £1,173 million.
The revenue growth of £223 million 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 in
2015/16 and a legal settlement received in 2014/15 that did not repeat in
2015/16. Net revenue (after deducting pass-through costs) was £14 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 role. Depreciation and amortisation was £14 million
higher reflecting the continued capital investment programme. Other costs
were £36 million higher than prior year due to additional asset impairments
this year and lower scrap and disposal proceeds.

UK Gas Transmission
Revenue in the UK Gas Transmission segment increased by £25 million
in 2015/16 to £1,047 million and adjusted operating profit increased by
£49 million to £486 million. Revenue was £25 million higher, principally
due to over-recoveries of allowed revenues in the year. Regulated
controllable costs were £10 million higher than the previous year,
mainly as a result of inflation, higher gas system service charges
and organisational change costs. Depreciation costs were £6 million
higher due to ongoing investment. Other operating costs were
£19 million lower than the previous year, mostly reflecting additional
costs in 2014/15 relating to the closure of LNG facilities.

US Regulated
Revenue in our US Regulated businesses was £493 million lower at
£7,493 million, while adjusted operating profit increased by £21 million to

198

National Grid Annual Report and Accounts 2016/17

Additional Information

£1,185 million. The stronger US dollar increased operating profit in the year by
£81 million. Excluding the impact of foreign 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 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 £1,027 million reduction in
pass-through costs incurred (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 due to
changes in actuarial discount rates, while other operating costs were £41
million higher at constant currency including higher asset removal costs.

Other activities
Revenue in Other activities increased by £110 million to £824 million
in the year ended 31 March 2016. Adjusted operating profit was
£174 million higher at £370 million. In the US, adjusted operating profit
was £143 million higher, reflecting lower spend on upgrades to our
finance systems which completed last year. In addition, we benefited
from a £49 million 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 £31 million higher as a result of strong
auction revenues at the French interconnector and higher property sales.

Analysis of the statement of financial position
for the year ended 31 March 2016

Goodwill and other intangible assets
Goodwill and intangibles increased by £255 million to £6,202 million
as at 31 March 2016. This increase primarily relates to foreign exchange
movements of £184 million and software additions of £220 million,
partially offset by software amortisation of £147 million.

Property, plant and equipment
Property, plant and equipment increased by £2,641 million to £43,364 million
as at 31 March 2016. This was principally due to capital expenditure of £3,673
million on the renewal and extension of our regulated networks and foreign
exchange movements of £543 million, offset by depreciation of £1,467 million
in the year. See page 22 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 £233 million
to £961 million. This is primarily due to an increase in investments in joint
ventures of £79 million, together with an increase in available-for-sale
investments of £152 million.

Inventories and current intangible assets, and trade and
other receivables
Inventories and current intangible assets, and trade and other receivables
have decreased by £284 million to £2,832 million as at 31 March 2016.
This is due to an increase in inventories and current intangible assets
of £97 million, more than offset by a net decrease in trade and other
receivables of £381 million. The £381 million decrease consists of a foreign
exchange impact of £57 million due to the stronger US dollar against sterling
offset by a decrease in the underlying balances of £421 million, 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 £7 million to £3,285 million,
primarily due to a foreign exchange impact of £48 million 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 £51 million to £175 million
as at 31 March 2016, which includes a £77 million current tax asset
(£60 million current tax asset in 2014/15 included in trade and other
receivables). 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 £337 million to £4,634 million
as at 31 March 2016. This was primarily due to the impact of the £125
million deferred tax charge on actuarial gains in reserves (£299 million 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 £136 million to £3,790 million as at 31 March 2016.

Total provisions decreased by £16 million in the year. The underlying
movements include additions of £63 million, 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 £33 million, together with foreign exchange movements of £42 million,
offset by utilisation of £200 million in relation to all classes of provisions.

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 90.

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)

Total
£m
(3,258)

(81)

(147)

(94)

(15)

(320)

325

(81)

(221)

(112)

(39)

(338)

877

348
(2,570)

587
(2,585)

19,401

(19,416)
(15)

7,033

26,434

(9,603)
(2,570)

(29,019)
(2,585)

The principal movements in net obligations during the year include net
actuarial gains of £539 million and employer contributions of £587 million.
Net actuarial gains include actuarial gains on plan liabilities of £877 million
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 £338 million 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 note 23 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 28.

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.

Commentary on consolidated
financial statements

199

National Grid Annual Report and Accounts 2016/17Additional informationSummary 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 2017. 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 2013, 2014, 2015, 2016 and 2017 has been prepared under IFRS issued by
the IASB and as adopted by the EU1.

Summary income statement (£m)

Continuing operations
Revenue

Operating profit

2017

20161

20151

20141

20131,2

15,035

13,212

13,357

12,941

12,673

Before exceptional items, remeasurements and stranded cost recoveries

Exceptional items, remeasurements and stranded cost recoveries

3,773

(565)

3,214

3,034

(83)

2,777

116

2,866

141

Profit before tax

Before exceptional items, remeasurements and stranded cost recoveries

Exceptional items, remeasurements and stranded cost recoveries

2,807

(623)

2,417

(88)

2,208

(248)

1,867

209

1,922

209

Profit after tax from continuing operations

Before exceptional items, remeasurements and stranded cost recoveries

Exceptional items, remeasurements and stranded cost recoveries

Profit after tax from discontinued operations

Before exceptional items, remeasurements and stranded cost recoveries

Exceptional items, remeasurements and stranded cost recoveries

Gain/(loss) on disposal of UK Gas Distribution after tax

2,141

(331)

1,813

1,665

(172)

1,450

324

1,452

208

606

5,321

576

116

–

516

–

553

137

–

462

–

Total profit for the year

7,794

2,594

2,011

2,464

2,154

Profit for the year attributable to equity shareholders

Before exceptional items, remeasurements and stranded cost recoveries

Exceptional items, remeasurements and stranded cost recoveries

Gain on disposal of UK Gas Distribution after tax

Total

Earnings per share
Basic – continuing operations (pence)3
Diluted – continuing operations (pence)3
Basic – discontinued operations (pence)3
Diluted – discontinued operations (pence)3
Basic – total (pence)3
Diluted – total (pence)3

Number of shares – basic (millions)4
Number of shares – diluted (millions)4

Dividends per ordinary share

Paid during the year (pence)
Approved or proposed during the year (pence)5
Paid during the year ($)
Approved or proposed during the year ($)

2,748

(274)

5,321

7,795

2,386

205

–

2,189

(170)

–

2,015

461

–

1,913

240

–

2,591

2,019

2,476

2,153

48.1

47.9

159.0

158.3

207.1

206.2

50.4

50.2

18.3

18.2

68.7

68.4

39.4

39.2

13.5

52.9

52.7

46.9

46.6

18.0

17.9

64.9

64.5

43.5

43.2

13.0

56.5

56.2

3,763

3,780

3,774

3,790

3,817

3,834

3,817

3,836

3,813

3,832

43.51
128.65

0.555
1.642

43.16
43.34

0.664
0.635

42.25
42.87

0.697
0.672

40.85
42.03

0.636
0.696

39.84
40.85

0.633
0.632

1. Items previously reported for 2013–2016 have been represented to reflect UK Gas Distribution being presented as a discontinued operation in the current year.
2. For the years ended 31 March 2015, 31 March 2016 and 31 March 2017, 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 2013 were restated to show the impact of IAS 19 (revised).
3. Items previously reported for 2013–2016 have been restated to reflect the impact of the bonus element of the rights issue and the additional shares issued as scrip dividends.
4. Number of shares previously reported for 2013–2016 have been restated to reflect the impact of the additional shares issued as scrip dividends.
5. Following the disposal of UK Gas Distribution, 2017 includes a special interim dividend of 84.375 pence per share that will be paid on 2 June 2017.

200

National Grid Annual Report and Accounts 2016/17

Additional Information

Summary statement of net assets

Non-current assets

Current assets

Total assets

Current liabilities

Non-current liabilities

Total liabilities

Net assets
Total shareholders’ equity

2017

2016

2015

2014

20131

52,266

13,574

65,840

52,622

49,058

44,895

45,129

6,312

6,031

7,489

9,576

58,934

55,089

52,384

54,705

(10,511)

(7,721)

(7,374)

(7,331)

(7,445)

(34,945)

(37,648)

(35,741)

(33,134)

(37,026)

(45,456)

(45,369)

(43,115)

(40,465)

(44,471)

20,384
20,368

13,565
13,555

11,974
11,962

11,919
11,911

10,234
10,229

1. For the years ended 31 March 2017, 31 March 2016 and 31 March 2015, 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 year to 31 March 2013 were restated to show the impact of IAS 19 (revised).

Summary consolidated
financial information

201

National Grid Annual Report and Accounts 2016/17Additional informationDefinitions 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 asset growth
‘Annual asset growth’ measures the increase in ‘total regulatory value
and other investments’ defined below.

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
BEIS
The Department for Business, Energy and Industrial Strategy, being the
UK Government department responsible for business, industrial strategy,
and science and innovation with energy and climate change policy,
which was formed in July 2016 merging the functions of the former
Department of Energy and Climate Change and Department for
Business, Innovation and Skills (BIS).

Board
The Board of Directors of the Company (for more information
see pages 34 and 35).

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.

Capital investment
‘Capital investment’ or ‘investment’ refer to additions to plant, property
and equipment and intangible assets, and equity contributions to joint
ventures, other than the St William joint venture during the period. St
William is excluded based on the nature of this joint venture arrangement.

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.

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.

Consortium
The consortium which purchased a 61% equity interest in the UK Gas
Distribution business on 31 March 2017, comprising Macquarie
Infrastructure and Real Assets, Allianz Capital Partners, Hermes
Investment Management, CIC Capital Corporation, Qatar Investment
Authority, Dalmore Capital and Amber Infrastructure Limited/International
Public Partnerships.

Constant currency
‘Constant currency basis’ refers to the reporting of the actual results
against the results for the same period last year which, in respect of any
US$ currency denominated activity, have been translated using the
average US$ exchange rate for the year ended 31 March 2017, which
was $1.28 to £1.00. The average rate for the year ended 31 March 2016,
was $1.47 to £1.00. Assets and liabilities as at 31 March 2016 have been
retranslated at the closing rate at 31 March 2017 of $1.25 to £1.00. The
closing rate for the balance sheet date 31 March 2016 was $1.44
to £1.00.

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.

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.

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.

202

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Additional Information

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 34 and 35
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.

E
earnings per share (EPS)
Profit for the year attributable to equity shareholders of the parent
allocated to each ordinary share.

Electricity Market Reform (EMR)
An energy policy initiative, introduced by the Energy 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.

Electricity System Operator (ESO)
The party responsible for the long-term strategy, planning and real time
operation (balancing supply and demand) of the electricity system in
Great Britain.

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 166 to 171, 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.

H
HMRC
HM Revenue & Customs. The UK tax authority.

HVDC
High voltage, direct current electric power transmission which uses
direct current for the bulk transmission of electrical power, in contrast
with the more common alternating current systems.

I
IAS or IFRS
An International Accounting Standard or International Financial Reporting
Standard, as issued by the International Accounting Standards Board
(IASB). IFRS is also used as the term to describe international generally
accepted accounting principles as a whole.

individual financial statements
Financial statements of a company on its own, not including its
subsidiaries or joint ventures and associates.

J
joint venture
A company or other entity which is controlled jointly with other parties.

K
KEDLI
KeySpan Gas East Corporation.

KEDNY
The Brooklyn Union Gas Company.

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 equivalent to delivering
1kW of power for a period of one month.

Definitions and glossary of terms

203

National Grid Annual Report and Accounts 2016/17Additional informationDefinitions and glossary of terms continued

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.

N
National Grid Metering (NGM)
National Grid Metering Limited, National Grid’s UK regulated
metering business.

Net revenue
‘Net revenue’ is revenue less pass-through costs, such as payments
to other UK network owners, system balancing costs, and gas and
electricity commodity costs in the US. Pass-through costs are fully
recoverable from our customers and are recovered through separate
charges that are designed to recover those costs with no profit.
Any over- or under-recovery of these costs is returned to, or
recovered from, our customers.

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.

NTS
The gas National Transmission System in Great Britain.

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.

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. Subject to shareholder approval of the
proposed share consolidation at the General Meeting of the Company
to be held on 19 May 2017, the nominal value of National Grid’s ordinary
shares will be 12204∕473 with effect from 22 May 2017.

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.

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 costs
Total operating costs under IFRS less depreciation and certain
regulatory costs where, under our regulatory agreements,
mechanisms are in place to recover such costs in current
or future periods.

regulatory asset value (RAV)
The value ascribed by Ofgem to the capital employed in the relevant
licensed business. It is an estimate of the initial market value of
the regulated asset base at privatisation, plus subsequent allowed
additions at historical cost, less the deduction of annual regulatory
depreciation. Deductions are also made to reflect the value realised
from the disposal of certain assets that formed part of the regulatory
asset base. It is also indexed to the RPI to allow for the effects
of inflation.

return on capital employed (RoCE)
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.

204

National Grid Annual Report and Accounts 2016/17

Additional Information

return on equity (RoE)
A performance metric measuring returns from the investment of
shareholders’ funds. It is a financial ratio of a measure of earnings
divided by an equity base.

revenue decoupling
Revenue decoupling is the term given to the elimination of
the dependency of a utility’s revenue on the volume of gas or
electricity transported. The purpose of decoupling is to eliminate
the disincentive a utility otherwise has to encourage energy
efficiency programmes.

RIIO
The revised regulatory framework issued by Ofgem which was
implemented in the eight-year price controls which started on
1 April 2013.

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, heat, steam or cooling 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.

SEC
The US Securities and Exchange Commission, the financial
regulator for companies with registered securities in the US,
including National Grid and certain of its subsidiaries.

SF6
Sulphur hexafluoride, an inorganic, colourless, odourless and non-
flammable greenhouse gas. SF6 is used in the electrical industry
as a gaseous dielectric medium for high voltage circuit breakers,
switchgear and other electrical equipment. 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.

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.

Total regulatory value and other investments
The sum of: the regulatory asset value of the UK regulated businesses
determined under the methodology set out in Ofgem’s Price Control
Financial Model; the rate bases applicable to each US regulated entity
calculated according to the methodology used by each respective utility
regulator; the value of assets held by the Group’s other activities;
together with investments in joint ventures and associates. Other
activities primarily relate to non-network businesses and other
commercial operations including: UK gas metering activities; the Great
Britain-France Interconnector; UK property management; and a UK LNG
import terminal.

Totex
Total expenditure, comprising capital and operating expenditure.

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.

Definitions and glossary of terms

205

National Grid Annual Report and Accounts 2016/17Additional informationDefinitions and glossary of terms continued

U
UK
The United Kingdom, comprising England, Wales, Scotland and
Northern Ireland.

UK Corporate Governance Code (the Code)
Guidance, issued by the Financial Reporting Council in September 2014
(as updated in 2016 to reflect forthcoming legislation on audit
committees and auditor appointments), 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 and is
calculated annually. For 2016/17, it is calculated on a fiscal year basis.
For 2015/16 and prior years, it is calculated on a calendar year basis.

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.

206

National Grid Annual Report and Accounts 2016/17

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
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The Registry
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1-800-466-7215
If calling from outside the US:
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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:

31 May 2017
1 June 2017

2 June 2017
8 June 2017
19 June 2017
31 July 2017
16 August 2017

9 November 2017
22 November 2017

23 November 2017

24 November 2017
10 January 2018

May 2018

ADRs go ex-dividend for 2016/17 final dividend
Ordinary shares go ex-dividend for 2016/17
final dividend
Record date for 2016/17 final dividend
Scrip reference price announced
Scrip election date
2017 AGM
2016/17 final dividend paid to qualifying
shareholders
2017/18 half-year results
ADRs go ex-dividend for 2017/18 interim
dividend
Ordinary shares go ex-dividend for 2017/18
interim dividend
Record date for 2017/18 interim dividend
2017/18 interim dividend paid to qualifying
shareholders
2017/18 preliminary results

Dividends
The Directors are recommending a final dividend of 29.10 pence per
ordinary share ($1.8924 per ADS) to be paid on 16 August 2017 to
shareholders on the register as at 2 June 2017. Further details in respect
of dividend payments can be found on page 22. 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 2016/17 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.

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 by telephone.

Internet Dealing Commission – 0.4% of the trade value (minimum
£16.20, maximum £62.20) until 30 June 2017. 0.50% of the trade
(minimum £19.00, maximum £76.50) after 30 June 2017.

Postal Dealing Commission – 10 pence per share (maximum £10)
when selling 1–150 shares, flat fee of £15 when selling 151 shares or
more. No commission will be chargeable for shareholders holding up
to 50 shares until 30 June 2017.

Telephone Dealing Commission – 0.75% of the trade (minimum
£24.50, maximum £114.50).

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. 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 ShareGift. 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 8EX.

Want more information or help?

207

National Grid Annual Report and Accounts 2016/17Additional informationinclude 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; 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, develop and retain
employees with the necessary competencies, including leadership and
business capabilities, 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 the Company’s sale of a majority interest
in its UK Gas Distribution business and 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 180 to 183 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 2017 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 8 to 71 and 172
to 201 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, including any arising as a result
of the United Kingdom’s exit from the European Union; announcements
from and decisions by governmental bodies or regulators, including
proposals relating to the role of the electricity system operator; 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 from those described in this document

208

National Grid Annual Report and Accounts 2016/17

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