National Grid Annual Report 2018

FY2018 Annual Report · National Grid

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Annual Report
and Accounts
2017/18

Bring Energy to Life

Contents
National Grid Annual Report and Accounts 2017/18

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.

About National Grid
Our business environment
How we create value for our stakeholders
Chairman’s statement
Chief Executive’s review
Our purpose, vision, values and strategy
Progress against our strategy
Internal control and risk management
Financial review
Viability statement
Principal operations
Our commitment to being
a responsible business

2
4
6
8
10
12
14
18
22
26
28

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; Finance; Safety, Environment and
Health; Nominations; and Remuneration
Committees. We also include details
of our shareholder engagement activities.

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

40
62
64

Financial Statements
Our financial statements include: the
independent auditor’s reports; consolidated
financial statements prepared in accordance
with IFRS as adopted by the EU and as issued
by the IASB; 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 auditor’s report
Report of independent registered
public accounting firm

80
81
82
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

184
218
223
224

Front cover
Cirhan Truswell, Senior Commercial
Analyst, at our carbon weighting
project, Burton, UK.

National Grid plc is an electricity and gas utility focused on transmission
and distribution activities in both the United Kingdom and the United States.
Business segments include UK Electricity Transmission, UK Gas Transmission,
National Grid Ventures and other activities, and US Regulated Gas and
Electricity distribution and transmission networks.

Group financial highlights

Statutory operating profit*

Statutory EPS*

Value Added

£3,493m

(2016/17: £3,208m)

Underlying operating profit*

£3,495m

(2016/17: £3,375m)

103.8p

(2016/17: 48.1p)

Underlying EPS*

60.4p

(2016/17: 58.6p proforma)

57.9p/share

(2016/17: 51.6p/share)

Capital investment

£4,251m

(2016/17: £3,862m)

Group return on equity (RoE)

12.3%

(2016/17: 11.7%)

For definitions and reconciliations of statutory and non-IFRS performance measures, and regulatory performance
measures see pages 206-214.

All financial metrics for the current year, which are calculated on a ‘per share’ basis, reflect a reduction in the weighted
average number of shares as of 2 June 2017, following the sale of the UK Gas Distribution business. The weighted
average number of ordinary shares outstanding for the period includes the effect of the 11 for 12 share consolidation.
Prior year metrics have not been restated, unless specifically identified as such.

Operational highlights

Group safety performance

Greenhouse gas emissions

Employee engagement index

0.10 IFR

(2016/17: 0.10 IFR)
(See page 15)

7.7m tonnes

(CO2 equivalent)
(2016/17: 9.1)

77%

(2016/17: 77%)

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 218-222 for this information,
as well as an important notice in relation to forward-looking statements with our cautionary statement on page 224.

*From continuing operations.

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 2017/18 was
$1.36 to £1 (2016/17 $1.28 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 206-214.

Online report
The PDF of our Annual Report
and Accounts 2017/18 includes
a full search facility. You can
find the document by visiting
the ‘About us’ section at
www.nationalgrid.com.

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

Inside front cover and page 1
Engineers, Gas Transmission,
Aylesbury, UK.

Strategic Report | Highlights

National Grid Annual Report and Accounts 2017/18Strategic ReportAbout National Grid
We are one of the world’s largest investor-owned energy
utilities, committed to delivering electricity and gas safely, reliably
and efficiently to the customers and communities we serve.

Our business model
Our business model, set out below, summarises our Company’s key drivers, how
we create and preserve value over the longer term, and how we generate cash flows.

UK Regulated
44% of Group statutory operating profit
44% of Group adjusted operating profit

What we do
We play a vital role in connecting millions of people to the energy they use through our
regulated utility businesses in the UK and US, with principal operations in electricity
and gas transmission and distribution, as well as National Grid Ventures.

Our purpose, vision and values
Our purpose is to Bring Energy to Life. We believe it’s crucial to have a clear sense of
what we stand for as a company and what it is that binds us all together. This is what
we call our purpose. In simple terms it’s what inspires us to serve our customers as
well as we can, and it’s what makes us proud about the work we do.

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

Our values are: every day we do the right thing and find a better way.

Adapting to change
We are responding to changes in our business environment, so we can ensure we
maintain our position in the industry. We are able to generate short-term profitability
and create long-term, sustainable value in an evolving energy landscape, as shown
by our performance described in pages 28-33.

Our strategic priorities
Our three strategic priorities are: optimise our operational performance; look for
opportunities to grow our core business; and make sure National Grid is better
equipped for the future.

Being a responsible business
For us, being a responsible business means being a force for positive environmental
and social change. We consider communities in all our operations, so we can fully
understand their needs, keep them safe, and make sure they are fairly represented
in our decisions and actions.

If we are to achieve our vision, we need to be aware of the needs of all our
stakeholders. We need to make sure we deliver value for them every day,
and continue to do so as the energy landscape changes.

How we make money
Our regulators in the UK and US set the type and level of charges we are allowed
to pass on to our customers to simulate market competition. We also make money
from businesses that operate in markets outside our core regulated businesses.

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 are also system
operator for the Scottish networks, but do
not own them.

346

Substations
(2016/17: 342)

4,474

Miles (7,200
kilometres) of
overhead line
(2016/17: 4,474 miles;
7,200 kilometres)

969

Miles (1,560
kilometres) of
underground cable
(2016/17: 932 miles;
1,500 kilometres)

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.

4,760

Miles (7,660
kilometres) of
high-pressure pipe
(2016/17: 4,760 miles;
7,660 kilometres)

Compressor
stations
(2016/17: 24)

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 balance supply and demand in real time
and we facilitate the connection of assets
to the transmission system.

Further reading

Definitions can be found
on pages 218-222

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

Strategic Report | About National Grid

National Grid Annual Report and Accounts 2017/18Strategic ReportOur business environment
Our environment is shaped by four themes: the impact on
consumer bills, energy security, environmental sustainability
and technology. As the energy ecosystem evolves, so do
the needs of our stakeholders.

£35.48

UK transmission network costs
per average annual household dual
fuel bill – representing around 3%
of the total bill

• Electricity transmission: £26.16

• Gas transmission: £9.32

• These costs cover the transport of
energy and maintaining very high
levels of reliability

46%

(UK capacity)

32%

(UK production)

21%

(US capacity)

15%

(US production)

Electricity generation supply
from renewable sources in 2017

Impact on consumer bills
Commentary
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 part of
their energy bills that covers network costs. These costs are subject to regulatory approval.

2017/18 developments

Our response

UK
In the UK, affordability of energy is a critical topic,
as highlighted in the 2017 General Election campaign.
Price caps featured in both the Conservative and
Labour manifestos and an energy price cap bill
is currently progressing through Parliament. The
Labour Party also indicated in its manifesto that
it was considering renationalising utility networks.
The Government commissioned the Cost of Energy
Review in the summer of 2017. Its main findings were
that the cost of energy is too high, and that the energy
policy, regulation and market design are not fit for the
purposes of the emerging low-carbon energy market.

US
The cost of energy remains a concern for consumers
and regulators who expect affordable, reliable and
cleaner energy at a low price. Costs of energy as a
percentage of total spending have declined, mainly
as a result of low natural gas prices and household
energy efficiency improvements. Additionally, costs
of low-carbon technologies such as solar, batteries
and energy management systems have fallen,
so they are increasingly being adopted.

• Our US and UK regulated businesses continue

to strive for greater efficiency, seeking innovative
ways to reduce both the time and cost to repair
or replace assets. This approach minimises the
costs to consumers.

• In the UK, we have been able to generate

£540 million of savings for consumers in the first
five years of the RIIO arrangements. We have also
volunteered that £480 million of RIIO-T1 allowances
for electricity transmission investments should
be deferred, which will help ease the impact on
consumer bills.

• We do not believe that renationalisation of

National Grid would be in the best interests of UK
consumers, and we have communicated externally
the ways in which we have created and driven
value for customers and society since privatisation.

• In the US, approval of new electricity and gas
delivery rates in upstate New York allows us to
continue our new Energy Affordability Program,
which provides a bill decrease for most
income-eligible customers. New energy efficiency
solutions will result in bill decreases for our
moderate income customers.

Energy security
Commentary
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.
Electricity margins need to be monitored and actively managed as we move to a generation mix
with greater volumes of intermittent and distributed generation.

2017/18 developments

Our response

• National Grid Ventures has made significant
progress in the construction of three new
electricity interconnectors from the UK to
Belgium, France and Norway.

• The Grain LNG import terminal received the

first ever UK LNG cargos from the US and Peru,
highlighting our ability to help deliver a more
diverse gas supply for the UK.

• In the UK, we published our System Needs and
Product Strategy report, which sets the scene
for future requirements, and consults on the
future of balancing services products.

• In the US, approval of new electricity and gas

delivery rates in upstate New York means we can
invest $2.5 billion over three years to modernise
our electricity and natural gas networks.

UK
Over the summer of 2017, the majority of the
UK’s energy supply came from renewable sources.
The UK also saw its first day free of generation from
coal in April 2017. As the region shifts towards an
increasingly decarbonised generation mix, baseload
electricity prices are expected to increase. UK
wholesale gas prices have been trending upwards
as sources of gas storage have decreased with the
closure of the Rough gas field and general global
shifts in preferences from coal to gas.

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. Natural gas supply has outpaced demand
due to technological improvements in shale gas
extraction, and wholesale gas prices have remained
at historic low levels. Wholesale electricity prices
have largely mirrored natural gas pricing due to
the increasing reliance of the energy industry
on natural gas as a fuel.

Strategic Report | Our Business Environment

National Grid Annual Report and Accounts 2017/18(UK)

26%
28.5%

(US)

Percentage of greenhouse gas
emissions attributable to the
energy sector in the UK and US

43%

(UK)

29%

(US)

Electric vehicle fleet
growth in 2017

Environmental sustainability
Commentary
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 – creating value for people, the environment
and businesses. This includes reducing greenhouse gas emissions, managing non-renewable
resources, and preserving and protecting habitats and ecosystems.

2017/18 developments

Our response

UK
During 2017, the UK saw a number of records
broken for renewable energy – including the first day
when wind, nuclear and solar generated more power
than gas and coal. The UK Government published
‘A Green Future: Our 25-year Plan to Improve
the Environment’, setting out the UK’s long-term
approach to protecting and enhancing the natural
environment. In July 2017, the Government
announced a ban on the sale of new petrol
and diesel cars from 2040.

US
In June 2017, President Trump announced that the
country would cease all participation in the 2015 Paris
Agreement on climate change mitigation, triggering
a three-year exit process. However, state renewable
energy support eclipses many federal policies. 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 16).
• Our environmental strategy, ‘Our Contribution’,
focuses on the areas where we can make
the greatest contribution. You can read more
about our approach and work on page 35.

• National Grid Ventures has been created to focus,
in part, on investments in renewables, including
utility-scale solar, wind and battery storage.
• 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.

• We are working with customers and stakeholders
in the UK to gather insights on the future role of
gas in managing the transition to a low-carbon
future.

• Although the US pulled out of the Paris Agreement,
we continue to support it and align ourselves with
state and local leaders who share our climate and
environmental goals.

Technology
Commentary
The energy landscape is being transformed by technologies such as renewable generation,
district heating, electric vehicles and battery storage. This transformation is being driven by
a range of factors: political and regulatory push, consumer pull and the rapid pace of change
in digital technologies.

2017/18 developments

Our response

Demand for more sustainable energy is accelerating
the pace of change within the energy industry.
Faster-than-expected price reductions for key
technologies have boosted the speed of
developments in areas such as solar energy, energy
storage, electric vehicles and distributed generation.
Battery pack prices have fallen 24% since 2016,
electric vehicle growth has continued apace in
both the UK and US, and UK small scale solar
is expected to double by 2025.

Digitisation of energy networks from generators to
households is further changing how people engage
with energy. We face the challenge of adapting our
networks to meet new demands, and making sure
we act on the opportunities that will benefit our
customers and other stakeholders.

• We created a Group technology and innovation
team to develop our new technology strategy,
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. We are
also involved in early-stage energy technology
venture investments.

• National Grid Ventures, established in April 2017,
focuses on business development, technology
and innovation.

• We are taking advantage of the latest technological

innovations to improve our performance.
For example, we are using robotics for gas
pipeline inspection, improving asset health
and lowering costs.

The impact of Brexit
We believe UK-EU cooperation on energy
is positive for UK and EU consumers in
terms of energy security, affordability
and decarbonisation.

We continue to keep the implications of
Brexit under review, especially regarding our
access to energy markets and the impacts
on interconnectors’ revenues and costs.
Our interconnector partners share a
financial interest in the ownership and
profits from their operation. For the past
12 months, we have been assessing these

issues and have devised scenarios to cover
the majority of likely outcomes. Based on
the worst case scenario (‘no deal’ on free
trade), we have determined that the risk of
increased costs of tariffs and any possibility
that our partners might be compelled to
‘switch off’ the interconnectors is low.

Throughout the year, we have been
engaging with our customers and
stakeholders, especially with our regulators,
as we seek to inform them of the Brexit
outcome we believe would be in the best
interests of consumers.

Strategic Report | Our Business Environment

National Grid Annual Report and Accounts 2017/18Strategic ReportHow we create value for our stakeholders
The long-term success of our business is critically dependent on the way
we work with a large number of important stakeholders. We aim to create
value for our stakeholders every day – and to continue doing so as the
energy landscape changes. The table below sets out our focus for the key
relationships that will help us Bring Energy to Life and deliver the energy
networks of the future.

Our stakeholders

Who they are and why they are important

How we are creating value over the long term

Where you can read more

Our customers

Our customers are the users of our
products and services.

Our customers want energy that is delivered
safely, reliably, sustainably and affordably.

Progress against our strategy,
Principal operations

In the UK, our key customers are
electricity and gas distributors and
generators. In the US, we have more
than seven million retail bill payers.

The communities
we work in

Our operations affect communities
where we work and live.

Being a responsible and sustainable
business is fundamental to the way
we work.

Targeted outcome: Creating or adapting
infrastructure to provide ready access to
clean energy, through smart grids and
evolving our networks to reflect changing
patterns of demand and supply over time.

By integrating sustainability into our
decision-making, we value the needs
of communities.

Targeted outcome: Preserving natural
resources and respecting the interests
of our communities.

Our commitment to being
a responsible business

Our regulators

In the UK, Ofgem regulates our
electricity and gas businesses and
transmission businesses.

We are heavily engaged with our
regulators in debates guiding future
energy policy direction.

Business environment,
Principal operations

Our suppliers

In the US, our retail activities are
regulated by state utility commissions.
Our wholesale activities (including energy
generation and interstate transmission)
are regulated by the Federal Energy
Regulatory Commission (FERC).

Our suppliers provide us with the goods
and services we rely on to deliver for
our customers.

They range from substantial
multinational companies to small-scale
local businesses providing bespoke
services when they are needed.

Our people

Our business is built by our people.

At 31 March 2018, we had more than
22,000 employees.

Targeted outcome: Frameworks within
which we can meet the changing energy
needs of the communities we serve.
Incentives for innovation and performance.

We are committed to long-term,
sustainable and fair working practices
with our suppliers, who must work to
our Supplier Code of Conduct.

Targeted outcome: Development of
stronger, long-term relationships critical
for the delivery of future projects.

We work to make sure we keep our
people as safe as possible. We train
them to deliver to the best of their abilities
and strive to maintain high levels of
engagement. In the UK and US, we have
inclusion and diversity policies, as well as
statistical information, that demonstrate
our commitment to providing an inclusive,
equal and fair working environment.

Our commitment to being
a responsible business

Our investors

Equity investors: We earn financial returns in
accordance with our regulatory contracts in
the UK and US. These contracts incentivise
us to invest in long-term sustainable
infrastructure in an efficient and cost-
conscious way.

Debt investors: Our debt investors provide
capital in the form of loans and bonds,
allowing us to optimise the way in which
we finance our investment.

Targeted outcome: Access to and retention
of a high-performing workforce with the
capabilities we need, delivering innovation.

Our investors desire long-term, sustainable
growth.

Financial review

Targeted outcome: Annual asset growth
in the range of 5-7%.

Dividend per share growth at least in line
with the rate of UK RPI growth each year
for the foreseeable future.

Balance sheet strength reflected in strong
credit metrics.

Strategic Report | How we create value for our stakeholders

National Grid Annual Report and Accounts 2017/18£60m

Potential savings over 20 years,
helping minimise household
energy bills

2,145

Tonnes potential CO2 equivalent
savings each year, helping reduce
our impact on the environment

1st

Winner of the Innovation Project
Award at the 2017 Institution of
Gas Engineers and Managers Gas
Industry Awards

A world first
in the pipeline

A robot will revolutionise how we
maintain our underground high-pressure
gas pipes, while adding value by saving
money and reducing our impact on the
environment, as Project Lead Dave
Hardman explains.

Our high-pressure gas pipes help bring
gas to 23.4 million UK homes. It’s vital we
keep all 4,760 miles (7,660 kilometres) in good
condition, which is hard when they’re buried
underground. But we’re going to change
how we check them, using a pioneering robot
being developed with the help of £5.7 million
of funding from Ofgem, through its Network
Innovation Competition.

Currently, the only way we can check our
site pipework is by digging. We choose these
locations based on what we know about
their age, and when they were last repaired.
Sometimes there’s repair work to do, but
not always. The Gas Robotic Agile Inspection

Device (GRAID) will give us the inside story
on the state of the pipes, taking away the
guesswork. And that means better value for
our repair budget. Once GRAID starts work
in late 2018, it could save around £60 million
over 20 years. Crucially, such savings help
minimise household energy bills. And the
carbon emissions we’ll cut are equivalent to
the amount 477 homes would use in a year.

It’ll need to be tough. Natural gas acts
like a liquid at high pressure. It creates five
times the force a submarine faces underwater.
To overcome this challenge, the robot’s twin
chassis design stabilises it while magnetic
tracks make it cling to the pipes. An engineer
will drive GRAID from the surface, making it
stop, reverse and zoom in on sections of pipe,
measuring thickness and looking for corrosion.

We’re sharing the story with our industry
and beyond, including rail infrastructure.

Pictures shown above
GRAID robot developed for use in high-pressure
underground gas pipelines.

Strategic Report | How we create value for our stakeholders

National Grid Annual Report and Accounts 2017/18Strategic ReportChairman’s statement

“ We remain on course
to deliver long-term
sustainable growth.”

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 foreseeable
future. Accordingly, the Board
has recommended an increase
in the final dividend to 30.44 pence
per ordinary share ($2.0606 per
American Depositary Share). If
approved, this will bring the full year
dividend to 45.93 pence per share
($3.0775 per American Depositary
Share), an increase of 3.75% over
the 44.27 pence per ordinary share
in respect of the financial year ended
31 March 2017.

See note 8 on page 124 for more
information on dividends.

Annual General Meeting 2018

The 2018 AGM will be held at 11:30am
on 30 July 2018 at the ICC, Birmingham.

In focus

Responsible business
www.nationalgrid.com/group/
responsibility-and-sustainability

Our KPIs
pages 14-17

In 2017/18 National Grid performed well,
both financially and operationally as a Group,
and strategically in evolving our regulated
US businesses towards achieving higher
growth and better returns.

While the UK continues to be the larger
contributor to overall operating profit following
the 2017 sale of a 61% stake in our UK Gas
Distribution business, the shape and dynamics
of the overall business are changing. Our
operations in the US are larger than our
operations in the UK in terms of employee
numbers, and the US also now offers stronger
growth prospects over the medium term.
The UK continues to be the larger contributor
in terms of operating profit.

We continue to be mindful of the large-scale
change that is affecting the energy sector and
are working hard to ensure our strategy and
business model adapt accordingly.

Share price
I am very conscious that the decline in our Total
Shareholder Return of 18.9% this financial year
has been disappointing because of the decline
in the share price over 2017/18 as a whole.
Our share price performance was driven by a
combination of factors, including rises in bond
yields and negative sentiment around political
and regulatory uncertainty in the UK. However,
for the vast majority of our 3.6 billion shares
in issue, we enjoy a long-term, stable and
supportive shareholder base.

Throughout the year, we worked hard to engage
with investors and to communicate clearly that
National Grid remains on course to continue
delivering long-term, sustainable growth.

Strategy
It is the Board’s role to set the strategic
direction of the Company and to scrutinise
management’s performance in terms of
delivering the strategy. This year, the Board was
pleased with the continued delivery of the core
regulated businesses in the UK, the progress of
our strategy to improve the returns and growth
opportunities in our US regulated businesses,
and the progress made in the development
of our interconnectors business.

Culture
In 2017/18, the Board started to implement the
recommendations of the Board effectiveness
review we undertook the previous year, several of
which touched upon culture. The National Grid
Board sees one of its key roles as being to
exemplify the Company’s values of ‘do the right
thing’ and ‘find a better way’. We have continued
this year to enhance the Board’s leadership role
in development of the Company’s culture.

Enhanced transparency
In light of recent events such as the collapse of
Carillion, we believe it is even more important we
provide investors with enhanced transparency
in respect of our assets and liabilities, a part of
which is discharging our responsibility to make
the Annual Report and Accounts fair, balanced
and understandable.

Some of the technicalities of International
Financial Reporting Standards (IFRS) make
reporting of performance challenging for
regulated utilities like National Grid, so we are
providing additional information on page 23 to
help inform investors about significant assets
and liabilities that do not form part of the
audited accounts.

Strategic Report | Chairman’s statement

National Grid Annual Report and Accounts 2017/18Special dividend
I was pleased in 2017/18 that we were able
to return money to investors following the
sale of 61% of our UK Gas Distribution
business. In total, we returned some £4 billion
to investors through a special dividend of
84.375 pence per share on 2 June 2017, and
an £835 million share buy-back programme,
which was completed in January 2018.

Awards
In 2017/18, National Grid won UK Business
in the Community’s Award for Environmental
Leadership in recognition of our work to reduce
our carbon footprint during construction. We
also won Business in the Community’s award
for Outstanding Employment after impressing
judges with the quality of our apprentice
opportunities and other initiatives to employ
young people. In the US, our Massachusetts
business was named one of the most energy
efficient utilities in America by the American
Council for an Energy-Efficient Economy.

Board changes
I would like on behalf of the Board to thank our
departing Finance Director Andrew Bonfield
for the significant contribution he has made
to National Grid over the last eight years and
to wish him every success for the future.

Pierre Dufour has decided that due to ill
health he will not be seeking re-election at
the forthcoming AGM. I would like to thank
him for his contribution and wish him all the
very best in the future.

The Board was delighted to appoint Amanda
Mesler as an independent Non-executive
Director with effect from 17 May 2018.
Amanda has more than 25 years of extensive
international leadership and general
management experience at CEO and Board
level. She brings a wealth of experience in
different sectors to National Grid’s Board,
in particular in the area of the application
of technology.

Ruth Kelly stepped down from the National
Grid Board in July 2017 and I would like to
thank her for the significant contribution she
made both to the Board and to the various
Committees with which she was involved.

Thank you
On behalf of the Board I would like to say
thank you to all National Grid employees for
their hard work and commitment, without
which the achievements of 2017/18 would
not have been possible.

Sir Peter Gershon
Chairman

In order to present a more comprehensive
picture of our results and financial position,
throughout this report we have used a number
of non-IFRS and regulatory performance
measures. Some of these measures form
part of the incentive arrangements for our
Executive Directors.

UK political environment
In 2017/18, National Grid was involved in
discussions with the UK Government on
energy issues related to Brexit, in particular the
importance of remaining within the European
Internal Energy Market (IEM) after March 2019.
Currently, the UK and the EU share 4GW of
electricity through interconnectors, including
1GW of electricity interconnection with Ireland.
We believe ensuring access to European
energy markets remains tariff-free post-Brexit
is in the best interests of energy users in the
UK and throughout Europe.

As a result of the Labour Party manifesto
for the 2017 general election, we have given
serious consideration to the prospect of
renationalisation of National Grid should the
Labour Party win the next UK general election.

The Board believes that since privatisation in
1990, National Grid has created and driven
value for customers, society and investors
in many ways, including:
• Over the past decade alone, we have
invested over £13 billion into required
network modernisation in England and
Wales, and we plan to continue to invest
more than a billion pounds every year.

• According to Ofgem, the cost of transporting
electricity through Britain’s energy network
has fallen by 17% relative to the retail price
index since the mid 1990s.

• Our own research shows that since

privatisation National Grid has created at
least £12 billion of benefits for consumers,
exceeding the benefits created for
shareholders by more than 65%.

We plan to increase our advocacy of these
and other benefits of privatisation over the
coming months.

US Tax Reform
In December 2017, the US enacted significant
tax reform which included the reduction of
the corporate tax rate from 35% to 21%. The
change in tax law holds significant benefits
for our customers by reducing the costs we
pass on to them for our services, while being
economically neutral for National Grid over
the long-term. We are continuing to work
with each of our regulators in the US to finalise
how the Tax Reform should be included in
customer rates.

Environmental sustainability
Our environmental sustainability performance
was strong in 2017/18. Highlights included
being significantly ahead of our target of
reducing greenhouse gas emissions by 45%
compared to 1990 a year ahead of schedule
(we have achieved a 65% reduction to date)
and being named on the Carbon Disclosure
Project’s ‘A’ list of companies, which puts us
in the top 5% of global participants in terms
of carbon disclosure and performance.

Strategic Report | Chairman’s statement

Full year dividend (pence per share)

42.03

42.87

43.34

44.27*

45.93

13/14

14/15

15/16

16/17

17/18

* excludes the special dividend of 84.375p.

Final dividend of

30.44p/share

expected to be paid on
15 August 2018

National Grid Annual Report and Accounts 2017/18Strategic ReportChief Executive’s review

Performance highlights

57.9p/share

Value Added
(2016/17: 51.6p/share)

Asset growth
(2016/17: 5%)

12.3%

Group Return on Equity (RoE)
(2016/17: 11.7%)

77%

Employee engagement index
(2016/17: 77%)

“ I believe strongly that
society now demands
more from business
than ever before.”

In 2017/18 National Grid made significant
progress in the execution of our strategic
priorities.

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

In both the US and the UK, we demonstrated
we not only recognise the imperative to change
with the times, but that we also possess the
willingness and expertise necessary to drive
our industry forward.

Performance highlights
In both the US and the UK, in 2017/18 we
worked hard to create real value for customers
and shareholders, and to implement cutting
edge innovation.

Over the course of the year, we delivered a
number of important projects that aligned with
our strategic priorities of growing the business,
optimising operational performance and ensuring
the Company is positioned to thrive in the future.

Our overall financial performance was good.
Our statutory operating profit grew 9% and
underlying operating profit on a constant
currency basis grew 6% to £3.5 billion.

Our Group Return on Equity (RoE) was 12.3%,
up from 11.7% the previous year, and Value
Added was £2 billion, equivalent to 57.9 pence
per share.

We invested £4.3 billion into the business,
growing our asset base by 6%.

We also performed well against the other key
metrics by which we benchmark our progress.

In terms of safety, our employee lost time injury
frequency rate was 0.10, which is consistent
with world class safety performance, evidence
of our continued total commitment to ensuring
no one is harmed as a result of our operations.

US
In the US, we enjoyed a good year, characterised
by strong growth. We invested a record
$3.3 billion into infrastructure and we increased
Return on Equity to 8.9%, from 8.2% the
previous year.

In line with our strategic priority of growing the
business, we filed for updated rate allowances
with regulators in key jurisdictions. These
allowances dictate the rates we can charge
for the services we provide to customers.
We filed new rate cases for gas distribution
in Massachusetts and for electricity and gas
distribution in Rhode Island (page 189).

We also reached agreement with regulators
for our Niagara Mohawk rate filing in upstate
New York, the first time our rates there had
been fully reviewed in five years.

The successful Niagara Mohawk filing means we
are now able to push ahead with infrastructure
projects worth some $2.5 billion over the next
three years. These projects will significantly
enhance reliability of gas and electricity supplies
for homes and businesses across upstate
New York.

Strategic Report | Chief Executive’s review

National Grid Annual Report and Accounts 2017/18Other US operational highlights in 2017/18
included the completion and energisation of the
first phase of our new $70 million South Street
Substation in Providence, Rhode Island, and
the commencement of our Metropolitan Natural
Gas Reliability Project to upgrade existing gas
distribution infrastructure in Brooklyn.

Additionally, we launched a customer
experience transformation programme to
improve the way we interact with customers at
a number of key touch points, from responding
to telephone enquiries to processing payments
and setting up new connections.

Over the course of the year, mindful of the
fact we operate within an evolving regulatory
environment, we also began preparing for
a new regulatory framework (RIIO-T2), which
will come into effect when the current one
expires in March 2021.

To this end, we responded to Ofgem’s
Framework Consultation, which aims to
establish the wider methodology of RIIO-T2,
and we also engaged customers and other
interested parties to discover their objectives
from the new period of regulation.

We also created a single capital delivery
function to manage construction of all future
major projects for the US electricity, gas and
transmission businesses. We anticipate the
new capital delivery function will achieve
significant savings by leveraging efficiencies
of scale in all areas of construction and
project management.

In 2017 we also successfully launched our
Gas Enablement Programme in Rhode Island
to optimise the operational performance of
our gas business through modernisation of all
aspects of our work, from asset management
to customer service. The programme will now
be rolled out across all US geographies in
which we operate, as we expect it to deliver
significant benefits for customers.

UK
In the UK, we faced new political and
regulatory pressures, notably on issues such
as affordability and renationalisation, as Sir Peter
mentioned on page 9. In response to these
pressures, we worked hard throughout the year
to communicate the many ways in which we
create and drive value for customers and society.

The speed of progress occurring in our industry
was starkly highlighted on 21 April 2017, when
Britain had its first working day free of coal
power generation since the Industrial Revolution.

Highlights of 2017/18 for National Grid in the
UK included the start of work to create a legally
separate company for the electricity System
Operator and the creation of significant value
for consumers through the completion of
several other landmark projects that showcased
our ability to deliver world-class efficiency
and innovation.

For example, in February 2018, I was honoured
to welcome HRH The Prince of Wales and HRH
the Duchess of Cornwall to the opening of the
ambitious, billion-pound London Power Tunnels
project. Completed on time and under budget,
the London Power Tunnels, which include new
substations in Highbury and Kensal Green,
are the most significant investment into the
UK capital’s electricity transmission system
since the 1960s.

We also continued to invest in innovation
throughout 2017/18, notably in the use of
cutting-edge robotics for underground
pipe inspections (page 7). Additionally, we
developed far-reaching plans to establish
a strategic rapid charging network across
the UK’s motorway system in order to
facilitate the coming electric vehicle
revolution (page 29).

In January 2018, I was disappointed by
Ofgem’s initial response to our proposal with
regard to connecting Hinkley Seabank (HSB)
to the electricity network. Ofgem’s response
indicated the regulator is considering ways in
which to keep returns on investment below a
level commensurate with the risk we attach to
the project. We believe this proposal would not
be in the best interests of consumers or the
wider energy sector as it seeks investment in
the future, and we will continue to work with
Ofgem in the hope of finding a way forward.

Exploring new opportunities
In April 2017, we established National Grid
Ventures to explore growth opportunities
in some of the most exciting areas of our
industry, including solar, battery storage
and interconnectors.

National Grid Ventures is managing the
£1.3 billion construction of three interconnectors
from the UK to Belgium, Norway and France,
and is also studying the commercial viability
of a fourth to Denmark.

Additionally, National Grid Ventures is leading
National Grid’s work to establish partnerships
with market leaders in renewable energy,
for example our partnership with Tesla on
a large-scale battery storage project on
the island of Nantucket in the US.

National Grid Ventures also launched a
Technology and Innovation team to explore
opportunities to proactively drive value and
growth through early stage adoption of
cutting edge technologies.

You can read about the exciting work
National Grid Ventures is doing on page 32.

People
National Grid is committed to doing everything
we can to ensure all members of staff work
in an environment in which they feel secure
and are able to thrive. In 2017/18, in light
of widespread news coverage of sexual
harassment in a range of industries, we
undertook a fundamental review of our
policies on sexual harassment and bullying
to ensure they are fit for purpose.

We also worked hard throughout the year
to promote careers that STEM subjects
can unlock. As one of the world’s leading
engineering companies, we are fortunate to be
able to help young people from a diverse range
of backgrounds kick-start rewarding careers,
through apprenticeships or other forms of
professional training. In 2017/18, for example,
I was delighted we were able to enrol 369
people into professional training schemes
in the US and the UK.

Bring Energy to Life
During the year I was pleased with the progress
we made in raising awareness within the
business of our Purpose, which is to Bring
Energy to Life, our Values, which are to find
a better way and to do the right thing, and our
Vision, which is to exceed the expectations
of the people we serve and to make possible
the energy systems of tomorrow.

I believe our purpose, vision and values are
powerful tools with which to build trust by
demonstrating our commitment to the societies
we serve is genuine, not only through provision
of our traditional services, but also by championing
the kind of change that facilitates progress and
meaningfully improves lives.

Looking ahead
Over the coming year, while continuing to work
to improve our safety culture, we will also focus
on improving our core competencies in terms
of operational and customer performance.

In line with our regulatory strategy, we will work
hard to make sure the outcomes of our rate
filings in the US continue to be successful and
that our dialogue with Ofgem in the UK ahead
of RIIO-T2 is effective. We will also seek to
recruit and develop talented people throughout
the business to help us deliver our strategy
and vision.

As we grow the business, we will embrace
opportunities to evolve as a purpose-led
organisation, while also continuing to play a
leadership role within our industry, particularly
in the area of energy transformation.

We will also develop both National Grid Ventures
and our existing expertise in increasingly
important areas, such as digital technologies,
data analytics and artificial intelligence.

Thank you
I was really proud during the year to be part
of an organisation, that worked so hard on
so many fronts – improving the quality of life
of millions of people by providing vital services
in an ever more effective way.

National Grid faces many challenges, but
our performance during the year showcased
the collective spirit I believe will ensure we
go on delivering sustained value for our
stakeholders and for wider society.

Thank you to everyone who worked hard
for National Grid in 2017/18.

John Pettigrew
Chief Executive

Strategic Report | Chief Executive’s review

National Grid Annual Report and Accounts 2017/18Strategic ReportOur purpose, vision, values and strategy
To make sure National Grid is well positioned to respond to
changes in our business environment and within the energy
industry, we continue to adhere to and promote our purpose,
vision, values and strategy.

Our purpose

‘Bring Energy to Life’.

Our vision

‘We will exceed the expectations
of our customers, shareholders
and communities today and
make possible the energy
systems of tomorrow’.

Our values

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

Our strategy

‘We have three strategic
priorities for our business
that will help us achieve
our vision: find new ways of
optimising our operational
performance, look for
opportunities to grow our
core business, and make
sure National Grid is better
equipped for the future’.

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 makes us
proud about the work we do.

Essentially, ‘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 among 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.

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 continue to see 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 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.

‘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.

Finding a better way to connect gas
It currently takes around three years and
£2 million to connect new gas customers
to the National Transmission System (NTS).
For smaller connections, we’re working to
halve the cost, and reduce the time to under
one year through Project CLoCC (Customer
Low Cost Connections).

We will deliver these savings in three main
ways. Firstly, we’re developing an online gas
connections portal to replace the current
paper-based process. Customers will be able
to generate indicative quotes within seconds,
and will benefit from greater transparency on
the status of their applications which they will
be able to track from start to finish.

Secondly, we’ve developed a suite
of pre-approved and pre-appraised
standardised connection designs, ready
to order off the shelf. This will save our
customers significant time and money.

Finally, we’re looking at ways to optimise
commercial arrangements through changes
to relevant gas regime governance. An
example of this is the work we have done
towards removing the absolute requirement
for every new NTS exit connection to
include a remotely operable valve (ROV)
installation. This governance change,
which became effective in January 2018,
will reduce costs for customers.

The project is running under budget and
on schedule to complete later in 2018.

Strategic Report | Our purpose, vision, values and strategy

National Grid Annual Report and Accounts 2017/18Our strategy
We are focused on three strategic priorities for our business, which will set the foundations for our future success. These are described below.

1. Find new ways of optimising
our operational performance

2. Look for opportunities to
grow our core business

3. Make sure National Grid is

better equipped for the future

Why it’s important

Our customers want and need us to
be more efficient, so we must find ways
to improve how we run our business.

To make possible the energy systems
of tomorrow requires investment in our
core and many areas close to our core.

What this means

We have looked at enhancing our
productivity and customer experience
through more efficient and customer-
focused processes. 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.

We continue to pursue business
development opportunities that are
close to our core business. In the
US, we are pursuing opportunities in
electricity and gas transmission. In the
UK, interconnectors will continue to
be our focus over the next decade.

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.

National Grid Ventures was established
in April 2017. National Grid Ventures is
tasked with creating value and gathering
knowledge through investment in
adjacent businesses, including
utility-scale projects, distributed energy
opportunities and the development of
new and evolving technologies.

Associated
principal risks
to achieving
our priorities

Operational: safety or environmental
event; cyber security breach; failure
to predict and respond to significant
disruption of energy; failure to
adequately manage data.

Strategic and regulatory: failure to secure satisfactory regulatory agreements;
failure to deliver our proposition due to political and economic uncertainty; failure
to adequately anticipate and minimise the adverse impact from disruptive forces
on our business model.

People: failure to build sufficient capability and leadership capacity required to deliver our vision and strategy.

How we measure
ourselves

• Safety performance
• Customer satisfaction scores***
• Network reliability***
• Group RoE
• Greenhouse gas emissions reduction

• Regulated asset base growth
• Capital investment

• Innovation investment

The metrics below underpin all our strategic priorities:
contribution of our corporate responsibility work; skills and capabilities; employee engagement;
workforce diversity; adjusted EPS; Value Added

Performance
in 2017/18**

0.10

Employee lost time injuries
per 100,000 hours worked
in a 12-month period
(2016/17: 0.10)

Asset growth
(2016/17: 5%)

59.5

Adjusted EPS
(2016/17: 56.9)

12.3%

Group RoE
(2016/17: 11.7%)

57.9
p/share

Value Added
(2016/17: 51.6p/share)

7.7m

Tonnes of CO2 equivalent
(2016/17: 9.1m)

£4,251m

Capital investment
(2016/17: £3,862m)*

77%

Employee
engagement index
(2016/17: 77%)

24.6%

Women in workforce
(2016/17: 24.1%)

£73m

Contribution of our corporate
responsibility work
(2016/17: £9m)

35,425

Interactions with young
people on STEM subjects
(2016/17: 29.6k)

17.9%

Ethnic minority in workforce
(2016/17: 17.3%)

Includes investments in joint ventures and associates (excluding St. William).

*
** For reconciliations between statutory and non-IFRS performance measures see pages 206-214.
*** Customer satisfaction and network reliability are not measured at a Group level. See pages 14-17 for the business segment performance.

Strategic Report | Our purpose, vision, values and strategy

National Grid Annual Report and Accounts 2017/18Strategic ReportProgress against our strategy
The Board uses a range of financial and non-financial metrics,
reported periodically, against which we measure Group
performance. These metrics are aligned to our three strategic
priorities. In addition there are a number of metrics that underpin
all our strategic priorities.

Metrics that underpin all
three strategic priorities

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.

Employee engagement index (%)

Data not
available

13/14

14/15

15/16

16/17

17/18

We measure employee engagement through
our employee engagement survey. The results
of our 2017/18 survey, which was completed by
87% of our employees, have helped us identify
specific areas where we are performing well
and those areas we need to improve.

This year’s employee engagement score
was 77%.

Workforce diversity
We measure the percentage of women and
ethnic minorities in our workforce. We aim to
develop and operate a business that has an
inclusive and diverse culture (see page 37).

Workforce diversity (%)

24.1

24.6

17.3

17.9

Data not
available
13/14

Data not
available
14/15

Data not
available
15/16

Women
Ethnic minorities

16/17

17/18

During 2017/18, we continued to increase the
diversity of our workforce and saw an increase
over the last 12 months of female and minority
groups: from 24.1% to 24.6% females (+0.5%
increase) and from 17.3% to 17.9% minorities
(+0.6% increase). The two years’ worth of data
we are showing does not include our UK Gas
Distribution workforce. Data prior to 2016/17
would include this data and is no longer being
shown on the graph.

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

2.1

1.7

44.7

1.8

1.9

2.0

47.6

51.6

57.9

For the year ended 31 March 2018, adjusted
EPS increased by 2.6 pence to 59.5 pence,
reflecting a lower number of shares following
the return of capital, increased revenue and
a 39% share of Cadent profits, partly offset
by increased costs, including the impact of
major US storms.

A target for adjusted EPS is included in the
incentive mechanisms for certain Executive
Directors’ remuneration within the Annual
Performance Plan (APP). You can find more
information in our Directors’ Remuneration
Report on pages 63-79.

13/14

14/15

15/16

16/17

17/18

Value Added per share (pence)

See page 206-214 for reconciliations to
our statutory measures.

While we have no specific target, our overall
aim is to grow Value Added sustainably
over the long term, while maintaining our
performance for our other financial KPIs. Value
Added in the year of £2.0 billion or 57.9 pence
per share was higher than 2016/17 (£1.9 billion
or 51.6 pence per share), primarily as a result
of higher RPI inflation on UK regulated assets
(March 2018 RPI of 3.3%, prior year 3.1%) and
improved US performance. Of the £2.0 billion
Value Added in 2017/18, £1.3 billion was paid to
shareholders as cash dividends and £0.2 billion
as share repurchases, with £0.5 billion retained
in the business.

A target for Value Growth, a derivative of Value
Added, is included in the incentive mechanisms
for executive remuneration within the Long
Term Performance Plan (LTPP). You can find
more information in our Directors’ Remuneration
Report on pages 63-79.

Adjusted EPS
Adjusted earnings represents profit for the
year attributable to equity shareholders.
This excludes exceptional items and
remeasurements (see page 123). Adjusted
EPS provides a measure of shareholder
return that is comparable over time.

Adjusted EPS from continuing operations
(pence)

43.9

48.0

56.9

59.5

14/15

15/16

16/17

17/18

Contribution of our corporate
responsibility work
Working with our communities is important
in creating shared value for us as a business,
the people we serve and the communities
where we work.

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 through
our social purpose activities.

Contribution of our corporate
responsibility work (£m)

Not
measured

13/14

14/15

15/16

16/17

17/18

In the UK the overall contribution of our
corporate responsibility work was valued at just
over £66 million. This is a significant increase
on last year due to the donations we have been
making through the Warm Homes Fund. In the
US, our contribution was just under £7 million.
This gives a combined Group-wide contribution
of just over £73 million.

Strategic Report | Progress against our strategy

National Grid Annual Report and Accounts 2017/18Our customer satisfaction KPI comprises
Ofgem’s UK electricity and gas transmission
customer satisfaction scores, the US residential
Customer Trust Advice survey metric and
National Grid Ventures’s Net Promoter Score
metric. This year our UK Gas Transmission
score was 0.4 points lower than last year.

The US metric measures customers’ sentiment
with National Grid by asking customers their
level of trust in our advice to make good energy
decisions. The metric, which is tied to the
value customers feel they receive from National
Grid, fell below target primarily due to higher
customer bills and storm-related outages.

NPS measures the willingness of customers
to recommend National Grid to others and is
a measure of their loyalty. This is the first year
we have reported a customer satisfaction

Network reliability

score for National Grid Ventures. The score i
s the average across National Grid Metering
Domestic, National Grid Metering I&C (Industrial
& Commercial), Grain (LNG Primary Shippers,
LNG Road Tanker Operators) and Interconnectors.
We currently do not have a target score.

We are also measuring NPS in the core UK
business to understand our customers’ views
and to introduce a benchmark measure.
We will comment more on this next year.

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

UK Electricity
Transmission

UK Gas
Transmission

US Electricity
Transmission

US Electricity
Distribution

Target or base
%

16/17
%

17/18
%

Performance
against target

99.9999

99.999964

99.999984

100

99.9

99.97500

99.996151

99.97

99.994

99.953

99.995

exceeded

not
achieved

no target

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

Find new ways
of optimising our
operational performance

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
lost time injury frequency rate for the Group
has been 0.10 or lower throughout the year,
which is consistent with world-class safety
performance. The below data does not
include UK Gas Distribution employees.

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

0.15

0.13

0.09

0.10

13/14

14/15

15/16

16/17

17/18

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

Customer satisfaction

NGV

Methodology

Measure

RIIO-related metrics
agreed with Ofgem

Customer Trust
Advice metric

Net Promoter
Score (NPS)1

Score from
surveys

Score from
survey

UK Electricity
Transmission

UK Gas
Transmission

16/17

17/18

Target

7.4

8.0

7.7

7.6

6.92

US – Residential3

60.7%

56.6%

57.4%

NGV

–

+34

–

1. NPS is a commonly used tool to measure customer
experience. It is an index ranging from -100 to +100.
2. Figures represent our baseline targets set by Ofgem for
reward or penalty under RIIO (maximum score is 10).

3. Our US customer satisfaction methodology is the
Customer Trust Advice survey metric. The survey
specifically focuses on the services we provide for
our customers and represents their views of us.

Strategic Report | Progress against our strategy

National Grid Annual Report and Accounts 2017/18Strategic ReportProgress against our strategy continued

Find new ways
of optimising our
operational performance
continued

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. UK Gas Transmission missed
its target as there was cessation to the flow
at one supply point on the NTS on a small
number of occasions. You can find more
information about our UK principal operations
on pages 28-29, and our US principal
operations on pages 30-31.

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 (%)

11.4

11.8

12.3

11.7

12.3

13/14

14/15

15/16

16/17

17/18

Group RoE increased during the year to
12.3%, from 11.7% in 2016/17. The UK
regulated businesses delivered a solid
operational return of 12.1% in aggregate
(2016/17: 13.1%), including an assumption
of 3% long-run average RPI inflation.
The US operational return of 8.9% was up
on last year’s 8.2%, as the US business
delivered a 20% increase in underlying
operating profit (at constant currency),
reflecting increased revenues from new
rate plans in MECO, KEDNY and KEDLI.

A target for Group RoE is included in the
incentive mechanisms for certain Executive
Directors’ remuneration within both the APP
and the Long Term Performance Plan LTPP.
You can find more information in our Directors’
remuneration on pages 63-79.

Look for opportunities to
grow our core business

Climate change
This is a measure of our reduction of Scope
1 and Scope 2 greenhouse gas emissions
of the six primary Kyoto greenhouse gases.
Our target is to reduce our greenhouse gas
emissions by 45% by 2020, 70% by 2030,
and 80% by 2050, compared with our 1990
emissions of 21.6 million tonnes.

How we assess progress:
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. It also contributes to our Group
target of 5-7% asset growth each year.

Greenhouse gas emissions (Scope 1 and 2
(million tonnes of carbon dioxide equivalent))

Total regulated asset base (£m)
and regulated asset base growth (%)

10.1

10.2

9.5

9.1

37.0

38.8

34.7

42.6

10%

33.6

33.8

7.7

65%

56%

58%

53%

13/14

14/15

15/16

16/17

17/18

reduction against 1990 baseline

Our Scope 1 greenhouse gas emissions for
2017/18 equate to 4.8 million tonnes of carbon
dioxide equivalent (2016/17: 5.8 million tonnes)
and our Scope 2 emissions (including electricity
line losses) equate to 2.9 million tonnes (2016/17:
3.4 million tonnes); combined this is a 65%
reduction against our 1990 baseline. These
figures now include line losses, but exclude UK
Gas Distribution. These are equivalent to an
intensity of around 505 tonnes per £1 million
of revenue (2016/17: 424).

Our Scope 3 emissions for 2017/18 were
31.9 million tonnes (2016/17: 34 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.

Reporting disclosure of our Scope 1, 2
and 3 emissions is part of the Task Force on
Climate-related Financial Disclosures (TCFD)
recommendations. You can read more
about TCFD on page 192.

13/14

14/15

15/16

16/17

Regulated asset base growth

16/17
represented

17/18

In total, our UK RAV and US rate base
increased by £0.2 billion (0.6%) in the year to
£33.8 billion. This reflects the continued high
levels of investment in our networks in both the
UK and US, offset by the impact of the weaker
US dollar. Excluding the impact of FX, growth
was 5.7%. 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 for 2016/17 decreased to £33.6 billion
(from £42.6 billion), as shown above.

Capital investment
‘Capital investment’ and ‘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 year. St William Property Limited
is excluded based on the nature of this joint
venture arrangement.

Capital investment (continuing operations (£m))

£m

2,955

2,958

3,380

4,251

3,862

13/14

14/15

15/16

16/17

17/18

Capital investment increased in the year by
£389 million (10%). Increased investment in
our US Regulated business, higher spend on
UK gas pipelines, and increased investment in
our interconnector projects were partly offset
by an unfavourable exchange rate impact of
£145 million.

Strategic Report | Progress against our strategy

National Grid Annual Report and Accounts 2017/18Performance highlights

57.9p/share

Value Added
(2016/17: 51.6p/share)

Growth in our total assets
(2016/17: 5%)

12.3%

Group Return on Equity (RoE)
(2016/17: 11.7%)

77%

Employee engagement index
(2016/17: 77%)

Make sure National Grid
is better equipped for
the future

How we assess progress:
Innovation
We are in the midst of an energy revolution
with the economic landscape, developments
in technology, evolving business models
and consumer behaviour all changing at
an unprecedented rate.

Our Gas Transmission projects have included
using light detection and ranging to carry out
aerial inspections of our pipeline; 3D printing
to allow an asset to be repaired rather than
replaced; and artificial intelligence to more
efficiently identify and mitigate corrosion
issues across the network.

We are focusing our innovation activities on
four value themes:
Managing assets – looking for innovative
ways to manage the life of our assets. The
better we understand what affects them, the
better we can maintain them at the lowest
cost and least disruption to our customers.
Efficient build – finding ways to reduce
the cost of building new infrastructure, such
as improving the design of the network and
trialling equipment that can be used more
flexibly, as well as looking at ways to improve
the design of the network.
Service delivery – we are exploring new
ways to provide value for our customers and
consumers as the energy system evolves.
By understanding the present and future
expectations of our customers and
stakeholders, we can develop the right
kind of products and services.
Corporate responsibility – we are constantly
researching and developing safer working
practices, including using materials with less
potential to cause harm to the environment.

Investment in research and development
during the year for the Group was £13 million
(2016/17: £14 million; 2015/16: £19 million).
On pages 204-205, you can read more about
some of the innovation work we have been
progressing during 2017/18.

For example, in the UK, we have signed
a £40 million innovation partnership with
Siemens to research and develop the
use of gas-insulated lines on the electricity
transmission network. Within this partnership,
we also plan to develop an alternative SF6
free insulating gas mixture that has less than
0.05% of the global warming impact of SF6.

On Deeside, we are converting an existing
substation into a trial facility to test new
technologies off network. It will be the first
facility in Europe where assets can be tested
around the clock.

Power Potential is a £9.5 million System
Operator project in collaboration with UK
Power Networks. £8.0 million of the project is
funded through the 2016 Network Innovation
Competition (NIC). The project aims to create
a regional reactive power market for distributed
energy resources and generate additional
capacity on the network.

In the US, 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 sites are designed with
advanced grid interactive control features,
beyond what typical PV facilities are required
to provide. We are also engaged with Electric
Power Research Institute (EPRI) on distributed
energy resources integration, energy storage,
asset management, system operations,
information and communication technology,
and system planning.

Lessons learned from the 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.

Skills and capabilities
We support developing the skills and
capabilities of young people through skills-
sharing employee volunteering, especially
in 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 many young people
to get involved in STEM subjects.

Skills and capabilities (Interactions)

35,425

29,591

18,408

Data not
available

13/14

14/15

15/16

16/17

17/18

We measure quality (>1 hour) interactions with
young people on STEM subjects. In the UK, in
2017/18, we have had 2,699 interactions with
young people on STEM subjects, and 32,726
interactions in the US. Overall we have seen a
total of 35,425 interactions with young people
on STEM, an increase of 5,834. The 2017/18
data excludes UK Gas Distribution. All figures
prior to 2017/18 include UK Gas Distribution.

Strategic Report | Progress against our strategy

National Grid Annual Report and Accounts 2017/18Strategic ReportInternal control and risk management
The Board is committed to protecting and enhancing our reputation
and assets, while safeguarding the interests of our shareholders.

Top down, bottom up assessment

Risk management activities take place
through all levels of our organisation.
Through a ‘top down, bottom up’
approach, all business areas identify the
main risks to our business model and
to achieving their business objectives.
Each risk is assessed by considering
the financial and reputational impacts,
and how likely the risk is to materialise.
The business area identifies and
implements actions to manage and
monitor the risks. The risks and actions
identified are collated in risk registers
and reported at functional and regional
levels of the Company quarterly. The
most significant risks for the UK and US
businesses are highlighted in regional
risk profiles and reported to the Group
Executive Committee and the Board
twice a year. In addition to these
reports, the Group Executive
Committee and the Board may also
identify and assess principal risks.
These risks and any associated
management actions are cascaded
through the organisation as
appropriate.

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.

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. The process
is designed to support the delivery of our vision
and strategy, described on pages 12-13.

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.
These top risks are agreed through discussions
of the Group’s risk profile with the Executive
Committee and the Board. The risks are
reported and debated with the Group Executive
Committee and Board every six months.

A broad range of factors are considered when
determining what our principal risks should
be. Brexit is not currently one of our principal
risks but the implications continue to be kept
under review, especially in relation to our
access to energy markets and the impacts
on interconnector revenues and costs. For the
past 12 months, our Brexit working group has
been assessing these issues and has devised
scenarios to cover the likely outcomes. Based
on the worst case scenario (‘no deal’ on free
trade), we have determined that the risk of
increased costs of tariffs and any possibility that
our partners might be compelled to ‘switch off’
the interconnectors is low. Throughout the year,
we have been engaged with our customers
and stakeholders, especially with our
regulators, as we seek to inform them of the
Brexit outcome we believe would be in the
best interests of consumers.

The Board has also considered the potential
for renationalisation of energy supply networks
by the UK Labour Party. Should the UK Labour
Party come into power, the timing and routes
for energy supply network renationalisation
generally are currently uncertain, and therefore
the impact upon National Grid plc remains
unclear. Renationalisation options we have
considered have included acquisition of the
listed plc, the UK business, the transfer of
transmission assets to ‘regional communities’
and regulatory change. The Government has

to pay fair compensation for the Company’s
property which will be determined at the time,
and which could be calculated in a number of
different ways. We have canvassed a wide range
of stakeholders including government officials,
consumers and members of the public to
understand the impact of renationalisation
on certain stakeholder groups.

In addition to the issues above, senior leaders
and the Board have also considered certain
aspects of the principal risks in more detail,
including cyber security, emerging technology,
compliance with new General Data Protection
Regulation, asset safety, US tax reform,
and Ofgem’s ‘minded to’ consultation on
the delivery model for a project to connect
the Hinkley Point C power station to the
electricity network.

The principal risks are tested annually to
establish the impact of the risks on the Group’s
ability to continue operating and to 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 26). The Board,
Executive Committee and other leadership
teams discuss the results of the annual testing
of our principal risks at the end of the year.

Changes during the year
This year, a reassessment of the Company’s
principal risks and approach to risk appetite
was undertaken by the Executive Committee
and the Board. The purpose of the assessment
was to validate that we have identified the right
risks in view of our strategy, priorities, and
changing external environment, to identify
potential new or emerging risks, and to develop
a risk appetite framework that will aid better
decision-making within the business.

The output from these workshops resulted in
two new principal risks: ‘Failure to predict and
respond to a significant disruption of energy
that adversely impacts our customers and/or
the public’ and ‘Failure to deliver any one of
our customer, investor and wider stakeholder
propositions due to increased political and
economic uncertainty’. One risk was removed
from the list of principal risks and several
have been reworded and/or consolidated
to better reflect the current meaning of the
risk. The principal risks are presented in the
table opposite.

The workshops also resulted in changes
to our risk appetite framework, including an
update to the categories in view of current
priorities and the determination of the risk
appetite position for each risk appetite category.
A system of classification of risks into categories
(Operational, Strategic, Regulatory, People and
Financial) has been implemented in accordance
with the revised risk appetite framework. Risk
categories help to distinguish the management
approach to mitigation. During this coming
year, we will embed the new framework
within the organisation.

Strategic Report | Internal control and risk management

National Grid Annual Report and Accounts 2017/18Our principal risks and uncertainties
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 considering 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 actions taken by management, are provided
in the table below. We have provided an overview of the
key inherent risks we face on pages 193-196, as well
as our key financial risks, which are incorporated within
note 30 to our consolidated financial statements on
pages 158-164.

Operational risks

Operational risks relate to the risk of losses resulting from inadequate or failed internal processes, people and systems, or due to external
events. These risks normally fall within our low risk appetite level as there is no strategic benefit from accepting the risk and accepting the
risk is not in line with our vision and values.

Our operational principal risks have a low likelihood of occurring, but have a high level of impact should the event occur without effective
prevention and mitigation controls. The risk owners, executive leaders, and their teams develop and monitor actions to control the risks.
Operational risks are managed through policy, standards, and procedure-based controls, active prevention and monitoring. The operational
risks link to our strategic priority of ‘Find new ways of optimising our operational performance’. Principal risk assessment included
reasonable worst case scenario testing – i.e. gas transmission pipeline failure, loss of licence to operate, cyber security attack – and the
financial and reputation impact should a single risk or multiple risks materialise. External events over this past year – the extreme weather
events, the WannaCry cyber security attack, new data privacy legislation – were considered in the assessment and testing, as well as in
the development of mitigation actions.

Please also refer to page 192 for the discussion of climate-related influences on risk management.

Risks
Catastrophic asset failure results in a significant safety and/or
environmental event.
Risk trend:

Major cyber security breach of business, operational technology
and/or critical national infrastructure (CNI) systems/data.
Risk trend:

Failure to predict and respond to a significant disruption of energy
that adversely affects our customers and/or the public.
Risk trend:

Failure to adequately identify, collect, use and keep private the
physical and digital data required to support Company operations
and future growth.
Risk trend:

Actions taken by management
We continue to commit significant resources and financial
investment to maintain the integrity and security of our assets
and data. This year, we have continued to focus on risk mitigation
actions designed to reduce the risk and help meet our business
objectives. Monitoring action status has been incorporated into
various business processes and senior leadership meetings.
Examples of actions include:
• Our Group-wide process safety management system is in

place to make sure a robust and consistent framework of risk
management exists across our higher hazard asset portfolio.

• We have implemented asset management and data

management standards with supporting guidelines to provide
clarity around what is expected, with a strong focus on what
we need in place to keep us safe, secure and legally compliant.
In support of this, we developed a capability framework to make
sure our people have the appropriate skills and expertise to
meet the performance requirements in these standards.

• We continually invest in strategies that are commensurate with
the changing nature of the security landscape. This includes
collaborative working with the Department for Business, Energy
and Industrial Strategy (BEIS) and the Centre for Protection
of National Infrastructure (CPNI) on key cyber risks, as well as
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.

• Business continuity and emergency plans are in place and
practised to ensure we quickly and effectively respond to a
variety of incidents – storms, physical and cyber-related
attacks, environmental incidents and asset failures.
• 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.

Strategic Report | Internal control and risk management

National Grid Annual Report and Accounts 2017/18Strategic ReportInternal control and risk management continued

Strategic and
regulatory risks

Strategic risk is the risk of failing to achieve the Company’s overall strategic business plans and objectives, as well as failing to have the
‘right’ strategic plan. We voluntarily accept some risk so we can generate the desired returns from our strategy.

Management of strategic risks focuses on reducing the probability that the assumed risk would materialise, and improving the Company’s
ability to effectively respond to the risk should it occur. The risk owners, executive leaders, and their teams develop and monitor actions to
control the risks. These risks link to our strategic priorities of ‘look for opportunities to grow our core business’ and ‘make sure National Grid
is better equipped for the future’. The political climate and policy decisions of our regulators this past year were key considerations
in assessing our risks.

Risks
Failure to influence future energy policy and secure satisfactory
regulatory agreements.
Risk trend:

Failure to deliver our customer, stakeholder and investor proposition
due to increased political and economic uncertainty.
Risk trend:

Failure to adequately anticipate and minimise the adverse impact
from disruptive forces such as technology and innovation on our
business model.
Risk trend:

Actions taken by management
In both the UK and the US, we strive to maintain a good
understanding of the regulatory agenda and emerging issues,
so that robust, public interest aligned responses can be selected
and developed in good time. Our reputation as a competent
operator of important national infrastructure is critical to our ability
to do this. We have plans and governance structures in place to
address specific issues such as RIIO-T2 and US rate case filings
and continuously work to foster open and effective relationships
with our regulators and other stakeholders.

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 National Grid Board strategy offsite discussions,
are reviewed regularly to ensure they continue to support 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.

We created the Group Technology and Innovation team to develop
our strategy with regards to new technology, 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 in 2015 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.

People

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 our strategic objectives is vital to our success. We must attract, integrate and retain the talent we need at all levels
of the business.

Risks
Failure to build sufficient capability and leadership capacity
(including effective succession planning) required to deliver
our vision and strategy.
Risk trend:

Actions taken by management
Strategic workforce planning has been embedded in our US and
UK organisations. This process helps to effectively inform financial
and business planning, as well as human resourcing needs.

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, including the
UK annual residential work experience week and the US Pipeline
and Graduate Development Programmes.

The rigour of our succession planning and development planning
process has been improved over the year, particularly at senior
levels, and is now being applied deeper into the organisation.
Our Strategic Talent Acquisition team now includes internal
executive search capability and market mapping of critical roles.
Ongoing attention is required in relation to the ethnic diversity of
our management population. There are multiple activities under
way to drive this agenda, including ‘blind’ talent and selection
processes, development interventions and a global review of
our inclusion and diversity strategy and resources.

Financial risks

While all risks have a financial liability, financial risks are those which directly relate to financial controls and performance.
Financial risk management is a critical process used to make investment decisions and aims to maximise investment returns
and earnings for a given level of risk.

Our key financial risks, which are incorporated within the notes to our consolidated financial statements, are described in note 30
to our financial statements on pages 159-164.

National Grid Annual Report and Accounts 2017/18

Strategic Report | Internal control and risk management

Our internal control process
We have a number of processes to support our
internal control environment. These processes
are managed by dedicated specialist teams,
including: risk management; ethics and
compliance management; corporate audit and
internal controls; and safety, environment and
health. Oversight of these activities is provided
through regular review and reporting to the
appropriate Board committees, as described
in the Corporate Governance section on
pages 41-79.

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,
UK Bribery Act legislation, appropriateness
of financial disclosures and procedures for
risk and compliance management, business
conduct, and internal audit. The Board is also
kept informed of issues by the Group Executive
Committee, sub-committees of the Board
through verbal and written reports, the CEO
updates, and the legal updates from the Group
General Counsel and Company Secretary.
‘Deep dive’ sessions are conducted on
significant risk issues throughout the year.

Reviewing the effectiveness of our
internal control and risk management
The Board continually monitors and assesses
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 2018 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. It noted that no material weaknesses
had been identified by the review and
confirmed that it was satisfied the systems
and processes were functioning effectively.

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 bi-annual 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 bi-annual review by the
Audit Committee.

A feature of our internal controls system is
our three lines of defence model. This model
is a way of explaining the relationship between
functions and how responsibilities for risk and
controls are allocated and monitored. Each
business function owns and is responsible for
managing its own particular risk and controls
(the first line of defence). Central management
teams (the second line of defence) act as an
advisory function on implementing the principal
risk assessments and actions taken to mitigate
and manage those risks. 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).

The Certificate of Assurance (CoA) from the CEO
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
annually in support of the Company’s full year
results. The Audit Committee considers the
CoA and provides a recommendation to the
Board in support of its review.

Internal control over financial reporting
The periodic Sarbanes-Oxley (SOX) Act reports
on management’s opinion on the effectiveness
of internal control 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 SOX Act and are received
directly from the Group Controls Team; and
through the Executive and Audit Committees.
A programme is currently under way to identify
and implement process improvements and
best practices.

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 CEO 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.
Each month, the Finance Director presents a
consolidated financial report to the Board.

As part of our assessment of financial controls
in previous years, we identified a number of
deficiencies in our financial control framework.
We are making progress in remediating these
deficiencies. For more information, including
reporting, see the report of the Audit
Committee on page 49.

Strategic Report | Internal control and risk management

National Grid Annual Report and Accounts 2017/18

Strategic ReportFinancial review
We delivered a strong financial performance this year, driven
by increased US revenues. We completed our £4 billion
return of capital and funded increased investment while
maintaining a healthy balance sheet.

This section

We explain how we create value
for our shareholders and provide
commentary on our key financial
performance metrics.

For details on how we define our
alternative performance measures
and regulatory performance measures,
refer to pages 206-214.

More detailed analysis is located in
the Financial Statements as follows:

Consolidated income statement:
page 96.

Principal operations by segment:
page 111.

Statement of financial position:
page 100.

Consolidated cash flow statement:
pages 102-103.

Borrowings: page 141.

Commentary on UK and US regulation:
pages 186-191.

Commentary on our financial
performance and position for the year
ended 31 March 2017 compared with
31 March 2016: pages 215-216.

Capital investment:

Additions to property, plant and
equipment, plus contributions to JVs
and associates, other than the St
William property JV (contributions
to St William are linked to property
site transfers).

Regulated asset base:

When considering the size of our asset
base, we reference our regulated asset
base. This represents a measure by
our regulators of the invested capital
on which we are authorised to earn
a cash return, and includes our
regulatory asset value in the UK,
plus our rate base in the US.

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

Revenue
and proﬁts

The vast majority of
our revenues are set
in accordance with our
regulatory agreements
(see pages 186-191),
and are calculated based
on a number of factors
including investment
in network assets;
performance against
incentives; allowed
returns on equity and
cost of debt; and
customer satisfaction.

Cash ﬂows

Investment

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, and 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
so we can continue to
deliver safe, reliable, and
cost-effective networks.

In addition to our regulated operations we own a UK metering business generating income
primarily through meter rentals. We also own a diverse and growing portfolio of commercial energy
businesses operating in competitive markets across the UK and US. These include our Grain LNG
terminal and electricity interconnectors between the UK and continental Europe, and between the
US and Canada. These are generally electricity and gas infrastructure assets with a low risk profile
and stable cash flows, underpinned by long-term contracts or regulatory arrangements. We also
own a property business, developing and selling surplus land in our portfolio.

In order to deliver this value, we:
• aim to operate within our regulatory frameworks as efficiently and compliantly as possible;
• perform well against our regulatory incentives, in order to deliver customer benefits and

good returns;

• manage our cashflow requirements and secure low cost funding; and
• maintain a disciplined approach to investment in our networks.

Our financial performance explained
In addition to our statutory reporting under IFRS, we believe it is helpful to report a range
of alternative performance measures (or non-IFRS measures), and regulatory performance
measures, as summarised below.

Profitability and earnings from the continuing business
Adjusted results, also referred to as ‘headline’ results: These exclude the impact of
exceptional items and remeasurements that are treated as discrete transactions under IFRS and
can accordingly be classified as such. This is a measure used by management that forms part
of the incentive target set annually for remunerating certain Executive Directors. Further details
of these items are included in Note 4 to the financial statements.

Underlying results: Further adapts our adjusted results to take account of volumetric and other
revenue timing differences arising due to the in-year difference between allowed and collected
revenues, including revenue incentives, as governed by our rate plans in the US or regulatory
price controls in the UK (but excluding totex-related allowances and adjustments). For 2017/18,
our underlying results exclude £104 million of timing differences, as well as £142 million of storm
costs (which are significant in aggregate this year) where we expect to recover the bulk of the
costs incurred through regulatory mechanisms in the US.

Prior period pro forma including Cadent overlay: To aid comparability with prior years,
we show an estimate of adjusted and underlying results and earnings for the continuing business
in 2016/17 and 2015/16, including an estimated contribution from our 39% interest in UK Gas
Distribution (now Cadent).

Strategic Report | Financial review

National Grid Annual Report and Accounts 2017/18Profitability and earnings
The table below shows our Group profit after tax and earnings per share for the year to 31 March 2018.

Results from continuing operations – at actual exchange rates

Statutory profit after tax

adjust for: exceptional items and remeasurements

Adjusted profit after tax

adjust for: timing

adjust for: major storms

Underlying profit after tax

adjust for: Cadent overlay

Underlying profit after tax (pro forma)

Group profit after tax from
continuing operations

Earnings per share from
continuing operations

2017/18

£m

3,592

(1,531)

2,061

(62)

2,090

–

2,090

2016/17

£m

1,810

331

2,141

(279)

–

1,862

167

2,029

%
change

98%

(4)%

12%

2017/18
pence

103.8

(44.3)

59.5

(1.7)

2.6

60.4

–

60.4

2016/17
pence

48.1

8.8

56.9

(7.4)

–

49.5

9.1

58.6

%
change

116%

22%

On a statutory basis, Group profit after tax from continuing operations was £3,592 million and EPS was 103.8p. Exceptional items and remeasurements
principally reflected a £1,510 million tax credit arising from the reduction in the US tax rate, financial derivative remeasurement gains of £119 million
pre-tax, and a net £103 million charge arising from our retained investment in Quadgas HoldCo Limited. Adjusted profit after tax (excluding exceptional
items and remeasurements) of £2,061 million included £62 million, relating to timing offset by £(91) million as a result of major storms.

On an underlying basis, Group profit after tax was £2,090 million, up £61 million (3%) and earnings per share were 60.4p up 1.8p (3%) compared to prior
year pro forma (including Cadent overlay). Revenues increased as a result of new US rate plans in New York and Massachusetts, partly offset by lower
UK transmission income, reflecting the return of efficiencies and lower delivered outputs. Costs (excluding pass-through costs) were higher, partly as a
result of increased workload and additional depreciation related to asset growth. The weaker dollar in 2017/18 reduced operating profit compared to last
year. Net financing costs were lower, with higher interest on inflation-linked debt, offset by gains on disposals of financial investments. Tax was lower
compared to 2016/17 partly as a result of decreases in both UK and US tax rates.

Financial position and capital investment
During 2017/18 our net assets under IFRS decreased from £20.4 billion to £18.8 billion, reflecting the £4.0 billion distribution to shareholders, relating to
last year’s disposal of our UK Gas Distribution business and the impact of the weaker dollar. This was partly offset by pension gains, and the reduction
in deferred tax liabilities due to the reduction in the US federal tax rate, and retained profits in the year, further details of which can be found on page 115.
The Group’s net assets under IFRS, excluding net debt of £23 billion, were £41.9 billion (2017: £39.7 billion excluding net debt of £19 billion).

To help readers’ assessment of the financial position of the Group, the table below shows an aggregated position for Group, as viewed through
a regulatory perspective. The measures included in the table below are calculated in part from financial information used to derive measures sent to
and used by our regulators in the UK and US, and accordingly inform certain of the Group’s regulatory performance measures, but are not derived
from, and cannot be reconciled to, IFRS.

There are certain significant assets and liabilities included in our IFRS balance sheet, but which are treated differently in the analysis below, and
to which we draw readers’ attention. These include the £1.5 billion reduction in IFRS deferred tax liabilities we have recognised in relation to US tax
reform this year, which, from a regulatory perspective remains as a future obligation. In addition, under IFRS we recognise liabilities in respect of US
environmental remediation costs, and pension and OPEB costs. For regulatory purposes, these are not shown as obligations because we are entitled
to full recovery of costs through our existing rate plans. Regulatory IOUs which reflect refunds due to customers in future periods are treated within
this table as obligations but do not qualify for recognition as liabilities under IFRS.

Asset growth: rate base, RAV and other invested capital

Year ended 31 March

UK Electricity Transmission RAV

UK Gas Transmission RAV

US rate base

National Grid Ventures and Other business invested capital

Total

UK other regulated assets/liabilities

US other regulated assets/liabilities

Other assets and liabilities

At actual exchange rates

At constant currency

2018
£m

13,045

6,014

14,762

2,167

35,988

(519)

1,921

(343)

2017*
£m

%
change

-4%

12,479

5,755

15,398

2,055

35,687

(479)

1,665

(241)

%
change

2017/18

2016/17*

£m

13,045

6,014

14,762

2,167

35,988

(519)

1,921

(343)

£m

12,479

5,755

13,751

1,984

33,969

(479)

1,487

(260)

Total Group regulated and other assets

37,047

36,632

37,047

34,717

* Re-presented for opening balance adjustments following the completion of the UK regulatory reporting pack process in 2017.

The UK RAV increased by £0.8 billion, reflecting significant capital expenditure, together with inflation. RPI inflation at 3.3% (April to March) was
slightly above our 3% long-term expectation. UK RAV growth also included capitalised efficiencies or ‘performance RAV’ of £67 million this year.
Other UK regulated assets and liabilities principally comprise regulatory IOUs, arising from timing (including totex timing adjustments) and output-
related allowance changes, which are expected to be recovered from or refunded to customers in future periods. Excluding foreign exchange impact,

Strategic Report | Financial review

National Grid Annual Report and Accounts 2017/18Strategic Report
Financial review continued

Net debt:

Net debt is the aggregate of cash
and cash equivalents, current financial
and other investments, and derivatives
(excluding commodity contract
derivatives and the fair value of a put
option to dispose of a 14% interest in
Cadent) as defined in note 27 to the
financial statements.

Adjusted net debt is principally adjusted
for pension deficits and hybrid debt
instruments. For a full reconciliation
see page 211.

RCF/adjusted net debt:

A key measure we use to monitor
financial discipline is retained cash
flow divided by adjusted net debt.
We monitor this metric carefully as
it is a key element of the information
used by rating agencies to assess
our creditworthiness. See page 211.

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, net of
the overall growth in debt. These are
reflected in the Value Added metric
used to measure our performance,
and that underpins our approach
to sustainable decision-making and
long-term incentive arrangements.

US rate base increased by £1.0 billion (7%) reflecting the step up in US investment, which was
15% higher than in 2016/17.

In total, our UK RAV and US rate base increased by £0.2 billion, net of a £1.6 billion reduction due
to foreign exchange movements decreasing the rate base reported in sterling. Excluding foreign
exchange our UK RAV and US rate base increased by £1.8 billion (6%) in the year to £33.8 billion.
The increase reflects the continued high levels of investment in our networks in both the UK and US.

US other regulated assets and liabilities principally comprise assets in the course of construction
(which will transfer to rate base once commissioned), timing balances and other cost or revenue
deferrals, which are expected to be recovered or refunded in future periods. National Grid
Ventures and other business-invested capital comprises the assets and liabilities of the operating
businesses within National Grid Ventures and Other activities. Other assets and liabilities includes
our interest in the RAV of Cadent after taking account of debt within the holding structure.

Capital investment
For the year ended 31 March 2018, investment of £4,251 million was £389 million higher than last
year, principally driven by increased investment in our US regulated businesses including higher
levels of gas mains replacement. Investment in National Grid Ventures also increased as we
continue to construct the Nemo Link, our second French interconnector and the North Sea Link.

Net debt, cash flow and credit metrics
During the year we continued to borrow to fund growth in the business. The level of net debt
remains appropriate for the size of our business.

Net debt and RCF to adjusted net debt metrics

Net debt (£m)

Adjusted net debt (£m)

Retained cash flow (£m)

RCF/adjusted net debt*

2018

23,002

22,777

2,199

9.7%

2017

19,274

20,290

3,020

14.9%

% change

(19)%

(12)%

(27)%

(520) bps

* RCF/net debt calculated including scrip share buyback costs.

During 2017/18, net debt increased by £3.7 billion. This was driven by the return of capital related
to the UK Gas Distribution disposal (£4.0 billion), outflows from interest, ordinary dividends, tax and
other financing flows of £2.2 billion and payments related to discontinued operations of £0.2 billion.
These were partly offset by cash inflows from operations (net of cash capital investment) of
£0.8 billion and other non-cash movements such as foreign exchange and accretion of interest
reducing net debt by £1.9 billion.

RCF/adjusted net debt (after deducting scrip buyback costs) was 9.7% for the year (2016/17:
14.9%; 2015/16: 10.5%). The RCF/adjusted net debt metric in 2016/17 was significantly improved
by the disposal of our UK Gas Distribution business on 31 March 2017, which reduced closing
net debt by £10 billion. Our long-term target for RCF/adjusted 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
4.4 times (2016/17: 5.0 times; 2015/16: 5.5 times). Our long-term target is to maintain interest
cover in excess of 3.0 times.

Other regulatory performance measures
Value Added
Value Added in the year was £2.0 billion or 57.9 pence per share as set out below:

Total Group regulated and other assets1

Net debt1,2

Dividend paid3

Share buyback3

Value Added – 2017/18

Year ended 31 March

2018
£bn

37.0

(23.0)

2017
£bn

34.7

(21.2)

change
£bn

+2.3

-1.8

+1.3

+0.2

+2.0

1. 2016/17 values presented on a constant currency basis using a closing exchange rate of $1.40:£1.
2. Net debt at 31 March 2017 adjusted to reflect £4 billion relating to the return of capital following the disposal

of our UK Gas Distribution business.

3. Excludes special dividend and share buy back associated with return of capital post UK Gas Distribution sale.

Value Added per share

Year ended 31 March (pence)

2018

57.9

2017

51.6

change

6.3

% change

12%

Value Added in the year was higher than 2016/17 principally as a result of improved underlying profits
in our US business and higher inflation on our UK regulated assets. Of the £2.0 billion Value Added
in 2017/18, £1,316 million was paid to shareholders as cash dividends and £178 million as scrip
repurchases (offsetting the scrip issuance during the year), with £510 million retained in the business.

Strategic Report | Financial review

National Grid Annual Report and Accounts 2017/18Group RoE:

We measure our performance in
generating value for our shareholders
by dividing regulated and non-
regulated financial performance, after
interest and tax, by our measure of
equity investment in all our businesses,
including the regulated businesses,
National Grid Ventures and other
activities and joint ventures.

Regulated returns on equity:

These are measures of how the
businesses are performing compared
to the assumptions and allowances
set by our regulators.

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.
Further details are included on
pages 211-213.

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

Dividend per share (pence)
and dividend per share growth (%)

42.03

42.87

43.34

44.27

45.93

UKET

UKGT

2017/18

2016/17

change

13.1% 13.6% -50 bps

10.0% 10.8% -80 bps

2.9%

3.7%

UK Transmission

12.1% 12.7% -60 bps

US Regulated

8.9%

8.2% +70 bps

Group

12.3% 11.7% +60 bps

2.0%

1.1%

2.1%

2014

2015

2016

2017

2018

National Grid plc, the parent company of the
Group, is a non-trading investment holding
company which derives its distributable
reserves from dividends paid by subsidiary
companies. The Directors consider the Group’s
capital structure and dividend policy at least
twice a year when proposing an interim and
final dividend and aim to maintain distributable
reserves that provide adequate cover for
dividend payments.

The dividend policy is influenced by a number
of the principal risks (see pages 18-21) which
could adversely affect the performance of
the Group.

In determining the level of dividend in any year
in accordance with the policy, the Directors
also consider a number of other factors that
influence the proposed dividend, including:
• the level of retained distributable reserves;
• availability of cash resources;
• the level of dividend cover;
• future cash commitments and investment

plans in line with the strategy; and

• potential strategic opportunities.

Group RoE has increased during the year to
12.3% from 11.7% in 2016/17. During the year
the US regulated business delivered strong
performance reflecting a full year of increased
revenues from new rate plans in MECO, KEDNY
and KEDLI. Group RoE also benefited from
gains on disposal of financial investments and
lower tax rates in both the US and the UK.

See page 16 for further information.

UK regulated return on equity
On a weighted average basis, UK Transmission
RoE has decreased 60 bps to 12.1%. 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.
UK average totex out-performance was at
a similar level to last year, representing 100
bps of our out-performance over the 10.1%
allowed return.

US regulated return on equity
US RoE for 2017/18 increased 70 bps to 8.9%,
compared to 2016/17, reflecting the benefit of
new rate cases and capital trackers on the
sizeable investment programme. The 8.9%
achieved return compares to an allowed
return of 9.4%.

Dividend growth
The Board is committed to a long-term
sustainable 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 foreseeable future. The Company
had £4,796 million of distributable reserves at
31 March 2018 available to support the dividend
policy. As set out in the Chairman’s statement,
the Board has recommended an increase in
the final dividend to 30.44 pence per ordinary
share ($2.0606 per American Depositary Share).
If approved, this will bring the full year dividend
to 45.93 pence per ordinary share ($3.0775
per American Depositary Share). If approved,
the final dividend will absorb approximately
£1.0 billion of shareholders’ funds.

Strategic Report | Financial review

National Grid Annual Report and Accounts 2017/18Strategic ReportViability statement

The Board’s consideration of the longer-term
viability of the Company is an extension of
our business planning process. This includes
financial forecasting, a robust risk management
assessment, regular budget reviews and scenario
planning incorporating industry trends and
economic conditions. Our business strategy
aims to enhance our long-term prospects
by making sure our operations and finances
are sustainable.

As described on page 18, the Executive
Committee held risk workshops using scenario
planning techniques. As a result, we have
refreshed our risk profile adding two new
principal risks, rewording or consolidating
several risks, and removing one principal risk.
The workshop discussions also considered
the potential impacts of Brexit and extreme
weather events on our risk profile and
incorporated such concerns as threats
to the applicable principal risks.

Over the course of the year, the Board has
considered the principal risks shown in the
table below in detail. The Board has discussed
the potential financial and reputational impact
of the principal risks against our ability to
deliver the Company’s business plan.

The assessment of the potential impact of
our principal risks on the longer-term viability
of the Company tests the significant solvency
and liquidity risks involved in delivering our
business objectives and priorities. Although
it has considered adopting a longer period,
the Board believes that five years is the most
appropriate time-frame over which we should
assess the long-term viability of the Company.
The following factors have been taken into
account in making this decision:
• 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.

Each principal risk was considered for
inclusion in the testing and, where appropriate,
a reasonable worst case scenario was
identified and assessed for impacts on
operations and/or financial performance
over the five-year assessment time period
as detailed below:

The reputational and financial impacts for
each scenario were considered (to the nearest
£500 million). The risk relating to leadership
capacity was not tested, as the Board did
not feel this would threaten the viability
of the Company within the five-year
assessment period.

The Board assessed our reputational and
financial ‘headroom’, and reviewed principal
risk testing results against that headroom.
No principal risk or cluster of principal risks
was found to have an impact on the viability of
the Company over the five-year assessment
period. Preventative and mitigating controls in
place to minimise the likelihood of occurrence
and/or financial and reputational impact are
contained 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 the licensed activities of National Grid
Gas plc and National Grid Electricity
Transmission plc.

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 18, the Directors have
a reasonable expectation that the Company
will be able to continue operating and meet
its liabilities over the period to May 2023.

Operational impacts
Scenario 1 – A terror-related
cyber attack
Scenario 2 – A gas transmission
pipeline failure in the US
Scenario 3 – A cyber security attack
in the UK that results in a financial
penalty of £600 million in accordance
with the directive on security of Network
and Information Systems (NIS)
Scenario 4 – Emerging technology
leading to significant numbers of
people going ‘off grid’

Performance impacts
Scenario 5 – The breach of personal
data information
Scenario 6 – The nationalisation
of the energy sector in the UK
Scenario 7 – A breach of compliance
rules for onshore competition in the UK

In addition to testing individual principal risks,
the impact of a cluster of the principal risks
materialising over the assessment period
was also considered. 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 which, in the opinion of the Board,
represented a Reasonable Worst Case Scenario.

Scenario 8 – A cyber security attack
or safety/environmental event as a result
of catastrophic asset failure and data
breach occurring together within the
assessment period

National Grid Annual Report and Accounts 2017/18

Strategic Report | Viability Statement

Principal risk

Viability scenario

Matters considered by the Board

Major cyber security breach of business,
operational technology and/or Critical
Network Infrastructure (CNI) systems/data.

Scenario 1 – A terror-related
cyber attack.

Failure to predict and respond to a significant
disruption of energy that adversely affects
our customers and/or the public.

Scenario 3 – A cyber security
attack in the UK that results
in a financial penalty of
£600 million in accordance
with the NIS Directive.

Catastrophic asset failure resulting in
a significant safety and/or environmental event.

Scenario 2 – A gas
transmission pipeline
failure in the US.

Failure to adequately identify, collect, use and
keep private the physical and IT data required to
support Company operations and future growth.

Scenario 5 – The breach of
personal data information.

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

N/A

Failure to deliver any one of our customer,
investor and wider stakeholder propositions due
to increased political and economic uncertainty.

Scenario 6 – The
nationalisation of the
energy sector in the UK.

The Board received monthly updates in the CEO report and more detailed
quarterly reports on cyber security. The Board has also undertaken cyber
security training. We have agreed a structured scorecard for future reports
to the Board.

The Board received biannual updates on network reliability and quarterly
updates on cyber security.

‘Deep dive’ reports on asset health were also provided.

Reliability information was provided to the Board through CEO reports.

Safety is a fundamental priority and is looked at in detail by the Safety,
Environment and Health Committee who have delegated authority from
the Board. The Board receives a report from the Committee Chairman
after every meeting.

Our Electricity and Gas Engineering Reports to this Committee also provide
progress updates on our asset management improvement programs.

Quarterly updates of the Company’s information systems were reviewed.

An update on the General Data Protection Regulation (GDPR) was given
in November, which included the Company’s state of readiness of
compliance with GDPR.

The Board received bi-annual updates related to the make up of the
workforce and the leadership team. The updates considered the
capabilities necessary to support delivery of the strategic priorities.

The Nominations Committee considered the structure, size
and composition of the Board and its committees and succession
planning. Additionally it tracks the development of individuals with the
potential to be Directors and members of the executive management
team and established the criteria for any new position.

The Board has been kept updated on political and economic issues that
have the potential to affect our stakeholders and our strategy to mitigate
any associated risks. These included:
• the impact of Brexit and access to the Internal Energy Market;
• the potential threat of nationalisation under a Labour government;
• US tax reform;
• UK and US regulatory strategy;
• bi-annual UK/US/National Grid Ventures customer updates; and
• the annual Update on Key Issues on Policy for 2018/19 reviewed

issues related to political and economic uncertainty.

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

Scenario 7 – A breach of
compliance rules for onshore
competition in the UK.

The Board received updates and reviews of:
• US and UK regulatory strategy;
• our response to Ofgem’s compensation proposal concerning

Failure to adequately anticipate and minimise
the adverse impact from disruptive forces
such as technology and innovation on our
business model.

Scenario 4 – Emerging
technology leading to
significant numbers of
people going ‘off grid’.

the Hinkley-Seabank transmission project;

• the impact of Brexit;
• the role of the System Operator; and
• the annual Update on Key Issues on Policy for 2018/19 reviewed

issues related to energy policy and regulation.

Two Board strategy sessions were held during the year which included
consideration of technology and innovation matters.

The Board also received a separate update on technology and innovation.

Bi-annual National Grid Ventures strategy overviews were also held.

National Grid Annual Report and Accounts 2017/18Strategic Report | Viability StatementStrategic ReportPrincipal operations – UK

Delivering our strategy

UK highlights

Performance optimisation

• £540 million customer savings
in the first five years of RIIO.

• UK RoE 12.1%, allowed return

10.1%.

• 99.999984% and 99.996151% –
our network reliability figures for
Electricity and Gas transmission
respectively.

• 7.7 and 7.6 – our customer

satisfaction figures for Electricity
and Gas Transmission respectively.

Growth

• £1,309 million UK capital investment

(2017: £1,241 million).

• Early preparation for RIIO-T2 started.

• 4.5% growth in RAV (2017: 4.3%).

Picture above
Tunnel boring machine for the London
Power Tunnels project which involves
building 10 new circuits and 20 miles (32
kilometres) of tunnels under the capital.

This year our UK business has made progress on plans
to create a legally separate Electricity System Operator,
achieved major project milestones and is finding smarter
ways to balance the system.

As new sources of energy connect to the
network, we need to find smarter ways to
balance the system. To help us do this, the
System Operator launched its first System
Needs and Product Strategy consultation.

This consultation gave us a better understanding
of the services we will need to procure in future.
We had 128 stakeholder responses and used
this feedback to shape the Product Roadmap
for frequency response and reserve services,
which we published in December.

We are reducing the number of balancing
services products, simplifying their procurement
and improving the products themselves. We are
also trialling close to real-time procurement to
reflect the rapid growth in renewable generation.

The System Operator is also closely involved in
far-reaching electricity charging reforms. During
2017/18, together with Ofgem and industry
partners, we established Charging Futures as
a platform to coordinate reform on electricity
access and charging. The aim is to ensure
a level playing field for all participants and to
recover revenue in a fair way. At the first forum
64 organisations took part, while more than
280 stakeholders have also signed up to hear
more about the plans.

Our Electricity and Gas Transmission businesses
have continued to provide reliable services.
We report on our key performance indicators
in detail on pages 14-17. This year the network
reliability figures for Electricity Transmission
and Gas Transmission were 99.999984%
and 99.996151% respectively.

To protect that for the future, this year we have
updated some of our back-office systems to
improve data and management control. In gas
we have made substantial progress in our
asset health data collection efforts. In electricity
we have rolled out a single view of the plan for
all sites ensuring that there is a unified view of
all work, outage and resource going forward.

We continue to invest in our understanding of
asset health in order to ensure high network
reliability. One example is work we do on
overhead lines to improve how we map the
operating environment. This work will enable
us to better assess the likelihood of asset failure
and which towers and spans are experiencing
the most wear. The work supports our long-term
strategy to improve the need for overhead line
investment. It led to a ‘Next Generation’ award
from the Institute of Asset Management for
project lead, Jon Hennah.

Our Gas Transmission business has made
good progress on Project GRAID, which is
developing an innovative robotic inspection
device for underground pipework. This year
we have developed the robot for offline trials
ahead of live site trials later in 2018. For more
details on this work, see page 7.

Highlights
Our UK business performed well in 2017/18 and
we maintained our focus on safe, customer-led,
reliable, innovative and efficient operations.

In December Ofgem published its RIIO
transmission annual reports for electricity and
gas. We were pleased that it recognised the
fact that network companies continue to
deliver for consumers.

Operational performance
From a safety perspective, for the full year
2017/18 we performed significantly better than
our high potential incidents target, which tracks
the events with the potential to cause more
serious harm. We have also worked hard on
risk assessments both ahead of work and at
the point of work across our UK business.

As well as a continued focus on safety, we are
constantly looking for other ways to optimise our
operational performance. We met our customer
satisfaction targets for 2017/18. The figures for
our Electricity and Gas Transmission businesses
were 7.7 and 7.6 respectively. This compares
with our agreed baseline of 6.9. The figure for
Gas Transmission was lower than in 2016/17
when customers gave us a rating of 8.0.

We have also made positive progress in our
first year using Net Promoter Score. We are
gaining more insight into the needs of our
customers (and theirs). For example, a
continuing theme has been the need for
greater transparency from us.

Here are a few examples of what we have
done this year to improve transparency:

Our Gas Transmission business has a new
online customer connections portal, which
is in the testing phase. You can read more
about this project on page 12.

Our Electricity Transmission business has
improved its customer application process,
reducing the average time to produce a
connection offer. We introduced a series
of initiatives that enable us to condense
the application process using a dedicated
cross-functional team. Our average historical
lead time was close to 90 days. This is now
60 days.

Strategic Report | Principal Operations – UK

National Grid Annual Report and Accounts 2017/18This year we marked the completion of phase
one of the London Power Tunnels project
which will ensure we can meet London’s
growing electricity demand.

In late February adverse weather affected the
UK, leading to high demand for energy on the
system. Our networks performed strongly,
maintaining secure supplies of electricity and
gas. As part of our response we issued a Gas
Deficit Warning. This signalled to the market
that we required more gas to keep the system
running safely and reliably. This is part of our
standard approach to balancing supply and
demand, and worked effectively.

Shaping the future of energy
2017 underlined the speed of change in
the energy sector. In April, Great Britain
experienced a day without any coal generation,
while between June and September low-
carbon sources met more than 51% of the
nation’s electricity generation needs.

The changes that we have already introduced
in the System Operator including the operation
of a new scheduling algorithm for balancing
the system have all ensured that we have
continued to deliver energy where and when
our customers require it. We continue to
develop our balancing tools.

We are also finding ways to ensure that
National Grid is better equipped for the future,
particularly through innovation. For example,
we are investing to ensure we can bring new
technologies onto the network. On Deeside,
we are converting an existing substation into a
trial facility to test new technologies off network.
This year Ofgem approved the substation
conversion costs of about £11 million.

In July 2017 the UK Government announced
plans to ban the sale of new petrol and diesel
cars and vans from 2040. Meanwhile, our own
‘Future Energy Scenarios’ analysis suggests the
potential for rapid growth in electric vehicles (EVs)
through to 2050. This year we have developed
a proposal for a strategic charging network
to enable a backbone of charging points at
motorway service areas and other strategic
locations. This would support the installation
of rapid high-capacity chargers and help
to tackle anxieties people have about the
perceived range of EVs. We are engaging
with Government and UK car manufacturers
on the way ahead for EVs.

In last year’s Annual Report and Accounts
we reported on the launch of Power Potential,
a joint project between National Grid and
UK Power Networks. It aims to create a new
reactive power market for distributed energy
resources and generate extra capacity on the
network. We are now calling for organisations
to participate in the project, which is initially
being trialled in the south east of the UK.
This year we are also building a novel
distributed energy resources management
system (DERMS) as a platform to manage
these resources at scale.

Looking ahead
Ahead of the new regulatory framework
(RIIO-T2) which begins in 2021 we will continue
to engage with stakeholders and work with
Ofgem to clarify the parameters of T2.

Next year we will also be working closely with
Ofgem on two further landmark developments.

We will create a legally separate Electricity
System Operator (ESO) within the National
Grid Group by April 2019. As part of this,
Ofgem has been consulting on the new licence.
We have developed our separation programme
internally, which is on track and we have started
publishing more details of the plans that the
ESO is putting in place. This began with a
consultation on its longer-term goals and its plan
for 2018/19, demonstrating how the ESO will take
an enhanced role in facilitating the transition to
a low-carbon energy system.

We will also begin detailed work on our HSB
project to connect EDF’s new Hinkley Point C
nuclear power station onto the network from
2024. Ofgem confirmed this year that the
project is required and proposed a model for
delivery, which it has called the Competition
Proxy Model (CPM).

We do not believe that this model is in the best
interests of consumers and have responded
robustly to Ofgem’s proposal. In our view, CPM,
as currently proposed, does not replicate the
outcome of a competitive process, as it does
not reflect either the actual cost of financing this
project or the risk being taken with construction
work of this complexity and scale. We believe
that Ofgem has under-estimated the costs of
delivering HSB under the proposed model,
and as such has come to an unfounded view
of consumer benefit.

We are committed to working with Ofgem to
find a solution. However, we are considering all
options open to us should the regulator decide
to proceed with this model in its current form.

Meanwhile, the Power Responsive programme
continues to encourage growth in demand
side response and storage. The programme is
facilitated by National Grid and 650 members
have joined since April 2017. There are now 2,150
stakeholders from more than 1,000 organisations
taking part.

Next year we will continue to focus on safe,
customer-led, reliable, innovative and efficient
operations. Achieving greater efficiency in
our businesses will be a priority for us —
particularly important considering the price
cap for supply to consumers that the
Government is seeking to impose.

Strategic Report | Principal Operations – UK

In focus

Since January 2017 we have raised
£270,000 for Alzheimer’s Society, our
chosen employee charity in the UK.
This figure exceeded the fundraising
target we set ourselves.

We are committed to playing an
active role in the communities
where we work. You can read more
about the work we are doing in the
responsible business section on
page 38.

Statutory operating profit

£1,528m

(2016/17: £1,868m)

Adjusted operating profit

£1,528m

(2016/17: £1,883m)

Capital investment

£1,309m

(2016/17: £1,241m)

Picture top right
His Royal Highness The Prince
of Wales with John Pettigrew,
CEO National Grid at the opening
of the London Power Tunnels
on 7 February 2018.

National Grid Annual Report and Accounts 2017/18Strategic ReportPrincipal operations – US

Delivering our strategy

A focus on growth, customer value,
and the clean energy transition

Performance optimisation

•

rate cases.

• customer experience

transformation.

• new energy infrastructure.

• gas mains replacement.

Growth

•

large-scale renewables.

• electric vehicle charging.

•

renewable gas.

• smarter grid.

Statutory operating profit

£1,734m

(2016/17: £1,278m)

Adjusted operating profit

£1,698m

(2016/17: £1,713m)

Capital investment

£2,424m

(2016/17: £2,247m)

Picture above
Nick Monte repairs an
electricity cable, USA.

A look at our US business’s operational performance,
core business growth, and how we are shaping the
future of energy.

priorities: find new ways of optimising our
operational performance; look for opportunities
to grow our core business; and make sure
National Grid is better equipped for the future.
Below are some examples of what we have
done this year under each priority:

One way we have been able to optimise our
core business performance is through our gas
business enablement initiative. This involves
standardising and simplifying processes that will
help us better manage our assets, deliver our
work, and serve our customers. An example
of this is a new ability to capture field data and
complete work orders via mobile technology.

Our new Customer Response Center (CRC)
is also designed to improve our operational
performance. The CRC opened in May 2017
with the goal of establishing two-way
communications with customers so we can
better anticipate and respond to customer
needs in everyday interactions.

One example of growing our core business is
the new South Street substation in Providence,
Rhode Island. In late March, we began the
first phase of energisation at the $70 million,
state-of-the-art substation that is providing
reliable energy to downtown Providence.
Safety was our fundamental priority for the
new substation. Employees are not in danger
of high arc flash incidents, as arcs are
extinguished under vacuum.

Revitalisation of the former power station,
a historic riverfront building, is generating
educational and economic development in
the city and across the state. It has been
transformed into space for Brown University
administration and both Rhode Island College
and University of Rhode Island nursing students.

The Metropolitan Natural Gas Reliability
Project in Brooklyn, New York, is another way
we are growing our core business. Through
this project, which started in May 2017,
we are installing approximately 1.7 miles
(2.7 kilometres) of 30-inch transmission
pipeline operating at 350 psi.

Our rate case filings allow us to make sure
we are better equipped for the future, as does
our continued work with Grid Modernization
in Massachusetts, with Reforming the Energy
Vision (REV) in New York, and with the Power
Sector Transformation in Rhode Island.

Approval this past winter of new electricity
and gas delivery rates in upstate New York
means we can invest $2.5 billion over three
years to modernise our electricity and natural
gas networks, and promote economic growth
across upstate and improve customer service.

Highlights
The US business has performed well during
2017/18, focusing on growth, customer value,
and the clean energy transition.

Overall, our revenue increased by 10% and we
are growing our rate base by 7%. Our energy
infrastructure spend across our footprint during
2017/18 was $3 billion. And we added around
65,000 new customer accounts – gas, electric,
and distributed generation, combined.
We filed two rate cases during the year – new
base gas distribution rates in Massachusetts
and new base electricity and gas distribution
rates in Rhode Island – where rates had
remained the same for eight and five years,
respectively. And in upstate New York, we
reached agreement with the NY Public Service
Commission (PSC) for a three-year rate plan.

Although the United States decided in June to
pull out of the Paris Climate Agreement, we
continue to support the Paris climate deal and
align ourselves with state and local leaders
who share our climate and environmental
goals. One example is the appointment of
Dean Seavers, National Grid Executive
Director, US, to co-chair the national Alliance
Commission on US Transportation Sector
Efficiency, convened by the Alliance to Save
Energy. The commission has said it will develop
recommendations to reduce energy use
in the US transportation sector by 50% by
2050 while meeting future mobility needs.

Operational performance
The US business saw a 6% reduction in the
number of injuries requiring medical attention
beyond first aid and a 19% reduction in the
number of preventable road traffic collisions
during 2017/18. We implemented safety, health
and environment (SHE) plans at local levels to
address current risks and injury trends. We also
established our guiding principles of safety
which sets out how our people can play a role
in promoting a safer environment for everyone.
We will continue to focus on improving our
safety culture to address key risk and
hazard mitigation strategies in 2018/19.

Our key performance indicators are reported in
detail on pages 14-17. We have worked hard to
find ways of operating more efficiently and with
innovative technology. The work we have done
has supported National Grid’s three strategic

The plan allows us to continue our new Energy
Affordability Program, which provides a bill
decrease for most income-eligible customers,
and to introduce new energy efficiency
solutions for our moderate-income customers.

Strategic Report | Principal Operations – US

National Grid Annual Report and Accounts 2017/18An important objective in 2018 is for us to
achieve a good outcome in our Massachusetts
and Rhode Island rate case filings. Together,
these companies represent around 30% of
our US rate base.

In Massachusetts, resetting distribution prices
would help us upgrade an 11,000 mile gas
distribution network, improve service quality safety,
meet regulatory expectations, and modernise
operations for the benefit of customers across
116 cities and towns in the state.

In Rhode Island, new rates will allow us to
continue improving service quality, provide the
safety and reliability our customers rely on, and
pursue new initiatives focused on renewable
energy, modernising the network and helping
income-eligible customers. Programmes to
support Governor Gina Raimondo’s call for the
Power Sector Transformation Initiative are also
important elements of our rate filing.

Storm response was a big focus for us this
past autumn and winter, both within and outside
our service area.

In September, Hurricane Irma caused massive
damage to the US southeastern area, including
Florida. At the storm’s peak, there were 7.8 million
outages. More than 130 National Grid US
employees responded as part of the Edison
Electric Institute Mutual Assistance network to
support restoration activities for Tampa Electric.

In late September, Hurricane Maria left Puerto
Rico without electricity. More than 150 National
Grid employees from New York assisted with
restoration over a six-month period, from
November to April.

Closer to home, in upstate New York, damaging
thunderstorms and tornadoes caused thousands
of outages in May and June 2017. Our response
earned us Edison Electric Institute’s emergency
assistance and emergency recovery award.

In late October, we responded to a storm that hit
the Northeast US particularly hard, with heavy
rain and wind gusts up to 80 mph. The storm
was much worse than originally forecasted.
Across our service area, more than 500,000
customers lost power. We were grateful for
mutual aid from other utilities and the quick
mobilisation of construction and tree crews
to aid restoration efforts. In Massachusetts,
we restored 85% of affected customers in
48 hours, and in Rhode Island, we restored
over 90% of peak customers affected in 2½
days. Regulators in both Massachusetts and
Rhode Island opened an investigation to review
our storm performance. Although we had
sufficiently prepared for the forecast weather,
they felt we should have been better prepared
for what actually transpired. We thoroughly
reviewed lessons learned and highlighted
opportunities to improve our restoration
efforts in future weather events.

In March three consecutive nor’easters caused
power outages to more than 800,000 of our
Massachusetts and Rhode Island customers.
Recognising the vital contributions of the
volunteers and emergency responders that
supported our customers’ needs, we donated
$100,000 to the American Red Cross to
support disaster relief efforts in both states.

Picture top right
Line-workers repairing
storm-damaged cables.

Shaping the future of energy
We are shaping the future of energy by
pursuing four distinctive policy priorities,
as described below:

80%x2050: Massachusetts, New York
and Rhode Island have each adopted targets
mandating 80% CO2 emission reductions
by 2050 across their entire economies (1990
baseline). To balance sustainability and to
achieve compelling customer outcomes,
we are adhering to three design principles:
• address the highest emitting fuels and

sectors first;

• optimise the use of existing networks; and
• avoid price shocks through strategic pacing

of the changes.

Large-scale renewables (LSRs): We
support state policies to promote renewable
energy development in Massachusetts,
New York and Rhode Island. LSRs are
interconnected to the transmission system
and deliver energy, including hydroelectric
power, to wholesale customers. We expect
state policy-makers to support these
resources via contractual agreements.

Electrify transportation: We are a strong
supporter of electrifying on-road transportation
because of its promise to significantly reduce
greenhouse gas emissions. Across our service
area, we are helping expand deployment of
charging infrastructure, informing customers
about electric transportation options, and
preparing for future integration of electric
vehicles into the network.

We have hosted several ‘ride and drive’ events
at our facilities to increase employee awareness
about vehicle options, battery performance,
charging types, and cost of ownership. We
also have sponsored state-wide ‘ride and drive’
events in collaboration with the Executive
Office of Energy and Environmental Affairs
in Massachusetts.

Future of gas: We support natural gas
capacity expansion projects in an effort to
address gas supply demand forecasts,
residential conversions to natural gas, network
reliability and renewable natural gas initiatives,
and the reduction of greenhouse gas emissions.

In addition to our operational performance
work described above, the following
programmes, grants, and awards support
our policy priorities:

In November, we joined forces with the
Department of Energy’s Pacific Northwest
National Laboratory to work together
on research in the areas of transmission
grid modernisation and energy storage
technologies.

Also in November, we announced plans to
install a 48 megawatt-hour battery energy
storage system (BESS), on the island of
Nantucket, 30 miles (48 kilometres) off the
Massachusetts coast, to help address the
island’s significant growth and demand for
electricity. The BESS will be six megawatts
with an eight-hour duration, which is also
described as a 48 megawatt-hour system,
and is being provided by Tesla.

In December, the Massachusetts Clean
Energy Center awarded energy storage grants
totalling $4.53 million to five projects supported
by National Grid. One grant will assist in
the construction and operation of an energy
storage system that will be deployed alongside
one of our large-scale solar installations located
in Shirley, Massachusetts.

We received the first-ever National Association
of Regulatory Utility Commissioners ‘Utility
Industry Innovation in Gas Award’ for our
Natural Gas Demand Response Program. This
uses advanced technology to help commercial
and industrial customers shift their energy use,
which will help us manage peak demand
during the coldest winter days.

Once again, the three states we service were
ranked among the leading states in the nation
when it comes to energy efficiency, according
to the American Council for an Energy-Efficient
Economy. Massachusetts took first place,
Rhode Island moved up to third from last
year’s fourth place ranking, and New York
was placed seventh.

Looking ahead
Looking ahead, we will stay focused on our
quest to become a great operating company.
This means developing our employees in a safe
workplace, providing our customers affordable
energy, and enabling strong economies in
our communities.

Some of the ways we will address these
goals are by improving both our capital and
operational expenditure efficiency, improving
our customer metrics, generating operating
profit from new sources, and limiting customer
bill increases.

We will continually improve our performance by
finding a better way and investing in our growth.

Strategic Report | Principal Operations – US

National Grid Annual Report and Accounts 2017/18Strategic ReportNational Grid Ventures and Other activities

The launch and progress of National Grid Ventures:
a new unit to drive growth outside our core
regulated businesses in the US and UK.

Delivering our strategy

Highlights

Performance optimisation

• National Grid Ventures +34

NPS score.

•

IFA 92.6% availability for FY17/18.

• BritNed 97.7% availability

for FY17/18.

• 107,000 smart meters
installed by early 2018.

Growth

• 3.4 GW of new interconnector
capacity on schedule to be
operational in 2021/22.

Better equipped for the future

• Established Technology and
Innovation team to support
National Grid Ventures and
our core businesses.

• Targeting investment in new
and evolving technologies.

Operational performance
Electricity interconnectors: National Grid
Ventures is the leading developer and operator
of electricity interconnectors from and to Great
Britain, with two subsea links in operation and
three 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 Great Britain and the Netherlands.
BritNed availability was 97.7% in FY17/18.
A substantial proportion of the flow over BritNed
was in the import direction from the Netherlands
to Great Britain.

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). IFA availability was 92.6% in
FY17/18. As with BritNed, a substantial proportion
of the flow was in the import direction from
France to Great Britain.

Nemo Link, developed between National Grid
and Elia, the Belgian transmission system
operator, will connect Richborough in Great
Britain and Herdersbrug in Belgium. The subsea
cable will be 80 miles (130 kilometres) in length
and will have a capacity of 1 GW. Cable-laying
work is due to be completed in May 2018, while
construction of the converter stations in both
countries is on track to be completed in October
2018. Overall, the project remains on schedule
and the interconnector is due to be operational
in the first quarter of 2019.

North Sea Link (NSL) will connect Blyth in
Great Britain 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 447 miles (720 kilometres). The 1.4 GW
link is expected to be operational in 2021/22.
Construction started in Norway in 2016, while
cable laying work will start in Great Britain later
this year.

Initial construction work has also started on the
149 mile (240 kilometres) IFA2 interconnector.
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.

LNG Storage: Isle of Grain LNG is one of
three LNG importation facilities in Great Britain.
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.

Grain LNG’s road tanker loading also offers the
UK’s transport and off-grid industrial sector a
more environmentally friendly alternative to diesel
or heavy fuel oil. The facility allows road tanker
operators to load and transport LNG in bulk
across the UK via road or rail. Grain LNG had
reloaded 3,950 road tankers by March 2018.

Highlights
This section relates to National Grid
Ventures, non-regulated businesses and
other commercial operations not included
within the business segments.

National Grid Ventures was established on
1 April 2017. The new unit, which operates
separately from our core regulated businesses,
comprises a broad range of activities in
competitive markets in Great Britain and
the US, including electricity interconnectors,
Europe’s largest liquefied natural gas (LNG)
terminal, and energy metering.

National Grid Ventures is also tasked with
creating value and gathering knowledge
through investment in adjacent businesses,
including utility-scale projects, distributed
energy opportunities and the development
of new and evolving technologies.

In the last year, National Grid Ventures has
made significant progress in the construction
of three new electricity interconnectors from
Great Britain to Belgium, France and Norway.

The Isle of Grain LNG import terminal received
the first ever Great Britain LNG cargos from the
US and Peru, highlighting our ability to deliver
a more diverse gas supply for Great Britain.

National Grid Ventures is committed to
providing a high level of service to customers
across all of its businesses. It achieved a high
overall NPS score of +34.

Our ‘Other’ activities comprise UK Property
and US non-regulated businesses, which
include LNG operations and corporate costs.
The UK Property business generated operating
profit of £84 million (2016/17: £65 million).

In aggregate, the National Grid Ventures
and Other segment delivered £231 million
of underlying operating profit and accounted
for £518 million of continuing investment in
2017/18, after corporate costs of £87 million
(2016/17: £127 million).

Picture above
Nemo Link HVDC cable on
board vessel for installation.

Strategic Report | Principal Operations – NG Ventures and Other

National Grid Annual Report and Accounts 2017/18Statutory operating profit

£231m

(2016/17: £62m)

Adjusted operating profit

£231m

(2016/17: £177m)

Capital investment

£518m

(2016/17: £374m)

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 11.1 million domestic, industrial and
commercial meters. Customer satisfaction
scores for NGM remain positive for domestic,
industrial and commercial businesses.

National Grid Smart (NGS) became operational
in November 2016, supporting energy suppliers
in fulfilling their UK smart meter roll-out
obligations. NGS offers a variety of services
from meter asset financing and customer
relationship management through to installation
and maintenance services. NGS installed its
107,000th smart meter by early 2018.

Shaping the future of energy
The economics for solar and wind generation
are becoming increasingly attractive, and
the ongoing significant growth in large-scale
renewables is set to continue into the long
term. 2017 was the ‘greenest year ever’ for
the UK, with over half of electricity generation
last summer coming from renewable sources.
Similarly, US states remain committed to
aggressive CO2 reduction targets.

National Grid Ventures is actively engaged
in the renewables space in the US. Through
the partnership with Sunrun, we have seen
increased conversion rates, particularly where
Sunrun has co-branded with National Grid.
In addition, National Grid Ventures manages
our stake in Enbala, which develops technology
to help utilities optimise increasingly complex
electricity grids. National Grid Ventures also
manages our stake in Energy Impact Partners,
a strategic investment firm that invests
in companies improving sustainable
energy generation.

In December 2017, we announced we would
join the Breakthrough Energy Coalition, which
brings together private investors, global
corporations that produce or consume energy
in vast quantities, and financial institutions
with the capital necessary to finance the
world’s largest infrastructure projects.

Looking ahead
NEMO Link, IFA2 and North Sea Link are
on track to be operational between 2019
and 2021/22, giving National Grid Ventures
a portfolio of more than 6 GW of interconnector
capacity.

In addition to driving growth in existing
businesses, National Grid Ventures will look
to develop opportunities in new and evolving
technologies. In 2018, National Grid Ventures
opened up a new presence in California,
with the establishment of a Technology and
Innovation team tasked with direct investment
in expansion and growth stage start-ups
that are ready to partner with our emerging
and core businesses.

Property: National Grid Property deals
with the management and regeneration of
our brownfield surplus estate in the UK.
Our specialist team works with stakeholders
such as Historic England, local authorities
and communities to reduce risk across our
portfolio and create new healthy, balanced
communities and employment land.

During 2017/18, we disposed of 44 sites and
exchanged contracts on a further five land sales,
to facilitate the delivery of thousands of new
homes across the UK. Our joint venture with
Berkeley Group, called St William Homes, has
entered its fourth year. Around 1,100 homes
are already under construction, with planning
permission secured for a further 1,880 homes.

Picture top right
NEMO Link team member holding
cross-section of HVDC interconnector.

Strategic Report | Principal Operations – NG Ventures and Other

National Grid Annual Report and Accounts 2017/18Strategic ReportOur commitment to being a responsible business
Businesses should be a force for positive social and environmental
change. To do this, companies have to act responsibly in everything
they do, and in the way that they do it. This belief is fundamental
to the way we work at National Grid.

Our risk management framework

Our risk management process
provides a framework through which
we can constantly identify, assess,
prioritise, manage, monitor and report
our risks. Through a ‘top down, bottom
up’ approach, all business areas
identify the main risks to our business
model and to achieving their business
objectives. Each risk is assessed
by considering the financial and
reputational impacts, and how likely
the risk is to materialise. Consideration
is given to the impact on the external
environment and the effect on our
stakeholders. Each business area
identifies and implements actions
to manage the risks.

Monitoring risks and controls is
conducted through established boards
and committees at different levels of
the organisation. Deficiencies, such
as a significant breach of policies,
are reported and corrected at the
appropriate entity level. The most
significant risk and controls issues
are monitored at the Senior Executive
and Board level.

In focus

You can read more about our
approach to internal control and
risk management on pages 18-21.

We describe our purpose, vision
and values on page 12.

Our approach
Businesses are a key part of the communities
where they work and we believe they should be
aiming to leave a positive purpose-led legacy
for future generations. At National Grid, we
work hard to bring energy to life and exceed
the expectations of our customers,
shareholders and communities.

We took part in the 2017 UK Social Mobility
Employer Index and were ranked 34th out of
the 98 companies that took part. Following
feedback, we have introduced changes to
our recruitment processes and the data we
capture so we can better understand and
address social diversity. We are undertaking
a significant piece of work to move the focus
of our corporate responsibility activities towards
supporting social mobility both in the UK
and US. We will describe the outcomes
from this work in next year’s report.

Being a responsible business covers every
aspect of our work, both what we do and
how we do it. When we are undertaking major
infrastructure projects, we work with our
customers, stakeholders and communities to
gather their views to help inform what we do.
For example, at our new Highbury substation in
London we are building retail units and residential
apartments to help support urban regeneration
in the area, half of which are affordable homes.
We support communities through our employee

volunteering programmes, partnering with
charities and civil society, and providing
community groups with financial support. In the
US, for example, 650 National Grid employees
participated in 17 coordinated Earth Day
projects in communities across all three states,
including clean-up events in public parks, city
beautification projects, tree plantings, and a
door-to-door LED lightbulb exchange.

We have policies in place that support our
approach to being a responsible business.
We report on a number of non-financial
performance measures relating to these
policies. You can find details about our key
non-financial performance measures on
pages 14-17, and also on our website, in the
Responsibility and Sustainability section.

Our priorities
Our priorities are shaped by the Company’s
strategic priorities, and a number of other
factors, including the risks we face as a
business, the views of our customers and
stakeholders, and the challenges faced by
the communities where we operate. We are
signatories to the United Nation’s Global
Compact and support its Sustainable
Development Goals (SDGs). These goals
promote prosperity while protecting the planet.
All 17 goals are important, and there are five
(see below) that are particularly linked to
our responsible business focus areas.

In focus

Environmental sustainability

Communities

People

Re-use of resources

Rhode Island housing

National Grid EmployAbility

Our KPIs are described on page 14-17.
You can find detailed sustainability
performance metrics on our website:
www.nationalgrid.com/group/
responsibility-and-sustainability

We are passionate about
operating our business in an
environmentally responsible way
and making sure sustainability
shapes our thinking and
decision-making. This helps
us to optimise our operational
performance, provide value
for our customers, and benefit
the environment.

We support the communities
where we work and live to help
them thrive and be socially
inclusive. Being a welcomed
part of the community helps
us to work effectively and
deliver for our customers.

We are working hard to overcome
some of the biggest energy
challenges of the 21st century
as generation moves from fossil
fuels to renewable sources and
transportation moves towards
electric vehicles. We need to make
sure we have highly motivated
people, with the right skills,
equipping us for the future.

Supporting the United Nation’s
Sustainable Development Goals
Our approach focuses on environmental
sustainability, communities and people, and
helps to support five of the United Nation’s
Sustainable Development Goals. You can
find out more about this on our website
in our responsible business section.
• Goal 4: Ensure inclusive and quality

education for all and promote
lifelong learning

• Goal 7: Ensure access to affordable,
reliable, sustainable and modern
energy for all

• Goal 8: Promote inclusive and sustainable
economic growth, employment and decent
work for all

• Goal 13: Take urgent action to combat

climate change and its impacts

• Goal 15: Sustainably manage forests,

combat desertification, halt and reverse
land degradation and halt biodiversity loss

Strategic Report | Our commitment to being a responsible business

National Grid Annual Report and Accounts 2017/18Our contribution to a low-carbon
economy

• We reduced Scope 1 and 2

emissions by 15.4% in 2017/18.

• We have enhanced the value
of natural assets at 30 sites.
We aim to enhance a total of
50 sites by 2020.

•

In 2017 we updated our
strategy, setting new global
and regional targets:

- Reduce carbon intensity of
our construction projects.

Implement carbon pricing
on major investment projects.

- Drive net gain in environmental
value on our major construction
projects.

In focus

You can read more about our approach
to environmental sustainability on the
Responsibility and Sustainability section
of our website.

Environmental sustainability

We know that our business operations have the
potential to affect the environment. Managing
any risks, whether these are short-term through
our physical operations, such as air quality and
pollution, or long-term through our greenhouse
gas emissions or resource use, is fundamental
to our approach to environmental sustainability.

Additionally, an environmental event arising from
catastrophic asset failure is one of our operational
risks. You can read more about this on page 19,
together with our approach to mitigation.

Our priorities
Our environmental strategy, Our Contribution,
was originally developed in 2012 with a wide
range of internal and external stakeholders,
and has been refined over the years to reflect
changing stakeholder priorities. It focuses on
three areas: climate change, resources and
caring for the natural environment. Our strategy
is delivered through our environmental policies.

We focus on:
• reducing our carbon footprint;
• maximising the value of resources and

reducing the impact on the environment
through re-use and recycling; and

• using our land holdings in ways that benefit
our business, the environment and the
communities in which we live and work.

This is all underpinned by maintaining high
environmental management standards.

As a company, we support climate change
science. Reducing greenhouse gas emissions
is an important area of focus for us, and is one
of our KPIs. You can read more about this,
and our performance, on page 16.

New life for old IT equipment
Max Morgan, from our Information Services
team, describes what we do and who benefits
when we reuse or recycle our old IT equipment.

Being at the forefront of information technology
is crucial for National Grid. It means regularly
upgrading systems to make sure they can handle
the challenges of our changing business.

When our IT equipment comes to the end
of its useful life, we want to dispose of it in a
responsible way. We have three goals: to make
sure we don’t harm the environment, to secure
our data, and to benefit the communities where
we work.

In the first eight months of 2017, working with
a recycling specialist, we were successful in
reusing or recycling more than 7,000 pieces of
IT equipment. Nothing ended up as landfill.

Circular economy
We reuse a lot of IT equipment internally, to
equip new starters, for example, or to test the
latest business applications. It’s part of our
‘circular economy’ approach. We recognise
that the best way to reuse a laptop, for
example, is to continue using it as a laptop,
perhaps for a different job. Maintaining
equipment for as long as is feasible means
we buy less new IT equipment, which reduces
the environmental impacts associated with
building and transporting it.

As a result, we also support the Paris
Agreement and have made our own
commitment to reduce our greenhouse gas
emissions by 70% by 2030 and 80% by
2050. This aligns with the trajectory required
to meet the goal of the Agreement: to limit
global warming to a 2˚C temperature rise
from 1990 levels.

In June 2017, the Financial Stability
Board released its final report on the
recommendations of the Task Force on
Climate-related Financial Disclosures (TCFD).
The voluntary framework for disclosure of
climate-related information in financial filings is
structured around four themes: governance,
strategy, risk management, and metrics and
targets. We recognise the importance of
these disclosures and are committed to
implementing the recommendations.

We have included information relating to how
we are managing our climate impact and how
our business is evolving in response to the risk
and opportunities we see arising from climate
change in various parts of this Report. The
table on page 192 shows how our disclosures
map against the TCFD recommendations,
and where relevant information can be found.
This represents our first set of disclosures.
We recognise this will evolve and expand
over time.

This year we were delighted to win Business
in the Community’s Award for Environmental
Leadership. In the US, our Massachusetts
business was named one of the most energy
efficient utilities in America by the American
Council for an Energy-Efficient Economy.

Our specialist recycling partner collects surplus
equipment from us such as PCs, laptops and
mobile phones. Some items they clean and
refurbish; some they dismantle, salvaging
reusable components such as circuit boards and
hard disks. They break down the rest into raw
materials, including precious metals. Nothing is
wasted. Even the packaging we wrap around
our old IT equipment is used again.

Metal, plastic, even glass from the IT equipment
can be put to further use. The money generated
by selling these materials pays for our donations
to local charities or schools. During 2017/18
we’ve helped hospices and charities dedicated
to healthcare and conservation among others,
in both the UK and US.

Responsible disposal of assets
We chose our recycling partner after a
competitive tender. We discovered through
this process that there are many approaches
to recycling, not all of which are acceptable
to us. However, our partner can meet all our
requirements for the responsible disposal
of our assets.

Strategic Report | Our commitment to being a responsible business

National Grid Annual Report and Accounts 2017/18Strategic ReportOur commitment to being a responsible business continued

Health and wellbeing

We have continued to focus our
wellbeing efforts on encouraging
behavioural change within our
workforce, through education
and training.

Our wellbeing programmes have
raised awareness to employees of risks
associated with modern living, and
the impact it can have on their health.
Campaigns in 2017 included: diabetes
awareness, circadian rhythms, body
weight, cancer prevention, nutrition,
heart health, sleep quality, fatigue
and immunisations.

The cornerstone of our mental health
work has been in-depth training
sessions in both the UK and US.
These sessions are designed to
provide employees and leaders with
the knowledge and confidence to
notice and respond to mental health
issues in the workplace.

Living Wage

We are accredited by the Living Wage
Foundation and our commitment to
our direct employees also extends to
contractors and their work on behalf of
National Grid. We believe that everyone
should be appropriately rewarded for
the vital work they do. We also go
above the Living Wage requirements
and voluntarily pay our trainees the
Living Wage. A Living Wage review
takes place annually to ensure
continued alignment and individual
salaries are increased as required.

In focus

For more information about
UK gender pay gap, visit our website:
www.nationalgrid.com/uk/
understanding-our-uk-gender-pay-gap

In focus

People

We are working hard to overcome some
of the biggest energy challenges of the 21st
century as generation moves from fossil
fuels to renewable sources and transportation
moves towards electric vehicles. We need
to make sure we have highly motivated
people, with the right skills, working for us,
and helping equip us for the future.

Our focus on people covers our current and
future employees. We aim to have an engaged
and diverse workforce to stimulate innovation,
reflect the communities where we work, and
deliver great customer service.

The culture we strive for stems from embracing
our values of everyday we do the right thing
and find a better way. You can read more
about our values on page 12.

We also know that building sufficient capability
and leadership capacity (including effective
succession planning) is an important factor
in delivering our vision and strategy. You can
read more about how we are mitigating the
risks of not achieving this on page 20.

Engaging our people
Through our approach to developing our
people and the wider benefits of working at
National Grid we aim to have an engaged and
productive workforce. To attract and retain
employees we make sure our remuneration
package is both fair and competitive. Through
a third party company, we also carry out
an annual employee survey to measure
engagement levels and to help us address
areas employees believe we need to improve.
Employee engagement forms one of our
KPIs – you can read more about this and
our performance on page 14.

The wellbeing of our workforce is also
important. This year our employee lost time
injury frequency rate remained at 0.10. Our
ambition is to achieve a safety performance
below 0.10.

Safeguarding the future
We continue to raise awareness of the career
opportunities in the energy utility industry in
both the UK and US. In the UK, the need for
a skilled workforce to develop, deliver and use
new technologies within the energy sector is
becoming more acute according to the EU
Skills Workforce Strategy. STEM skills underpin
our business, so we promote STEM as an
exciting career path for young people through
education outreach activity such as the Big
Bang Fair, work experience, and hosting
school visits to our sites.

In the US we have signed a memorandum of
understanding with the State University of New
York (SUNY), which outlines our commitments
to education, internships, and hiring opportunities.
We also continue to grow our partnerships
through the Center for Energy Workforce
Development (CEWD) and the National
Energy Education Network (NEEN).

National Grid was the winner of Business
in the Communities award for Outstanding
Employment. This award recognised our
apprenticeship schemes and the work
we do to support hard-to-reach groups
of young people gain vital skills for work,
such as our EmployAbility programme
in the UK.

Whistleblowing
We have confidential external whistleblowing
helplines available 24/7 in all the regions
where we operate. We publicise the contact
information to our employees and on our
external website so concerns can be reported
anonymously. Our policies make it clear that
we will support and protect whistleblowers
and any form of retaliation will not be tolerated.

Empowering people with special
educational needs to excel
‘EmployAbility – Let’s work together’ is an
employee-led initiative that aims to bring
together businesses and local communities
to support individuals with special educational
needs. Supported internships are provided
to those people who might otherwise struggle
to find meaningful employment.

deal with people, while her confidence and
self-esteem grew.

As her internship was coming to an end,
two local employers offered her full-time
employment. Now Melanie is a valued member
of the 14Forty team who run our restaurant at
Warwick, providing customers with excellent
service and supporting her colleagues.

Only 6% of people with learning disabilities gain
paid employment in the UK. At National Grid,
we think we can do better – last year, 65% of
our supported interns found employment.

Melanie said: ‘Without National Grid’s
EmployAbility scheme, my future looked very
uncertain. I feel happy and proud that I have
achieved so much.’

To find out more about our people, visit:
www.nationalgrid.com/group/our-people

See also ‘how we add value’ on page 6

Melanie attended a special educational needs
school. She started her supported internship
with us last year and excelled from the
beginning. She found a natural ability to

We are working with the Government and
others to encourage more employers to get
involved in this life-changing programme.

Strategic Report | Our commitment to being a responsible business

National Grid Annual Report and Accounts 2017/18Promoting an inclusive and diverse workforce

In 2017 we implemented inclusion and diversity
policies in the UK and the US. The purpose of
the policies is to demonstrate our commitment
to providing an inclusive, equal and fair working
environment through:
• driving inclusion and promoting equal

Following the appointment of a new
Non-executive Director on 17 May 2018, the
Board’s gender demographic is currently:
Male 8, Female 4, Total 12 (Male 66.7%,
Female 33.3%).

opportunities for all;

Gender demographic as at 31 March 2018

NGV

Total6

Voluntary

Non-
voluntary

6.0%

5.1%

5.3%

2.2%

2.4%

1.4%

2.3%

Total

8.2%

7.5%

6.5%

7.6%

• ensuring the workforce, whether part-time,
full-time or temporary, will be treated fairly
and with respect;

• eliminating discrimination; and
• ensuring selection for employment,

promotion, training, development, benefit
and reward, will be on the basis of merit
and in line with regional legislation.

17.9% of our total workforce have declared
themselves to be of ‘minority’ racial or
ethnic heritage. We recognise the value a
diverse workforce and an inclusive culture bring
to our business and have many initiatives to
encourage and promote this. For example,
our UK employee resource groups created our
second edition of ‘Remarkable’, which highlights
the full diversity of our people. We have
implemented a diverse panel interview
approach in the UK and US to appoint senior
leaders. In the UK, this resulted in an increase
in gender diversity and BAME representation
on our Network Capability Electricity leadership
team. We have also established development
programmes for women (US) and BAME (UK)
employees to build leadership capability.

Our US business achieved 100% in the Human
Rights Campaign’s Corporate Equality Index;
received the Age Smart Award by Columbia
University and is noted as a top 50 employer
by ‘CAREERS and the disABLED’ magazine.
These recognitions reinforce our commitments
to all our employees.

Our policy is that people with disabilities should
be given 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. Our policy recognises the right
for all people to work in an environment that
is free from discrimination.

Our leaders advocate a diverse workforce.
For example, John Pettigrew gave a keynote
speech at the Women in Energy conference
2018. Several of our senior leaders have taken
part in our reverse mentoring programme.

The gender demographic table that follows
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.

Our
Board1

Senior
management2

Whole
Company3

4. In scope are active, permanent employees.
Out of scope are temporary employees.

5. Employees recorded in our system as part time;

or have <1 FTE.

6. Included in ‘Total’ are Non-executive Directors

and Executive Officers who are not categorised
as UK, US or NGV.

Learning days per employee
From 1 April 2017 to 31 March 2018 the
total number of training days delivered per
employee, (as recorded in our HR systems),
across the whole of National Grid is 6.5 days.

Promotion rate
The table below shows the rate of promotion
within the business. Promotion rate is defined
as number of employees who were promoted
to a higher grade as a percentage of headcount
last year.

NGV

Total

Promotion rate %

10.3

12.4

7.9

11.7

Keeping our Board and Executive
Committee updated
Our Board and Executive Committee receive
regular updates on matters relating to our
people. The Board receives regular updates
on four key focus areas for our people and
organisation: our culture, diversity, the people
we need for the future and efficiency. The
Board also receives updates on our employee
opinion survey results and action plans.
Additionally, this year the Board has discussed
and considered the culture of the Company
and stakeholder engagement activities
(see page 48 for more details).

The Executive Committee also receives a
quarterly update on people-related matters.
In addition to these reports, the Committee
receives regular talent updates and considers
the remuneration structure for senior
management. It also monitors safety and
operational performance and receives reports
in relation to matters of business conduct, risk
and compliance matters for review, including
breaches of ‘Always Doing the Right Thing’ and
biannual reports from the US and UK Ethics
and Compliance Committees in conjunction
with the Ethics and Business Conduct reports
that they receive twice a year.

Male

Female

Total

Male (%)

Female (%)

72.7

27.3

171

248

17,366

5,657

23,023

75.4

24.6

1. ‘Board’ refers to members as defined on the

Company website.

2. ‘Senior management’ refers to Band A/B employees

as well as subsidiary directors.

3. This measure is also one of our Company KPIs.

See page 14 for more information.

Total headcount4
The tables below show the breakdown of
employees by work pattern and diversity.

Work-pattern

Full-time

Part-time5

5,599

16,352

685

22,650

95.1

99.6

96.5

98.4

286

373

4.9

0.4

3.5

1.6

Male

4,365

12,526

466

Female

74.2

76.3

65.6

1,520

3,888

244

25.8

23.7

34.4

NGV

Total6

Gender

NGV

Total6

17,366

75.4

5,657

24.6

Ethnicity demographic as at
31 March 2018
‘Minority’ refers to racial/ethnic heritage
declarations as recorded in our system.
Those who have not stated their ethnicity
are excluded from the baseline.

White

Minority

Total

White (%)

Minority (%)

18,161

3,965

22,126

82.1

17.9

Employee turnover
Turnover is defined as employees who have
left in the last 12 months as a percentage of
headcount last year. Voluntary turnover relates
to employees who have left through either
resignation or retirement. Non-voluntary
attrition includes any other leave reasons
– including dismissal, severance, etc.

Strategic Report | Our commitment to being a responsible business

National Grid Annual Report and Accounts 2017/18Strategic ReportOur commitment to being a responsible business continued

Our role in communities

An important part of our vision is to exceed the
expectations of our communities. We do this
by providing a safe and reliable service, and by
helping our communities to thrive through our
responsible business activities. We also know
that, from time-to-time, when we are carrying
out large construction projects that our work
can have a negative impact on communities.
We work with communities to reduce this
impact and to help support their social
and economic needs.

Safe reliable energy
Providing a reliable and safe service at as
low a cost as possible is important to our
customers and to us as we work hard to
exceed their expectations.

The safety of our employees, contractors and
the public is one of our highest priorities and
this is reflected in our KPIs, described on page
15. We have policies, procedures and training
in place to make sure we maintain our safety
performance at the high level that we expect.

The reliability of our networks is world-class,
running at more than 99.9% availability in both
the UK and US. You can read more about this
on page 15, as well as how we manage our
operational risks on page 19.

We ask our customers what they think of us
and we act on their feedback. You can read
about our customer satisfaction performance
on page 15.

£73m

The value of our volunteering,
fundraising and community
contributions in 2017/18

Supporting communities to thrive
We don’t just supply power to communities,
we are part of them. As a purpose-led
organisation, we believe that helping to build
strong communities is good for the people
who live there, good for our business and
good for the wider economy.

In the UK we are part of the Government’s
Inclusive Economic Partnership, a partnership
between the business sector, Government
and civil society. We are supporting work in the
vital areas of mental health in the workplace
and equipping people to successfully transition
to the world of work.

The overall additional value we bring to
communities is estimated to be £73 million.

We achieve this by partnering with civil society,
providing communities with one-off grants to
support their social, economic and environmental
development. We encourage our employees
to pursue skills-based volunteering and
fundraising opportunities. In the future, we
will be focusing on helping to address social
mobility, both in the UK and US.

We voluntarily set up a £150 million Warm
Home Fund after the sale of a 61% stake in our
UK Gas Distribution business to help address
fuel poverty. To date, we have given out just
over £63 million to improve homes and help
people across England, Wales and Scotland
by, for example, enabling them to have central
heating systems for the first time.

Our employees also support local schools and
colleges with work experience opportunities
and careers advice sessions, as described on
page 17. Last year we had more than 35,400
quality STEM interactions with young people.

We are partnering with Hudson Valley Community
College in the US to offer entry-level natural gas
industry training. This will help meet the challenge
of an ageing engineering workforce in the energy
industry. Investing in future generations links in
with one of our strategic priorities to ensure that
National Grid is better equipped for the future.

Preventing modern slavery
We strive to make sure that modern slavery
is not taking place anywhere in our business
or in our supply chain. We rely on our suppliers
to deliver our human rights requirements within
their own supply chains and we expect all
suppliers to be compliant with the Modern
Slavery Act. Each year we publish our modern
slavery statement on our UK website.

We work with our suppliers and peers to
understand what approach they are taking to
combat modern slavery. In 2017 we completed
a desktop risk assessment of our top 250
suppliers. We are now engaging with those
suppliers that have been identified as potentially
high risk and will be working with them to
complete a range of assessment questions
to develop risk mitigation plans for any
identified issues.

We are also developing a framework for our
buyers so that the sustainability risk criteria,
including those relating to modern slavery,
can be embedded into the initial stages of
the sourcing process and integrated into
the selection criteria. Any risks identified
will be reviewed through the contract
management process.

Affordable housing in Rhode Island
We’re supporting United Way of Rhode Island
in its affordable housing project, Housing for All.
Community and Customer Manager Marisa
Albanese explains why.

Affordable housing is a basic need. We know
it contributes to the stability and growth of
communities. Yet a shortage of affordable
housing is an ongoing problem facing working
families and individuals in some of the
communities we serve in Rhode Island. That’s
why United Way of Rhode Island stepped in
with Housing for All, which we support.

Our work with United Way takes various
forms. We match donations our people make
through fund-raising campaigns. Some of
us also volunteer on United Way projects
and committees.

Housing for All came out of a United Way
summit to find solutions to the root causes of
the housing problem in Rhode Island. As one
of the state’s energy suppliers, we directly
touch the lives of people struggling with their
household bills. We see the need to be part
of the discussion and the solution. So we
gave United Way $50,000 to help fund four
projects to address some of the issues
raised at the summit.

We’ll be working with United Way to help
monitor the work of the four agencies managing
these projects, to evaluate progress, and to
offer our expertise when it’s needed. This
by itself won’t solve the problem of housing
costs in Rhode Island, but it’s a step in the
right direction.

Strategic Report | Our commitment to being a responsible business

National Grid Annual Report and Accounts 2017/18Good business conduct

To provide an understanding of the Company’s
development, performance and position, we
describe our respect for human rights and
anti-corruption and anti-bribery matters below.

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. However, due to the jurisdictions
in which we operate, the nature of the work
we undertake, and our associated supply
chain, human rights is not considered to
be a principal risk to our business.

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 Supplier Code of Conduct
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.

Anti-bribery and corruption
We have policies and governance in place
that set and monitor our approach to being
responsible, including our Code of Ethical
Business Conduct (covering bribery and
corruption). We have a Company-wide
framework of controls designed to prevent
and detect bribery.

We investigate all allegations of ethical
misconduct thoroughly and, where appropriate,
we take corrective action. We also record trends
and metrics relating to such allegations – only
a small percentage of these relate to bribery
or corrupt practices, so we do not consider
them to be material for reporting purposes.
For the seventh successive year, we have been
recognised by the Ethisphere Institute as one
of the World’s Most Ethical Companies.

Governance and oversight
We regularly review and update our framework
so we can make sure our procedures remain
proportionate to the principal risks we have
identified.

Our UK and US Ethics and Compliance
Committees (ECC) oversee the Code of Ethical
Business Conduct and associated awareness
programmes. Any cases alleging bribery are
required to be referred immediately to the
relevant ECC so the members can satisfy
themselves that cases are investigated
promptly and, where appropriate, acted upon,
including ensuring any lessons learnt are
communicated across the business.

The Audit Committee receives an annual report
on the procedures currently in place to prevent
and detect bribery. You can read more about
the Audit Committee’s role on page 44. None
of our investigations over the last 12 months
have identified cases of bribery.

Anti-bribery policy
Our Group Policy Statement – Anti-Fraud and
Bribery – applies to all permanent employees,
temporary agency staff and contractors. It sets
out our zero-tolerance approach to bribery.

To ensure compliance with the UK Bribery Act
2010, we carried out a risk assessment across
the Company so we could highlight higher risk
areas and make sure adequate procedures
were in place to address them. We introduced
an e-learning course for all employees so they
can adequately understand the Company’s
zero-tolerance approach to fraud, bribery or
corruption of any kind.

Ethical business conduct
Our Code of Ethical Business Conduct
sets out the standards and behaviours we
expect from all employees to meet our values
of Do the Right Thing and Find a Better Way.
The document is issued to all employees
and is supported by a regular programme
of communications to promote a strong
ethical culture. Additionally, we provide
briefings for high risk areas of the business,
such as Procurement.

Suppliers
Our Supplier Code of Conduct is issued to
our suppliers and sets out our requirements
that they have in place a programme with
procedures to prevent and detect bribery
and corruption, in accordance with all
applicable local, state, federal or national
laws or regulations including the UK Bribery
Act 2010 and the US Foreign Corrupt
Practices Act 1977.

We provide specific guidance and briefings
for high risk areas, so contractors, agents and
others who are acting on behalf of National
Grid do not engage in any illegal or improper
conduct. Our Global Procurement team carries
out regular supplier screening to identify any
requirements for prosecutions or sanctions
within our supplier base.

Compliance framework
Each of our business areas is required to
consider its specific risks and maintain a
compliance framework setting out the controls
it has in place to prevent bribery. Every six
months, as part of the compliance procedure,
the business is asked to self-assess the
effectiveness of its controls and provide
evidence that supports its compliance.

Each year, all function heads are asked to certify
the compliance in their area, and to provide
details of any exceptions. This culminates in
presentation of a Certificate of Assurance from
the Chief Executive to the Board (following
consideration by the Audit Committee).

Strategic Report | Our commitment to being a responsible business

National Grid Annual Report and Accounts 2017/18

Strategic ReportLetter from the Chairman

Corporate Governance contents

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

41
46
49
56

57
58
59
60

62
63

Structure of the report
This report sets out how we are governed
and the Board’s key governance activities
during the year. Further information on
our compliance with the UK Corporate
Governance Code for 2017/18 is set
out on pages 61-62.

Special dividend

This year we returned some £4 billion
to shareholders following the sale of a
61% stake in our UK Gas Distribution
business, through a combination of a
share consolidation, a special dividend
and share buybacks.

I believe that strong corporate governance
supports long-term value creation for shareholders
and is key to balancing the interests of our
shareholders with those of our wider stakeholders.
Your Board recognises the importance of our
wider stakeholders and takes its responsibility
and duty to them under section 172 of the
Companies Act 2006 very seriously. On page
6, we set out who our key stakeholders are,
why they are important to us and how we
create value for them over the long term.

Engagement with our stakeholders continues
to be an important priority for us. This year,
the Board has reviewed who the Company’s
key stakeholders are; our current stakeholder
engagement activities; the appropriateness
of this engagement; how this engagement is
reported to the Board; the mechanisms used to
feedback to our stakeholders; and whether there
is a need for greater engagement at Board level.
You can read about this on page 48.

I believe that the Board should choose a
stakeholder engagement model best suited
to the needs of the Company, and for us
that means it should reflect that more than
two-thirds of our employees now work in,
and more than 60% of our capital expenditure
is in, the US. We will continue to engage
with our stakeholders in a way that is guided
by our purpose, vision and values.

Board changes and diversity
As reported last year, Ruth Kelly stepped
down from the Board in July 2017. I would
like to thank Ruth for her significant
contribution to the Board and Committees
during her tenure. As previously announced,
Andrew Bonfield will step down from the
Board at the conclusion of the 2018 AGM.
Andy Agg, currently Group Tax and Treasury
Director, will be appointed as Interim Finance
Director pending the appointment of a
permanent Finance Director. Andy will not
join the Board, but will become a member
of the Executive Committee.

We also announced on 15 May 2018 that Pierre
Dufour will step down from the Board at the
conclusion of the 2018 AGM due to ill health.

On 17 May 2018 we will welcome Amanda
Mesler on to the Board as a Non-executive
Director. The Nominations Committee oversaw
the rigorous selection process for Amanda’s
appointment. You can read more about this on
page 59. Amanda’s appointment is part of our
ongoing commitment to build and maintain an
effective Board which is high quality in terms
of expertise, diversity and background. As a
result, shareholders will continue to benefit
from strong governance and stewardship.

We remain focused on maintaining an inclusive
and diverse culture. We believe this improves
effectiveness, encourages constructive debate,
delivers superior performance and enhances
the success of the Company. At its January
meeting, the Nominations Committee approved
amendments to our Board diversity policy and
discussed progress made against our diversity
objectives. You can read more about this on
page 59.

Sir Peter Gershon
Chairman

Dear shareholders,
This year the Board has continued to focus on
providing effective leadership and oversight of
the Company as it seeks to achieve its strategic
priorities and create value for our shareholders
during an ongoing period of external regulatory
and political uncertainty. These external changes
have influenced the Board’s agenda during the
year, as we considered, among other matters,
the impact of US tax reform, Ofgem’s ‘minded-
to’ consultation on the delivery model for the
Hinkley-Seabank project, Brexit and the threat
of renationalisation.

Risk
As a Board we are responsible for determining
the nature and extent of the principal risks we are
willing to take to achieve our strategic priorities.
In addition to its usual ongoing oversight of the
Company’s risk management and internal control
systems and assessment of our principal risks,
the Board this year undertook a risk management
review to revalidate our principal risks and rethink
our risk appetite framework. You can read about
the outcome of our work on risk during the year
on page 41.

Culture
Like risk management, I believe that focusing
on the Company’s culture is part of doing good
business and is intrinsic to everything we do.
We reported last year on the outcome of the
Board’s previous performance evaluation,
which focused on culture, and it remained a
focus area for the Board this year; particularly
how we oversee, shape and monitor culture.
You can read more about this on page 47.

As Chairman, promoting a culture of openness
and debate is one of my key responsibilities and
as a Board we play an important leadership role
in promoting the desired culture throughout
the organisation and making sure that good
governance, which underpins a healthy culture,
is established. The right culture and governance
can support us in achieving our purpose and
strategic priorities. It is also integral to creating
sustainable value in a way that is consistent with
our values: every day we do the right thing and
find a better way.

Corporate Governance
Your Board remains committed to the highest
standards of corporate governance and alignment
with best practice, and this requires ongoing focus
as the corporate governance landscape continues
to develop. We are cognisant of this changing
environment and are an active participant in it – in
February we responded to the Financial Reporting
Council’s consultation on its proposed revision
to the UK Corporate Governance Code.

National Grid Annual Report and Accounts 2017/18

Corporate Governance | Letter from the Chairman

Matters considered by the Board

Examples of Board focus during the year included:

Key areas of activity Matters considered

Outcome

Business
performance
oversight

The Board has received regular updates on how our operational businesses have performed
and progressed against our strategic priorities, as we find new ways of optimising our
operational performance, look for opportunities to grow our core business and make sure
we are better equipped for the future. This included performance updates from our UK and
US businesses as well as the inaugural update from our newly created division, National Grid
Ventures, as it focuses on the development of new growth opportunities and strengthening
our commercial and partnership capabilities.

• Board review and challenge of business
performance against the Company’s
performance targets and strategic priorities.

Strategy

Risk

Political and
regulatory
environment

Culture

Cyber security

Technology
and innovation

Our strategic focus is predicated on our customers, and the Board was kept up to date with
business performance relative to customer expectations and against our customer ambitions
throughout the year. As part of this, the Board considered how we could learn from industry
leaders to support our US customer transformation initiative and position the US business for
future success, while capturing appropriate value for the Company and its shareholders.

The Board has participated in two interactive sessions this year in addition to the time allocated
during Board meetings. These strategy sessions focused on ensuring the Board remains up to
date on the changing energy landscape and the implications on the Company’s portfolio and
strategy, and the entry and growth strategies for National Grid Ventures so it can help us deliver
against our strategic priorities and deliver shareholder value. At its April 2018 meeting the Board
considered the external energy landscape further and endorsed the strategic priority areas
for management focus for 2018/19.

The Board is responsible for determining the nature and extent of the principal risks it is willing
to take in achieving the Company’s strategic priorities. It reviews the Company’s principal
risks and the management of significant risks as part of its risk management and monitoring
process through bi-annual review and challenge sessions. This year, the Board and Executive
Committee, with the assistance of an external risk advisor, have undertaken a risk management
review to revalidate our principal risks and rethink our risk appetite framework.

The Board discussed the Group risk profile in September and March and considered any changes
to existing risks, any emerging risks, and whether the agreed principal risks were consistent
with the Company’s risk appetite levels. The Board also reviewed the testing of the Company’s
principal risks and the impact on the Company’s viability over a five-year viability period.

This year, the Board continued to focus on how to promote the success of the Company
during further developments in our external environment. Following the UK General Election
in June 2017, the Board discussed the impact of its outcome on the Company and its business
environment. During the year, the Board also had regular updates on risks and opportunities
posed by Brexit and our continued engagement activities with our stakeholders on this issue.
The Board also reviewed the impact of US tax reform on the Company, including on our
regulatory strategy, and on our US customers.

Ahead of our next UK regulatory price control, the Board considered the key elements of Ofgem’s
RIIO-T2 framework review consultation, published in March 2018, and scrutinised the Company’s
UK regulatory strategy, providing feedback, guidance and support for its ongoing development.

The Board also discussed Ofgem’s ‘minded-to’ consultation on the delivery model for the
Hinkley-Seabank project and our response to the consultation. At its March 2018 meeting,
the Board received an update on the key political, policy and regulatory issues in the UK
and US to which the Company was responding.

The Board has spent much time this year on how it shapes, monitors and assesses culture
of the Company, which you can read more about on page 47. This included reviewing and
approving a proposed culture ‘scorecard’ which could be considered regularly by the Board.
The Board reviewed the first culture ‘scorecard’ at its April 2018 meeting, which showed
trends and gave an assessment of areas of strength and areas for further focus.

The Board continued to focus on the evolving cyber security landscape during the year, with
a regular cadence of Board reporting and review in place, supported by engagement with the
Company’s Chief Information and Digital Officer. This included review of the external and internal
cyber threat environment, our key cyber risks and the Company’s cyber strategy. The Board
was also updated on the activities of the Company’s Cyber Operational Research Establishment
(CORE), a joint initiative between our UK business and Digital Risk & Security function.

The Board has also considered how the Company measures its approach to cyber security and
how this is used to manage cyber security risk, and how cyber risk is reported to the Board
and Executive Committee.

To support our response to the threat and opportunities presented by emerging technology,
this year the Board reviewed the organisation and governance of our Technology and Innovation
function. This included how we learn from and leverage innovation that is occurring externally;
how we enhance the effectiveness of internally generated innovation; and how we measure the
success of our efforts in this area. Our focus has been on enabling an innovative culture with rapid
decision-making and the acceleration of internally sourced ideas. At its April 2018 meeting, the
Board considered, and provided input on, the Company’s technology and innovation strategy.

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

• Board approval of the Company’s strategy.
• Board endorsement of the strategic priority
areas for management focus for 2018/19.

• Agreed risk appetite profile and principal
risks, including two new principal risks.
• Agreed enhancements to Board reporting,

utilising risk appetite.

• Approved a new risk appetite framework
for implementation across the business.
• Board approval of the Group risk profile
and confirmation that a five-year viability
period was appropriate.

• Approved the Company’s viability statement.

• Board input on, support for and monitoring

of the UK and US regulatory strategy.

• Political sub-group of Executive

Committee established to take a more
hands-on approach.

• Board endorsement of a culture

‘scorecard’ to support the Board in
shaping, monitoring and assessing culture.

• Board review of and input on cyber security
measurement and reporting, including a
cyber ‘scorecard’.

• Board review and endorsement of the

organisation and governance for the Group
Technology and Innovation function.

• Board review of and input on the Company’s

technology and innovation strategy.

• continued regular reviews of safety activities;
• UK, US and National Grid Ventures operational business overviews;
• continued detailed review of our strategy for growth and its financing;
the implications of regulatory and political changes in our business
•
environment on our activities, including Brexit;

• our UK and US regulatory strategy and preparation for RIIO-T2;
• Ofgem’s recommendations and decisions regarding the delivery model

for the Hinkley-Seabank project;

technology and innovation;

•
• cyber security updates;
•
• monitoring and assessing the Company’s culture, supported

results of the 2018 employee engagement survey;

by our culture ‘scorecard’;

• our stakeholder engagement model; and
• addressing changes to the UK Corporate Governance Code

and other corporate governance policy developments.

National Grid Annual Report and Accounts 2017/18Corporate Governance | Corporate GovernanceCorporate GovernanceCorporate Governance

Our Board

Skills and competencies: In this role
he draws on his broad business and
governance experience from the executive
and non-executive senior positions he has
held. His leadership as Chairman is pivotal
in creating an effective Board by encouraging
robust debate. Sir Peter has a commitment
to strong corporate governance and has
regular constructive engagement with
investors through the Company’s
shareholder networking programme. Sir
Peter actively engages with employees
across our operational sites.

External appointments: Sir Peter
currently holds external appointments as
a Non-executive Chairman of the Aircraft
Carrier Alliance Management Board,
Trustee of The Sutton Trust, Trustee of the
Education Endowment Foundation and
Chairman of Join Dementia Research (JDR)
Partnership Board. He is also a board
member of the Investor Forum.

Committees: Chairman of the
Nominations Committee.

Strategic Rail Authority, Office of the Rail
Regulator, Bechtel Ltd, Halcrow Fox, the
World Bank and London Transport.

Skills and competencies: 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 large regulated
businesses. This enables her to draw on
her diverse experience and knowledge
to assist the Board and, in particular,
the Executive Committee.

External appointments: Non-executive
Director of International Consolidated
Airlines Group, S.A., Director of Major
Projects Association and member of the
Audit Committee of English Heritage.

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.

Skills and competencies: Dean brings
to the Board a broad range of financial and
customer experience along with significant
general management experience with
a particular focus on change and
performance improvement programmes.

Sir Peter Gershon CBE FREng (71)
Chairman

Appointed: 1 August 2011 as Deputy
Chairman and became Chairman with
effect from 1 January 2012.
Tenure: 6 years

Career and experience: Sir Peter
has held senior positions spanning both
public and private sectors in the healthcare,
technology and telecommunications
industries. His previous senior board level
appointments include Chairman of Tate
and Lyle plc, Chief Executive of the Office
of Government Commerce, Managing
Director of Marconi Electronic Systems
and a member of the UK Defence
Academy Advisory Board.

Nicola Shaw CBE (48)
Executive Director, UK

Appointed: 1 July 2016
Tenure: 1 year

Career and experience: Nicola has
served in senior management roles,
as Chief Executive Officer of HS1 and
Managing Director of UK Business Division
at FirstGroup plc. She was also an
independent Non-executive Director
of Ellevio AB and Aer Lingus Group plc.
Nicola’s career, both in the UK and
overseas, has included roles at the

Dean Seavers (57)
Executive Director, US

Appointed: 1 April 2015
Tenure: 3 years

Career and experience: Dean began his
career at the Ford Motor Company. From
there he held a series of leadership roles
before moving to Tyco International Ltd,
where he held various senior management
positions before joining General Electric
Company and United Technologies

External appointments: Advisor to
the board at City Light Capital, Board
member of Red Hawk Fire & Security,
LLC and Non-executive Director of
Albemarle Corporation.

Skills and experience

John Pettigrew FEI FIET (49)
Chief Executive

Appointed: 1 April 2014 and became
Chief Executive with effect from 1 April 2016.
Tenure: 4 years

Career and experience: John is a Fellow
of the Energy Institute and of the Institution
of Energy and Technology. He joined the
Group in 1991 and has progressed through
a variety of senior management roles. These
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.

Andrew Bonfield (55)
Finance Director

Appointed: 1 November 2010
Tenure: 7 years

Career and experience: Andrew is
a chartered accountant with significant
financial experience, having previously
held the position of Chief Financial Officer
at Cadbury plc and five years as Executive
Vice President and Chief Financial Officer at
Bristol Myers Squibb. Andrew also has prior
experience in the energy sector as Finance
Director of BG Group plc.

Nora Mead Brownell (70)
Non-executive Director; Independent

Appointed: 1 June 2012
Tenure: 5 years

Career and experience: Nora has
substantial senior management experience
gained in a variety of roles, including
Commissioner of the Pennsylvania Public
Utility Commission, the Federal Energy
Regulatory Commission (FERC) and former
President of the National Association of
Regulatory Utility Commissioners. Most
recently, Nora sat on the Boards of ONCOR
Electric Delivery Holding Company LLC and
Comverge, Inc.

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Each bar shows the number of members on the Board with strong or very strong skills or experience in this area

Corporate Governance | Corporate Governance

Skills and competencies: With his
extensive operational experience of the
Group and in depth understanding of both
the US and UK energy and utility industries,
John brings significant know-how and
commerciality to his leadership of the
executive team. John is responsible for
the implementation of strategy and the
continued growth of our businesses.
He maintains a productive dialogue with
institutional investors on Group strategy
and performance.

External appointments: John is a
member of the Government’s Inclusive
Economy Partnership and the CBI’s
Presidents Committee and Non-executive
Director of Rentokil Initial plc.

Committees: Member of the
Finance Committee.

Skills and competencies: Andrew has
significant listed company and financial
experience at board level both in UK and
overseas. This enables him to contribute to
financial discussions during Board meetings.

He has a strong focus on corporate
responsibility and investor relations from
a finance perspective. He is also Chairman
of the 100 Group of Finance Directors.

External appointments: Non-executive
Director and Chairman of the Audit
Committee at Kingfisher plc to 12 June
2018 and Non-executive Director and a
member of the Audit Committee at Reckitt
Benckiser Group plc as of 1 July 2018.

Committees: Member of the
Finance Committee.

Skills and competencies: Nora brings
to the Board significant expertise in the US
utilities industry, in particular from her role
as a Commissioner with FERC. Her first-hand
regulatory experience, combined with her
non-executive directorships, provides the
Board with valuable strategic insights into
regulation and US government relations.
This allows her to scrutinise performance
and provide an additional perspective for
the Board’s discussions.

External appointments: Board member
of Spectra Energy Partners LP, the
Strategic Advisory Council of the NewWorld
Capital Group, LLC, the Advisory Board
of Morgan Stanley Infrastructure Partners
as well as a partner in ESPY Energy
Solutions, LLC.

Committees: Member of the Nominations,
Remuneration and Safety, Environment and
Health Committees.

Tenure as at 31 March 2018

Charts and committee membership
as at 16 May 2018

This graph, together with the biographies
above, shows some of the key sector
experience and skills the Board has
identified for the effective running of the
Company and the delivery of its long-term
strategy. They also demonstrate how each
Board member contributes to this blend
of skills and experience.

National Grid Annual Report and Accounts 2017/18

Committee of Jardine Lloyd Thompson
Group plc.

Skills and competencies: Jonathan has
wide-ranging financial services, pensions
and non-executive director experience,
and he brings significant and in-depth
understanding in remuneration and
financial matters to his role as Chairman
of the Remuneration Committee. As a
Non-executive Director his contribution
is essential to the successful operation
of the Board and through his specialisms
he delivers scrutiny, additional challenge
and independent oversight to the Board.

External appointments: Chairman of
River and Mercantile Group PLC, Chairman
of Trustees of the Royal Albert Hall pension
scheme and Chairman and a founding
partner of Penfida Limited.

Committees: Chairman of the
Remuneration Committee, member of the
Finance and Nominations Committees.

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.

Skills and competencies: With a
distinguished career in the investment
banking sector, Therese brings significant
banking, strategic and international financial
management expertise and knowledge of
financial markets to the Board and to her
role as Chairman of the Finance Committee.
This enables her to contribute a constructive
viewpoint to Board debates with her sharp
and incisive thinking.

External appointments: Non-executive
Director of Imperial Brands PLC.

Committees: Chairman of the Finance
Committee and member of the Audit and
Nominations Committees.

Skills and competencies: Mark’s role as
Senior Independent Director is essential to
the successful operation of the Board. He
has an excellent understanding of investor
expectations and significant experience in
managing relationships with investor and
financial communities. During the course
of his career, Mark has gained a broad
knowledge within the utilities sector as
well as extensive city, international and
accounting experience; this makes him
ideally suited to his role as Chairman of
the Audit Committee. Mark also brings
the skills of an experienced Chairman
to his role as a Non-executive Director.

External appointments: Chairman
of Imperial Brands PLC and Chairman
of Spectris plc.

Committees: Chairman of the Audit
Committee, member of the Nominations
and Remuneration Committees.

Jonathan Dawson (66)
Non-executive Director; Independent

Appointed: 4 March 2013
Tenure: 5 years

Career and experience: 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 and Senior Independent Director
and Chairman of the Audit & Risk

Therese Esperdy (57)
Non-executive Director; Independent

Appointed: 18 March 2014, and
appointed to the Board of National Grid
USA from 1 May 2015
Tenure: 4 years

Career and experience: Therese started
her banking career at Lehman Brothers,
then moved to Chase Securities in 1997.
She subsequently held a variety of senior
roles at JPMorgan Chase & Co. including
Head of US Debt Capital Markets and

Mark Williamson (60)
Non-executive Director and
Senior Independent Director

Appointed: 3 September 2012
Tenure: 5 years

Career and experience: Mark is a
chartered accountant with considerable
financial and managerial experience. He has
a deep knowledge of operating within highly
regulated industries from his time as the
Group Financial Controller of Simon Group
plc, Chief Financial Officer of International
Power plc and Non-executive and Senior
Independent Director of Alent plc.

Executive Vice President of the Air Liquide
group with responsibility for all Air Liquide
activities across The Americas, Middle East,
Africa and Asia.

Skills and competencies: Pierre brings
to the Board a deep understanding and
knowledge of safety and engineering
from his previous roles. His international
management experience is an asset to the
Board. This, coupled with his record of
successfully delivering large-scale capital
projects, provides a wider perspective to
Board debates and strategic discussions.

External appointments: Non-executive
Director of Archer Daniels Midland, Director
of Airgas Inc., an Air Liquide subsidiary and
Director and Chairman of the Environment
and Society Committee of Air Liquide S.A.

Committees: Member of the Nominations,
Remuneration and Safety, Environment and
Health Committees.

Chairman of AEA Technology Group plc
and Chairman of EngineeringUK.

Skills and competencies: Paul has
a lifelong passion for engineering and
innovation, and has spent his career in
the energy, governmental and regulatory
sectors. He brings the skills of an
experienced Chairman and Chief Executive
to his role as a Non-executive Director.
He adds a valuable perspective to debates
on UK regulatory and strategic issues.
His deep understanding and specific
experience in safety and risk management
is crucial to his role as Chairman of the
Safety, Environment and Health Committee.

External appointments: 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.

Committees: Chairman of the Safety,
Environment and Health Committee,
member of the Audit and Nominations
Committees.

Group, she was a corporate/commercial
solicitor in private practice.

Skills and competencies: Alison is
responsible for the legal, compliance and
governance framework for the Group.
She is an experienced commercial lawyer
and brings a wealth of practical advice
and guidance to her current role as Group
General Counsel and Company Secretary.
She also has expertise in regulatory and
contractual law and legal risk management
from her experience at National Grid.
Alison provides support and advice to the
Directors, Board and its Committees. She
brings rigour around corporate governance
and ensures that Board procedures and
policies are complied with.

External appointments: Member and
Vice-Chair of the Association of General
Counsel and Company Secretaries working
in FTSE 100 Companies.

Pierre Dufour (63)
Non-executive Director; Independent

Appointed: 16 February 2017
Tenure: 1 year

Career and experience: Pierre started his
career at SNC Lavalin Group. 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

Dr Paul Golby CBE FREng FIET,
FIMechE, FEI, FCGI (67)
Non-executive Director; Independent

Appointed: 1 February 2012
Tenure: 6 years

Career and experience: Paul is a
Chartered Engineer with a doctorate
in Mechanical Engineering, Fellow of
the Royal Academy of Engineering, the
Institution of Engineering and Technology,
the Institution of Mechanical Engineers,
the Energy Institute and City of Guilds.
He was awarded honorary degrees from
Aston University and Cranfield University.
Paul 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 Non-executive

Alison Kay (54)
Group General Counsel and
Company Secretary

Appointed: 24 January 2013

Career and experience: Alison joined
National Grid in 1996 and has undertaken
several roles including UK General Counsel
and Company Secretary from 2000 to 2008
and Commercial Director, UK Transmission
from 2008 to 2012. Prior to joining the

Board gender

Executive and Non-executive Directors

Non-executive Directors’ tenure

Board members by nationality

Women

Men

Executive

Non-executive

(inc. Chairman)

0-3 years

3-6 years

6-9 years

British

Canadian

Corporate Governance | Corporate Governance

National Grid Annual Report and Accounts 2017/18Corporate 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. Our Board
is comprised of a majority of independent Non-executive
Directors whose diverse skills and experience are vital to
constructive challenge, debate and for the robust scrutiny
of management performance and proposals.

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 58.

We will welcome Amanda Mesler on to the Board
as a Non-executive Director from 17 May 2018.
Andrew Bonfield and Pierre Dufour will step down
from the Board at the conclusion of the 2018 AGM.

Governance structure

Governance framework: Structure and responsibilities

The schedule of matters
reserved for the Board
is available on the
Corporate Governance
section of our website,
together with the terms
of reference for each
Board committee:
www.nationalgrid.com

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

Board

The role of the Board
Our Board is collectively responsible for the effective oversight of the Company and its businesses. It determines the
Company’s strategic direction and objectives, business plan, viability and governance structure that will help achieve
long-term success and deliver sustainable shareholder value. The Board recognises that to promote success over
the long term we must earn and keep the trust and confidence of our employees, customers, the communities in
which we operate and wider stakeholders.

The Board sets the risk appetite and determines the 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 18-21). The Board also plays a key role in setting and
leading the Company’s culture. For more information see page 47.

Board
committees

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.

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.

Remuneration
Committee
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.

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.

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.

Management
committees

Disclosure Committee; Investment Committee; Share-schemes Sub-Committee

Executive Committee

In focus

Details of the
management
committees can be
found on page 60

Our Board and its committees
In order that it can operate efficiently and give the right level
of attention and consideration to relevant matters, the Board
delegates authority to its Board committees. 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 and the minutes of committee meetings
are made available so the non-committee members
are kept up to date with the work undertaken by each
Board committee.

Management committees
To help make sure we allocate time and expertise
appropriately, the Company has a number of management
committees, including the Executive Committee and
Disclosure Committee. You can read more about these
committees on page 60.

Board and committee membership and attendance
The table overleaf sets out the Board and committee
attendance during the year to 31 March 2018. 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. The one
instance of non-attendance during the year was considered
and determined as being reasonable due to individual
circumstances; Paul Golby was unable to attend an Audit
Committee meeting due to the meeting being called at
short notice and him having a prior commitment.

Corporate Governance | Corporate Governance

National Grid Annual Report and Accounts 2017/18Board and committee membership and attendance continued

Director

Sir Peter Gershon

John Pettigrew

Andrew Bonfield1

Dean Seavers

Nicola Shaw

Nora Mead Brownell

Jonathan Dawson

Pierre Dufour

Therese Esperdy

Paul Golby2

Ruth Kelly3

Mark Williamson

Board

Audit

Finance Nominations

Remuneration

Safety, Environment
and Health

8 of 8

2 of 2

8 of 8

–

6 of 6

5 of 6

2 of 2

6 of 6

–

4 of 4

–

4 of 4

–

4 of 4

–

2 of 2

–

7 of 7

–

7 of 7

2 of 2

7 of 7

–

6 of 6

–

2 of 2

–

6 of 6

–

1 of 1

–

4 of 4

–

4 of 4

–

4 of 4

–

1. Andrew Bonfield stepped down from the Safety, Environment and Health Committee on 21 April 2017.
2. Paul Golby stepped down from the Remuneration Committee on 15 May 2017.
3. Ruth Kelly stepped down from the Board and relevant Board committees with effect from 31 July 2017.

Directors’ induction and training

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. Consideration
is given to committee appointments and where relevant,
tailored training can be undertaken.

A tailored induction programme will be created for
Amanda Mesler and monitored accordingly.

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

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.
In January the Board participated in its second EU Market
Abuse Regulation training session to ensure it remained
up to date with market abuse obligations and emerging
best practice. Examples of other topics on which Board
members received training during the year included:
remuneration and corporate governance developments;
culture; and corporate reporting.

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.
During the year, site visits were made by Board members
to a range of the Company’s projects and sites in the UK
and US, such as to our London Power Tunnels project
and our Long Island Gas Control Centre.

Pierre Dufour
Non-executive Director

Pierre Dufour – Non-executive Director induction
Pierre, appointed in February 2017, underwent a tailored
induction programme covering a range of areas of the
business, some examples of which are detailed below.
This included matters pertinent to his role on the Safety,
Environment and Health Committee.

Governance and remuneration
• Received a briefing from our legal advisors
which included company law and directors’
duties; corporate governance; the Market Abuse
Regulation; and listing and disclosure obligations.

• Met key employees in our Reward team to

understand our reward strategy, remuneration
policy and current market practice.

Business and functions
• Met employees across the UK, US and National
Grid Ventures businesses and undertook site
visits, such as to our Isle of Grain LNG site.
• Met with the Group Head of Assurance and

discussed the key risk and compliance issues.

• Met with the Director of Investor Relations.

Safety
• Met employees throughout the business and
in key safety roles to discuss safety matters.
• Undertook a number of site visits in the UK and
US which enabled Pierre to become familiar
with our approach to safety and safety culture.

• Received a briefing on our Process Safety

Management System.

Stakeholder matters
• Engaged with employees across the business,
including during multiple site visits in the UK
and US.

• Met with the Group HR Director.
• Met key employees in the UK and US

in regulatory roles.

• Met with the Director of Procurement and
discussed our key suppliers and how we
engage with them.

Corporate Governance | Corporate Governance

National Grid Annual Report and Accounts 2017/18Corporate GovernanceCorporate Governance continued

Performance evaluation

Board and Committee evaluation
This was the third year of our three-year performance cycle, as shown in the diagram below. We undertook an internal
Board performance evaluation, led by Mark Williamson, Senior Independent Director.

Review cycle:

Evaluation Process: Year 3 of review cycle

– 2015/1 6

1
r
a
e
Y

–

6
/

1
7

1. Comprehensive
questionnaire completed
by the Board

2. Results collated,
evaluated and reported

3. Board review
of outcome

4. Action plan agreed

ear 3 – 20 1 7 /

Year 1 – Externally
facilitated evaluation
Year 2 – Internal evaluation

Year 3 – Internal evaluation

5. Committee performance evaluations, led by the committee Chairs

6. Individual performance reviews with the Chairman

7. Assessment of Chairman, led by the Senior Independent Director

5. 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 a tailored questionnaire.

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.

6. Individual performance
The Chairman held performance meetings with each
Board member to discuss their individual contribution
and performance over the year and their training and
development needs. Following these meetings, the
Chairman confirmed to the Nominations Committee
that he considered that each Director demonstrated
commitment to the role and that their performance
continued to be effective.

Following recommendations from the Nominations
Committee, the Board determined that all Directors
continue to be effective, committed to their roles and
have sufficient time available to perform their duties.

7. Chairman’s performance
As part of our annual evaluation process, Mark Williamson,
as Senior Independent Director, led a review of the Chairman’s
performance. At a private meeting, 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 to fulfil his role, given he is
also chairman of the Aircraft Carrier Alliance Management
Board and of the Join Dementia Research (JDR) Partnership
Board, Trustee of The Sutton Trust and the Education
Endowment Foundation and a board member of the
Investor Forum. It was concluded that the Chairman
showed effective leadership of the Board and his actions
continued to positively influence the Board and wider
organisation. Mark Williamson discussed the feedback
and areas for development with the Chairman.

1. Comprehensive questionnaire completed
by the Board
Board members completed a structured questionnaire
with a series of questions designed to understand the
Board members’ views on:
• the right skills, capabilities and expertise needed

in the Boardroom;

• the effectiveness of Board meetings in terms
of frequency, Board papers and content;
• the effective use of risk in Board decision-

making processes;

• the agreed Company strategy and progress

on strategy execution;
• the Board’s priorities; and
• other actions to improve Board effectiveness.

2. Results collated, evaluated and reported
The individual responses to the performance evaluation
questionnaire were reviewed and analysed by the
Senior Independent Director together with the Group
General Counsel and Company Secretary. A confidential
and non-attributable report was then compiled with
recommended improvement actions for discussion
by the Board.

3. Board review of outcome
The Board discussed the findings of the year’s evaluation
and agreed a number of actions for the coming year as
set out below. 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.

4. Action plan agreed for 2018/19
• Increase the opportunities for the Board to engage

with external experts on key strategic topics
Responsibility: Chairman/Group General Counsel
and Company Secretary

• Consider Board agendas and, in particular, whether

more time can be devoted to strategic issues
Responsibility: Chairman/Group General Counsel
and Company Secretary

• Review whether enhancements could be made to

how risk appetite is incorporated into Board papers
where a decision is required
Responsibility: Chairman/Group General Counsel
and Company Secretary

• Improve the efficiency and speed of Board

decision-making by continuously assessing the
quality of Board papers
Responsibility: Chief Executive/Group General
Counsel and Company Secretary

Corporate Governance | Corporate Governance

National Grid Annual Report and Accounts 2017/18

Progress against actions from 2016/17 – culture
Last year’s internally facilitated evaluation focused on
the Company’s culture, as well as the role of the Board in
shaping, monitoring and overseeing the culture and a clear
action plan was agreed. Throughout the year, the Board has
discussed the progress of the actions identified, which have
also been monitored by the Group General Counsel and

Company Secretary and the Chairman. A commentary
regarding the Board’s work in this area and reviewing
progress against each action from last year’s review is set
out below. Progress against actions arising from last year’s
Board Committee evaluation has also been monitored
throughout the year.

Actions

Commentary

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

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

Determine the Board’s role in guiding the culture
of the Company.

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

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
and Company Secretary.

The Board discussed and agreed a common definition of ‘culture’ for the
Company, which reflects that culture results from the purpose, values, beliefs
and behaviours that characterise our Company and guide our practices.
Culture is evidenced and promoted by behaviours and actions of employees
at all levels.

As a purpose-led organisation, we are guided by our purpose and vision,
which set out why we exist and how we create value for our shareholders,
customers and wider society, and by our values, which shape how we expect
to achieve our purpose and vision. Additionally, our leadership qualities build
upon our values and are the common expected behaviours of our leaders.
Ensuring clarity of these expectations and that the behaviours and actions of
our employees are aligned to these expectations is a continuous focus for us.

The Board considered the importance of the leadership role it plays in
influencing and monitoring the Company’s culture, setting the standards
of good behaviour that align with our values, reinforcing these formally in
the Boardroom and supporting management to embed our values, beliefs
and behaviours throughout the organisation.

The Board also reviewed the work that had already been undertaken
during the current and previous financial year in relation to culture, including
embedding the articulation of our purpose and the evolution of our vision
and values across the Company.

The Board discussed and agreed areas of focus for how it could specifically
help to set the right tone from the top and support our culture, both within
and outside the Boardroom, including how our Chairman’s Awards and
other formal and informal engagement events could be used to achieve this.

The Board discussed the areas where the Board plays a key role in shaping
and overseeing our culture and agreed an action plan to target these areas
(set out below).

The Board also considered the importance of remuneration strategy and
diversity in supporting the desired culture, being areas where the Board
has a clear role.

The Board reviewed and endorsed a scorecard that would be used to monitor
and assess culture and which would be regularly reviewed by the Board. The
measurement system will highlight where our culture is currently, using both
internal and external data, and generate insights that can lead to action.

Following agreement of the role and areas of focus for the Board to influence
and monitor culture, the Board has targeted these actions to set the tone at
the top:

Visible leadership on culture and open communication about the
Board’s priorities, activities and the tone set from the top
• continue with Board dinners to informally engage with the business leaders;
• actively promote the Chairman’s Awards as the values-based recognition

system; and

• conduct on-site employee interactions aligned to Board meeting agendas

and more informal engagement as appropriate.

Alignment of the recruitment and appointment of Board and
Executive Committee members with the desired culture
• evaluate and recommend candidates for Board and Executive Committee
roles on cultural fit, based on values and leadership qualities (balanced
with technical qualifications and diversity).

In addition, the Board considered how specific business areas, such as
the core businesses and National Grid Ventures, should be encouraging
our culture in a consistent and targeted way to achieve strategic priorities.

Corporate Governance | Corporate Governance

National Grid Annual Report and Accounts 2017/18Corporate GovernanceCorporate Governance continued

Investor engagement

We believe it is important to maintain effective channels
of communication with our debt and equity institutional
investors and individual shareholders. This engagement
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 updating investors on the progress of our
US rate case filings, raising the profile of the US business,
and communicating the value presented by the UK
business against the challenging UK political and
regulatory backdrop.

In July 2017, we held a governance and stewardship
event designed to update major investors on our activities
over the year and future plans. It provided the opportunity
for attendees to ask questions and meet Non-executive
members of the Board and for our Non-executive
Directors to further develop their understanding of
our shareholders’ views.

of our investors during the year regarding the resolutions
put to shareholders at the 2017 Annual General Meeting
in relation to the approval of the Company’s remuneration
policy and Remuneration Report.

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 reviewed by the Board.

Debt investors
Over the last year, senior group treasury representatives
have met debt investors in the UK, continental Europe and
the US to discuss various topics, such as our full year results
and upcoming US rate case filings. We also hosted debt
investors in New York at our teach-in event for our New York
business and met with debt investors at various conferences
over the course of the year.

We also communicated with our debt investors through
regular announcements and the debt investor section of
our website. This contains bond information, credit ratings
and materials relating to the subsidiary year-end reports,
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 95% of the total number of shareholders on
our share register, is led by the Group General Counsel
and Company Secretary.

During the year, we also held a teach-in event for our
New York business, hosting investors and analysts in
London and New York. This event was designed to update
investors and analysts on our rate filing progress in New
York and provide context for the growth and opportunities
in the New York regulated business. Following the success
of the engagement programme over the last year, we will
be hosting similar events this year, with an investor teach-in
about our UK business, scheduled for September 2018.
A copy of our event presentations and associated materials
are available in the Investors section of our website.

Shareholders are invited to learn more about the
Company through our shareholder networking programme.
The programme includes visits to UK operational sites,
presentations by senior managers and employees over two
days and an opportunity to engage with Board members.

In November, Sir Peter Gershon hosted members of the
UK Shareholders’ Association for presentations given
by John Pettigrew, Chief Executive, and Aarti Singhal,
Director of Investor Relations, on our business operations;
purpose, vision and values; and financial performance.

In his capacity as Chairman of the Remuneration
Committee, Jonathan Dawson engaged with a number

For information on the 2018 Annual General Meeting,
please see page 62.

Stakeholders

Engagement with our stakeholders continues to be an
important priority for us; it supports us in achieving our
purpose and vision and is informed by our values.

The needs of our customers, shareholders and communities
are at the heart of everything we do, and our vision statement
clearly describes the challenge we have set ourselves – we
will exceed the expectations of our customers, shareholders
and communities today and make possible the energy
systems of tomorrow.

As the owner and operator of regulated utilities and other
large-scale infrastructure assets, we have a significant
number of important stakeholders and you can read about
who our key stakeholders are, why they are important to
us and how we create value for them over the long-term
on page 6.

The Board continues to be very mindful of the need to
create value for our shareholders within a framework of
high standards of corporate governance, and recognises
our responsibilities to our wider stakeholders.

In addition to existing stakeholder engagement and
reporting of this to the Board, a review of our current
stakeholder engagement activities was undertaken and
reviewed by the Board in April 2018. The review considered:
• who the Company’s key stakeholders are;
• our engagement activities with each key stakeholder

and the appropriateness of this engagement;

• the information the Board receives on our stakeholders,
including as to the outcome of engagement activities;

• that stakeholder engagement is a two-way process

and whether appropriate stakeholder feedback loops
are in place; and

• whether there was a need for greater engagement

with any stakeholders at Board level.

During 2018/19, the Board will further consider the
Company’s stakeholder engagement model and any
appropriate enhancements to strengthen the views of our
stakeholders in the Boardroom, including in relation to
employees. Following the Government’s announcement that
it will be taking steps to strengthen stakeholder engagement
and the development of a new UK Corporate Governance
Code, the Board will also review the final legislative and
Code changes and report on our activities accordingly.

Corporate Governance | Corporate Governance

In focus

368

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

Further details on:
investors.nationalgrid.com

Effective
communications
with engaged
shareholders
– dividend
reunification
programme

During 2017 we
undertook a dividend
reunification programme
to reunite our
shareholders with
unclaimed dividend
payments and to also
find shareholders who
had lost contact with us.
Through the programme,
we were able to reunite
our shareholders with
almost £2.5 million of
unclaimed dividends
during the year.

In focus

2018 Annual
General Meeting:
For more information
on the 2018 AGM,
please see page 62,
and the Investor
section of our website:
investors.nationalgrid.com

National Grid Annual Report and Accounts 2017/18Audit Committee

Mark Williamson
Committee Chairman

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.

In November 2017 and January 2018, the Group Chief
Information and Digital Officer attended our meeting
to discuss cyber risk and improvements being made
to access controls across all financial systems. Also in
January 2018, I visited the UK Finance team, principally
to better understand the progress being made in
improving the control environment in the UK.

Continued focus on internal controls relating
to financial reporting
We have continued to focus on improvements to the
Group’s financial controls, receiving regular reports from
both management and Deloitte throughout the year. As
noted in last year’s Annual Report and Accounts, during the
second half of 2016/17 the Group launched a comprehensive
review of the design, operation and documentation in respect
of its key controls relating to financial reporting, the SOX
refresh programme (the Sarbanes-Oxley Act 2002 (SOX)).

As part of the SOX refresh, we have focused on improving
the Group’s IT access controls and controls in the UK
finance environment. We have considered the impact of
these on the year-end attestation relating to the effectiveness
of internal controls in respect of financial reporting required
under SOX. You can read more about these significant
issues on the following pages.

Auditor transition
Following a formal tender process, Deloitte were
appointed as our external auditors at the 2017 AGM.
We have received regular updates from management and
Deloitte on the transition process, including observations
around the Company’s processes, controls and accounting
judgements. Management have worked closely with
Deloitte through the transition and are establishing
a strong transparent relationship. We welcome and
encourage the insight and challenge Deloitte bring.

IFRS reporting matters
We spent time considering the impact of US tax
reform, the Group’s accounting in respect of its retained
interest in the UK Gas Distribution business, and the
judgements and methodologies applied by management
in selecting discount rates in relation to long-term
environmental provisions and for defined benefit
pension scheme accounting.

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.

In focus

Terms of Reference:
You can view the
Audit Committee Terms
of Reference on the
Corporate Governance
section of our website:
www.nationalgrid.com

The Committee also received regular updates on
preparations for and the impact of the new accounting
standards which will come into effect in 2018 and 2019
– IFRS 9 (Financial Instruments), IFRS 15 (Revenue from
contracts) and IFRS 16 (Leases).

An additional meeting was held in January 2018 in advance
of the year end to provide an update on the Group’s
implementation of IFRS 9 and IFRS 15 and a summary of
the key matters where judgement, complexity or a change
in the basis of accounting had been identified.

Use of Alternative Performance Measures
(‘APMs’ or ‘non-IFRS measures’)
The Committee has played a key role in reviewing and
challenging the APMs presented by management. At the
September meeting we discussed the Company’s response
to a comment letter received from the SEC in relation to the
2016/17 Annual Report, recognising the need to maintain a
careful balance between the ongoing scrutiny on the use of
non-IFRS measures and the Company’s ability to articulate
the performance of the business and our results under
IFRS. Planned enhancements to disclosures agreed by
the Company have been implemented for the 2017/18
Annual Report.

Looking forward
Internal controls relating to financial reporting
The Committee will remain focused on ensuring that
management delivers the planned internal control
improvements in respect of IT access controls.

New IFRS accounting standards
The changes introduced by IFRS 9 and IFRS 15 were
implemented with effect from 1 April 2018. We will receive
reports from both management and Deloitte with regard
to the effectiveness of the changes to processes, controls,
and systems that have been implemented as a result of
the new requirements.

IFRS 16, which will be implemented with effect from
1 April 2019 brings its own challenges around transition
to the new standard, specifically that US GAAP and IFRS
are not identical. Management’s implementation timeline
for this standard sees significant activity during 2018/19
and we will receive further updates in the coming year.

Climate-related financial disclosures
Following the publication of the final recommendations
of the Financial Stability Board’s Task force on Climate-
related Financial Disclosures (Task Force, TCFD) a
management working group has been meeting regularly to
develop our roadmap to implementing the recommendations,
as well as keeping abreast of other relevant developments.
While the recommendations are not binding, they are seen
as highly desirable and the Company has publicly committed
to implement the recommendations, although there is a clear
expectation that organisations will take time to implement the
recommendations in full. We received progress reports from
management in September 2017 and March 2018 and we will
continue to receive updates in the coming year. The related
financial disclosures included on page 192 are our first steps
in the implementation of the recommendations.

Mark Williamson
Committee Chairman

Corporate Governance | Audit Committee

National Grid Annual Report and Accounts 2017/18Corporate GovernanceCorporate Governance continued

Areas of focus

Matters considered

Outcome and action

Significant issues
The most significant issues the Committee considered in relation to the financial statements are set out in the table below. In addition to commentary in these areas,
the independent auditor’s report (pages 83-91) also includes other areas of focus, including net pension obligations, environmental provisions, revenue recognition,
classification of capital costs and treasury derivative transactions which were also considered by the Committee during the year.

Internal controls
relating to financial
reporting, including
the year-end SOX
attestation

The Committee received reports at the May 2017, September 2017
and March 2018 meetings on the key findings and observations arising
from the SOX refresh programme. The most significant findings related
to IT access controls across the Group and specific observations in
respect of certain business controls in UK Finance. Further details
are provided below.

The Committee has continued to receive updates from management
on the progress to remediate the control deficiencies identified in the
US financial controls environment (building on previous years). The
Committee noted that good progress had been made in the US Finance
team to recruit new talent to add further strength and depth to the team.
At year end the Committee was pleased to note the historical US control
deficiencies had been remediated.

The SOX refresh programme had resulted in observations across
a number of key UK processes and included a focus on the reliance
placed on the data used in controls and on third-party reports, and
the precision of key review controls.

In response, the UK Executive leadership defined a comprehensive
multi-year control programme to identify and implement solutions to
optimise the UK business control environment while continuing to focus
on the real-time need of addressing the findings of the SOX refresh
programme in the short term.

In September 2017, the UK CFO presented an update to the Committee
on key developments in the UK Finance team, with a particular focus
on financial controls.

The Committee considered all the above matters as part of its final
SOX conclusions.

A number of improvements were identified as necessary by management
and Deloitte in respect of access to the Group’s financial systems.
The Committee was provided with a specific update by the Group Chief
Information & Digital Officer in January 2018 which focused on the key
themes arising and management’s action plans. Further updates were
provided to the Committee in March and May.

The extent of improvements required was more pronounced in the
UK, primarily as a result of the UK’s complex legacy IT infrastructure
coupled with the US having benefited from a focus on the financial
control environment in recent years.

The IT control findings related primarily to six key focus areas: privileged
access, segregation of duties, user access management, user access
reviews, third-party general IT controls, and the quality of the information
used in the control. This year, in conjunction with testing performed by
Deloitte, the Company observed access control improvements required
in the infrastructure layer relating to our finance administrative systems
which are administered by outsourced service providers.

On 22 December 2017 the Tax Cuts and Jobs Act (US tax reform)
was signed into law, taking effect from 1 January 2018. The Committee
received an update in March on the main impact on the Company’s
IFRS financial results:

Exceptional gain from rate reduction: The principal impact under IFRS
concerned the impact of the reduction in the headline federal tax rate
from 35% to 21%. The change in the tax rate has given rise to a circa
$2 billion exceptional gain as deferred tax assets and liabilities are
remeasured downwards accordingly.

Reduction in US effective tax rate: The reduction in the federal tax rate
has also resulted in a reduction in the statutory, adjusted and underlying
effective tax rates this year, as a blended headline federal tax rate is
applied to the US business’s IFRS earnings.

IT controls

US tax reform

Carrying value
of interests
in Quadgas
HoldCo Limited

On 30 April 2018, the Group signed an agreement with Quadgas Bidco
Holdings Limited (the vehicle through which the Consortium hold their
61% interest in Quadgas HoldCo Limited) in relation to the potential sale
of our remaining 25% interest (the Remaining Acquisition Agreement).

At its May 2018 meeting the Committee considered the implications of
this arrangement on the 2017/18 financial statements and, in particular,
the £110 million derivative fair value gain recognised in relation to the
Further Acquisition Agreement, and the £213 million impairment charged
against the carrying value of the Group’s equity interests in Quadgas
HoldCo Limited.

The Committee asked management to explain the incremental
increases in the number of processes and IT systems considered
to be in scope for SOX purposes.

The Committee challenged management on its progress on
mitigating control observations as they arose and requested
additional insight into areas which were subject to shorter-term
fixes. The Committee sought additional context from management
on its assessment of the severity of the matters identified (in
particular the IT control matters noted below), the identification
of mitigating controls and the impact on the year-end aggregation
exercise for SOX purposes.

Following the update in September, the Committee asked
management to look to lessons learned from the US finance
transformation plan and improvements in the US financial control
environment and how these could be applied to the UK financial
control environment.

The Committee noted the outcome of management’s exercise
to assess the impact of the control matters identified individually
and in aggregate, and the conclusions of the relevance of these
to the year-end SOX attestation (as described further on page 52).

The Committee was pleased to note in May 2018 that there were
no business control findings. After careful consideration the
Committee concurred with management’s overall assessment
that the Group’s internal control over financial reporting is effective.

At its November meeting the Committee challenged management
on the number of outstanding control improvement actions in the
IT control environment.

The Committee noted that to ensure appropriate and immediate
focus on the matters identified, management had established
governance mechanisms across the IS and Finance leadership.

At its March meeting the Committee requested that a short and
longer-term remediation plan to deliver sustainable IT-related
controls, in particular user access, be presented to the
Committee in May.

Recognising the risk and criticality of executing the outstanding
actions, the Committee continues to monitor progress closely
and has requested regular updates from management.

The Committee noted the report received from management
on the impact of this change on the Company.

The Committee challenged the appropriateness of the recognition
of a $2 billion exceptional credit to income, in view of the fact that
the Company will, over time, be required to return this benefit
to customers.

The Committee was satisfied that the treatment applied was
in line with IFRS and requested that management ensure
that adequate disclosures of the Company’s commercial and
regulatory arrangements be included in the Annual Report and
Accounts to allow users of the financial statements to understand
the economic impact of tax reform on the Company.

The Committee reviewed and concurred with the accounting
undertaken by management, noting that after accounting for our
share of profits, and all other movements, the aggregate carrying
value of our interests was £2.1 billion at 31 March 2018, consistent
with management’s initial determination of the fair value of the
interests as at 31 March 2017.

Corporate Governance | Audit Committee

National Grid Annual Report and Accounts 2017/18Areas of focus

Matters considered

Outcome and action

Other areas of focus

External auditors

The Committee is responsible for reviewing and monitoring the
appropriateness of the provision of non-audit services by the external
auditors in the context of reviewing the auditors’ independence. You can
read more about how the independence and objectivity of the external
auditors is safeguarded on page 54 and the non-audit services provided
by the external auditors on page 55.

The Committee is also responsible for the external auditors selection
procedure and making recommendations regarding the appointment
and re-appointment of the external auditors to the Board for shareholder
approval. For further details of how the external auditors’ performance
was reviewed and the outcome, see page 54.

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.

While there have been no new significant corporate transactions in
the year, and no new accounting standards are yet applicable, there
were a number of changes to the basis of accounting compared with
the 2016/17 financial statements that the Committee considered:
• changes in pension assumptions since 31 March 2017;
• the presentation of the results of National Grid Ventures (NGV); and
• the adoption of a ‘three column’ approach for our consolidated
Income Statement showing results before and after exceptional
items and remeasurements.

Deloitte’s audit plan for the Group audit, including the identification
of significant audit risks and key areas of focus, was formally
approved by the Committee in September 2017 and minor
amendments to the plan in January and March 2018.

In May 2018, the Committee considered an assessment by
the Corporate Audit team of controls in place to ensure that our
external auditors, Deloitte, are independent from National Grid.
The controls testing did not find any items that would impact
the auditors’ objectivity and independence.

The Committee Chairman also provided an oral update to the
May Board meeting on the outcome of the audit and explained
how the audit had contributed to the integrity of the year-end
financial statements and the Committee’s role in that process.

The Committee noted that the change in the calculation
performed to determine the discount rate and other assumptions
applied to the UK pension obligations had resulted in a material
reduction in the liabilities and had increased the net asset position
reported for the UK pension schemes.

Following consideration of the appropriateness of the change
in pension assumptions, the Committee concurred with
management’s approach.

The Committee discussed whether the results of NGV should
be reported as a separate segment. The Committee noted that
for the time being, management had chosen not to voluntarily
report the results of NGV as a reportable segment, and that
NGV would continue to be aggregated with ‘Other activities’
for segment disclosure purposes. The Committee agreed
with management’s approach.

Under its Terms of Reference, the Committee is required to review the
Annual Report and Accounts and any other report filed with the SEC
containing financial statements, and make recommendations to the
Board with respect to the disclosures contained therein.

Additional disclosures have been added in the footnotes to
the operating segment note (see pages 109-110) to show
how NGV has contributed to revenue, operating profit and
capital expenditure.

Alongside its consideration of the Annual Report and Accounts 2017/18,
when reviewing the draft Form 20-F the Committee considered what
information would be disseminated to the SEC at year-end, the basis
of the preparation of the Form 20-F and the principal SEC disclosure
matters considered this year.

The Committee approved management’s proposal to amend the
way in which the consolidated Income Statement was presented
to adopt a three column approach showing results before and
after exceptional items and remeasurements. The Committee
noted that this would provide a more user-friendly approach
to presenting results.

The Committee recommended the Annual Report and Accounts
2017/18 and the Form 20-F for approval by the Board at its
meeting in May 2018.

Fair, balanced and
understandable

At its May 2018 meeting, 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 that it provides the information
necessary for shareholders to assess the Company’s position and
performance, business model and strategy.

When considering this requirement the Committee took into
consideration the viability statement, going concern statement and
an update on significant accounting matters from management.

Viability statement

The Code requires the Board to confirm that it has undertaken a robust
assessment of the principal risks facing the Company. 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 received a draft viability statement in March and May
2018 for its review and comment in advance of the Board’s consideration
of the statement in May. In support of this review the Committee also
received an update on the process and a summary of the outcome
of the annual testing of our principal risks.

The Committee discussed and provided input to management on
the disclosure and presentation of APMs and non-IFRS measures.
The Committee noted the challenges faced by management
in reflecting the economic performance of the Company within
the confines of IFRS. This needed to be in the context of the
regulations and guidance issued by the FRC, ESMA and the
SEC concerning the need to ensure at least equal prominence
between IFRS and non-IFRS measures.

The Committee Chairman in his oral report to the Board in
May confirmed that the Committee considered that the Annual
Report and Accounts, taken as a whole, was fair, balanced
and understandable.

The Committee reviewed and challenged the clarity and
completeness of the viability statement to be included in the
Annual Report and Accounts at its meetings in March and May
2018 and provided comments for management to address.

The Committee Chairman in his oral report to the Board in May
recommended the statement to the Board for approval. You can
find the viability statement on page 26.

Corporate Governance | Audit Committee

National Grid Annual Report and Accounts 2017/18Corporate GovernanceCorporate Governance continued

Areas of focus

Matters considered

Outcome and action

Going concern
statement

At half and full year the Board is required to consider whether the
going concern assumption is appropriate in preparing the Group’s
financial statements.

The Committee reviewed the paper and confirmed that it
considered it appropriate to adopt the going concern basis
in the half and full-year financial statements.

In support of this, at its November and May meetings, the Committee
received a report on the Group’s short-term liquidity and capital to
assist in the going concern determination for the half and full-year
financial information.

Sarbanes-Oxley Act
2002 (SOX) testing
and attestations

The Sarbanes-Oxley Act requires the Company to undertake an
annual assessment of the effectiveness of internal control over financial
reporting. The Committee received regular updates on the status of
testing as well as the identified deficiencies (including those discussed
in the significant issues above).

The Committee received updates on the SOX control findings in
September, March and May. See page 21 for the Company’s statement
on the effectiveness of internal control over financial reporting.

The Committee Chairman made recommendations in this respect
to the November and May Board meetings. The Board considered
and approved the Committee’s recommendation.

The Company’s going concern statement is set out on page 104,
note 1A.

In May the Committee noted and agreed with the conclusions
of the review of the effectiveness of internal control over financial
reporting as required under s.302 and s.404 of the Sarbanes-
Oxley Act and the Disclosure and Transparency Rules and
management’s opinion on the effectiveness of these controls.
The Committee Chairman reported this conclusion to the Board
at its May meeting at which the effectiveness of the internal
control and risk management processes were considered.

Disclosure
Committee
reports

The Committee receives a report from the Disclosure Committee on
matters relevant to the half and full-year announcements in November
and May.

The Committee took into consideration the oral report received
from the secretary to the Disclosure Committee when reviewing
the half and full-year announcements.

Corporate Audit

In November 2017 and May 2018, the Disclosure Committee reviewed
the half and full-year results statement and the planned presentations,
having regard to the European Securities and Markets Authority (ESMA)
guidance and SEC guidance in relation to the presentation of statutory
and adjusted measures.

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 60 for more information on the role
of the Disclosure Committee.

The Committee received regular controls updates from the Corporate
Audit team. As set out above, this year there has been significant
control remediation activity relating to SOX controls, driven by the
refresh programme. These efforts have focused heavily on the UK
finance and IS control environment and the audit findings highlighted
the same focus areas.

Corporate Audit have been supporting management’s remediation plans
in a number of ways, for example several audits provided direct insight
around how to improve the control environment and by providing
advisory support (subject to retaining independence).

In March 2018, risk driven changes to the audit plan were proposed:
audits added to the audit plan; audits merged due to linkage of business
process; audits removed due to a reduced risk profile; and audits
deferred to the following financial year due to business change.

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. The purpose of the review is
to assess if the purpose, authority and responsibility, as defined in
the charter, are sufficient to enable the Corporate Audit function to
complete its objectives. No changes to the charter were proposed.

The Committee noted that the Disclosure Committee considered
that the Company’s disclosure controls had operated effectively
over the year.

When considering the updates from the Head of Corporate
Audit during the year, the Committee challenged management
in relation to the progress made in closing the outstanding
actions identified by Corporate Audit, in particular in relation
to remediation of the significant issues as set out above.
Management has prioritised the actions on controls required
as part of SOX remediation as well as continuing work on the
broader key strategic initiatives.

The Committee considered and approved the proposed
changes to the audit plan.

The Committee considered the charter to be appropriate
and noted that no changes were proposed.

When assessing the effectiveness of Corporate Audit the
Committee noted the annual self-assessment of the function
against the IIA standards had resulted in a ‘generally conforms’
rating, the highest achievable, and that all the External Quality
Assessment actions raised last year had been implemented.
The Committee confirmed that it was satisfied that the
Corporate Audit function had the quality, experience and
expertise appropriate for the business.

As part of its annual review of the effectiveness of risk management and
internal controls, the Committee assesses the effectiveness of Corporate
Audit and satisfies itself that the function has the quality, experience and
expertise appropriate for the business.

Additionally, in accordance with the Committee’s Terms of
Reference, the Committee considered and approved the
appointment of the Head of Corporate Audit in September.

See page 55 for more details on the work of the Corporate Audit team.

The Committee also met privately with the Head of Corporate
Audit during the year.

Corporate Governance | Audit Committee

National Grid Annual Report and Accounts 2017/18Areas of focus

Matters considered

Outcome and action

Risk management
and internal control

The Committee has been delegated responsibility by the Board
for monitoring and assessing the effectiveness of our risk
management processes.

In support of this responsibility, the Committee received regular updates
on the risk management processes and any changes as well as updates
on other risk management activities within the business.

When undertaking its review of the effectiveness of the risk management
and internal control processes (which included financial, operational and
compliance controls) the Committee noted the sources of assurance
and various controls that had operated during the last 12 months and
the matters raised in the CEO’s Certificate of Assurance (CoA).

In September the Committee received a proposal from management
to change the frequency of the CoA process from bi-annual to annual.
The CoA provides a ‘top-down’ assurance process, which complements
the core compliance and risk management procedures. Removing the
requirement for the half yearly CoA process would enable the business
to focus that time and resource on core compliance and risk
management procedures and initiatives.

You can read more about our risk management process and the review
of effectiveness of our internal control and risk management on pages
18-21. Details of our internal control systems, including those relating
to the financial reporting process, can be found on page 21.

Cyber security
risk management

A report providing insight into the cyber risk control environment of the
Company was presented to the Committee in September and March.
The reports provided insight into the cyber risk control environment
within the Company based on the findings of Corporate Audit.

Compliance
management

Business
separation
compliance

Additionally, following the Committee’s discussion on cyber risk at the
March 2017 meeting, Deloitte was asked to comment on the reporting
Audit Committees receive on this subject at other complex companies.
The report from Deloitte was presented to the Committee in November
along with a paper from management commenting on the findings of
the report.

The Committee receives bi-annual reports on compliance with external
legal obligations and regulatory commitments. In September management
reported that there had been a significant increase in issues compared with
the previous period. The majority of these issues were related to control
framework and data issues as a result of preparing for compliance with the
new EU General Data Protection Regulation (GDPR) that would come into
effect in May 2018. Management would continue to improve and embed
compliance obligations into the business to ensure that robust control
frameworks are in place, understood and adhered to by the business.

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 the UK Gas Distribution
business over other independent distribution networks. Reporting on this
matter continues to be required as Ofgem considers that the Company’s
continued minority shareholding in Quadgas HoldCo Limited (Cadent)
gives rise to a potential conflict of interest.

Business separation compliance reports were submitted to the
Committee twice in the year, in May 2017 and November 2017. In March
2018 management set out a proposal to the Committee that, instead
of sending separate reports, the reports on business separation
compliance be combined with the wider compliance reports which
are provided to the Committee in March and September.

The Committee noted that the planned enhancements continued
to be developed and embedded into business processes
to strengthen the management of our most important risks.
For example risk classification had been added to the risk
identification process. This classification system helps to identify
accumulations of similar risks and which strategies, tactics and
operations are most vulnerable, and guides the approach to
risk mitigation.

Following consideration of the significant aspects of the internal
control and risk management systems and processes for the
year under review, the Committee confirmed that the processes
provided sufficient assurance and that the sources of assurance
had sufficient authority, independence and expertise. The
Committee Chairman reported to the May Board meeting on the
outcome of its annual review and confirmed that management’s
process for monitoring and reviewing internal control and risk
management processes are functioning effectively.

The Committee approved the change in frequency of the CoA
process to annual. When making this decision the Committee
took into consideration the significant improvements made to
the risk and compliance management processes over the last
couple of years and the increased focus on risk and compliance
in the business. The Committee will continue to receive
regular reports and updates on the core risk and compliance
management procedures.

The Committee noted the progress made by management during
the year on the cyber security strategy and that Corporate Audit
continued to deliver a balanced programme of audits across cyber
risk. In relation to the matters identified by the audits, management
had been remediating these issues and managing the associated
risks, in line with the agreed action plans.

In respect of the report from Deloitte, the Committee noted
that reporting to the Board and Audit Committee was aligned
with current market practice in terms of frequency and content.
Reporting to the Executive Committee was a potential area
for improvement which management was reviewing.

Despite the increase in incidents, the Committee noted
that significant improvements had been made in compliance
performance as indicated by the overall reduction of new issues
during the year, increased closure of issues, progress of action
plans, and overall continued engagement on compliance issues
within the business.

The Committee also noted that the majority of action plans were
on track to resolve the identified compliance issues.

The Committee considered the reports received and noted that
a high level of compliance was being maintained and no material
business separation issues had been reported during the period.

The Committee approved the proposal to include the business
separation compliance reports in the wider compliance reports
noting that the compliance reports already covered business
separation and that any specific incidents which the Committee
should be aware of would continue to be reported on an
exceptional basis, as at present.

Business conduct

Ethics and business conduct programmes are part of the internal controls
in place to ensure business conduct issues are identified and effectively
managed. 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 reports provide
a summary of significant cases and draw out any underlying themes and
action plans to mitigate future occurrences.

In March the Committee received a business conduct report
for consideration which also included the whistleblowing report.
This was following a request from the Committee earlier in the
year that these reports be combined. The Committee noted
the ethics and business conduct updates and concurred
with management’s view that the whistleblowing procedures
continued to be effective.

The Committee reviews the reporting 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 received annual reports on the Company’s anti-bribery
procedures and reviewed their adequacy.

The Committee noted the procedures currently in place for
the prevention and detection of bribery and that none of the
investigations over the last 12 months had identified cases
of bribery.

Committee
performance
evaluation

The Committee received updates on the action plan agreed following
the 2016/17 Committee performance evaluation at its November 2017
and March 2018 meetings and noted the progress made against the
actions identified.

The 2017/18 Board and committee evaluation was conducted
internally, see page 46 for more details.

The Committee considered its performance over the year
generally and determined that it had operated effectively
through the year.

The recommended actions from the 2017/18 evaluation
were considered and agreed by the Committee in March.
The Committee will monitor progress against the action
plan over the year.

Corporate Governance | Audit Committee

National Grid Annual Report and Accounts 2017/18Corporate GovernanceCorporate Governance continued

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 113.

Following a formal tender process concluded in November
2015, Deloitte was appointed by shareholders as the
Group’s statutory auditors at the AGM in July 2017.

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

Auditor transition
Deloitte’s transition plan focused on developing a deeper
understanding of the Group’s businesses, processes and
controls, and leveraging the experience and knowledge of
PwC during the shadowing period. Deloitte shadowed PwC
during the 2016/17 year-end close process and attended
Audit Committee meetings in January, March and May 2017.
They also undertook a review of the PwC audit files in the
UK and US and held meetings with key management.

Auditor independence and objectivity
Mindset, integrity and objectivity enable auditors to
undertake their role with professional scepticism while
maintaining effective working relationships with those
subject to audit i.e. management and other employees.

In assessing the mindset, professional scepticism and
degree of challenge to management, the Committee took
in to account the observations, recommendations and
conclusions drawn by Deloitte, in particular in relation to
the findings arising from the SOX refresh and concluded
that the performance of Deloitte reflected the relevant
skills, rigour, perseverance and robustness expected.

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 are safeguarded by a number of control
measures, including:
• limiting the nature and value of non-audit services

performed by the external auditors in accordance with
the Company’s policy on the provision of non-audit
services. The Committee receives updates to each
regular meeting on all non-audit services approved
and confirmed in May 2018 that it is satisfied that the
non-audit fees do not impair the auditors’ independence.

• 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 auditors.

• the rotation of the lead engagement partner at least

every five years. Douglas King, the current lead partner,
will be required to rotate off in 2022.

• consideration of Deloitte’s annual independence letters.
• independent reporting lines from Deloitte to the
Committee and the opportunity to meet with the
Committee privately. The Committee chairman has
regular meetings with the auditors to discuss agenda
items and other matters of importance.

• an annual review by Corporate Audit of the independence
of the external auditors. They review compliance against
the non-audit services policy and the recruitment of
employees from the external auditors by National Grid
into financial reporting oversight roles. Testing did not
identify any items that would impact the objectivity and
independence of the external auditors.

Audit quality
How the external auditors have demonstrated an
appropriate mindset, the degree of challenge to
management and the communication of contentious
issues are all critical to delivering a high-quality audit.

To maintain audit quality the Committee reviews and
challenges the proposed external audit plan, including its
scope and materiality prior to approval, to make sure that
Deloitte has identified all key risks and developed robust
audit procedures and communication plans.

Deloitte’s audit plan was formally approved by the
Committee in September 2017 and minor amendments
were approved in January and March 2018.

The Committee noted that Deloitte would engage specialists
to assist in their audit of the Group IT systems, derivative
financial instruments, pension obligations, discount rates,
tax balances, as well as utilising employees within the core
audit team who have significant experience of regulated
utilities in the UK and US.

On a continuous basis throughout the year, the Committee
looks at the quality of the auditors’ reports and considers
their response to accounting, financial control and audit
issues as they arise.

The Committee also meets with Deloitte regularly without
management present, providing the external auditors with
the opportunity to raise any matters in confidence and
provides the opportunity for open dialogue. This also gives
the Committee the opportunity to monitor the performance
of the lead engagement partner both in and outside
Committee meetings.

Auditor performance
In assessing auditor performance this year, the Committee
considered: the quality of planning, delivery and execution
of the audit; quality and knowledge of the audit team;
effectiveness of communications between management
and the audit team; robustness of the audit including the
audit team’s ability to challenge management as well as
demonstrate professional scepticism and independence;
quality of the reports received; views of management to
gauge the quality of the audit team and their knowledge
and understanding of the business.

Since Deloitte are in the first year of their appointment, the
Committee did not take length of tenure into account when
assessing their independence and objectivity. In forming
its conclusions, the Committee solicited views from the
senior finance team members most directly involved in
the year-end audit.

A more detailed feedback process involving a wider range
of individuals from within the Company will take place in
summer 2018. The feedback from this process will be
taken into account in Deloitte’s planning for the 2018/19
audit cycle.

Auditor appointment
Following consideration of the auditors’ independence and
objectivity, the audit quality and the auditors’ performance,
the Committee was satisfied with the effectiveness,
independence and objectivity of Deloitte and recommended
to the Board their reappointment for the year ended 31
March 2019. A resolution to re-appoint Deloitte and giving
authority to the Directors to determine their remuneration
will be submitted to shareholders at the 2018 AGM.

Corporate Governance | Audit Committee

National Grid Annual Report and Accounts 2017/18The Statutory Auditors and Third Country Auditors
Regulations 2016 require that the external audit contract
is put out to tender at least every 10 years and that the
auditors are changed at least every 20 years. The audit will
be put out to tender in accordance with the requirements.

Non-audit services provided by the external auditors
Last year the Committee approved changes to the
Company’s policy on the provision of non-audit services
by the auditors to take account of the implementation of
the EU Audit Regulation and Directive on non-audit services.
The revised policy includes 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.

During the year the Committee approved amendments to
the non-audit service policy. The Committee continues to
be responsible for all non-audit service approvals but it
now allows pre-approval for certain specified services.

Services that have fees of less than £50,000 and are on
a defined list are considered to fall within the ‘clearly trivial’
concept used by the FRC. For any services which do not
meet these criteria, no threshold is applied and approval
will be sought from the Committee in advance of the work
being performed.

The services for which pre-approval can be sought relate to:
• audit, review or attest services. These are services that
generally only the external auditors can provide, in
connection with statutory and regulatory filings. They
include comfort letters, statutory audits, attest services,
consents and assistance with review of filing documents;
• ongoing work with the UK property team on the review of
its commercial property portfolio, which was approved
and continues to evolve. Our history with Deloitte means
that they are the clear choice for relevant expertise.
Such work does not include valuation work, or any
other prohibited services; and

• other areas such as training or provision of access

to technical publications.

Our policy requires that a list of all approved non-audit
work requests is presented to the Committee at each
meeting (other than ad hoc meetings), as well as annually
in aggregate to ensure the Committee is aware of all
non-audit services provided.

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.

Total billed non-audit services provided by Deloitte
during the year ended 31 March 2018 were £1.9 million,
representing 14% of total audit and audit-related fees.
In 2016/17, PwC billed £17.3 million for non-audit services
(87% of total audit and audit-related fees), a substantial
proportion of which related to work associated with the
disposal of the UK Gas Distribution business.

The most significant element of non-audit services provided
by Deloitte relates to services provided to the UK property
business, principally evaluating possible options for the
use of property assets and support in the preparation
and submission of planning applications and responses
to resulting questions. The Company’s relationship with
Deloitte Real Estate in the UK dates back several years
and Deloitte were advisors to the Company in 2014 on
the establishment of the Group’s St William joint venture
(in partnership with the Berkeley Group), through which
Deloitte have developed a detailed understanding of our
UK property portfolio.

Following the appointment of Deloitte as external auditor,
all existing projects were carefully considered through
our independence processes throughout the auditor
transition period. In particular, the Committee requested
confirmation from both management and Deloitte that
there are no valuation services or other prohibited services
being provided, and no reliance is placed on analysis
provided by Deloitte for any assessments in respect of
asset carrying values for financial reporting purposes.
These processes have continued throughout the year
and the same confirmations have been provided for
each service procured.

Total audit and audit-related fees include the statutory fee
and fees paid to Deloitte 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 Deloitte not included in the above.

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 priorities. In the
provision of independent assurance, corporate audit reports
functionally to the Chairman of the Audit Committee and
represents the third line of defence within our three lines of
defence model (see page 21). Assurance work is conducted
and managed in accordance with the IIA international
standards for the Professional Practice of Internal Auditing
and Code of Ethics.

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

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
cyclical reviews, reviews of emerging risks and business
change activity, 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.

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.

To ensure that the audit plan remains agile and focused
on key risks facing the business we have undertaken
periodic reviews of our planned audit assurance activities.
Our reviews take into account changes to risk registers,
hot spots and emerging risks in the industry and changes
based on engagement with the business.

Any in-year change to our audit plan therefore ensures
Corporate Audit adds greater value to the business and
can provide greater assurance to the Audit Committee.
As a result of our reviews since the year end there have
only been minor changes to the audit plan approved by
the Committee in March 2017.

Corporate Governance | Audit Committee

National Grid Annual Report and Accounts 2017/18Corporate GovernanceCorporate Governance continued

Finance Committee

Therese Esperdy
Committee Chairman

Review of the year
Following the successful sale of a majority interest in the
UK Gas Distribution business, this year the Committee
focused on supporting the reshaped Group in achieving
its key business and strategic objectives. This included
reviewing the Company’s financing strategy and its interest
rate risk management approach, to ensure they would
continue to support the Company’s earnings and dividend
policy. The Committee also remained cognisant of changes
in the external regulatory and political environment, including
Brexit, tax reform in the US, and the ongoing debate around
renationalisation, focusing on any resulting financial risk.

The Committee has continued to oversee key financial
aspects of optimising our core business performance.
In July, we reviewed the capital structure of our US
operating companies, including how this benchmarked
externally and how it is managed to reflect our regulatory
filings. We received updates on the significant funding
activity across our US business, with new long-term bonds
issued across a number of different operating companies.

During the year, the Committee received a report from
external advisors in relation to feedback from debt investors
on Company performance and other factors that could
impact the Company’s funding programme. Management
continue to undertake an extensive debt investor
engagement programme, more details of which can
be found on page 48.

In its role of monitoring financial risk, during the year and at
its last meeting in April 2018, the Committee discussed and
approved enhancements to how it assesses financial risk
and how it gains assurance as to management decision-
making and execution within the agreed financial risk
appetite set by the Board. The Committee discussed the
potential financial risks to the Company created by Brexit;
the possible impact of Brexit on the Company’s risk
management activities; and the proposed actions to
be taken in preparation for the outcome of the Brexit
negotiation process.

In focus

In April 2017 and January 2018, the Committee also
considered the potential impact of the upcoming UK
bank ring-fencing reforms on the Company’s risk
management activities.

Terms of Reference:
You can review the
Finance Committee
Terms of Reference
on the Corporate
Governance section
of our website:
www.nationalgrid.com

Following final approval in December 2017 of the US Tax Cuts
and Jobs Act, and prior to wider consideration by the Board,
the Committee reviewed the potential impact on the Company
and its financing activities of tax reform, together with the
actions being considered by management in response to the
legislative changes. Our review included an assessment of
the potential impacts on credit ratings across the Group as
part of our ongoing focus in this area given the importance
to the Company of maintaining appropriate ratings.

Following the appointment of a new Group Head of
Pensions, the Committee received a report covering his
proposed focus areas across the Company. At subsequent
meetings, we have focused on scheme valuations,
potential future risk management strategies and a review
of organisational changes within the Pensions team.
As noted on page 145, the Committee also received
a summary of the proposed longevity swap in relation
to the UK Electricity pension scheme and this was
successfully enacted in March 2018.

The Committee continued to review the Company’s
insurance strategy and received updates on the captive
optimisation programme, which was a key priority for the
business this year. In order to ensure that we remained
informed about insurance market conditions, we received
a briefing from senior representatives of a global insurance
broker on the current position and outlook for the wider
insurance market for the coming year.

Examples of other key matters the Committee considered
during the year included:
• funding requirements for the US, UK and National Grid

Ventures businesses;

• engagement sessions with UK and US

finance employees;

• preparations for the next UK regulatory price control;
• financial and treasury controls, including

Sarbanes-Oxley controls;

• credit ratings of Group companies;
• treasury performance updates;
• publication of our tax strategy;
• the draft going concern statement for the half and full
year results prior to consideration by the Board; and
• US energy procurement and UK energy trading activities.

Therese Esperdy
Committee Chairman

2017/18 key areas of focus
• Oversight of financial risk
Outcome: enhanced Committee oversight of financial
risk and increased assurance over management
decision-making and execution within the agreed
financial risk appetite.

• US tax reform
Outcome: scrutiny and shaping of management’s
proposed response to US tax reform.

• Pensions
Outcome: review of future pension strategy
and approval of scheme valuations.

• Insurance
Outcome: supervision of delivery of the Company’s
insurance captive optimisation programme and
monitoring of implementation of the insurance
renewal programme.

2018/19 key areas of focus
• The potential financial implications of the next

UK regulatory price control;

• Financing strategy for ongoing capital programme;
• Oversight and assurance around potential Brexit

financial risks and response;

• The implications of US tax reform; and
• Update of our long-term pension funding strategy.

National Grid Annual Report and Accounts 2017/18

Corporate Governance | Finance Committee

Corporate Governance

Safety, Environment and Health Committee

of risk for major hazard assets, including key US LNG
plants and the Company’s US gas pipeline safety
compliance programme.

In relation to the environment, the Committee continues to
review the Company’s strategy and approach to sustainability,
as well as its external reporting of environmental performance,
including greenhouse gas emissions (GHG). The Committee
has been pleased to see progress against the Company’s
continued ambition to reduce GHG while also challenging the
businesses on GHG reduction activities. The Committee
approved a Group target of a 70% reduction in GHG emissions
by 2030, including those from electricity system energy losses,
to provide a clear milestone between the 2020 and 2050
Company targets. The Company continues to drive this
reduction through mains replacement programmes, reductions
in SF6 leakage and energy efficiency measures and the
Committee will continue to monitor progress.

In terms of health, the Committee has seen a continued focus
by the Company in this area, particularly around mental
health where the Committee noted that 12% of the workforce
are now trained in mental health first aid. Interest and support
in this area remains strong throughout the Company.

Examples of other matters the Committee reviewed during
the year included:
• compliance and risk reporting for safety, environment

and health matters;

• consideration of the introduction of new EU legislation
on EU Security of Gas supply regulations which came
into force in September 2017;

• Engineering Assurance Committee Reports on

Electricity and Gas; and

• review of the Company’s environmental strategy.

(You can read about the Company’s response to the
recommendations of the Financial Stability Board’s Task
Force on Climate-related Financial Disclosures on page 192.)

Paul Golby
Committee Chairman

2017/18 key areas of focus
• US Gas Pipeline Safety:
Outcome: Supervision of delivery of the Company’s
US gas pipeline safety compliance programme.

• Carbon Reduction:
Outcome: The Committee approved a Group target
of 70% reduction in GHG emissions by 2030.

• Health and wellbeing:
Outcome: Monitoring of the Company’s move from its
previous five year programme structure to a rolling one
year analysis of the health challenges in the business.

• Engineering Assurance:
Outcome: Monitoring measures being taken to
mitigate risks at major hazard sites, including key
US LNG plants.

2018/19 key areas of focus
• Monitoring the implementation of key Safety,
Environment and Health BMS Standards
• Development of leading indicators of safety
• Monitoring action plan to achieve long-term

carbon reduction targets

• Analysis and understanding of near miss incidents
• Monitoring the progress of switching error

improvements in the US business

Paul Golby
Committee Chairman

Review of the year
During the year, the Committee has seen the Company
make progress in improving its safety culture throughout
the businesses, with specific focus on two key areas.
Firstly, the simplification of key procedures, where we have
encouraged the proposed development of new Business
Management Systems (BMS) Standards to provide simple
and fit for purpose procedures in relation to safety, process
safety, environmental sustainability and wellbeing and
health. Secondly, the Company has undertaken work to
develop and encourage key safety leadership behaviours
across the Group. We have ensured that time and attention
is being focused on incidents with high potential for harm
and the Committee will continue to monitor the progress
in this area.

The Group employee lost time injury frequency rate at
0.10 remains in line with last year. However, November
marked a year since the death of an employee working in
our UK Electricity Transmission business. Since my report
last year, the Committee has spent considerable time with
the business to understand the cause of this fatality, to
consider the findings of investigations and to monitor the
implementation across the Company of the lessons learnt
from this incident. The Committee received a closeout
report on the progress at its April 2018 meeting.

The Committee has reviewed the impact of culture on
safety and the behaviours underpinning this. For example,
whether employees feel able to speak out where there
might be safety concerns. We found that while our people
are generally good at speaking out, encouragement of
positive behaviour still needs to be increased. To further
understand this issue, in September, the Committee held
a workshop with external behavioural safety experts, which
considered how to promote a positive and engaging safety
culture across the Company. The Committee is pleased
to note that this workshop has been cascaded to all senior
leadership across the Company.

The US business continues to focus on switching errors,
which although slightly improved from last year, still remains
at an unacceptable level. I previously reported that the US
business had engaged an external consultant to review
these issues and through this five key categories have been
identified to drive improvements. The Committee continues
to monitor progress in this area.

In focus

Terms of Reference:
You can view the Safety,
Environment and Health
Committee Terms of
Reference on the
Corporate Governance
section of our website:
www.nationalgrid.com

The process safety management systems of the Company
remain an area of focus for the Committee. In January, the
Committee members received a briefing and reviewed the
process safety management systems currently in place.
Areas for simplification and improvement were identified and
the Committee will receive further updates to demonstrate
the implementation of the new BMS Standards in this area.
The Committee has also continued to receive updates on
the measures being taken to address and mitigate levels

Corporate Governance | Safety, Environment and Health Committee

National Grid Annual Report and Accounts 2017/18

Corporate GovernanceCorporate Governance continued

Nominations Committee

Sir Peter Gershon
Committee Chairman

Review of the year
Succession planning has remained the main area of
focus for the Committee this 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.

Board composition
We recognise that the success of the Company begins
with a high-quality Board and senior management team.
Key to this is the make up of the individual members.

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.

Following a thorough and rigorous process, Amanda Mesler
was appointed as a Non-executive Director to the Board
with effect from 17 May 2018. Amanda brings a wealth of
experience in different sectors to National Grid’s Board, in
particular in the area of the application of technology.

Amanda’s appointment is part of our ongoing commitment
to build and maintain an effective Board which is high-
quality in terms of expertise, diversity and background.
On appointment Amanda will join the Audit, Finance and
Nominations Committees. See opposite for more details
on the search and appointment process.

In focus

Terms of Reference:
You can view the
Nominations Committee
Terms of Reference
on the Corporate
Governance section
of our website:
www.nationalgrid.com

Talent pipeline
During the year the Committee received an update on the
current strength of the pipeline to our Executive Committee
roles and specific actions to mitigate succession risk
including development of internal candidates and the
viability of external hiring as part of the longer-term
succession plan.

The succession pipeline to the Executive Committee
and health of the talent pool further down the organisation
is discussed at quarterly Executive Global Talent Pool
meetings. Each member of the Executive Committee
has specific talent and succession targets.

The Board has also met with high-potential employees both
in the UK and the US on several occasions during the year.

Diversity
The creation of an inclusive and diverse culture supports
the attraction and retention of talented people, improves
effectiveness, delivers superior performance and enhances
the success of the Company.

While traditional diversity criteria such as gender, age and
ethnicity are important, we also value diversity of thought,
skills, experience, knowledge and expertise including
educational and professional backgrounds.

Our Board diversity policy sets out our approach to
diversity on the Board and senior management of National
Grid. You can read more about our Board diversity policy
and progress towards our objectives opposite.

Sir Peter Gershon
Committee Chairman

2017/18 key areas of focus
• Board succession planning
• Non-executive Director search and appointment
• Review of Executive Committee succession
• Updates on the external reviews on diversity
• Review of the Chairman’s performance, led by

Mark Williamson, the Senior Independent Director

• Review of Director independence and

potential conflicts

2018/19 key areas of focus
• Board succession planning to optimise the

regeneration of the Board while maintaining a
degree of continuity of knowledge and experience
through the next UK regulatory review

• Executive Committee succession planning and the
development of high potential internal candidates
• Meeting high potential employees below Executive

Committee level

National Grid Annual Report and Accounts 2017/18

Corporate Governance | Nominations Committee

Non-executive search and appointment process
Spencer Stuart were appointed to undertake a search
for a new Non-executive Director, together with a small
US boutique firm specialising in technology, Hobbs &
Towne, Inc.

• The Committee reviewed and agreed the Non-
executive Director candidate profile which was
formulated taking into account the current skills
matrix of the Board members.

• The search agencies conducted initial searches

and produced a list of potential candidates which
was reduced to a shortlist by the Chairman.

• At the November 2017 Committee meeting it was

Board diversity policy
As reported last year, in April 2017 the Committee
approved updates to the Board diversity policy and
the associated objectives.

In January 2018, the Nominations Committee approved
a few minor updates to the policy including valuing diversity
of age and educational and professional backgrounds,
expanding the remit of the policy to include the Executive
Committee and its direct reports, and adding a new item
in relation to the development of the talent pipeline to the
Board and the senior management team in support of
the two objectives approved last year.

agreed that the Chairman would interview the shortlisted
candidates and a sub-group of the Nominations
Committee (John Pettigrew, Therese Esperdy,
Mark Williamson and Jonathan Dawson) would
interview the final candidate(s).

The policy applies to the Board, the Executive Committee
and direct reports to the Executive Committee. It does
not apply directly to diversity in relation to the remaining
employees of National Grid as this is covered by other
policies and the National Grid Inclusion Charter.

• At the January 2018 Committee meeting, the shortlisted
candidates from Spencer Stuart were reviewed and the
Committee members gave feedback on the prospective
candidates they had met.

• Following discussion, it was agreed one candidate
would progress to the next stage of the process to
meet with the Nominations Committee sub-group.

• Subsequent to the January meeting, one further

candidate from Spencer Stuart and two candidates
from Hobbs & Towne, Inc. were selected to meet
with the Chairman in March.

• At the March 2018 Committee meeting, Committee
members and the Chairman gave feedback on the
initial shortlisted candidates. The Chairman met with
the preferred candidate shortly after the March Committee
meeting to further test the candidate’s credentials and
ensure that the majority of requirements set out in the
specification would be met by the appointment.
• The Committee agreed the preferred candidate and
made a recommendation to the Board in April 2018.

• The Board approved the recommendation and

Amanda Mesler was appointed to the Board with
effect from 17 May 2018.

As set out in our Board diversity policy:
• 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.

• We will only engage executive search firms who

have signed up to the UK Voluntary Code of Conduct
on Gender Diversity. Hobbs & Towne, Inc., a small
US firm, is not a signatory to the UK Voluntary Code
of Conduct on Gender Diversity (but they did provide
us with a number of diverse candidates). This deviation
from the policy was felt to be appropriate to ensure
a comprehensive search of the marketplace in the
niche area of technology and innovation. Our new
Non-executive Director, Amanda Mesler, was a
candidate from Spencer Stuart.

• We will continue to make key diversity data, both

about the Board and our wider employee population,
available in the Annual Report and Accounts.

We will continue to review our progress against the Board
diversity policy annually and 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.

Examples of the initiatives to promote and support inclusion
and diversity throughout our Company are set out below
and on page 37.

Objectives

Progress

The Board aspires to meet the target of 33% of Board and
Executive Committee positions, and direct reports to the Executive
Committee, to be held by women by 2020.

The Board aspires to meet the Parker Review target for FTSE
100 boards to have at least one director from a non-white ethnic
minority by 2021.

Objective ongoing
Following the departure of Ruth Kelly from the Board in July 2017
the percentage of women on the Board has fallen to 27.3%. Following
the recent appointment of Amanda Mesler to the Board there will
be 33.3% women on the Board.

In our Executive and Non-executive Director searches we take this
into consideration, however all appointments are made on merit.
We currently have 33% women on our Executive Committee and
31% women direct reports to the Executive Committee.

We are undertaking the following actions to help achieve our target:
• All senior external recruitment requires a diverse list of candidates

to be considered as part of the selection process.

• All talent meetings have inclusion and diversity moments at the
start to ensure an inclusive mind set when discussing talent
moves and promotions.

• All Executive Directors have diversity targets.

Objective met
We currently have one Director from a non-white ethnic minority
on the Board. Additionally, our mandatory requirement for a diverse
candidate pool should ensure that we continue to have the
opportunity to recruit further persons from non-white ethnic
minorities in the future.

Corporate Governance | Nominations Committee

National Grid Annual Report and Accounts 2017/18Corporate GovernanceCorporate Governance continued

Our Executive Committee

Membership Key

Member of the Board and

Executive Committee
Full biographies on page 42

Secretary to the Board and member

of the Executive Committee
Full biography on page 43

Member of Executive Committee

John Pettigrew
Chief Executive and
Committee Chairman

Andrew Bonfield
Finance Director

Dean Seavers
Executive Director, US

Nicola Shaw
Executive Director, UK

Alison Kay
Group General Counsel and
Company Secretary

Badar Khan
Group Director, Corporate Development
and National Grid Ventures

Mike Westcott
Group Human Resources Director and
Group Commercial Property Director

George Mayhew
Group Corporate Affairs Director

Adriana Karaboutis
Group Chief Information and
Digital Officer

Badar joined the Company in 2017. He is
responsible for competitive businesses
globally including interconnectors, LNG,
metering, renewables and distributed
energy. He also leads group strategy
and technology & innovation globally.
Previously, he worked at Centrica plc for
14 years in the UK and US, including
4 years as CEO of Direct Energy, the
North American subsidiary which provides
electricity, natural gas and home services.

External Appointments: None.

Examples of key areas of focus
during 2017/18

• Progress towards a generative

safety culture.

• Delivering improved

operational performance.

• Delivering successful
regulatory outcomes.

• Building capacity and capability
to enable future growth and
deepening succession cover.

• Progressing the execution of

our corporate strategy.

Examples of key areas of focus
for 2018/19

• Continue progress towards
a generative safety culture.

• Drive our operational and
customer performance.

• Deliver on our regulatory strategy.

• Develop and source talent and
leaders to deliver our strategy
and vision.

• Position National Grid as a purpose-
led business and as a leading voice
in energy transformation.

Mike is responsible for setting and delivering
the global HR agenda and driving long-term
sustainable value from our surplus property
portfolio. Previously, he worked for Diageo
plc for 14 years in a number of senior HR
roles, including HR Director at Diageo
International Markets and HR Director
for North America.

George is responsible for setting and
delivering the Group’s public policy,
legislative and communications strategy.
Prior to joining National Grid, he worked
at BAE Systems plc, Centrica plc and
Granada Media Group undertaking
a number of corporate and public
affairs roles.

Adriana is responsible for the development
of a Group-wide digital strategy, delivery
of information systems and services,
digital security and risk as well as overall
security. Previously, she worked as an
innovative technology executive and a
business leader for Biogen, Dell, Ford,
and General Motors.

External Appointments: Board
of Trustees at SportsAid and Board
of Centrepoint.

External Appointments: None.

External Appointments: Board of
Directors of Perrigo Company plc and
of Advance Auto Parts.

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 furthering the strategy,
business objectives and targets established
by the Board. It approves expenditure and
other financial commitments within its authority
levels and discusses, formulates and approves
proposals to be considered by the Board.

The nine Committee members have a broad
range of skills and expertise, which are updated
through training and development. Some
members also hold external non-executive
directorships, giving them valuable board
experience. As previously announced, Andrew
Bonfield will be stepping down from his role on
the Board and the Committee at the end of the
2018 AGM. Andy Agg, currently Group Tax and
Treasury Director, will be appointed as Interim
Finance Director pending the appointment
of a permanent Finance Director and will
become a member of the Committee.

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 Disclosure Committee assists 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. The Committee is chaired by
the Finance Director and its members are the Group
General Counsel and Company Secretary, the
Group Tax and Treasury Director, the Group Financial
Controller, the Director of Investor Relations and
the Head of Corporate Audit. Others attended
as appropriate.

This year the Committee met to consider the
announcements for the full and half-year results as
well as the announcement relating to completion of
the sale of the UK Gas Distribution business and the
issue of the notice of the General Meeting to approve
the return of cash following the sale. The Committee
reported on relevant matters to the Audit Committee.

The Committee reports the results of its evaluation
of the effectiveness of the Company’s disclosure
controls to the Audit Committee.

Corporate Governance | Our Executive Committee

National Grid Annual Report and Accounts 2017/18Statement of compliance with and application of the UK Corporate Governance Code

For the year ended 31 March 2018, the Board considers that for the period under review it has complied in full with the provisions of the UK Corporate
Governance Code 2016 (the Code), available in full at www.frc.org.uk. Our statement of compliance below, together with the rest of the Corporate
Governance report, 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 62 sets out where to find each of the disclosures required in the Directors’ Report
in respect of Listing Rule 9.8.4.

A. Leadership
A.1 The role of the Board
Our Board is collectively responsible for the
effective oversight and long-term success of
the Company. 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 18-21).

There is a clear schedule of matters reserved for
the Board and a schedule of delegation, which
were both reviewed and updated in January
2018. 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 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. The Chairman manages and leads
the Board (see below for more information).

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 agenda items, including
strategic issues.

A.4 Role of the Non-executive Directors
Independent of management, our Non-
executive Directors bring diverse skills and
experience, vital to constructive challenge
and debate. Exclusively, they form the Audit,
Nominations and Remuneration Committees,
and their views are actively sought when
developing proposals on strategy. The
Non-executive Directors monitor the delivery of
the agreed strategy and objectives within the risk
and governance framework set by the Board.

Our Senior Independent Director (SID) 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 eight scheduled Board
meetings, the Chairman held meetings with
the Non-executive Directors without the
Executive Directors present.

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 42-43. Board and committee attendance
during the year to 31 March 2018 is set out
on page 45. The size and composition of the
Board and its committees is kept under review
by the Nominations Committee to ensure
the appropriate balance of skills, experience,
independence and knowledge. The
independence of the Non-executive Directors
is considered at least annually along with
their character, judgement, commitment
and performance on the Board and Board
committees. The Board took into consideration
the Code and indicators of potential non-
independence, including length of service.
Following due consideration, the Board
determined that all the Non-executive
Directors were independent in character
and judgement. As such the Board confirmed
that with the exception of the Chairman,
whose independence is only determined
on appointment, all Non-executive Directors
remained independent throughout the year
as defined in the Code.

B.2 Appointments to the Board
The Nominations Committee, which comprises
the Chairman and Non-executive Directors,
leads the process for Board appointments
and makes recommendations to the Board.
The Nominations Committee also considers
Board succession planning and the leadership
needs of the Company. As they will have
been Board members for more than six years
by the time of the 2018 AGM, a particularly
rigorous review of Sir Peter Gershon,
Paul Golby and Nora Mead Brownell was
undertaken, taking into account the need
for progressive refreshing of the Board.

Further details of the formal, rigorous and
transparent appointment processes for
Amanda Mesler and the role of the Nominations
Committee can be found on page 59. Spencer
Stuart, Hobbs & Towne, Inc and Korn Ferry
provided external search consultancy services
in relation to the appointment of a new
Non-executive Director. Hobbs & Towne,
Inc does not have any other connections
with the Company. Spencer Stuart provided
other recruitment services to the Company’s
subsidiaries and Korn Ferry provided other
HR-related services for example, the employee
engagement survey and consultancy services
to the Company and its subsidiaries.

B.3 Time commitment
Non-executive Directors are advised of the
time commitment and travel, expected from
them on appointment. The time commitment
of each Director is kept under review by
the Nominations Committee. 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 42-43.
As part of the evaluation of the Chairman,
the Non-executive Directors, with input from
the Executive Directors, assessed his ability
to fulfil his role as Chairman, taking into
account other significant appointments.

With the agreement of the Board, Executive
Directors gain experience of other companies’
operations, governance frameworks and
boardroom dynamics through non-executive
appointments. The fees for these positions are
retained by the individual. For further details
about the Directors’ service contracts and
letters of appointment, see page 70 of the
Directors’ Remuneration Report.

B.4 Development
All new Directors are provided with a full and
tailored induction programme when they are
appointed to the Board. Details of Director
induction and ongoing development can
be found on page 45.

B.5 Information and support
The Group General Counsel and 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 and 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
and Company Secretary after each meeting
and shares the feedback from these meetings
with the Chairman. A clear set of guidelines
is in place to assist the Executive Directors and
management on the content and presentation
of papers to the Board and committees; and
the quality of Board and committee reporting
is an area of continuous focus for management
to ensure the Board receives timely, clear
and accurate information.

Corporate Governance | Statement of compliance with the UK Corporate Governance Code

National Grid Annual Report and Accounts 2017/18Corporate GovernanceCorporate Governance continued

B.6 Evaluation
The 2017/18 performance evaluations of
the Board, Board Committees and individual
Directors were carried out internally. Led by the
SID, and with input from the Executive Directors,
the Non-executive Directors reviewed the
Chairman’s performance. See pages 46-47
for more information on this year’s Board,
Committee, individual Director and Chairman
performance evaluations.

Following the evaluation process, it was agreed
that the Board and its Committees continue
to operate effectively and that each Director,
including the Chairman, contributes effectively
and demonstrates commitment to their role.

In line with the Corporate Governance code,
the Board expects that the 2018/19 Board
performance evaluation will be carried out
externally.

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, Amanda Mesler will seek election and all
other Directors (with the exception of Andrew
Bonfield and Pierre Dufour) will seek re-election
at the 2018 AGM.

C. Accountability
C.1 Financial and business reporting
The requirement for Directors to state that they
consider the Annual Report and Accounts, taken
as a whole, is fair, balanced and understandable,
remains a key consideration in the drafting and
review process. The coordination and review of
the Annual Report and Accounts is conducted
in parallel with the formal audit process
undertaken by the external auditors and
the review by the Board and its committees
(of relevant sections).

The drafting and assurance process supports
the Audit Committee’s and Board’s assessment
of the overall fairness, balance and clarity of the
Annual Report and Accounts and the statement
of Directors’ responsibilities as set out on page
82. The independent auditor’s report is on
pages 83-91 and the Company’s business
model is on page 2.

C.2 Internal control and risk management
The Board has carried out a robust assessment
of the nature and extent of the principal risks
facing the Company in achieving its objectives
including those that would threaten the
business model, future performance, solvency
or liquidity. Further details can be found on
pages 19-20.

The Board also sets the Company’s risk
appetite, internal controls and risk management
processes. The Board monitors the Company’s
risk management and internal control systems
and undertakes a review of their effectiveness
annually. Further details are set out on pages
18-21.

The activities of the Audit Committee, which
assists the Board with its responsibilities in
relation to risk and assurance, are set out
on pages 49-55.

C.3 Audit Committee and auditors
The Audit Committee is comprised entirely
of independent Non-executive Directors.
In accordance with the Disclosure and
Transparency Rules and the Code, the
composition and competence of the Audit
Committee was considered by the Nominations
Committee at its April meeting. The Board
confirmed the recommendations of the
Nominations Committee: that all members
of the Committee are independent (including
the chairman of the Committee), that Mark
Williamson as a chartered accountant is
considered to have competence in accounting,
and that the Committee as a whole has
competence relevant to the sector in which
it operates. In reaching a determination
regarding the Committee’s competence,
the skills and experience of the Committee
members were considered.

The report on pages 49-55 sets out
details of how the Committee has discharged
its duties during the year, matters reviewed by
the Committee and how it ensures the auditors’
objectivity, effectiveness and continued
independence.

D. Remuneration
D.1 The level and components
of remuneration
The Remuneration Committee, comprised
entirely of independent Non-executive Directors,
is responsible for recommending to the Board
the remuneration policy for Executive Directors
and other members of the Executive Committee
and for the Chairman, and for implementing this
policy. The aim is to align remuneration policy to
Company strategy and key business objectives
and make sure it reflects our shareholders’,
customers’ and regulators’ interests.

The Remuneration Report on pages 63-79
sets out key aspects of the remuneration
policy as approved by shareholders at the
2017 AGM and outlines the activities of the
Committee during the year.

D.2 Procedure
For further information on the work of the
Remuneration Committee and Directors’
remuneration packages, see the Directors’
Remuneration Report on pages 63-79.

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, and members
take an active role in engaging with
shareholders. 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 48.

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
both formally and informally. Company
representatives and our Registrar are also on
hand to answer any questions shareholders
might have.

Our AGM will be held on Monday, 30 July 2018,
at The International Convention Centre in
Birmingham, and broadcast via our website.
The Notice of Meeting for the 2018 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.

Index to Directors’ Report
and other disclosures

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

62
197
82
42
2
203
203
203

186
203

70
76
37
8
198
135
4
16
204

10
18

204
199
36

204
204
18
199

Corporate Governance | Statement of compliance with the UK Corporate Governance Code

National Grid Annual Report and Accounts 2017/18Annual statement from the Remuneration Committee Chairman

salary. Other UK-based Executive Directors must hold at
least four times their pre-tax salary in National Grid’s shares,
which is equivalent to around seven times their post-tax
salary. For the US-based Executive Director, the minimum
shareholding requirement is also four times his pre-tax
salary, which is equivalent to around six times his post-tax
salary. This requirement ensures that executives have a
longer-term view in their decision-making, are rewarded for
achieving success over the long term, and have interests
aligned to our private and institutional shareholders –
gaining if the share price increases, and sharing in the
consequences of share price falls.

The largest element of our incentive pay, the LTPP, is
measured against the two components through which
National Grid earns returns for our shareholders. These are
RoE, which measures management’s ability to grow the
business profitably; and Value Growth, which comprises
growth in assets, less net debt plus dividends paid. The
two measures are designed to provide a balance, deterring
excessive debt-financed asset growth, while incentivising
management to maintain an efficient balance sheet.

Consistent with our approach for aligning executive interests
to the long term, LTPP awards are determined after a
three-year performance period. Furthermore, the shares
that are then allocated to Executive Directors have to be
held for at least a further two years.

2. Achievement of short-term (APP) and long-term
(LTPP) incentive opportunities are linked to National
Grid financial performance
We focus largely on visible financial measures to assess
the level against which incentive payouts are determined.
Over 90% of John Pettigrew’s potential incentive pay is
calculated on that basis.

3. Discretion and independent judgement is applied
As a committee, we are willing to exercise discretion when
approving remuneration outcomes for Executive Directors.
We reflect on whether the Company’s overall performance
is correctly represented by the financial measures we
have set, and we shall take account of the performance
of non-financial measures, and the demonstration of
leadership qualities and living our values, before
agreeing APP awards.

Last year, for example, we reduced senior executives’
APP awards to acknowledge the importance of maintaining
a strong safety culture following the tragic fatality of one
of National Grid’s employees in the UK. Also last year,
we included within the LTPP a portion of the Value
Added from the sale of a majority interest in the UK Gas
Distribution business to reflect the Executive Directors’
role in crystallising shareholder value from the Gas
Distribution sale.

This year, the Committee has not exercised discretion either
positively or negatively. I also wish to confirm that the LTPP
and APP plans both state that the Committee has absolute
discretion to determine whether exceptional circumstances
exist which justify whether any or all of an award should
be forfeited, even if already paid. Examples of exceptional
circumstances include, but are not limited to, material
misstatement, misconduct of the participant, a significant
environmental or health and safety issue, failure of risk
management, and if certain other facts emerge after
termination of employment. We would not hesitate to
use this ability to clawback incentive awards paid to
executives where we determine that the payment
levels were unjustified given new information.

Jonathan Dawson
Remuneration Committee Chairman

Introduction
Last year, our shareholders approved National Grid’s
remuneration policy for the period 2017 to 2020, with
over 97% in favour. At the same time, more than 87%
approved the annual Remuneration Report. The
Remuneration Committee and the whole Board are
grateful to shareholders for their support for our policy
and our implementation of it. This year, through the
annual advisory shareholder vote, we are seeking
shareholder support for the implementation of the
approved remuneration policy during 2017/18.

National Grid has had another successful year, delivering
on all our key measures. Underlying operating profit was
up by around 6% in constant currency terms to around
£3.5 billion and underlying EPS was up by more than 3%
to 60.4p despite adverse movements in exchange rates.
Strong Return on Equity (RoE) was achieved at 12.3% and
dividends were increased in line with policy. Value Added
of £2 billion was achieved in the year and contributed
to the three-year measure of Value Growth of 11.8%.
Value Growth is an internal equivalent to Total Shareholder
Return (TSR). We also invested £4.3 billion into the
business this year, growing our asset base by 6%.

What is our remuneration policy seeking to achieve?
Our objective in developing our remuneration policy
is to ensure we pay our senior executives in a way that
incentivises stretching performance, is fully aligned to
the way National Grid earns its returns for shareholders,
and actively supports our strategy and values.

The main features of our remuneration policy are as follows:

1. Significant weighting towards business
performance over the long term
Nearly three quarters of John Pettigrew’s variable pay
opportunity is represented by the Long Term Performance
Plan (LTPP). We emphasise this over the Annual Performance
Plan (APP) because National Grid is a long-term business.
We want to make sure investment decisions are made, and
operating efficiencies achieved, against this background.

Most of senior executives’ variable pay is settled in National
Grid’s shares. For Executive Directors, some 85% of their
variable pay opportunity is delivered in shares.

We also require senior executives to maintain very high
shareholdings in National Grid. As CEO, John Pettigrew has
to hold at least five times his pre-tax salary in National Grid’s
shares, which is equivalent to around nine times his post-tax

To summarise, in setting Executive Director pay, we take
account of a wide range of factors to inform decisions that
are fair given each executive’s accountabilities, individual
contribution, business performance, and the wider
workforce pay outcomes. We illustrate this overleaf.

Corporate Governance | Directors’ Remuneration Report

National Grid Annual Report and Accounts 2017/18

Corporate GovernanceDirectors’ Remuneration Report

How our variable pay is determined

Financial measures

Individual objectives

Committee discretion

Malus/clawback

Specific financial performance
measures considered

Other performance considered

APP
1-year
performance period
(up to 125% of salary)

Return on Equity

Value Added

Adjusted EPS

Objectives are set on
an individual basis,
dependent on role
remit and requirements.
Includes wider business
measures as appropriate

LTPP
3-year performance period
(up to 350% of salary for
CEO, 300% for other EDs)

Return on Equity

Value Growth

n/a

Committee considers wider
business performance
as well as individual
demonstration of leadership
qualities and values, and will
adjust as appropriate

Committee has absolute
discretion to apply malus/
clawback in exceptional
circumstances

How do we report on Directors’ remuneration?
Our aim is to be highly transparent so shareholders
can assess whether remuneration paid to executives
is appropriate, given both the financial and operational
performance of the Company and executives’ individual
performance. We have reviewed feedback from last year’s
report and have further enhanced how we analyse and
describe executives’ individual performance.

A particular focus has been to provide further detail of
their individual objectives, as set out on pages 71-73. This
includes an explanation both on positive aspects and on
areas where we consider performance fell short of stretch
targets. We continue to include full retrospective disclosure
of performance against the financial targets we set last year
in respect of the APP, as set out on page 71.

Review of performance for the year
APP
APP payouts for Executive Directors comprise 70% based
on the achievement of Company financial measures and
30% based on the achievement of individual objectives. As
in prior years, technical adjustments are made to the EPS
outturn to account for the impact of timing and storms, and
to target to reflect the net effect of currency adjustments,
certain actuarial assumptions on pensions, scrip dividend
uptake, and to ensure consistency of accounting treatment.
Thus, the reported figure was adjusted down from 59.5p
to 58.0p and the target was reduced from 57.7p to 57.0p.
Technical adjustments have also been made to Group RoE
which has resulted in an increase to target of 0.2% primarily
to reflect the net effect of currency adjustments and to
ensure consistency of accounting treatment. This year
there have been no discretionary adjustments made by
the Committee to any of the APP financial results.

The performance of the respective financial measures has
resulted in outturns ranging from 58.7% to 85.0% of the
maximum for the financial portion. The performance against
individual objectives has resulted in outturns ranging from
74.0% to 81.0% of the maximum for the individual portion.
Taking both financial and individual performance together,
the overall APP awards to Executive Directors on the Board
at 31 March 2018 range from 63% to 83% of the maximum
award which amounts to payments of between 79% and
104% of salary. Details of the APP payouts are presented on
pages 71-73, including the full range of performance levels
for each of the financial measures and also commentary
on each of the Executive Directors’ performance against
individual objectives.

LTPP
The 2015 LTPP awards vest in July 2018. The three-year
performance period ended on 31 March 2018 and vesting
outcomes ranged from 66.3% to 86.0%. As with last year,
this year’s LTPP vesting also benefitted from the inclusion
of a portion of the value arising from the sale of a majority
interest in the UK Gas Distribution business in 2016/17 in
the Value Growth measure, as this event occurred within
the 2015-2018 performance period measured.

Executive Director alignment
As I stated above, a key element in our remuneration
strategy is to require senior executives to have a substantial
shareholding in the Company. The purpose of this is to
make sure executives share the benefit of any growth in the
share price and the effects of any fall. The last year has seen
a decline in our share price. We have examined carefully
whether this was a consequence of executives’ performance
or the result of other factors. We concluded that the decline in
the share price over the period was driven by a combination
of factors, including rises in bond yields and negative
sentiment around political and regulatory uncertainty in the
UK. Additionally, we noted the continued strong operational
and financial performance of the Company. This includes
Group RoE and Value Growth, which are key performance
indicators for the Company and key measures of value
creation for shareholders.

We also noted that during the year, the value of John
Pettigrew’s shareholding, taking account of the value of
shares after the share consolidation exercise and shares
vested in the year, fell by some £750,000 – equivalent to
around 160% of his post-tax salary. This serves to illustrate
powerfully what we mean by alignment of interest with
shareholders and why we regard it as a central feature
of our remuneration strategy.

Annual salary review
As I have stated in the last two remuneration reports, the
Committee decided not to award John Pettigrew and Nicola
Shaw salaries at our assessment of the appropriate levels
for their roles when they were initially appointed. Instead,
I wrote that over time we would make increases in excess
of the managerial salary increase budget, subject to their
individual performance. This approach is consistent with
that for the wider employee population, where employees
may begin a role at up to 20% below our assessment of
market levels, but subsequently may receive significantly
larger salary increases than budget when justified by
individual performance.

Last year, following a review of both John Pettigrew’s and
Nicola Shaw’s performance in their respective roles, the
Committee increased their base salaries by 9% (comprising
the UK budget of 2.6% and a further 6.4%). I indicated that
we would follow a similar approach this year, and we have
therefore considered John Pettigrew’s and Nicola Shaw’s
individual performance during the year to assess whether
this approach continues to be justified.

In John Pettigrew’s case, the Committee concluded that in
his second year as CEO he had continued to build on his
strong first year in the role. We considered, taking account
also of the employee opinion survey, that he had made
robust progress in developing National Grid as both a
purpose and performance-led organisation. He has focused
the US business on advancing its strategy, with successful
new rate case filings and new capital delivery and gas
enablement capabilities.

Corporate Governance | Directors’ Remuneration Report

National Grid Annual Report and Accounts 2017/18The US is now a critical part of National Grid’s growth strategy.
It has an annual capital expenditure of some £2.5 billion, has
some 16,000 employees, and is delivering a strong and growing
return on equity. In the UK, John has been actively engaged
on consultations over RIIO-T2 and making good progress in
preparing our business to operate successfully in the RIIO-T2
period. John has also overseen the work culminating in the
recent announcement of an option agreement with Quadgas
for the potential sale of the remaining 25% stake in Cadent.

He has also focussed National Grid in both the US and
the UK on the new energy agenda, the challenges and
opportunities brought by the emergence of new technology
and their implications for transmission and distribution.
National Grid Ventures, established as a new business
in 2017/18, has taken shape and begun to deliver on its
strategic priorities. He has also further strengthened the
senior team, in particular appointing Adriana Karaboutis
our new Chief Information and Digital Officer, while
developing our talented people across the Company.

As Executive Director for the UK, Nicola Shaw has led the
complex and time-critical work with Ofgem on preparing for
the successful separation of the Electricity System Operator
from the rest of the UK business. She has also enhanced
our focus on making the UK regulated businesses more
responsive to the needs of our customers.

Nicola has made excellent progress in leading the
development of plans that will enable the UK regulated
transmission network businesses to operate successfully in
the anticipated RIIO-T2 environment. She has facilitated the
smooth decoupling of the Gas Distribution business from
National Grid and its success in establishing itself as an
independent company, while ensuring our interests as a
minority shareholder were properly protected. In addition,
she has significantly strengthened the pool of our talented
people across the UK business.

For the coming year, the Committee has decided to reflect
progress in role and to reduce the gap to our mid-market
policy level by awarding a salary increase of 6% to each of
John Pettigrew and Nicola Shaw. This comprises, as last
year, an element representing the overall UK managerial
salary increase budget which this year is 2.2%, coupled with
a further 3.8%. We intend to apply a similar approach next
year, subject again to individual performance, which should
result in salaries that are in line with the Committee’s
assessment of the appropriate salaries for the roles. Our
expectation is that from 2020, we shall employ the same
approach as for the other Executive Directors, i.e. setting
increases that are aligned to the managerial salary increase
budget, again subject to individual performance.

The Committee agreed a salary increase for Dean Seavers
of 3% in line with the US managerial salary increase budget.

Resignation of Andrew Bonfield
As has been announced, Andrew Bonfield will be leaving
National Grid at the end of July to take up a new role in the
United States. In accordance with our policy for executive
resignations he will not be eligible to receive a June 2018 salary
increase, a 2018 LTPP award, or a discretionary prorata APP
payment in respect of his four months’ contribution within the
2018/19 financial year. Andrew remains eligible for an APP
award in respect of the 2017/18 financial year and he is also
eligible to receive the 2015 LTPP shares that will vest on 1 July
2018. Details of the values of these awards can be found on
pages 71-74. He will forfeit all unvested LTPP shares granted to
him under the 2016 LTPP and 2017 LTPP. Andrew is subject to
a 12 months’ notice period and as a condition for releasing him
early the Committee has required him to maintain a holding in
National Grid shares to the value of at least 200% of his current
salary for a period of three years ending on 31 July 2021. This
reflects the significance of Andrew’s role to date within National
Grid, in particular regarding our preparation for the RIIO-T2
regulatory period which commences in April 2021.

Developments for 2018/19
Looking ahead, the Committee’s work will be dominated
by considering the impact of RIIO-T2 on our remuneration
structure.

Shareholders will know that National Grid’s first eight-year RIIO
regulatory period in the UK will conclude on 31 March 2021.
Given the bulk of senior executive remuneration comes from
the LTPP, we shall need to consider what arrangements
should be made for the LTPP awards whose performance
periods straddle the two regulatory periods.

The challenge is illustrated below:

2019/20 2020/21 2021/22 2022/23 2023/24 2024/25

June 2019
award

June 2020
award

Performance
period

Performance period
impacted by RIIO-T2

Holding
period

The first such LTPP will be granted in June 2019, the outturn
of which will be based on two years of RIIO-T1 performance
and one year of RIIO-T2 performance. The second will be
granted in June 2020, the outturn of which will be based
on one year of RIIO-T1 performance and two years of
RIIO-T2 performance.

We shall not know what Ofgem will determine as National
Grid’s regulatory allowances for RIIO-T2 at the time the 2019
grant is made, so we shall need to agree the most suitable
set of measures to put to shareholders at the 2019 AGM.
We are assessing several alternative ways of addressing this
challenge and I anticipate consulting our leading shareholders
from late autumn of 2018 to establish what would be the most
suitable approach. Our proposals will be put to shareholders
at the 2019 AGM for policy approval. We shall also take the
opportunity at that time to review all aspects of our policy.

Separately, we have already decided to make a small
change to the composition of the financial measures for the
APP for the performance year 2018/19. Last year, I said we
were planning to sharpen the focus on regional business
performance by adopting a combination of business specific
Value Added and business specific regional Return on Equity
as the primary financial measures for senior executives with
responsibilities specific to a business unit. We have decided
to augment this approach this year by adding a further
measure – business specific operating profit. The financial
measures together will continue to represent 70% of the
overall APP award for all Executive Directors, the other 30%
being based on achievement of personal objectives. We
shall be reporting on this in the 2019 Remuneration Report.
We are not making any changes to the financial measures
for the CEO or Finance Director.

Conclusion
We have carefully considered the outcomes of the
APP and LTPP for this year and we believe they are a
fair reflection of the performance of the senior executive
team. We also consider that the shareholding requirement
for senior executives has ensured that they have been
significantly exposed to the fall over the last year in National
Grid’s share price, thereby demonstrating real alignment
with the wider shareholder body.

Accordingly, on behalf of the Committee, I commend this
report to you and ask for your approval at the AGM in July.

Committee membership
There has been no change in the composition of the
Committee since the end of last year. Pierre Dufour is not
seeking re-election and will leave the Board on 30 July.

Jonathan Dawson
Committee Chairman

Corporate Governance | Directors’ Remuneration Report

National Grid Annual Report and Accounts 2017/18Corporate GovernanceDirectors’ Remuneration Report continued

At a glance

Performance
A comparison of the total 2017/18 single figure of remuneration with 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. For Dean Seavers a depreciation in 2015 LTPP value is shown due to a reduction in ADS price
between the grant price, $66.9618 and the estimated vesting price of $55.1600.

Total remuneration

Executive
Director

Andrew Bonfield

John Pettigrew

Dean Seavers

Nicola Shaw

Maximum if variable pay

vested in full £’000

2017/18 single figure
remuneration £’000

2.4%
49.4%

1.8%
36.9%

-3.4%
48.2%

37.4%

4,345

3,945

3,952

1,247

3,847

3,519

3,038

1,026

26.1%

35.2%

24.4%

30.8%

20.5%

27.7%

62.6%

Key

2015 LTPP – share appreciation/
depreciation and dividend
equivalent values
2015 LTPP – face value
APP
Fixed

Andrew
Bonfield

John
Pettigrew

Dean
Seavers

Nicola
Shaw

Key features of remuneration policy

Annual report on remuneration for 2017/18

Salary

• Target broadly mid-market against FTSE 11-40 for UK Directors

• Salary increases of 2.6% for Andrew Bonfield and 2.5% for

and general industry and energy services companies with similar
revenue for US Directors

Dean Seavers. These increases (June 2017) being in line with
the respective budgets for UK and US managerial employees

Annual
Performance
Plan (APP)

• 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

• Salary increases of 9.0% for each of John Pettigrew and
Nicola Shaw (June 2017). These higher increases were
awarded to help reduce the gap and bring their pay closer to
appropriate levels for their roles and based on assessment
of strong individual performance

• 70% based on financial measures and 30% based on

individual objectives

• Financial metrics for CEO and Finance Director comprise

35% adjusted EPS and 35% Group RoE

• Financial metrics for Executive Director, US and Executive

Director, UK comprise 35% US/UK Value Added respectively
and 35% US/UK RoE respectively

• Individual objectives cover putting our customers first,

optimising the performance of our core business, seeking
out growth opportunities in a disciplined way and evolving
the business for the future

Long Term
Performance
Plan (LTPP)

Pension and
other benefits

Shareholding
requirement

• 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

• 2017 LTPP award, 50% Group RoE and 50% Value Growth
• 2015 LTPP vesting in 2018, 50% RoE and 50% Value Growth

- 50% Group RoE for CEO and Finance Director
- 25% Group RoE and 25% US/UK RoE for Executive Director,

• Shares must be retained until later of two years from vesting

US and Executive Director, UK respectively

and meeting shareholding requirement

• Subject to both clawback and malus

• Eligible to participate in defined contribution (or defined

• UK cash allowance (Andrew Bonfield, John Pettigrew

benefit if already a member)

and Nicola Shaw): 30% of pensionable pay

• Pensionable pay is salary only in UK and salary and APP

• US defined contribution (Dean Seavers): 9% of pensionable

in US in alignment with market
• Other benefits as appropriate

• 500% of salary for CEO
• 400% of salary for other Executive Directors

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, and a car and driver when required

• Andrew Bonfield has a shareholding of 632% and has met

his shareholding requirement

• John Pettigrew, Dean Seavers and Nicola Shaw have not yet met
their shareholding requirement due to their relatively short time in
role; their shareholdings are 326%, 144% and 13% respectively

Corporate Governance | Directors’ Remuneration Report

National Grid Annual Report and Accounts 2017/18Directors’ remuneration policy – approved by shareholders in 2017

Key aspects of the Directors’ remuneration policy, along with elements particularly applicable to the 2017/18 financial year are shown on pages 67
to 69 for ease of reference only. This policy was approved for three years from the date of the 2017 AGM, held on 31 July 2017. A shareholder vote on
the remuneration policy is not required in 2018. A copy of the full remuneration policy is available within the 2016/17 Annual Report and Accounts on
the Company’s investor website (investors.nationalgrid.com). From time to time, the Committee may consider it appropriate to apply some judgement
and discretion in respect of the approved policy. This is highlighted where relevant in the policy, and the use of discretion will always be in the spirit of
the approved policy.

Our peer group
The Committee 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.

Approved policy table – Executive Directors
Salary
Purpose and link to strategy: to attract, motivate and retain high-calibre individuals, while not overpaying.

Operation

Maximum levels

Performance metrics, weighting and time
period applicable

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.

No prescribed maximum annual increase.

Not applicable.

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.

Benefits
Purpose and link to strategy: to provide competitive and cost-effective benefits to attract and retain high-calibre individuals.

Operation

Maximum levels

Performance metrics, weighting and time
period applicable

Benefits have no predetermined maximum, as the
cost of providing these varies from year to year.

Not applicable.

Participation in tax approved all-employee share plans
is subject to limits set by the relevant tax authorities
from time to time.

Benefits provided include:
• company car or a cash alternative (UK only);
• use of a car and driver when required;
• private medical insurance;
• life assurance;
• personal accident insurance;
• opportunity to purchase additional benefits
under 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.

Corporate Governance | Directors’ Remuneration Report

National Grid Annual Report and Accounts 2017/18Corporate GovernancePerformance metrics, weighting and time
period applicable

Not applicable.

Directors’ Remuneration Report continued

Pension
Purpose and link to strategy: to reward sustained contribution and assist attraction and retention.

Operation

Maximum levels

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.

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

Maximum levels

The maximum award is 125% of salary.

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.

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.

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.

Operation

Maximum levels

Awards of shares may be granted each year, with
vesting subject to long-term performance conditions.

The maximum award for the CEO is 350%
of salary and it is 300% of salary for the
other Executive Directors.

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 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.

Corporate Governance | Directors’ Remuneration Report

National Grid Annual Report and Accounts 2017/18Approved 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.

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 CEO
and 400% of salary for the other Executive Directors.

Unless the shareholding requirement is met, Executive Directors will not be permitted to sell shares, other than to pay income tax liabilities
on shares just vested or in exceptional circumstances approved by the Remuneration Committee.

Corporate Governance | Directors’ Remuneration Report

National Grid Annual Report and Accounts 2017/18Corporate GovernanceDirectors’ Remuneration Report continued

Annual report on remuneration
Statement of implementation of remuneration policy in 2017/18

Role of Remuneration Committee
The Committee is responsible for recommending to the Board the remuneration policy for Executive Directors, the other members of the Executive
Committee and 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 2017/18
were Nora Mead Brownell, Jonathan Dawson (chair), Pierre Dufour, and Mark Williamson.

The Committee’s activities during the year

Meeting

April

May

June

January

March

Main areas of discussion

2016/17 individual objectives scoring for Executive Committee
Approval of 2017/18 objectives for Executive Committee
Discussion on 2016/17 expected incentive plan outturns

2016/17 APP financial outturns and confirmation of awards for Executive Committee
Approval of 2017/18 objectives for new Executive Committee appointment
Annual salary review and LTPP proposals for Executive Committee
Review of Chairman’s fees

Items related to new Executive Committee appointment

Review of 2018/19 APP financial measures

Market data review for Executive Committee remuneration
Discussion of measures and targets for 2018 LTPP
First review of 2018/19 individual objectives of Executive Committee
Review first draft of Committee Chairman’s Annual Statement and Directors’ Remuneration Report

Service Contracts
In line with our policy, all Executive Directors have service contracts which are terminable by either party with 12 months’ notice. Appointment of
Non-executive Directors are subject to letters of appointment. The Chairman’s appointment is subject to six months’ notice by either party; for other
Non-executive Directors, notice is one month. Both Executive Directors and Non-executive Directors are required to be re-elected at each AGM.

Single Total Figure of Remuneration – Executive Directors (audited information)
The following table shows a single total figure in respect of qualifying service for 2017/18, together with comparative figures for 2016/17:

Salary
£’000

Benefits in kind
£’000

APP
£’000

LTPP
£’000

Pension
£’000

Other
£’000

Total
£’000

17/18

16/17

17/18

16/17

17/18

16/17

17/18

16/17

17/18

16/17

17/18

16/17

17/18

16/17

Andrew Bonfield

John Pettigrew

Dean Seavers

Nicola Shaw

Total

768

887

771

484

749

825

800

338

497

787

919

740

383

684

762

694

315

1,993

1,362

1,361

–

4,154

2,291

1,553

–

2,910

2,712

192

605

2,829

2,455

4,716

7,998

230

266

142

145

783

225

248

145

101

719

–

485

3,847

3,519

3,038

1,026

5,872

4,623

3,217

1,262

11,430

14,974

Notes:
Salary: Base salaries were last increased on 1 June 2017. The decrease in Dean Seavers’ salary is due to exchange rate fluctuations ($1.3578:£1 for 2017/18 and $1.2767:£1 for 2016/17).
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 a driver when required. For John Pettigrew the 2016/17 figure (as disclosed last year) includes reimbursement for costs relating to his relocation to London on appointment
as CEO. Nicola Shaw’s 2016/17 benefits in kind figure has been restated to include a Sharesave option award granted on 22 December 2016. There were no Sharesave options granted to
any of the Executive Directors during 2017/18.
LTPP: The 2015 LTPP is due to vest in July 2018. The average share price over the three months from 1 January 2018 to 31 March 2018 of 787.8 pence ($55.16 per ADS) has been applied.
The 2016/17 LTPP figure includes both the 2013 LTPP award and the 2014 LTPP award due to a change in the vesting period of four years to three years between the 2013 LTPP and 2014
LTPP awards. The 2016/17 LTPP figures have been restated because last year they were estimated using the average share price (January-March 2017) and they now include the actual
share price on vesting at 1 July 2017 and all dividend equivalent shares. Due to a lower share price at vesting of 954.0 pence versus the estimate of 963.0 pence, the actual value at vesting
was £18,911 and £13,146 lower than the estimate (last year) for Andrew Bonfield and John Pettigrew, respectively. Due to a higher ADS price at vesting of $62.40 versus the estimate of
$59.84, the actual value at vesting was £52,065 higher than the estimate (last year) for Dean Seavers.
Other: The 2016/17 ‘Other’ figure for Nicola Shaw of £485,000 was disclosed last year and is a cash payment to compensate her for the forfeiture of short-term and long-term incentive
cash awards at her former employer that were due to vest in June 2016.
Nicola Shaw: Nicola Shaw joined on 1 July 2016 and therefore the 2016/17 figures stated for salary, benefits in kind, APP and pension are all prorated based on her start date.
Additionally, Nicola did not receive a 2015 LTPP award.

National Grid Annual Report and Accounts 2017/18Corporate Governance | Directors’ Remuneration ReportPerformance against targets for APP 2017/18 (audited information)
APP awards are earned by reference to the financial year and paid in June. Financial measures determine 70% of the APP and individual objectives
determine 30% of the APP.

Payment of the APP award is made in shares (50% of the award) and cash (50%). Shares (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. Threshold, target and stretch performance levels for the financial
measures are pre-determined by the Committee and pay out at 0%, 50% and 100% of the maximum potential for each part and on a straight-line
basis in between threshold and target performance and target and stretch performance. Target and stretch performance levels for the individual
objectives are also pre-determined by the Committee and an assessment of the performance relative to the target and stretch performance levels and
outturns is made at the end of the performance year on each objective.

The outcomes of APP awards earned for financial and individual performance in 2017/18 are summarised in the table below:

Performance measure

CEO and Finance Director

Adjusted EPS (p/share)

Group RoE (%)

Executive Director, UK

UK Value Added (£m)

UK RoE (%)
(Percentage points above average
allowed regulatory return)

Executive Director, US

US Value Added ($m)

US RoE (%)

All Executive Directors

Individual objectives (%)

Proportion of

max opportunity

Threshold

Target

Stretch

Actual

Proportion of
max achieved

35%

30%

54.5

11.2

57.0

11.6

59.5

12.0

1,566

1,619

1,672

1.75

1,463

8.5

2.00

1,513

8.7

2.25

1,562

8.9

58.0

12.32

1,629

2.04

1,513

8.92

70.0%

100.0%

59.4%

58.0%

50.0%

100.0%

Detail expanded in tables below

74%-81%

Notes:
Adjusted EPS: Technical adjustments have been made reducing adjusted EPS actual by 1.5 pence to account for the impact of timing and storms, and reducing the target by
0.7p to reflect the net effect of currency adjustments, certain actuarial assumptions on pensions, scrip dividend uptake, and to ensure consistency of accounting treatment.
Group RoE: Technical adjustments have been made to increase the target by 0.2% primarily to reflect the net effect of currency adjustments and to ensure consistency of
accounting treatment.
UK RoE and Value Added: No adjustments have been made.
US RoE and Value Added: No adjustments have been made to US RoE. The target for US Value Added has been increased by $109m to ensure consistency of accounting treatment.

For 2017/18, the individual objectives of the Executive Directors when taken together were designed to deliver against each of our business priorities.
Performance against these objectives is set out in the tables below and overleaf. As with the financial measures, the achievement of ‘stretch’
performance and ‘target’ performance results in 100% and 50% respectively of the maximum payout.

Andrew Bonfield

Individual objective & performance commentary

Optimising the performance of our core UK business
• Financing workstream has been a key input to RIIO-T2 regulatory framework development
• UK Business Services launched during the year
• £4 billion of capital was returned to investors following the partial sale of UK Gas Distribution

Evolving the business for the future
• Operating model successfully revised and new Business Excellence function and communities of practice developed and implemented,

resulting in third party cost reductions

• New Business Management System (BMS) and business reporting process implemented to ensure effective and efficient controls across

the company

• Improvement on identification and development of high potential talent. Further strides yet to be made in relation to employee enablement

Optimising the performance of our core US business
• Facilitated successful rate case filings for Massachusetts Gas and Rhode Island Gas during the year
• Financing successfully executed with cost savings against budget
• Responded quickly to US tax reform, updating rates for jurisdictions with rate filings underway

Optimising the performance of the Group
• Sarbanes-Oxley refresh has been completed
• Further work is required on delivering more efficient controls and in improving employee enablement

Seeking out growth opportunities in a disciplined way
• Board approved a finance strategy for growth with stakeholder communication plan developed

Summary

Weighting

30%

25%

20%

15%

10%

Andrew Bonfield has provided excellent support to the US and UK businesses on regulatory agreements this year. Strong management of the balance sheet has
been exhibited, as has a focus on driving efficiency. Additionally, Andrew has delivered on business initiatives key to delivering on National Grid’s business strategy
for the future. Further work is required on ensuring controls are efficient and in improving employee enablement.
As a result, the proportion of maximum achieved is 75%.

National Grid Annual Report and Accounts 2017/18Corporate GovernanceCorporate Governance | Directors’ Remuneration ReportDirectors’ Remuneration Report continued

John Pettigrew

Individual objective & performance commentary

Evolving the business for the future
• Clear articulation of long-term drivers of success for leadership teams and external stakeholders: Customer first; Performance Optimisation;

Growth; Evolve for the Future

• Clear succession plans in place, improvement in identification and development of high potential talent
• Implemented revised operating model and new Business Excellence function
• Further work remains on strengthening employee enablement and to implement outcomes of a talent strategy review that was conducted

Optimising the performance of our core US business
• Guided on the development of new regulatory strategy. NIMO rate filing completed with allowed RoE of 9% and capex allowance of $2.5 billion

over three years

• Established new Capital Delivery function taking learnings from UK, to deliver construction projects more efficiently
• Developed organisation structure and processes that benefit from synergies of scale. US jurisdictions reinforced with stronger and more

focused operational support

Optimising the performance of our core UK business
• Drove strong focus on performance optimisation, a key theme for all senior leadership engagement
• Supported UK with positive management of key stakeholder engagement and debate on regulatory frameworks, e.g. SO legal separation,

RIIO-T2, though there is more work to be done to achieve an acceptable position on Hinkley-Seabank

• Ensured recognition of the Group’s significant customer-led investment and strong operational performance

Seeking out growth opportunities in a disciplined way
• New National Grid Ventures team set up to support evolution of National Grid and drive incremental growth opportunities with similar risk/

reward profile

• Established National Grid’s voice as a leader in the energy industry, with National Grid Ventures now fully recognised internally and externally

giving National Grid more visibility and leadership on the energy transition agenda

• Further progress to be made in emerging technologies

Summary

Weighting

30%

25%

20%

John Pettigrew has had a strong year, cementing himself as a leader to the Company and in the industry, developing National Grid as both a purpose and performance
led organisation, successfully engaging with regulatory and political change, and achieving significant milestones across the individual businesses, including the creation of
a new business in National Grid Ventures. Further work is to be done on Hinkley-Seabank arrangements, implementing our talent strategy and emerging technologies.
As a result, the proportion of maximum achieved is 78%.

Dean Seavers

Individual objective & performance commentary

Optimising the performance of our core US business
• Achieved new rates for 80% of the core US business, including Niagara Mohawk, Massachusetts Gas, and Rhode Island Gas
• Capital Delivery function implemented
• Improvements have been made in relation to safety, with a reduction in switching errors year on year, although there remains more to do

on injury rates

• Material work order issues were addressed during the year, although further process efficiencies are still to be implemented

Evolving the business for the future
• An advanced analytics team has been set up and a refreshed US strategy was developed and agreed
• Filings made on Electric Vehicles in all jurisdictions
• New agile reporting process has improved ability to assess and manage performance against key indicators
• Employees’ understanding of the Company’s purpose, vision and values has been embedded, as evidenced by results from employee surveys
• Succession plans were delivered; however, further improvements are needed in relation to employee enablement and driving a performance

culture through continuous feedback

Putting our customers first
• In-year milestones for the Gas Enablement programme met to improve customer service
• Implementation of a pilot programme to significantly improve end-to-end customer experience
• While operational model changes have been introduced, more needs to be done to fully embed them

Summary

Weighting

40%

35%

25%

Dean Seavers has delivered strong results in the execution of a sustainable improvement plan, driven by the advancement of the regulatory strategy and successful rate
filings. In addition to achievement of his objectives, Dean led a strong response to major winter storms with good restoration times for the vast majority of our customers.
Further work is needed on process efficiency implementation and in embedding the operational model changes.
As a result, the proportion of maximum achieved is 81%.

National Grid Annual Report and Accounts 2017/18Corporate Governance | Directors’ Remuneration ReportNicola Shaw

Individual objective & performance commentary

Optimising the performance of our core UK business
• A continued focus on efficiency and removing unnecessary processes contributed to savings in the year
• New electricity balancing system delivered, though some implementation aspects have taken time to resolve
• The safety action plan was implemented in line with the agreed milestones and focus on a ‘generative’ safety culture was good during the year;

however, there remains more to do in this area

• Cadent performing in line with expectation and risk managed appropriately

Putting our customers first
• Customer satisfaction scores have been strong and customer journeys have been mapped, albeit slightly behind planned timescales
• There has been a constructive approach to RIIO-T2 with Ofgem, with our focus of putting consumers at the centre of the process in line
with Ofgem’s proposals. There is more work to be done to achieve an acceptable position on Hinkley-Seabank, despite the work of the
UK regulation team

• The new regime for System Operator incentives has been agreed with Ofgem and work on the legal separation of the electricity System

Operator has progressed in line with expectation

Evolving the business for the future
• Strategic initiatives are on track, employees’ understanding of the Company’s purpose, vision and values is strong based on employee

survey results, and strides have been made in the identification and development of high potential talent in the organisation

• Further work remains in relation to realising the potential of emerging technologies to enhance the effectiveness of our operations

and strengthening employee engagement and enablement

Seeking out growth opportunities in a disciplined way
• Gas Transmission published the ‘Future of Gas’ as well as developing an asset health plan to the agreed timescales, with implementation

on track

Summary

Weighting

50%

20%

10%

Nicola Shaw has led the UK business strongly this year. There has been strong progress on key initiatives relating to safety and focus on our customers, with good
progress too on regulatory topics other than Hinkley-Seabank. Further work is to be done in certain areas, e.g. improving employee engagement and enablement.
As a result, the proportion of maximum achieved is 74%.

2017/18 APP as a proportion of base salary
The overall APP award and its composition based on financial performance and individual performance for each Executive Director is shown
as a proportion of salary.

Note: US RoE and US Value Added pertain to Dean Seavers Executive Director, US and UK RoE and UK Value Added pertain to Nicola Shaw, Executive Director, UK.

US/UK RoEUS/UK Value AddedGroup RoEAdjusted EPSIndividual43.75%43.75%30.63%43.75%37.5%28.13%125%MaxActualMaxActualMaxActualMaxActual102.51%43.75%43.75%30.63%37.5%43.75%29.25%103.63%43.75%43.75%43.75%37.5%21.88%30.38%96.01%Andrew BonfieldJohn PettigrewDean SeaversAPP amount £960,034£787,306£1,108,594£919,069£963,281£739,87743.75%43.75%25.98%37.5%25.38%27.75%79.11%Nicola Shaw £604,688£382,695125%125%125%National Grid Annual Report and Accounts 2017/18Corporate GovernanceCorporate Governance | Directors’ Remuneration ReportDirectors’ Remuneration Report continued

2017/18 LTPP performance (audited information)
The LTPP value included in the 2017/18 single total figure relates to vesting of the conditional LTPP awards granted in 2015.

2015 LTPP
The 2015 award is determined by performance over the three years ending 31 March 2018 of RoE (50% weighting) and Value Growth (50%
weighting), which will vest on 1 July 2018. LTPP vesting is based upon the position held at the award date. For the UK and US Executive Directors in
position at the award date, the RoE component is split equally between Group RoE and UK and US RoE respectively. For the Chief Executive Officer
and the Finance Director in position at the award date, the entire RoE component is based on Group RoE.

The performance achieved against the 2015 LTPP award performance targets was:

Performance measure

Group RoE (50% weighting for the
CEO and Finance Director, 25%
weighting for the Executive Director, UK
and the Executive Director, US)

UK RoE (25% weighting for the
Executive Director, UK)

US RoE (25% weighting for the
Executive Director, US)

Value Growth (50% weighting)

Threshold –
20% vesting

Maximum –
100% vesting

Actual/expected
vesting

Actual/expected proportion of
maximum achieved

11.0%

12.5% or more

12.1%

78.7%

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

2.7 percentage points above
the average allowed
regulatory return

90% of the average
allowed regulatory return

105% of the average
allowed regulatory return

88% of the average
allowed regulatory return

10.0%

12.0% or more

11.83%

75.5%

0.0%

93.3%

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 in
2016/17 as this event occurred within the 2015-2018 performance period measured.

The amounts expected to vest under the 2015 LTPP for the performance period ended on 31 March 2018 and included in the 2017/18 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 2018 to 31 March 2018
of 787.80 pence ($55.16 per ADS).

Andrew Bonfield

John Pettigrew

Dean Seavers (ADSs)

Original number
of share awards

in 2015 LTPP

259,668

179,072

44,801

Overall vesting
percentage

Number of

awards vesting

Number of dividend
equivalent shares

86.0%

85.2%

66.3%

223,314

152,569

29,714

29,697

20,289

3,786

Total value of awards
vesting and dividend
equivalent shares
(£’000)

1,993

1,362

1,361

Note:
Nicola Shaw was appointed in July 2016 and therefore did not receive any share awards under the 2015 LTPP.

Total pension benefits (audited information)
Andrew Bonfield, John Pettigrew and Nicola Shaw received a cash allowance in lieu of participation in a pension arrangement. Dean Seavers
participated in a defined contribution pension arrangement in the US. There are no additional benefits on early retirement. The values of these
benefits, received during this year, are shown in the single total figure of remuneration table.

In addition, John Pettigrew has accrued defined benefit (DB) entitlements. He opted out of the DB arrangement on 31 March 2016 with a deferred
pension and lump sum payable from the normal retirement date. At 31 March 2018, John Pettigrew’s accrued DB pension was £153,761 per annum
and his accrued lump sum was £461,285 payable at the normal retirement date of 26 October 2031. There have been no increases to these benefits
over the period, other than an increase for inflation due under the Scheme rules and legislation. Under the terms of the Scheme, were he to satisfy the
Scheme’s ill health requirements, an unreduced pension would be payable or he may receive an unreduced pension from age 50 if made redundant.
A lump sum death in service benefit may also be payable.

National Grid Annual Report and Accounts 2017/18Corporate Governance | Directors’ Remuneration ReportSingle total figure of remuneration – Non-executive Directors (audited information)
The following table shows a single total figure in respect of qualifying service for 2017/18, together with comparative figures for 2016/17:

Nora Mead Brownell

Jonathan Dawson

Pierre Dufour

Therese Esperdy

Sir Peter Gershon

Paul Golby

Ruth Kelly

Mark Williamson

Total

Fees
£’000

Other emoluments
£’000

Total
£’000

2017/18

2016/17

2017/18

2016/17

2017/18

2016/17

106

136

511

100

128

102

133

499

105

124

–

106

112

151

585

104

134

105

103

145

567

113

129

1,206

1,154

120

103

1,326

1,257

Notes:
Therese Esperdy: Fees for 2017/18 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.
Ruth Kelly: Ruth Kelly stepped down at the 2017 AGM.
Other emoluments: 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. Amounts for travel expenses relating to both 2017/18 and 2016/17 have been provided in the table above (the figures for 2016/17 have been restated to include
these). Nora Mead Brownell, Pierre Dufour and Therese Esperdy are US-based Non-executive Directors.

The total emoluments paid to Executive and Non-executive Directors in the year was £12.8 million (2016/17: £19.5 million). The 2016/17 figure includes
both the 2013 and 2014 LTPP award for Executive Directors.

2017 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 (28 June 2017) (£9.738 per share
and $63.94 per ADS) and is used to determine the value of the awards granted.

Basis of award

Face value ‘000

Proportion vesting at
threshold performance

Number of shares

Performance period

end date

Andrew Bonfield

John Pettigrew

Dean Seavers (ADSs)

Nicola Shaw

300% of salary

350% of salary

300% of salary

£2,314

£3,147

$3,152

£1,471

20%

237,610

323,205

49,294 (ADSs)

151,109

31 March 2020

Note:
The 2017 LTPP grant will vest on 1 July 2020.

Performance conditions for LTPP awards granted during the financial year (audited information)

Performance measure

Group RoE

Group Value Growth

Conditional share awards granted – 2017

for all Executive Directors

Weighting

50%

Threshold
20% vesting

11.0%

10.0%

Maximum
100% vesting

12.5% or more

12.0% or more

Payments for loss of office (audited information)
There were no payments made for loss of office during 2017/18.

National Grid Annual Report and Accounts 2017/18Corporate GovernanceCorporate Governance | Directors’ Remuneration ReportDirectors’ Remuneration Report continued

Payments to past Directors (audited information)
Steve Holliday stepped down from the Board and retired from the Company on 22 July 2016. Mr Holliday held awards over shares that were prorated
for time served. 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. The vesting of all these awards will occur at the normal vesting dates subject to satisfaction of their specified performance
conditions at that time.

Past Director

Steve Holliday

2013 LTPP (RoE portion)

2014 LTPP

Tom King (ADSs)

2014 LTPP

Nick Winser

Prorated number of
share awards

Overall vesting
percentage

Number of

awards vesting

Number of dividend
equivalent shares

Total value of awards
vesting and dividend
equivalent shares
(£’000)

57,711

271,425

50.00%

84.89%

11,917

67.44%

28,855

230,412

8,036

9,725

5,553

33,066

1,206

1,871

328

2,514

452

111

2013 LTPP (RoE portion)

19,451

50.00%

Note:
The 2013 LTPP (RoE portion) is the remaining 25% of the 2013 LTPP award which vested on 1 July 2017. The 2014 LTPP fully vested on 1 July 2017.

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 2018, had headroom of
3.95% and 7.73% 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. 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 2018 and the salary
used to calculate the value of the shareholding is the gross annual salary as at 31 March 2018.

Andrew Bonfield has met his shareholding requirement of 400% of base salary. As John Pettigrew, Dean Seavers and Nicola Shaw are relatively new
in post, they have not yet met the requirement, but are expected to do so in 2021, 2021 and 2023 respectively. They will not be allowed to sell shares
until this requirement is met.

The normal vesting dates for the conditional share awards subject to performance conditions are 1 July 2018, 1 July 2019 and 1 July 2020 for the
2015 LTPP, 2016 LTPP and 2017 LTPP respectively. In April 2018, a further 18 shares were purchased on behalf of each of Andrew Bonfield, John
Pettigrew and Nicola Shaw and again in May 2018. These 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 2018 and
16 May 2018.

Directors

Executive Directors

Andrew Bonfield

John Pettigrew

Dean Seavers (ADSs)

Nicola Shaw

Non-executive Directors

Nora Mead Brownell (ADSs)

Jonathan Dawson

Pierre Dufour (ADSs)

Therese Esperdy (ADSs)

Sir Peter Gershon

Paul Golby

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 2015, 2016

& 2017)

400%

500%

400%

–

607,810

358,897

26,764

8,270

4,583

36,705

3,700

1,508

90,128

2,291

47,460

632%

320%

144%

13%

n/a

3,230

4,286

–

4,070

–

718,161

785,087

138,542

273,273

–

Notes:
Andrew Bonfield: On 31 March 2018 Andrew Bonfield held 3,230 options granted under the Sharesave Plan. 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. 2,022 options were granted at a value of 749 pence and they can be exercised at 749 pence per share
between April 2020 and September 2020. For Andrew Bonfield, the number of conditional share awards subject to performance conditions is as follows: 2015 LTPP: 259,668; 2016
LTPP: 220,883; 2017 LTPP: 237,610. However, in consequence of his resignation only the 2015 LTPP is now eligible for vesting in July 2018.
John Pettigrew: On 31 March 2018 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: 2015 LTPP: 179,072; 2016 LTPP: 282,810;
2017 LTPP: 323,205.
Dean Seavers: The number of conditional share awards subject to performance conditions is as follows: 2015 LTPP: 44,801; 2016 LTPP: 44,447; 2017 LTPP: 49,294.
Nicola Shaw: On 31 March 2018 Nicola Shaw held 4,070 options granted under the Sharesave Plan. 4,070 options were granted at a value of 737 pence per share and they can
be exercised at 737 pence per share between April 2022 and September 2022. The number of conditional share awards subject to performance conditions is as follows: 2016 LTPP:
122,164; 2017 LTPP: 151,109.
Dean Seavers, Nora Mead Brownell, Pierre Dufour 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 2017/18Corporate Governance | Directors’ Remuneration ReportExternal 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 2018:

Andrew Bonfield

John Pettigrew

Nicola Shaw

Company

Kingfisher plc

Rentokil Initial (from 1 January 2018)

Ellevio AB (until 31 December 2018)
International Consolidated Airlines Group S.A.
(from 1 January 2018)

Retained fees (£)

£83,917

£15,000

£34,398 (SEK 377,434)
£26,498 (Euros 30,000)

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
which was sold on 31 March 2017, including the subsequent special dividend.

4,074

3,735

-3%

1,578

1,648

1,575

1,522

-12%

666

589

-5%

1,029

974

Payroll costs

Dividends

Tax

Net interest

Capital expenditure

2016/17 £m

2017/18 £m

Note:
The Dividends figure for 2016/17 has been restated at £1,575 million (from £1,572 million) to reflect the actual value of dividends paid.

Performance graph
This chart shows National Grid plc’s nine-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.

Total shareholder return

350

300

250

200

150

100

155.79

167.17

123.65

131.11

100.00

197.94

190.98

173.94

155.42

248.64

223.74

289.19

309.95

263.10

211.45

227.33

211.21

262.78

251.39

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 31/03/18

National Grid plc

FTSE 100 Index

Source: FactSet

Note:
The data source for the above graph has been changed for 2017/18 from Thomson Reuters to FactSet. This has not resulted in any changes to prior year figures.

National Grid Annual Report and Accounts 2017/18Corporate GovernanceCorporate Governance | Directors’ Remuneration ReportDirectors’ Remuneration Report continued

Chief Executive’s pay in the last nine financial years
Steve Holliday was CEO throughout the seven-year period from 2009/10 to 2015/16. John Pettigrew became CEO on 1 April 2016.

2009/10

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16

2016/17

2017/18

Steve Holliday

John Pettigrew

Total single figure of remuneration
(£’000)

3,931

3,738

3,539

3,170

4,801

4,845

5,151

4,623

3,519

APP (proportion of maximum awarded)

95.33%

81.33%

68.67%

55.65%

77.94%

94.80%

94.60%

73.86%

82.90%

PSP/LTPP (proportion of maximum
vesting)

100.00%

65.15%

49.50%

25.15%

76.20%

55.81%

63.45%

90.41%

85.20%

Notes:
Total single figure 2017/18: The figure for 2017/18 for John Pettigrew is explained in the single total figure table for Executive Directors.
Total single figure 2016/17: The 2016/17 single figure includes both the 2013 LTPP and the 2014 LTPP and has been restated to reflect actual share price at 1 July 2017, consistent
with comparative figures shown in this year’s single total figure of remuneration table.
Vesting: The vesting outcome for 2016/17 of 90.41% reflects the combined (actual) vesting performance outcomes for the 2013 LTPP (90.00%) and the 2014 LTPP (90.58%) as stated
last year.
PSP/LTPP plans: Prior to 2014, LTPP awards were made under a different LTI framework which incorporated a four-year performance period for the RoE element of the awards.
The last award under this framework was made in 2013 and was fully vested in 2017. Awards made from 2014 are subject to a three-year performance period, the first of these
awards vested in 2017.

Percentage change in CEO’s remuneration
The table below shows how the percentage change in the CEO’s salary, benefits and APP between 2016/17 and 2017/18 compares with the
percentage change in the average of each of those components of remuneration for non-union employees in the UK and the US. The Committee
views this group as the most appropriate comparator group, as this group excludes employees represented by trade unions whose pay and benefits
are negotiated with each individual union.

John Pettigrew

Non-union employees (average increase)

Salary

Taxable benefits

APP

£’000
2017/18

£’000

2016/17

887

825

Change

7.5%

2.8%

£’000
2017/18

£’000

2016/17

Change

£’000
2017/18

£’000

2016/17

497

-82.9%

919

762

3.9%

Change

20.6%

1.9%

Notes:
Chief Executive Officer: Taxable benefits for John Pettigrew in 2016/17 include a one-time relocation benefit.
Non-union employees: Pay data for US employees have been converted at $1.3578:£1.

Statement of implementation of remuneration policy in 2018/19
The remuneration policy adopted at the 2017 AGM will be implemented during 2018/19 as described below.

Salary
Salary increases, subject to individual performance, 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 2018

From 1 June 2017

£771,285

£953,205

$1,082,144

£519,930

£771,285

£899,250

$1,050,625

£490,500

Note:
Andrew Bonfield: Andrew will be leaving at the end of July 2018 and therefore is not eligible to receive a 1 June 2018 salary increase.

APP measures for 2018/19
The APP targets are considered commercially sensitive and consequently will be disclosed in the 2018/19 Directors’ Remuneration Report.

John Pettigrew

Adjusted EPS

Group RoE

Individual objectives

Weighting

Dean Seavers and Nicola Shaw

35%

30%

UK or US Value Added

UK or US RoE

UK or US Operating Profit

Individual objectives

Increase

n/a

6.0%

3.0%

6.0%

Weighting

23.3%

30.0%

National Grid Annual Report and Accounts 2017/18Corporate Governance | Directors’ Remuneration ReportPerformance measures for LTPP to be awarded in 2018

Group RoE

Value Growth

Weighting
for all Executive Directors

50%

Threshold

20% vesting

11.0%

10.0%

Maximum

100% vesting

12.5% or more

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.

Role

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 2018
£’000

From 1 June 2017
£’000

525.0

22.5

67.5

79.7

10.5

19.8

12.8

513.0

22.0

66.0

78.0

10.3

19.4

12.5

Increase

2.3%

2.2%

1.9%

2.1%

2.4%

Advisors to the Remuneration Committee
The Committee received advice during 2017/18 from independent consultants as follows: firstly, New Bridge Street (NBS), a trading name for Aon
Hewitt Ltd (part of Aon plc), provided advice until stepping down on 31 July 2017; secondly, following a competitive tendering process, Willis Towers
Watson was selected by the Committee to become its independent advisor from 23 October 2017.

Willis Towers Watson is a member of the Remuneration Consultants Group and have signed up to that group’s code of conduct. The Committee is
satisfied that any potential conflicts were appropriately managed.

Work undertaken by NBS and Willis Towers Watson in their role as independent advisors to the Committee included providing market information for
the Executive Directors and other senior employees and governance matters. This work has incurred fees of £14,063 for NBS, and of £136,283 for
Willis Towers Watson. The Committee also received legal advice from Linklaters LLP and this has incurred fees of approximately £15,000.

The Committee reviews the objectivity and independence of the advice it receives from its advisors each year. It is satisfied that they all provided
credible and professional advice.

The Committee considers the views of the Chairman on the performance and remuneration of the CEO, and of the CEO on the performance and
remuneration of the other members of the Executive Committee. The Committee is also supported by the Group General Counsel and Company
Secretary who acts as Secretary to the Committee, the Group HR Director, the Group Head of Reward, and as required the Group Head of Pensions
and Group Financial Controller. No other advisors have provided significant services to the Committee in the year.

Voting on 2016/17 Directors’ Remuneration Policy at 2017 AGM
The voting figures shown refer to votes cast at the 2017 AGM and represent 61.62% of the issued share capital. In addition, shareholders holding
9.4 million shares abstained.

Number of votes

Proportion of votes

For

2,060,765,320

97.54%

Against

52,015,518

2.46%

Voting on 2016/17 Directors’ Remuneration Report at 2017 AGM
The voting figures shown refer to votes cast at the 2017 AGM and represent 61.18% of the issued share capital. In addition, shareholders holding
24.5 million shares abstained.

Number of votes

Proportion of votes

For

1,828,221,066

87.15%

Against

269,507,926

12.85%

The Directors’ Remuneration Report has been approved by the Board and signed on its behalf by:

Jonathan Dawson
Committee Chairman
16 May 2018

National Grid Annual Report and Accounts 2017/18Corporate GovernanceCorporate Governance | Directors’ Remuneration ReportFinancial Statements

Contents

Introduction to the Financial Statements

Directors’ statement and independent auditor’s reports
82 Statement of Directors’ responsibilities
83
92 Report of independent registered public accounting firm

Independent auditor’s report

Consolidated financial statements under IFRS
Primary statements
94 Consolidated income statement
97 Consolidated statement of comprehensive income
98 Consolidated statement of changes in equity
99 Consolidated statement of financial position
101 Consolidated cash flow statement

Notes to the consolidated financial statements –
analysis of items in the primary statements
104 Note 1 – Basis of preparation and recent accounting developments
108 Note 2 – Segmental analysis
112 Note 3 – Operating costs
114 Note 4 – Exceptional items and remeasurements
116 Note 5 – Finance income and costs
117 Note 6 – Tax
123 Note 7 – Earnings per share (EPS)
124 Note 8 – Dividends
125 Note 9 – Discontinued operations
127 Note 10 – Goodwill
128 Note 11 – Other intangible assets
129 Note 12 – Property, plant and equipment
130 Note 13 – Other non-current assets
131 Note 14 – Financial and other investments
132 Note 15 – Investments in joint ventures and associates
135 Note 16 – Derivative financial instruments
139 Note 17 – Inventories and current intangible assets
139 Note 18 – Trade and other receivables
140 Note 19 – Cash and cash equivalents
140 Note 20 – Borrowings
142 Note 21 – Trade and other payables
142 Note 22 – Other non-current liabilities
142 Note 23 – Pensions and other post-retirement benefits
151 Note 24 – Provisions
153 Note 25 – Share capital
154 Note 26 – Other equity reserves
155 Note 27 – Net debt

Notes to the consolidated financial statements –
supplementary information
157 Note 28 – Commitments and contingencies
158 Note 29 – Related party transactions
158 Note 30 – Financial risk management
165 Note 31 – Borrowing facilities
166 Note 32 – Subsidiary undertakings, joint ventures and associates
169 Note 33 – Sensitivities
171 Note 34 – Additional disclosures in respect of guaranteed securities
177 Note 35 – Post balance sheet events

Company financial statements under FRS 101
Basis of preparation
178 Company accounting policies

Primary statements
180 Company balance sheet
181 Company statement of changes in equity

Notes to the Company financial statements
182 Note 1 – Fixed asset investments
182 Note 2 – Debtors
182 Note 3 – Creditors
183 Note 4 – Derivative financial instruments
183 Note 5 – Investments
183 Note 6 – Borrowings
183 Note 7 – Share capital
183 Note 8 – Shareholders’ equity and reserves
183 Note 9 – Parent Company guarantees
183 Note 10 – Audit fees

Financial Statements | Contents

National Grid Annual Report and Accounts 2017/18Introduction 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 2), and showing how the disclosures reflect this strategy.

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 94-103. 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
96-98, 100, 102-103, 111, 121-122, 124, 131 and 141.

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 83) 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 (see 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.

Financial Statements | Introduction to the Financial Statements

National Grid Annual Report and Accounts 2017/18

Financial 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 in accordance with applicable law
and regulations.

Company law requires the Directors to prepare financial statements for
each financial year. Under that law the directors are required to prepare
the Group financial statements in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union and
Article 4 of the IAS Regulation and have elected to prepare the Parent
Company financial statements in accordance with United Kingdom
Generally Accepted Accounting Practice (United Kingdom Accounting
Standards and applicable law), including FRS 101 ‘Reduced Disclosure
Framework’. Under company law the directors must not approve the
accounts unless they are satisfied that they give a true and fair view of
the state of affairs of the Group and Parent Company and of the profit
or loss of the Group and Parent Company for that period.

In preparing the Group financial statements, International Accounting
Standard 1 requires that directors:
• properly select and apply accounting policies;
• present information, including accounting policies, in a manner

that provides relevant, reliable, comparable and understandable
information;

• provide additional disclosures when compliance with the specific

requirements in IFRSs are insufficient to enable users to understand
the impact of particular transactions, other events and conditions
on the entity’s financial position and financial performance; and

• make an assessment of the Group’s ability to continue as a

going concern.

In preparing the Parent Company financial statements, the Directors
are required to:
• select suitable accounting policies and then apply them consistently;
• make judgments and accounting estimates that are reasonable

and prudent;

• state whether applicable UK Accounting Standards have been

followed, subject to any material departures disclosed and explained
in the financial statements; and

• prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Group and Parent Company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the Group and Parent Company on a consolidated

and individual basis, and to enable them to ensure that the consolidated
financial statements comply with the Companies Act 2006. They are also
responsible for safeguarding the assets of the Parent 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
42 and 43, confirms that:
• to the best of their knowledge, the consolidated financial statements
and the parent company financial statements, which have been
prepared in accordance with IFRSs 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,
are fair, balanced and understandable and provides the information
necessary for shareholders to assess the Company’s position and
performance, business model and strategy.

This responsibilities statement was approved by the Board and signed
on its behalf.

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 2–79
and 184–217, was approved by the Board and signed on its behalf.

Strategic Report
The Strategic Report, comprising pages 2–39, was approved by the
Board and signed on its behalf.

By order of the Board

Alison Kay
Group General Counsel & Company Secretary

16 May 2018
Company number: 4031152

Financial Statements | Statement of Directors’ responsibilities

National Grid Annual Report and Accounts 2017/18Independent auditor’s report
to the Members of National Grid plc

Report on the audit of the financial statements

Opinion
In our opinion:
• the financial statements give a true and fair view of the state of the
Group’s and of the Company’s affairs as at 31 March 2018 and of
the Group’s profit for the year then ended;

• the Group financial statements have been properly prepared in

accordance with International Financial Reporting Standards (IFRS)
as adopted by the European Union and IFRSs as issued by the
International Accounting Standards Board (IASB);

• the Company financial statements have been properly prepared in
accordance with United Kingdom Generally Accepted Accounting
Practice including Financial Reporting Standard 101 ‘Reduced
Disclosure Framework’; 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.

We have audited the financial statements of National Grid plc
(the ‘Company’) and its subsidiaries (the ‘Group’) which comprise:
• the consolidated income statement;
• the consolidated statement of comprehensive income;
• the consolidated statement of changes in equity;
• the consolidated statement of financial position;
• the consolidated cash flow statement;
• the related notes 1 to 35 of the consolidated financial statements;
• the Company accounting policies;
• the Company balance sheet;
• the Company statement of changes in equity; and
• the related notes 1 to 10 of the Company financial statements.

We have not audited the unaudited commentaries on:
• the consolidated income statement;
• the consolidated statement of comprehensive income;
• the consolidated statement of changes in equity;

Summary of our audit approach

• the consolidated statement of financial position;
• the consolidated cash flow statement;
• the results of our principal operations by segment – continuing

operations (accompanying note 2);

• tax (accompanying note 6);
• dividends (accompanying note 8);
• financial and other investments (accompanying note 14); or
• borrowings (accompanying note 20).

The financial reporting framework that has been applied in the preparation
of the Group financial statements is applicable law and IFRS as adopted
by the European Union and IFRSs as issued by the IASB. The financial
reporting framework that has been applied in the preparation of the
Company financial statements is applicable law and United Kingdom
Accounting Standards, including FRS 101 ‘Reduced Disclosure
Framework’ (United Kingdom Generally Accepted Accounting Practice).

Basis for opinion
We conducted our audit in accordance with International Standards on
Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under
those standards are further described in the auditor’s responsibilities
for the audit of the financial statements section of our report.

We are independent of the Group and the Company in accordance
with the ethical requirements that are relevant to our audit of the financial
statements in the UK, including the Financial Reporting Council’s (FRC)
Ethical Standard as applied to listed public interest entities, and we
have fulfilled our other ethical responsibilities in accordance with these
requirements. We confirm that the non-audit services prohibited by the
FRC’s Ethical Standard were not provided to the Group or the Company.

We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our opinion.

Key audit matters

The key audit matters that we identified in the current year are in relation to:
• the internal control refresh programme;
• IT user access management controls;
• environmental provisions;
• net pension obligations;
• revenue recognition;
• classification of capital costs; and
• treasury derivative transactions.

Materiality

Scoping

First year audit
transition

Two key audit matters identified by the previous auditor and described in their report for the year ended 31 March 2017 are not included
in our report for the year ended 31 March 2018. These were:
• accounting for the disposal of the UK Gas Distribution business – the transaction was completed and accounted for in
the previous financial year and accordingly it does not have such a significant impact on the result for the current period; and
• US financial controls which have been subject to a programme of process and control improvements – this programme has
been subsumed within the group-wide internal control refresh programme which we have identified as a key audit matter
in the current period.

This year we have identified IT user access management controls as a new key audit matter.

Within this report, any key audit matters which are similar to those identified by the previous auditor in the prior year are identified with
New key audit matters are identified with

We have set materiality for the current year at £130 million based on 5% of profit before tax, exceptional items and remeasurements
for the year.

Our scope covered eight components of the Group. Of these, four were subjected to a full-scope audit whilst the remaining four were
subject to specific procedures on certain account balances.

The year ended 31 March 2018 is our first as auditor of the Group. We have been independent since 1 January 2017 and commenced
our transition from that date. The transition has included:
• establishing a detailed audit transition plan;
• shadowing the previous auditor through the 31 March 2017 audit, including attendance at key meetings;
• holding transition workshops with key component finance and operational management, Internal Audit, the treasury function,

the pensions, tax and legal teams and Group finance management in order to inform our audit planning;

• holding a Group audit planning meeting with our component audit teams;
• performing Group audit team oversight visits to components throughout the transition process;
• reviewing the previous auditor’s audit file; and
• reviewing historic accounting policies and accounting judgements through discussion with management and review and challenge

of management’s papers and supporting documentation.

This process built our understanding of the Group which informed our risk assessment process, from which we identified the risks
of material misstatement to the Group’s financial statements.

We presented our audit plan and transition observations to the Group’s senior management and to the Audit Committee throughout the
transition process, including in a transition report and audit plan presented in September 2017 and updates to our audit plan in January
2018 and March 2018.

Financial Statements | Independent auditor’s report

National Grid Annual Report and Accounts 2017/18Financial StatementsIndependent auditor’s report
to the Members of National Grid plc continued

Conclusions relating to going concern, principal risks and viability statement

Going concern
We have reviewed the Directors’ statement in note 1 to the Financial Statements about whether they considered it appropriate
to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the
Group’s and Company’s ability to continue to do so over a period of at least twelve months from the date of approval of the
Financial Statements.

We confirm that we have
nothing material to report,
add or draw attention to in
respect of these matters.

We are required to state whether we have anything material to add or draw attention to in relation to that statement required
by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent with our knowledge obtained in the audit.

Principal risks and viability statement
Based solely on reading the Directors’ statements and considering whether they were consistent with the knowledge we obtained
in the course of our audit, including the knowledge obtained in the evaluation of the Directors’ assessment of the Group’s and the
Company’s ability to continue as a going concern, we are required to state whether we have anything material to add or draw
attention to in relation to:
• the disclosures on pages 18-21 that describe the principal risks and explain how they are being managed or mitigated;
• the Directors’ confirmation on page 26 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 Directors’ explanation on pages 26-27 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 are also required to report whether the Directors’ statement relating to the prospects of the Group required by Listing Rule
9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit.

We confirm that we have
nothing material to report,
add or draw attention to in
respect of these matters.

Key audit matters
Key audit matters are those matters that, in our professional judgement,
were of most significance in our audit of the Financial Statements of the
current period and include the most significant assessed risks of material
misstatement (whether or not due to fraud) that we identified. These
matters included those which had the greatest effect on: the overall audit
strategy; the allocation of resources in the audit; and directing the efforts
of the engagement team.

Throughout the course of our audit we identify risks of material
misstatement (‘risks’) and classify those risks according to their severity.
In assigning a category we consider both the likelihood of a risk of a
material misstatement and the potential magnitude of a misstatement

Internal control refresh programme

in making the assessment. Certain risks are classified as ‘significant’ or
‘higher’ depending on their severity. The category of the risk determines
the level of evidence we seek in providing assurance that the associated
financial statement item is not materially misstated.

We have described herein the risk categorisation assigned to each of
our key audit matters and the reasoning behind that judgement.

These matters were addressed in the context of our audit of the Financial
Statements as a whole, and in forming our opinion thereon, and we do
not provide a separate opinion on these matters.

Key audit matter
description

Throughout the period the Group has undertaken a refresh of its internal control over financial reporting framework including the scoping,
risk assessment, process and design of control documentation, and the evaluation and testing of controls (‘the refresh programme’).

As a result of the programme undertaken by management a significant focus has been placed on the understanding of the Group’s
processes and the assessment of the design, implementation and operating effectiveness of the Group’s internal control framework.

The assessment of the Group’s control framework is a key part of our audit and core to the Group’s ability to maintain financial records,
prepare financial statements in accordance with IFRSs and, where material, prevent or detect unauthorised acquisition, use or disposition
of the Group’s assets. In particular, in the current period, the refresh programme has meant that the control environment has evolved
through the period and accordingly has required additional resource to perform procedures on new or enhanced controls as they are
designed and implemented by the Group.

The internal control refresh programme is pervasive to the Group’s operations and accordingly the level of risk ascribed to our work in this
area is dependent on the nature and complexity of the control itself and the balance or balances within the Financial Statements to which
the control relates.

Refer additionally to the Audit Committee’s discussion of significant issues on pages 50-53.

In performing our assessment of the Group’s control environment we have performed a number of procedures, including:
• detailed walkthroughs of the processes associated with each of the Group’s key business cycles including financial reporting,

revenue, purchase-to-pay, order-to-cash and property, plant and equipment;

• identification of the audit risks impacted by a change in process or control during the period;
• testing of relevant controls where the control has changed in the period following the refresh programme;
• identifying reports and other information used in the operation of relevant controls and performing appropriate procedures to

determine their accuracy and completeness;

• identifying relevant IT applications, infrastructure and operating systems used in the operation of the Group’s relevant controls

and performing testing of the general IT controls over those systems, including the use of our automated controls testing tool; and
• where deficiencies in internal control were identified testing compensating controls or performing alternative procedures, including

modifying our audit approach, where appropriate.

How the scope of our
audit responded to
the key audit matter

Key observations

We identified weaknesses relating to user access controls over some IT systems in both the UK and US which could have had
a negative impact on other controls by allowing unauthorised access to the financial reporting systems. As a result of our findings
we identified a further key audit matter in relation to IT user access management controls discussed below.

Financial Statements | Independent auditor’s report

National Grid Annual Report and Accounts 2017/18IT user access management controls

Key audit matter
description

Due to the reliance on IT systems within the Group, controls over access rights are critical to maintaining an effective control environment.
As a result of our procedures over internal control, we identified a number of deficiencies relating to segregation of duties, control over
privileged access and user access management, both within the Group and the Group’s IT service organisations (together ‘access
deficiencies’). The access deficiencies identified increase the risk that individuals within the Group and at service organisations had
inappropriate access during the period. The existence of deficiencies during the year and at the year end result in an increased risk
that data and reports from the affected systems are not reliable. The issues identified impact all components of the Group but
particularly the UK-based operations.

The Group put in place a programme of activities to remediate the deficiencies during the year which is ongoing at year end.

The IT user access management controls are pervasive to the Group’s operations and accordingly the level of risk ascribed to our
work in this area is dependent on the nature and complexity of the control itself and balances within the financial statements the
control addresses.

Refer additionally to the Audit Committee’s discussion of significant issues on pages 50-53.

How the scope of our
audit responded to
the key audit matter

In responding to the identified deficiencies in user access we have:
• obtained and reviewed reports on the internal controls implemented and operated by relevant service organisations and, where

necessary, directly tested certain third party controls or identified business controls that do not rely on information that is potentially
affected by the IT access management controls which mitigate reported control issues;

• determined the impact that utilising inappropriate levels of access could feasibly have had on the affected systems including assessing
the likelihood of inappropriate user access impacting the financial statements, and testing controls implemented by management to
identify instances of the use of inappropriate access; and

• identified and tested alternative or compensating controls where such controls existed within the Group’s control framework or where
no such controls existed extended the scope of our audit such that we have not placed reliance on controls for information produced
or held in the impacted systems, including expanding the scope of our substantive testing.

Key observations

We confirmed that the mitigating business controls address the risk of a material misstatement to the financial statements. Furthermore,
we conducted a largely substantive audit in the UK Electricity Transmission (UKET), UK Gas Transmission (UKGT) and US Regulated
components and all other areas impacted by the access deficiencies. We have, however, continued to rely on revenue and environmental
provisions controls in the UKET and UKGT components.

Environmental provisions

Key audit matter
description

The Group’s environmental provisions relate to a number of sites owned and managed by the Group together with certain US sites, which
are no longer owned. In the US, the most significant provisions relate to former manufacturing gas plant facilities that are subject both to
state and federal law. In the UK, the most significant portion of the provision relates to old gas manufacturing and electricity sites.

Environmental provisions as at 31 March:

UK sites

US sites

2018

2017

Discounted
£m
213

Undiscounted
£m
235

1,318

1,531

1,410

1,645

Real
discount
rate
1%

Discounted
£m
242

Undiscounted
£m
270

1,479

1,721

1,619

1,889

Real
discount
rate
1%

The key audit matter arises from a number of estimation uncertainties that exist in relation to the environmental provisions including the
impact of regulation, the form and extent of remediation needed at each site including timing and cost assumptions thereon, methods
and technologies used in remediation and the discount rates applied to the cash flow assumptions.

We have identified the discount rate used in calculating the present value of the environmental provisions as a ‘significant’ risk within our
audit plan due to the level of sensitivity, estimation uncertainty and judgement involved in determining the rate used. Other assumptions
have been assessed as ‘higher’ or ‘lower’ risk within our audit plan depending on the significance of the judgement and the sensitivity
of those assumptions within the calculation.

Refer additionally to notes 24 and 33 of the financial statements for further discussion on environmental provisions.

How the scope of our
audit responded to
the key audit matter

We have tested the effectiveness of controls over the determination of the discount rate and additionally in the US over the cash flow
assumptions.

The expenditure required to remediate the sites is determined by management with the support of their internal and external specialists.
We have reviewed the reports provided by those specialists and agreed they are reflected in the expenditure forecasts prepared. We have
also assessed the independence, objectivity and competence of the internal and external specialists used.

We have challenged the methodology that management has adopted for calculating the discount rate with reference to common practice
and publicly available papers released by relevant organisations. In addition, we have independently calculated an appropriate discount
rate range and used this to benchmark management’s rate. We have performed a sensitivity analysis of the environmental provisions using
our independently calculated range. We have also tested the mechanical accuracy of the calculations performed including the reversal or
utilisation of provisions in the current period.

Key observations

The results of our testing were satisfactory – we consider the estimated costs of remediation for identified sites to be reasonable and that
the discount rate used by management is within our internally developed ‘reasonable range’, albeit the rate used for provisions in the US
is towards the upper end of that range.

Financial Statements | Independent auditor’s report

National Grid Annual Report and Accounts 2017/18Financial StatementsIndependent auditor’s report
to the Members of National Grid plc continued

Net pension obligations

Key audit matter
description

Substantially all of the Group’s employees are members of one of a number of pension schemes in either the UK or US. These pension
schemes include both defined benefit and defined contribution schemes. Healthcare and life insurance benefits are also provided to
eligible retired US employees.

We have identified a key audit matter specifically in relation to the assumptions used in the valuations of the defined benefit schemes which
as at 31 March 2018 represent an obligation of £23.7 billion and scheme assets of £23.9 billion.

The key judgements relating to the pension obligations include inflation assumptions, discount rates, mortality assumptions and future
salary changes applied to active members.

The setting of these assumptions is complex and changes to these assumptions can have a material impact on the value of pension
liabilities. The increase or decrease in the Group’s net asset position caused by a change in each of the key assumptions is set out below:

Pensions and other post-retirement benefits (pre-tax):

UK discount rate change of 0.5%

US discount rate change of 0.5%

UK RPI rate change of 0.5%

UK long-term rate of increase in salaries change of 0.5%

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%

2018

Income
statement
£m

–

Net
assets
£m

1,075

623

965

588

359

448

2017

Income
statement
£m

Net
assets
£m

1,305

669

1,114

673

365

510

The pension schemes also include a number of ‘level 3’ assets, being those assets which do not have market-observable inputs to use
in calculating their fair value. As such there is significant judgement in determining the fair value of these assets including the selection of
the valuation methodology and other key assumptions.

We have identified the discount rates applied to net pension obligations as a ‘significant’ risk within our audit plan due to the sensitivity
of the balance to changes in the rate and the level of estimation uncertainty and judgement involved in determining the level of liability.
We have assessed other areas of the net pension obligations to be ‘higher’ or ‘lower’ risk in our audit plan.

We additionally note that during the year there has been a change in the specialist actuary used by the Group to calculate net pension
obligations for the UK schemes.

Refer additionally to note 23 for further discussion on the Group’s net pension obligations and note 33 for sensitivity analysis.

How the scope of our
audit responded to
the key audit matter

We have tested the operating effectiveness of controls over the pension assets and liabilities.

We have engaged our actuarial experts to assist in testing of the discount rate used in calculating the pension liabilities. We have
independently calculated an appropriate discount rate and compared this to management’s rate. We have performed a sensitivity
analysis of the pension liabilities using our independently calculated rate.

Further, our actuarial experts have assisted us in benchmarking and challenging the other assumptions used by management in
determining the value of pension liabilities particularly focusing on inflation, salary growth and mortality rates; this has included comparing
the inputs and assumptions used in determining the valuation of the Group’s schemes to those used in comparable pension plans and
our internal benchmarks.

Additionally, we have considered the independence, objectivity and competence of the independent actuaries engaged by management
to perform valuations of the relevant schemes.

We have performed audit procedures relating to the assets held within the pension schemes through seeking third party confirmation
from asset managers and/or custodians or other supporting evidence as appropriate. Additionally, we have engaged internal specialists
to challenge the valuation of scheme assets, in particular the ‘level 3’ assets. Our work has included reviewing publicly available information
on these assets, comparing to internal benchmarks and reconciling inputs used by management to determine the asset values.

Key observations

We judge the discount rate and other key pension assumptions used by management to be in the middle of our internally developed
reasonable range.

Financial Statements | Independent auditor’s report

National Grid Annual Report and Accounts 2017/18Revenue recognition

Key audit matter
description

In the year to 31 March 2018 the Group has recognised revenue of £15.3 billion (31 March 2017: £15.0 billion, 31 March 2016: £13.2 billion)
from four segments: UKET, UKGT, US Regulated and National Grid Ventures and Other (‘Other’).

Revenue profile by segment for the past three years (£m)

3,957

4,410

4,126

UKET

UKGT

938

981

1,082

US
Regulated

Other

824

713

770

7,493

8,931

9,272

2,000

4,000

6,000

8,000

10,000

2016

2017

2018

We have identified aspects of revenue recognition as ‘higher’ risks in our audit plan within the UKET, UKGT and US Regulated components
of our audit. We have rebutted the presumption set out in Auditing Standards that there is a significant risk of fraud in revenue recognition
given the nature of the Group’s primary revenue streams. As the first year of our audit tenure however, significant resource has been
invested in understanding the regulatory environment and methodologies used and this has led us to identify revenue recognition as
a key audit matter.

Revenue has historically been predictable across the segments which is a function of both the nature of the business and, where relevant,
the regulatory price controls.

In the UKET and UKGT components, the Group is a transmission owner and operator and operates in a highly regulated market.
Accordingly there is little judgement with regard to revenue recognition.

In the US Regulated component, the Group sells electricity and gas directly to private consumers. Whilst the Group operates in a highly
regulated market this requires estimates to be included within the Financial Statements concerning the level of accrued income to be
recognised for energy delivered but not yet billed. The methodology used for this is well established and the Group has a significant
amount of historic data on which to base such estimates.

Refer additionally to note 2(a).

How the scope of our
audit responded to
the key audit matter

We have tested the effectiveness of controls over revenue recognition including the controls over the calculation of accrued income.

In the UKET and UKGT components, we have developed analytical tools designed to use third party data and known regulatory prices to
recalculate the Group’s revenue for the period. We have tested whether the amounts charged to customers are consistent with the rates
which are set by the Group’s regulators.

In the US Regulated component, we have used analytical tools to develop expectations for relevant revenue streams based on volumes
and knowledge of the rates set by regulators adjusted for other factors such as the impact of weather. Specific focus has been given to
the impact of rate changes resulting from new rate proceedings.

Key observations

On the basis of the procedures performed we are satisfied that the Group has recognised revenue in accordance with its policy and
IAS 18 Revenue.

Financial Statements | Independent auditor’s report

National Grid Annual Report and Accounts 2017/18Financial StatementsIndependent auditor’s report
to the Members of National Grid plc continued

Classification of capital costs

Key audit matter
description

The Group has an extensive capital investment programme with capital expenditure across the Group totalling £3.9 billion (2017: £4.1 billion).

Judgement is required to determine whether certain activities should be treated as operating expenditure (maintenance or network repair)
or capital expenditure (additions of or enhancement to network assets).

The Group has significant experience in determining the classification of expenditure as operating cost or capital expenditure. We do not
consider this to be a ‘significant’ risk for our audit. We have however identified the accuracy of capital expenditure as a ‘higher’ risk within
our audit plan as there is judgement in classifying expenditure albeit the level of judgement is not as significant as in other areas of the
financial statements. Due to the magnitude and significance of the asset base to the Group’s operations we do consider it to be a key
audit matter requiring the allocation of significant audit resource.

Additionally we note that the previous auditor identified a risk in the US Regulated business that the controls over:
• the classification of costs between property, plant and equipment and expenses in relation to small value work orders; and
• the transfer of assets in the course of construction to assets in service may not have been working effectively throughout the

previous period.

Refer to note 12 for further discussion of the Group’s capital expenditure.

How the scope of our
audit responded to
the key audit matter

We have tested the effectiveness of controls over the classification of expenditure and the transfer between assets in the course
of construction and property, plant and equipment.

We have tested an audit sample of additions to assets which are classified as assets in the course of construction and validated
their classification as capital expenditure.

Key observations

The results of our procedures were satisfactory and on the basis of these procedures we conclude that the capital expenditure recorded
is appropriate.

In particular we have not found any of the issues highlighted by the previous auditor in their 31 March 2017 audit opinion.

Treasury derivative transactions

Key audit matter
description

At 31 March 2018 the Group had total borrowings of £26.6 billion (31 March 2017: £28.6 billion). The Group mitigates the exposure to
interest rate and foreign exchange rate risks with risk management activities including the use of derivatives such as cross-currency
and variable interest rate swaps. The Group designates derivatives in hedge relationships where possible.

The valuation of the derivative portfolio requires management to make certain assumptions and judgments in particular around the
valuation methodologies adopted and the discount rate to be applied to forecast cash flows.

The portfolio also includes ‘level 3’ derivatives for which no directly observable inputs for their fair value are available (such as a quoted
market price). Accordingly there is judgement involved in determining the methodology used to fair value these derivatives.

We have identified the accuracy and valuation of certain treasury derivatives as a ‘higher’ risk within our audit plan due to the level
of judgement and the technical nature of determining derivative values. We have also identified certain of the hedge accounting
requirements adopted for certain of the Group’s derivative financial instruments as a ‘higher’ risk.

Refer additionally to notes 16 and 30 to the financial statements for further detail on derivatives.

How the scope of our
audit responded to
the key audit matter

We have tested the design, implementation and operating effectiveness of controls over the recording and valuation of derivative
financial instruments. This has included testing of the review-type controls performed by management over the valuations and challenge
of the estimates made.

In conjunction with our treasury specialists we have tested a sample of the models used by management, including a challenge of the
assumptions therein, to confirm the appropriateness of the valuation methodology adopted and the assumptions applied. Where relevant
we have obtained third party confirmations to test the completeness and accuracy of the information held within the Group’s treasury
management system.

We have analysed the hedge effectiveness testing performed by management and tested the disclosure within the financial statements.

In the performance of our testing we have considered the requirements of IAS 39 Financial Instruments: Recognition and Measurement
to determine whether the appropriate accounting treatment has been adopted by the Group.

Key observations

The results of our procedures were satisfactory and on the basis of these procedures we conclude that the accounting for derivatives,
including the Group’s use of hedge accounting, is appropriate.

Financial Statements | Independent auditor’s report

National Grid Annual Report and Accounts 2017/18Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of
a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and
in evaluating the results of our work.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Group financial statements

Company financial statements

Materiality

Component
materiality

Materiality has been set at £130 million for the current year. In 2017
the previous auditor used a materiality of £175 million.

The majority of the audit work is performed at a component level and is
audited to a lower materiality. The component performance materiality
used ranges from £24.5 million to £52.5 million – refer to the table below
for more details.

Basis for
determining
materiality

We have set materiality for the current year at £130 million based on 5%
of profit before tax, exceptional items and remeasurements for the year
as disclosed in the consolidated income statement.

Rationale for the
benchmark applied

In 2017 the previous auditor also set materiality on the same basis.

We consider profit before tax, exceptional items and remeasurements
to be a critical benchmark of the performance of the Group. We consider
it appropriate to adjust for exceptional items and remeasurements as
these items are one-off in nature or relate to derivative items which are
volatile and not reflective of the underlying performance of the Group.
We consider this measure suitable having considered also other
benchmarks: our materiality equates to 3.8% of operating profit; 0.2%
of gross non-current assets; and 0.7% of net assets.

Materiality has been set at £125 million for the current year.

Component materiality is not relevant to our audit of the
Company financial statements.

We have set materiality for the current year at £125 million.

We have set materiality based on 2% of the net assets of
the Company.

As the Company is non-trading and operates primarily as a
holding company for the Group’s trading entities we believe the
net asset position is the most appropriate benchmark to use.

We have agreed with the Audit Committee that we would report
to the Committee all audit differences in excess of £6.3 million
(in 2017 the previous auditor used a threshold of £9 million), as
well as differences below that threshold which, in our view, warrant
reporting on qualitative grounds. We also report to the Audit Committee
on disclosure matters that we identified when assessing the overall
presentation of the financial statements.

We set performance materiality for the Group at £87.5 million which
represents 67% of our materiality. We use performance materiality
to determine the extent of our testing; it is lower than materiality to
reflect our assessment of the risk of errors remaining undetected
by our sample testing and uncorrected in the financial statements.

In the performance of our audit we also allocated a specific component
materiality to each of the component audit teams. We use component
performance materiality to determine the extent of our testing at
each component individually; it is lower than the Group performance
materiality to reduce the risk of the aggregation of errors across
components remaining undetected in the Group’s financial statements.
The performance materialities used for each component reflect the
fact that this is our first year as auditor and are summarised below:

UKET

UKGT

US Regulated

Quadgas HoldCo

£m

43.8

35.0

52.5

24.5

Financial Statements | Independent auditor’s report

National Grid Annual Report and Accounts 2017/18Financial StatementsIndependent auditor’s report
to the Members of National Grid plc continued

An overview of the scope of our audit
The following significant components of the Group were identified in
our audit planning: UKET, UKGT, US Regulated and Quadgas HoldCo.
Each of these components was subjected to a full-scope audit for
Group reporting purposes, completed to the individual component
materiality level discussed above.

As each of the financially significant components maintains separate
financial records we have engaged component auditors, from the
Deloitte member firms in the US or the UK, to perform procedures
at these components on our behalf. This approach also allows us
to engage local auditors who have appropriate knowledge of local
regulations to perform this audit work. We have issued detailed
instructions to the component auditors and directed and supervised
their work through a number of visits to the component auditors during
the planning and performance stages of our audit alongside frequent
remote communication and review of their work.

Our oversight of component auditors focused on the planning of their
audit work and key judgements made. In particular our supervision and
direction focused on the work performed in relation to key audit matters
including internal controls (including general IT controls), environmental
provisions, pensions, revenue recognition, capital expenditure and
derivative financial instruments. As part of our monitoring of component
auditors we have also attended key local audit meetings.

Other information

Additionally our audit planning identified the following non-significant
components where we consider there to be a reasonable possibility of
material misstatement in specific items within the Financial Statements:
UK Property, NG Insurance, the Isle of Grain LNG terminal and the
Metering business. Accordingly, we have directed component auditors
to perform specific audit procedures in relation to material account
balances and analytical procedures on the respective income statements
and statements of financial position for these components. The work
on these components is carried out by the same component audit
team as for the UKET and UKGT components.

In addition to the work performed at a component level the Group
audit team also performs audit procedures on corporate activities
such as treasury and pensions as well as on the consolidated Financial
Statements themselves, including the consolidation, Financial Statement
disclosures and risk assessment work on components not included
elsewhere in the scope of our audit. The Group audit team also
co-ordinates certain procedures performed on key areas, such as
environmental provisions, where audit work is performed by both
the Group and component audit teams.

The Directors are responsible for the other information. The other information comprises all information included in the Annual
Report other than the Financial Statements and our auditor’s report thereon.

We have nothing to report
in respect of these matters.

Our opinion on the Financial Statements does not cover the other information and, except to the extent otherwise explicitly stated
in our report, we do not express any form of assurance conclusion thereon.

In connection with our audit of the Financial Statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the Financial Statements or our knowledge obtained in the audit or
otherwise appears to be materially misstated.

If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is
a material misstatement in the Financial Statements or a material misstatement of the other information. If, based on the work we
have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

In this context, matters that we are specifically required to report to you as uncorrected material misstatements of the other
information include where we conclude that:
• Fair, balanced and understandable – the statement given by the Directors that they consider the Annual Report and Financial

Statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders
to assess the Group’s position and performance, business model and strategy, is materially inconsistent with our knowledge
obtained in the audit; or

• Audit Committee reporting – the section describing the work of the Audit Committee does not appropriately address matters

communicated by us to the Audit Committee; or

• Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the Directors’ statement
required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing
provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure
from a relevant provision of the UK Corporate Governance Code.

Financial Statements | Independent auditor’s report

National Grid Annual Report and Accounts 2017/18Responsibilities of Directors
As explained more fully in the Statement of Directors’ responsibilities, the Directors are responsible for the preparation of the Financial Statements and
for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the Financial Statements, the Directors are responsible for assessing the Group’s and the Company’s ability to continue as a going
concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either
intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the Financial Statements as a whole are free from material misstatement, whether
due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise
from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of these Financial Statements.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.

Use of our report
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit
work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report
and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and
the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Report on other legal and regulatory requirements

Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006.

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 year 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 the light of the knowledge and understanding of the Group and of the Company and their environment obtained in the course of the audit,
we have not identified any material misstatements in the Strategic Report or the Directors’ Report.

Matters on which we are required to report by exception

Adequacy of explanations received and accounting records
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 are not in agreement with the accounting records and returns.

We have nothing to report
in respect of these matters.

Directors’ remuneration
Under the Companies Act 2006 we are also required to report if, in our opinion, certain disclosures of Directors’ remuneration
have not been made or the part of the Directors’ Remuneration Report to be audited is not in agreement with the accounting
records and returns.

We have nothing to report
in respect of these matters.

Other matters
Auditor tenure
We became independent and commenced our audit transition on 1 January 2017. Following the recommendation of the Audit Committee, we were
appointed by the Shareholders at the Annual General Meeting on 31 July 2017 to audit the Financial Statements for the year ending 31 March 2018.
The period of total uninterrupted engagement including previous renewals and reappointments of the firm is accordingly one year.

Consistency of the audit report with the additional report to the Audit Committee
Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISAs (UK).

Douglas King FCA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor

London
United Kingdom
16 May 2018

Financial Statements | Independent auditor’s report

National Grid Annual Report and Accounts 2017/18Financial StatementsReport of independent registered public accounting firm

To the Shareholders and the Board of Directors
of National Grid plc
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of National
Grid plc and subsidiaries (the ‘Company’) as at 31 March 2018, based
on criteria established in Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). In our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting
as at 31 March 2018, based on criteria established in Internal Control
– Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) (PCAOB), the
consolidated financial statements as at and for the year ended 31 March
2018, of the Company and our report dated 16 May 2018, expressed
an unqualified opinion on those financial statements.

Basis for opinion
The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying internal control over financial reporting section appearing
on page 193 of the Additional Information section. Our responsibility is
to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to
the Company in accordance with the US federal securities laws and
the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.

We conducted our audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures
as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.

Definition and limitations of internal control over
financial reporting
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 (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the company; (2) 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 (3) 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.

Deloitte LLP
London
United Kingdom
16 May 2018

Financial Statements | Report of independent registered public accounting firm

National Grid Annual Report and Accounts 2017/18Report of independent registered public accounting firm

To the Shareholders and the Board of Directors
of National Grid plc
Opinion on the financial statements
We have audited the accompanying consolidated statement of
financial position of National Grid plc and subsidiaries (the ‘Company’)
as at 31 March 2018, the conslidated income statement, the statement
of comprehensive income, the consolidated statement of changes in
equity and the consolidated cash flow statement for the year ended
31 March 2018, and the related notes (collectively referred to as the
‘financial statements’). We have not audited the unaudited commentaries
on: the consolidated income statement, the statement of comprehensive
income, the consolidated statement of changes in equity, the consolidated
statement of financial position, the cash flow statement, the results of our
principal operations by segment – continuing operations (accompanying
note 2), tax (accompanying note 6), dividends (accompanying note 8),
financial and other investments (accompanying note 14), and borrowings
(accompanying note 20), which are not part of the financial statements.
In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as at 31 March 2018,
and the results of its operations and its cash flows for the year ended
31 March 2018, in conformity with International Financial Reporting
Standards as issued by the International Accounting Standards Board.

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as at 31 March 2018,
based on criteria established in Internal Control — Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated 16 May 2018, expressed
an unqualified opinion on the Company’s internal control over
financial reporting.

Basis for opinion
These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audit. We are a public
accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the
US federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud. Our
audit included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audit
also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audit
provides a reasonable basis for our opinion.

Deloitte LLP
London
United Kingdom
16 May 2018

The first accounting period we audited was the 12 months ended
31 March 2018. In 2017, we began preparing for audit firm transition.

Financial Statements | Report of independent registered public accounting firm

National Grid Annual Report and Accounts 2017/18Financial StatementsConsolidated income statement
for the years ended 31 March

2018

Continuing operations

Revenue

Operating costs

Operating profit

Finance income

Finance costs

Share of post-tax results of joint ventures and associates

Profit before tax

Tax

Profit after tax from continuing operations

Loss after tax from discontinued operations

Total profit for the year (continuing and discontinued)

Attributable to:

Equity shareholders of the parent

Non-controlling interests1

Earnings per share (pence)

Basic earnings per share (continuing)

Diluted earnings per share (continuing)

Basic earnings per share (continuing and discontinued)

Diluted earnings per share (continuing and discontinued)

Notes

2(a)

3,4

2(b)

4,5

15,4

2(b),4

1. The non-controlling interests for the year ended 31 March 2018 relate to continuing operations.

20171

Continuing operations

Revenue

Operating costs

Operating profit

Finance income

Finance costs

Share of post-tax results of joint ventures and associates

Profit before tax

Tax

Profit after tax from continuing operations

Profit after tax from discontinued operations

Total profit for the year (continuing and discontinued)

Attributable to:

Equity shareholders of the parent

Non-controlling interests2

Earnings per share (pence)

Basic earnings per share (continuing)

Diluted earnings per share (continuing)

Basic earnings per share (continuing and discontinued)

Diluted earnings per share (continuing and discontinued)

Notes

2(a)

3,4

2(b)

4,5

2(b),4

Before exceptional items
and remeasurements
£m

Exceptional items and
remeasurements
(see note 4)
£m

15,250

(11,793)

3,457

154

(1,128)

167

2,650

(589)

2,061

–

2,061

2,060

–

229

(207)

1,473

1,531

(41)

1,490

–

Before exceptional items and
remeasurements
£m

Exceptional items and
remeasurements
(see note 4)
£m

15,035

(11,262)

3,773

(1,082)

2,807

(666)

2,141

606

2,747

–

(565)

–

(58)

–

(623)

292

(331)

5,378

5,047

5,048

(1)

1. Comparatives have been re-presented to reflect the change to a columnar format (see note 1).
2. The non-controlling interests for the year ended 31 March 2017 relate to discontinued operations.

Total
£m

15,250

(11,757)

3,493

154

(899)

(40)

2,708

884

3,592

(41)

3,551

3,550

103.8

103.3

102.6

102.1

Total
£m

15,035

(11,827)

3,208

(1,140)

2,184

(374)

1,810

5,984

7,794

7,795

(1)

48.1

47.9

207.1

206.2

Financial Statements | Consolidated income statement

National Grid Annual Report and Accounts 2017/1820161

Continuing operations

Revenue

Operating costs

Operating profit

Finance income

Finance costs

Share of post-tax results of joint ventures and associates

Profit before tax

Tax

Profit after tax from continuing operations

Profit after tax from discontinued operations

Total profit for the year (continuing and discontinued)

Attributable to:

Equity shareholders of the parent

Non-controlling interests2

Earnings per share (pence)

Basic earnings per share (continuing)

Diluted earnings per share (continuing)

Basic earnings per share (continuing and discontinued)

Diluted earnings per share (continuing and discontinued)

Notes

2(a)

3,4

2(b)

4,5

2(b),4

4,6

Before exceptional items and
remeasurements
£m

Exceptional items and
remeasurements
(see note 4)
£m

13,212

(9,998)

3,214

(878)

2,417

(604)

1,813

576

2,389

2,386

–

(99)

–

(88)

177

116

205

–

1. Comparatives have been re-presented to reflect the change to a columnar format (see note 1).
2. The non-controlling interests for the year ended 31 March 2016 relate to both continuing and discontinued operations.

Total
£m

13,212

(9,987)

3,225

(977)

2,329

(427)

1,902

692

2,594

2,591

50.4

50.2

68.7

68.4

Financial Statements | Consolidated income statement

National Grid Annual Report and Accounts 2017/18Financial StatementsConsolidated income statement continued

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.

The commentary below relates to continuing operations only.

Revenue
Revenue for the year ended 31 March 2018 increased by £215 million
to £15,250 million. This increase was driven by higher revenues in
our US Regulated and NGV and Other businesses, partially offset by
lower revenues in our UK Electricity Transmission business. US
Regulated revenues were £341 million higher year-on-year including
increased pass-through costs, the impact of new rate plans and the
benefit of capital trackers, partially offset by an unfavourable impact
from foreign exchange. UK Electricity Transmission revenues
decreased by £285 million, including a reduction in pass-through costs,
the absence of last year’s recovery of outstanding timing balances and
higher adjustments this year to return the benefits of efficiencies and
lower required outputs to customers. Revenue from NGV and Other
businesses increased by £63 million, primarily driven by support
services provided to Cadent.

Operating costs
Operating costs for the year ended 31 March 2018 of £11,757 million
were £70 million lower than the prior year. This decrease in costs
included a £601 million decrease in exceptional items and
remeasurements, which is discussed below. Excluding exceptional
items and remeasurements, operating costs were £531 million higher,
principally due to higher pass-through costs in the US, £142 million
of major storm costs incurred in the US and higher depreciation as
a result of continued asset investment, partially offset by the impact
of movement in exchange rates.

Net finance costs
For the year ended 31 March 2018, net finance costs before
exceptional items and remeasurements were £55 million lower than
2016/17 at £974 million, mainly as a result of the impact of the weaker
US dollar, higher gains on the sale of financial assets and lower pension
interest expense due to a reduction in pension deficits, partially offset
by the impact of higher UK RPI inflation. Net finance costs in 2017/18
included remeasurement gains of £119 million on derivative financial
instruments used to hedge our borrowings, compared to £58 million
of remeasurement losses in 2016/17. In addition, during 2017/18
we had a £110 million remeasurement gain on a derivative financial
instrument relating to the put/call option over a 14% interest in
Quadgas HoldCo Limited.

Share of post-tax results of joint ventures and associates
Share of post-tax results of joint ventures and associates before
exceptional items and remeasurements was £104 million higher at
£167 million, primarily due to the inclusion of our 39% share of the
results of Cadent this year.

Tax
The tax charge on profits before exceptional items and remeasurements
of £589 million was £77 million lower than 2016/17. This was primarily
due to lower UK and US corporate tax rates partially offset by lower tax
credits in respect of prior years.

Exceptional items and remeasurements
Operating costs for the year ended 31 March 2018 included a £26 million
gain on settlement of outstanding balances related to the LIPA
Management Services Agreement, together with a net £10 million gain on
remeasurement of commodity contracts. In the previous year, operating
costs included £565 million of exceptional costs primarily associated with
environmental charges and gas holder decommissioning.

Finance costs for the year ended 31 March 2018 included a gain
of £229 million on financial remeasurements of derivative financial
instruments, including a £110 million gain on the put option to dispose
of a 14% interest in Cadent. For the previous year ended 31 March
2017, we incurred a loss of £58 million on financial remeasurements.

Share of post-tax results of joint ventures and associates for the
year ended 31 March 2018 included a £207 million exceptional loss,
principally relating to an impairment of the carrying value of our
investment in Cadent following the agreement to potentially dispose
of our remaining 25% holding.

Exceptional items and remeasurements relating to taxation for
2017/18 comprised a credit of £1,473 million, which primarily related
to a decrease in net deferred tax liabilities due to the reduction in
the US corporate tax rate.

Adjusted earnings and adjusted EPS from continuing
operations
Adjusted earnings and adjusted 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 note 7 for a reconciliation of adjusted basic
EPS to EPS.

Adjusted earnings and adjusted EPS from continuing operations1

£1,675m

£1,812m

43.9p

48.0p

£1,465m

38.4p

£2,141m

56.9p

£2,060m

59.5p

2013/14

2014/15

2015/16

2016/17

2017/18

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 2017/18 of 2.6p (5%).

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)

1.36

1.40

1.28

1.25

12%

2017/18

2016/17

% change

The movement in foreign exchange during 2017/18 has resulted in a
£536 million reduction in revenue, a £98 million reduction in adjusted
operating profit, and a £73 million reduction in operating profit.

Financial Statements | Consolidated income statement

National Grid Annual Report and Accounts 2017/18Consolidated statement of comprehensive income
for the years ended 31 March

Profit after tax from continuing operations

Other comprehensive income from continuing operations

Items from continuing operations that will never be reclassified to profit or loss:

Remeasurement gains of pension assets and post-retirement benefit obligations

Share of other comprehensive income of associates, net of tax1

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 in respect of cash flow hedges

Transferred to profit or loss in respect of cash flow hedges

Net (losses)/gains on available-for-sale investments

Transferred to profit or loss on sale of available-for-sale investments

Share of other comprehensive income of associates, net of tax1

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 for the year, net of tax from continuing operations

Other comprehensive income for the year, net of tax from discontinued operations

Other comprehensive income 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

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
£m

1,902

2018
£m

3,592

1,313

142

(530)

925

423

–

(277)

146

(505)

346

(3)

(30)

(73)

(554)

371

–

371

3,963

(41)

3,922

3,963

(41)

3,922

–

(6)

(25)

–

(34)

432

578

620

2,388

6,026

8,414

2,389

6,026

8,415

(1)

–

(1)

410

–

(95)

315

–

(39)

187

502

573

2,404

763

3,167

2,403

761

3,164

1. The share of other comprehensive income of associates relates to items of other comprehensive income of Cadent (investment through Quadgas HoldCo Limited), comprising £142 million
(2017: £nil; 2016: £nil) remeasurement gains on pension assets and post-retirement benefit obligations and a £5 million (2017: £nil; 2016: £nil) net gain in respect of cash flow hedges. Both
items are shown net of tax.

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 of pension assets and post-retirement benefit obligations
We had a net gain after tax of £925 million (2016/17: £146 million; 2015/16: £315 million) on our pension assets and other post-retirement benefit
obligations 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 loss of
£505 million (2016/17: £346 million gain; 2015/16: £69 million gain).

Net gains 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 £19 million (2016/17: £70 million; 2015/16: £88 million).

Financial Statements | Consolidated statement of comprehensive income

National Grid Annual Report and Accounts 2017/18Financial StatementsConsolidated statement of changes in equity
for the years ended 31 March

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

Profit for the year

Other comprehensive income/(loss) 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

Share-based payments

Tax on share-based payments

At 31 March 2018³

Retained
earnings
£m

Other equity
reserves1
£m

Total
shareholders’
equity
£m

Non-
controlling
interests
£m

(4,682)

11,962

Share
capital
£m

443

Share
premium
account
£m

1,331

–

(5)

–

447

1,326

–

(2)

–

14,870

2,591

414

3,005

(1,337)

–

(267)

(6)

–

16,305

7,795

7,879

(1,463)

–

(189)

(6)

–

159

–

2,591

573

3,164

(1,337)

(1)

(267)

(6)

–

(4,523)

13,555

–

536

–

7,795

620

8,415

(1,463)

–

(189)

(6)

–

449

1,324

22,582

(3,987)

20,368

–

(3)

–

3,550

925

4,475

(4,487)

–

(1,017)

(5)

–

(553)

–

3,550

372

3,922

(4,487)

–

(1,017)

(5)

Total
equity
£m

11,974

2,594

573

3,167

(1,337)

(1)

(267)

(6)

(5)

13,565

7,794

620

8,414

(1,463)

–

(189)

(6)

20,384

3,551

371

3,922

(4,487)

–

(1,017)

(5)

–

(5)

–

(1)

–

(1)

–

(1)

–

452

1,321

21,599

(4,540)

18,832

18,848

1. For further details of other equity reserves, see note 26.
2. Included within the share premium account are costs associated with scrip dividends.
3. Refer to note 7 for the effect of the share consolidation and the special dividend.

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 30.44 pence per share, bringing the total dividend for the year to 45.93 pence per share, a 3.7% increase
on 2016/17. 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, the Company paid a special interim dividend on 2 June 2017
of 84.375 pence per existing ordinary share ($5.4224 per existing American Depositary Share). This returned approximately £3,170 million
to shareholders.

Financial Statements | Consolidated statement of changes in equity

National Grid Annual Report and Accounts 2017/18Consolidated 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

2018
£m

5,444

899

20171
£m

6,096

923

39,853

39,825

115

1,409

899

2,168

1,319

603

1,100

2,083

1,567

52,106

52,266

341

2,798

114

2,694

405

329

6,681

58,787

(4,447)

(401)

(3,453)

(123)

(273)

403

2,728

317

8,741

246

1,139

13,574

65,840

(5,496)

(1,147)

(3,345)

(107)

(416)

(8,697)

(10,511)

(22,178)

(23,142)

(660)

(1,317)

(3,636)

(1,672)

(1,779)

(31,242)

(39,939)

18,848

452

1,321

21,599

(4,540)

18,832

(1,246)

(1,370)

(4,479)

(2,536)

(2,172)

(34,945)

(45,456)

20,384

449

1,324

22,582

(3,987)

20,368

18,848

20,384

1. Comparative amounts have been represented to reflect the reclassification of commodity derivative contracts from trade and other receivables and payables, and from other non-current assets

and liabilities to derivative financial assets and derivative financial liabilities (see note 16).

The consolidated financial statements set out on pages 94 to 177 were approved by the Board of Directors on 16 May 2018 and were signed on its
behalf by:

Sir Peter Gershon Chairman
Andrew Bonfield Finance Director

National Grid plc
Registered number: 4031152

Financial Statements | Consolidated statement of financial position

National Grid Annual Report and Accounts 2017/18Financial StatementsConsolidated statement of financial position continued

Unaudited commentary on consolidated statement of financial position

The consolidated statement of financial position shows all the
Group’s assets and liabilities at the year end. As a capital-intensive
business, we have significant amounts of physical assets and
corresponding borrowings.

Goodwill and other intangible assets
Goodwill and other intangibles decreased by £676 million to
£6,343 million as at 31 March 2018. This decrease primarily relates
to foreign exchange movements of £707 million with software additions
of £173 million mostly offset by software amortisation of £138 million.

Property, plant and equipment
Property, plant and equipment remained steady, showing a
£28 million increase to £39,853 million as at 31 March 2018. This
was principally due to additions of £3,901 million primarily related to
capital expenditure on the renewal and extension of our regulated
networks less depreciation of £1,392 million in the year, disposals
of £45 million and the impact of foreign exchange movements of
£2,428 million. See note 2 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 (including the non-current
corporate tax asset) have decreased by £70 million to £3,182 million.
This is primarily due to the net effect of the sale of our shares in
Dominion driving a decrease of £173 million in the year; additions
to our joint ventures and associates of £129 million partially offset
by a net reduction in our investment in Quadgas HoldCo Limited
of £17 million as a result of the impairment recorded, the actuarial
gains in the pension scheme and dividends received largely
offsetting profits; and the recognition of a non-current corporation
tax asset of £51 million in respect of tax repayments due in the US.

Inventories and current intangible assets and trade
and other receivables
Inventories and current intangible assets and trade and other
receivables have increased by £286 million, excluding £278 million
of foreign exchange, to £3,139 million as at 31 March 2018. The
increase in trade receivables reflects the colder winter, higher gas
costs and Balancing Services Incentives Scheme cost recoveries.
This is partly offset by a decrease in inventories following lower levels
of gas on hand held at 31 March 2018 due to the increased demand
at that time and to lower current intangible assets of £30 million
following the settlement of outstanding emissions credits.

Current tax balances
The net current tax liability of £9 million as at 31 March 2018 has
changed by £219 million from a net current tax asset of £210 million
as at 31 March 2017. This is primarily due to the current tax charge
in the year.

Deferred tax balances
Deferred tax balances have decreased by £843 million to £3,636 million
as at 31 March 2018. This is primarily due to the deferred tax credit
arising on the reduction in the US corporate tax rate partially offset
by the deferred tax charge on actuarial gains in reserves.

Trade and other payables
Trade and other payables have increased by £313 million, excluding
foreign exchange of £209 million, to £3,453 million. This is principally
due to an increase in storm accruals in the US.

Provisions and other non-current liabilities
Provisions and other non-current liabilities decreased by £324 million,
excluding foreign exchange of £265 million, to £3,369 million as at
31 March 2018.

This primarily relates to provisions, which decreased by £341 million
in the year excluding the impact of foreign exchange. The underlying
movements included £93 million utilisation and reversal of unused
provisions for costs associated with the sale of UK Gas Distribution
and £75 million utilisation of the environmental provision. In 2016/17
we recognised a provision of £150 million relating to a voluntary
distribution to be made for the benefit of energy customers from the
proceeds arising from the sale of UK Gas Distribution. During the year
we paid out £33 million, and the remaining balance of £117 million
is now classified within trade and other payables, reflecting our
Funding Agreement with Affordable Warmth Solutions.

Net debt
Net debt is the aggregate of cash and cash equivalents, current
financial and other investments, borrowings, and all derivative financial
assets and liabilities excluding commodity contract derivatives and
excluding the Further Acquisition Agreement derivative. See further
analysis with the consolidated cash flow statement on page 101
and further breakdowns and analysis within note 27.

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 surplus/(deficit)

As at 1 April 2017

Exchange movements

Current service cost

Net interest cost

Curtailments and other

Actuarial gains/(losses)

– on plan assets

– on plan liabilities

Employer contributions

As at 31 March 2018

Represented by:

Plan assets

Plan liabilities

UK
£m

(156)

–

(49)

(3)

(15)

103

1,074

150

1,104

15,330

(14,226)

1,104

US
£m

Total
£m

(1,777)

(1,933)

175

(144)

(62)

(20)

465

(329)

325

175

(193)

(65)

(35)

568

745

475

(1,367)

(263)

8,528

(9,895)

(1,367)

23,858

(24,121)

(263)

The principal movements in net obligations during the year include
net actuarial gains of £1,313 million and employer contributions of
£475 million. Actuarial gains include gains of £568 million arising on
plan assets resulting from actual asset returns being greater than
assumed returns which are based upon the discount rates at the
start of the year. Actuarial gains on plan liabilities of £745 million arose
primarily as a consequence of an increase in the real UK discount
rate giving an actuarial gain of £604 million combined with updated
UK demographic assumptions reducing liabilities by £565 million
and a decrease in the US nominal discount rate resulting in actuarial
losses of £430 million.

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
commitments and contingencies detailed 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.

100

Financial Statements | Consolidated statement of financial position

National Grid Annual Report and Accounts 2017/18Consolidated 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 recovered/(paid)

Net cash inflow from operating activities – continuing operations

Net cash (used in)/inflow from operating activities – discontinued operations

Cash flows from investing activities

Acquisition of investments

Investments in joint ventures and associates

Loans to joint ventures and associates

Disposal of investments

Disposal of UK Gas Distribution

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 investments1

Net cash flow from/(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

Dividends paid to shareholders

Net cash flow used in financing activities – continuing operations

Net cash flow (used in)/from financing activities – discontinued operations

Net (decrease)/increase 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 year1

1. Net of bank overdrafts of £nil (2017: £nil; 2016: £3 million).

Notes

2018
£m

2017
£m

2016
£m

2(b)

3,493

3,208

3,225

9,15

27(a)

(36)

1,530

–

118

(206)

(239)

4,702

4,710

(207)

(2)

(129)

(68)

134

(20)

(173)

(3,738)

213

5,953

2,237

–

(1,017)

(5)

1,941

(2,156)

(772)

(853)

(4,487)

(7,316)

(231)

(807)

–

(3)

1,139

329

565

1,481

–

151

(181)

(768)

(36)

4,452

(132)

4,320

909

–

(76)

(61)

–

5,454

(223)

(3,296)

(5,600)

(3,634)

(680)

(189)

(6)

2,463

(1,616)

(839)

(1,463)

(1,542)

1,611

984

124

1,139

(11)

1,311

(49)

416

(58)

(293)

(40)

4,522

(230)

4,292

1,076

–

(116)

–

(196)

(2,855)

(391)

(3,459)

(577)

(267)

(6)

2,726

(896)

(730)

(711)

(1,337)

(1,205)

(123)

–

116

124

Financial Statements | Consolidated cash flow statement

101

National Grid Annual Report and Accounts 2017/18Financial StatementsConsolidated cash flow statement continued

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 flows 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 recovered/(paid) – continuing operations

Tax paid – discontinued operations

Ordinary dividends paid and scrip buybacks

Return of capital

Disposal of UK Gas Distribution

Other cash movements

Non-cash movements

(Increase)/decrease in net debt

Opening net debt

Closing net debt

2018
£m

4,702

(207)

4,495

(4,098)

–

(4,098)

397

(796)

–

(796)

–

(1,494)

(4,010)

(20)

239

1,948

(3,728)

(19,274)

(23,002)

2017
£m

4,452

987

5,439

(3,638)

(605)

(4,243)

1,196

(788)

(1,167)

(1,955)

(132)

(78)

(210)

(1,652)

–

11,344

110

(2,782)

6,051

(25,325)

(19,274)

Cash generated from continuing operations

£m

4,522

4,452

4,702

2015/16

2016/17

2017/18

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 2018, cash flows from continuing
operations increased by £250 million to £4,702 million. The outflow
of £239 million from changes in pensions and other post-retirement
obligations was £529 million lower than 2016/17 due to higher levels
of contributions into the UK and US schemes in the prior year.

Cash flows from discontinued operations decreased by £1,194 million
to a £207 million outflow in 2017/18. Discontinued operations in
2016/17 included the cash flows of the UK Gas Distribution business.
In 2017/18, discontinued operations included cash outflows for
residual transaction costs related to the disposal.

102

Financial Statements | Consolidated cash flow statement

National Grid Annual Report and Accounts 2017/18Unaudited commentary on the consolidated cash flow statement continued

Net capital investment
Net cash capital investment for continuing operations in the year
of £4,098 million comprising investments and loans to joint ventures
and associates of £197 million (including St William) and purchases
of intangibles and property, plant and equipment (net of disposals) of
£3,901 million was £460 million higher than the prior year. This was a
result of higher spend in our US Regulated and UK Gas Transmission
businesses, along with increased levels of investment in interconnectors,
offset by exchange movements of £133 million and lower spend in
UK Electricity Transmission.

Net interest paid (including exceptional interest)
Net interest paid for continuing operations was £796 million, £8 million
higher than 2016/17 with increased payments at constant currency
mostly offset by 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,
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 recovered/paid
Tax recovered for continuing operations in the year to 31 March
2018 was £8 million. This was primarily due to refunds in the US
and UK of tax previously overpaid of £46 million and £67 million
respectively, offset by UK tax payments which were lower than
2016/17 as a result of tax deductible costs incurred in respect
of the disposal of UK Gas Distribution.

Return of capital
A total cash outflow of £4,010 million related to the return to
shareholders of proceeds from the disposal of the UK Gas Distribution
business. This comprised a £3,171 million outflow related to the special
dividend on 2 June 2018 (accompanied by an 11 for 12 share
consolidation) and £839 million of share buybacks.

Disposal of UK Gas Distribution
The inflow in 2016/17 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). The outflow of
£20 million in 2017/18 relates to the completion account settlement
in November 2017.

Other cash movements
Other cash flows principally arise from the disposal of a financial
investment in Dominion for £126 million and dividends from joint
ventures and associates of £213 million (£114 million higher than
2016/17), partly offset by movements in treasury shares.

Non-cash movements
The non-cash movements are predominantly due to the weakening
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
weakened from $1.25 at 31 March 2017 to $1.40 at 31 March 2018.
Other non-cash movements primarily arise from changes in fair values
of financial assets and liabilities and interest accretions and accruals.

Dividends paid and scrip buybacks
Ordinary dividends paid in the year ended 31 March 2018 amounted
to £1,316 million. This was £147 million lower than 2016/17 reflecting
the decrease in the number of shares following the share consolidation,
offset by an increase in the final dividend paid in August 2017. Share
buybacks of £178 million, related to the repurchase of the scrip
uptake, were £11 million lower than 2016/17.

Net debt

£m

25,325

23,002

19,274

2016

2017

2018

Financial Statements | Consolidated cash flow statement

103

National Grid Annual Report and Accounts 2017/18Financial 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 IASB and EU endorsed accounting standards, amendments and interpretations and whether these are effective in 2019 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, National Grid plc, which is the ultimate parent of the
Group, 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 16 May 2018.

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 2018 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.

A. Going concern
The Directors considered it appropriate to prepare the financial
statements on a going concern basis, having considered the Company’s
cash flow forecasts with respect to business planning and treasury
management activities. 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 results, assets and
liabilities of the Company and its subsidiaries, together with a share of the
results, assets and liabilities of joint operations. The Group accounts for
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 Group. Control is
achieved where the Group is exposed to, or has the rights to, variable
returns from its involvement with the entity and has the power to affect
those returns through its power over the entity.

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.

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.

These consolidated financial statements are presented in pounds
sterling, which is also the functional currency of the Company.

The notes to the financial statements have been prepared on a
continuing basis unless otherwise stated.

Our income statement and segmental analysis separately identify
financial results before and after exceptional items and remeasurements.
The Directors believe that presentation of the results in this way is
relevant to an understanding of the Group’s financial performance.
Presenting financial results before exceptional items and
remeasurements is consistent with the way that financial performance
is measured by management and reported to the Board and Executive
Committee and aids the comparability of reported financial performance
from year to year in this context.

Further, this year we have adopted a columnar presentation as we
consider it improves the clarity of the presentation, and is consistent with
the way that financial performance is measured by management and
reported to the Board and Executive Committee, and better enables
users of the financial statements to understand the results. The inclusion
of total profit for the period from continuing operations before exceptional
items and remeasurements forms part of the incentive target set annually
for remunerating certain Executive Directors. Accordingly we believe it is
important for users of the financial statements to understand how this
compares to our results on a statutory basis and year-on-year.

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).

Where necessary, adjustments are made to bring the accounting policies
used in the individual financial statements of the Company, subsidiaries,
joint operations, joint ventures and associates into line with those used
by the Group 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 operations, 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 of 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 on the board
of Quadgas HoldCo Limited.

In addition, the Group entered into a Further Acquisition Agreement
(FAA) over a further 14% interest. Refer to note 15 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 was classified as a discontinued
operation in the 2016/17 consolidated income statement. This continues
to be reflected 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.

In the current year, any true-ups relating to the disposal of the controlling
stake are recorded within discontinued operations.

104

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statements1. Basis of preparation and recent accounting developments continued

F. Accounting policy choices
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 after tax
from continuing operations, together with additional subtotals
excluding exceptional items and remeasurements as a result of the
three columnar layout described earlier. Exceptional items and
remeasurements are presented in a separate column 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.

New IFRS accounting standards effective for the year ended
31 March 2018
The Group has adopted the following amendments to standards:

• annual improvements to IFRSs 2014-2016 Cycle;
• amendments to IAS 7 ‘Statement of cash flows’; and
• amendments to IAS 12 ‘Income taxes’.

The adoption of these amendments has had no material impact
on the Group’s results or financial statement disclosures.

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 application of hedge accounting requires inclusion in other
comprehensive income see 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
recognised in other comprehensive income and transferred to the
consolidated translation reserve within other equity reserves see 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:

• categorisation of certain items as exceptional items and the definition

of adjusted earnings see notes 4 and 7.

Key sources of estimation uncertainty that have a significant risk
of causing a material adjustment to the carrying amounts of assets
and liabilities within the next financial year are as follows:

• valuation of liabilities for pensions and other post-retirement benefits

see note 23; and

• the discount rate and cash flows applied in determining the

environmental provisions see note 24.

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.

105

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial 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.

Classification and measurement: financial liabilities
Under IFRS 9 financial liabilities can be designated at FVTPL to eliminate
an accounting mismatch. Where financial liabilities are designated at
FVTPL, changes in their fair value due to credit risk are presented in other
comprehensive income. Remaining changes in fair value are presented in
the income statement.

i) IFRS 9 ‘Financial Instruments’
IFRS 9 ‘Financial Instruments’ is effective for National Grid for the year
ending 31 March 2019. The change to IFRS 9 principally impacts the
accounting for the classification and measurement of financial
instruments, impairment of financial assets and hedge accounting.

The Group has elected not to restate comparatives on initial application
of IFRS 9. The full impact of adopting IFRS 9 will depend on the financial
instruments that the Group has during the year ending 31 March 2019
as well as on economic conditions and judgements made as at the year
end. The Group has performed an assessment of the potential impact
of adopting IFRS 9 based on the financial instruments and hedging
relationships as at the date of adoption of IFRS 9 (1 April 2018). It is not
expected that the adoption of IFRS 9 will materially impact our profits
or net assets on transition or prospectively.

Classification and measurement: financial assets
The number of categories of financial assets has been reduced under
IFRS 9 compared to IAS 39. Under IFRS 9 the classification of financial
assets is based on the business model within which the asset is held and
the contractual terms of the asset. There are three principal classification
categories for financial assets that are debt instruments: (i) amortised
cost, (ii) fair value through other comprehensive income (FVOCI), and
(iii) fair value through profit or loss (FVTPL). Equity investments are either
classified as (i) FVTPL or (ii) FVOCI. Where assets or liabilities are
measured at FVTPL, any fair value movements will be reported as
remeasurements. If measured at FVOCI, realised gains on equity
investments are not recycled to the income statement but instead
are transferred directly to retained profits.

The largest reallocation of financial assets will be from available-for-sale
investments to FVTPL and relates to over £2 billion Group investments
in money market funds and insurance company investments in mutual
funds, where the contractual terms are such that they do not qualify for
any other category. All other available-for-sale investments will be
categorised as FVOCI under IFRS 9.

The change to the asset classification rules will have no impact on
reported Group net assets, although there will be some changes
to reserves at transition.

With effect from 1 April 2018 the Group will take the fair value option for
one issued zero coupon liability to reduce the measurement mismatch
against some derivatives. This change will result in a reduction of
reported net assets of less than £50 million.

Impairment
The impairment model under IFRS 9 reflects expected credit losses,
as opposed to only incurred losses under IAS 39. The new impairment
model will apply to the Group’s financial assets that are debt instruments
measured at amortised cost or FVOCI as well as the Group’s trade
receivables.

The Group expects to apply the simplified approach, recognising lifetime
expected losses for its trade receivables. The Group’s preliminary
calculation of the loss allowance for these assets as at 31 March 2018
results in an immaterial impact compared to under IAS 39.

The Group’s other investments in debt instruments that are subject
to the IFRS 9 impairment model are determined to be low credit risk
at 31 March 2018. The Group intends to apply the low credit risk
simplification in IFRS 9, which allows the Group to assume that there has
not been a significant increase in credit risk since initial recognition of
these assets, and therefore recognise a loss allowance for only 12-month
expected credit losses as at 1 April 2018. The adjustment to the opening
reserves in respect of this is not expected to be significant.

Hedge accounting
On initial application of IFRS 9, an entity may choose to continue to
apply the hedge accounting requirements of IAS 39 instead of those of
IFRS 9. The Group has elected to apply the IFRS 9 hedge accounting
requirements because they more closely align with the Group’s risk
management policies.

An assessment of the Group’s designated hedging relationships under
IAS 39 has been performed and it has been determined that all would
qualify as continuing hedge relationships under IFRS 9. However, in order
to apply elective changes to the treatment of costs of hedging, certain
relationships will be formally redesignated from the date of adoption. The
Group is considering additional opportunities to apply hedge accounting
under IFRS 9.

The Group does not anticipate the application of IFRS 9 hedge
accounting requirements will have a material impact on the Group’s
consolidated financial statements.

106

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsNotes to the consolidated financial statements–analysis of items in the primary statements continued1. Basis of preparation and recent accounting developments continued

iii) IFRS 16 ‘Leases’
IFRS 16 ‘Leases’ is effective for National Grid for the year ending
31 March 2020. The Group enters into a significant number of
operating lease transactions. 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,
will result in an increase in finance costs and depreciation and a
reduction in operating costs. The outcome of our conclusions will have
an impact on how we account for our operating leases. We are also
performing an assessment of our revenue, service contracts and power
purchase 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 IFRS 2 ‘Share-based payment’;
• IFRIC 22 ‘Foreign Currency Transactions and Advance Consideration’;
• IFRIC 23 ‘Uncertainty over Income Tax Treatments’;
• Amendments to IAS 40 ‘Investment Property’;
• Amendments to IAS 28: ‘Investments in associates’ – Long-term

interests in associates and joint ventures;

• Annual Improvements to IFRS Standards 2015–2017 Cycle;
• IFRS 17 ‘Insurance Contracts’; and
• Amendments to IAS 19 ‘Employee Benefits’.

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.

ii) IFRS 15 ‘Revenue from Contracts with Customers’
IFRS 15 ‘Revenue from Contracts with Customers’ is effective for
National Grid for 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 have been
undertaken prior to our transition to IFRS 15 on 1 April 2018. We will
adopt the modified retrospective approach whereby the historical
cumulative transition adjustment is reflected through retained earnings.
There are two types of revenue arrangements that will be impacted on
transition to IFRS 15. The financial impacts and the transition adjustment
to retained earnings are described further:

• There are certain pass-through revenues (principally revenues
collected on behalf of the Scottish and Offshore transmission
operators) where the principal/agency assessment changes on
transition to IFRS 15. In moving from a risk and reward model to
a control model, we will no longer record our revenues collected
on behalf of the Scottish and Offshore transmission operators as
principal as we do not control the Scottish or Offshore transmission
networks. If we had adopted IFRS 15 in 2017/18, both revenues
and operating costs would have been £1,056 million lower, with
no impact to profit as a result of this change. There will be no
transition adjustment as a result of this change; and

• Across our subsidiaries in the UK and the US, our customers provide
contributions for certain capital works (e.g. connections) which we
continue to own on completion of the works. In our electricity
business in the UK, we currently recognise customer contributions
for connections over time as we have an ongoing contractual
condition to maintain connections over their lives. In our UK Gas
Transmission business, we recognise customer contributions when
the connection is completed (the contractual conditions of the
connection agreement do not explicitly require connections to be
maintained over the life of the connection). In the US, revenue is
also recognised when the connection is completed.

Under IFRS 15, connection contributions in our subsidiaries will be
deferred and released into the income statement as revenue over
the life of the network. We have reached this conclusion because
our customers cannot benefit from a connection without the use
of our utility network; access to our network through the connection
is satisfied over time.

In the UK, we also have arrangements where our customers make
contributions for diversions. These are currently deferred over the life
of our network. Under IFRS 15, these revenues are recognised on
completion of the diversion as there are no ongoing performance
obligations to satisfy.

Had we adopted IFRS 15 in 2017/18, revenues would have been
approximately £83 million lower, as revenues from connections in the
US and in UK Gas Transmission that were recognised up-front would
have been deferred over the life of the network. The decrease in profit
after tax in our subsidiaries would have been £56 million.

The transition adjustment through retained earnings of £167 million
will result in an increase to deferred revenues of approximately
£240 million and a corresponding deferred tax impact of £73 million.

107

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements2. Segmental analysis

This note sets out the financial performance for the year split into the different parts of the business (operating segments). The performance of
these operating segments is monitored and managed on a day-to-day basis. Revenue and the results of the business are analysed by operating
segment, based on the information the Board of Directors uses internally for the purposes of evaluating the performance of operating segments
and determining resource allocation between operating segments. The Board is National Grid’s chief operating decision maker (as defined by
IFRS 8 ‘Operating Segments’) and assesses the profitability of operations principally on the basis of operating profit before exceptional items and
remeasurements (see note 4). As a matter of course, the Board also considers profitability by segment, excluding the effect of timing. However,
the measure of profit disclosed in this note is operating profit before exceptional items and remeasurements as this is the measure that is most
consistent with the IFRS results reported within these financial statements.

Our strategy in action
The Group owns a portfolio of businesses that range from businesses with high levels of investment and growth to cash generative developed
assets with lower investment requirements (such as National Grid Metering, included within NGV and Other). The majority of revenue is generated
from regulated operating segments in the UK and US. The Group works with its regulators to obtain agreements that balance the risks faced with
the opportunity to deliver reasonable returns for investors. When investing in NGV and Other, the Group aims to leverage its core capabilities to
deliver higher returns for investors. The 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 the Group’s regulatory agreements and
any such timing differences are adjusted through future prices. NGV and Other businesses earn revenue in line with their contractual terms.

The following table describes the main activities for each reportable operating segment:

UK Electricity Transmission

High-voltage electricity transmission networks in England and Wales

UK Gas Transmission

High-pressure gas transmission networks in Great Britain and LNG storage activities

US Regulated

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

NGV was formed on 1 April 2017 and brought together our businesses that are adjacent to our core regulated operations to create a new division
with its own leadership. NGV is led by a member of the Group Executive Committee and its results are reported separately to the Board of Directors.
This operating segment represents our key strategic growth area outside our regulated core business in competitive markets across the US and
the UK. The business comprises all commercial operations in metering, LNG at the Isle of Grain in the UK and electricity interconnectors, with
a focus on investment and future activities in emerging growth areas. NGV does not meet the thresholds set out in IFRS 8 to be identified as a
separate reportable segment and therefore its results have not been disaggregated. The results of the businesses that now form NGV were previously
reported in the Other activities segment and therefore, although the segment has been renamed NGV and Other, the results of previous periods
have not been affected.

Other activities that do not form part of any of the segments in the above table or NGV primarily relate to UK property development together with
insurance and corporate activities in the UK and US.

Discontinued operations in 2017 and 2016 comprise the profits and losses associated with the UK Gas Distribution business, up to and including
the point at which it was sold to Quadgas HoldCo Limited (see note 9). In the current year, transactions within discontinued operations relate solely
to the business prior to the sale and the sale transaction itself.

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 allowed
revenue as stipulated by regulatory agreements and explained further in the unaudited commentary on pages 186–191.

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.

108

(a) Revenue

Operating segments – continuing operations:

UK Electricity Transmission

UK Gas Transmission

US Regulated

NGV and Other1

2018

Sales
between
segments
£m

Total
sales
£m

Sales
to third
parties
£m

2017

Sales
between
segments
£m

Total
sales
£m

4,154

1,091

9,272

776

(28)

(9)

–

(6)

4,126

1,082

9,272

770

4,439

1,080

8,931

713

(29)

(99)

–

Sales
to third
parties
£m

4,410

981

8,931

713

2016

Sales
between
segments
£m

Total
sales
£m

3,977

1,047

7,493

824

(20)

(109)

–

Sales
to third
parties
£m

3,957

938

7,493

824

Total revenue from continuing operations

15,293

(43)

15,250

15,163

(128)

15,035

13,341

(129)

13,212

Split by geographical areas – continuing operations:

5,938

9,312

15,250

6,064

8,971

15,035

5,619

7,593

13,212

1. Included within NGV and Other is £593 million (2017: £604 million; 2016: £719 million) of revenue relating to NGV.

(b) Operating profit
A reconciliation of the operating segments’ measure of profit to profit before tax from continuing operations 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

NGV and Other1

Total operating profit from continuing operations

Split by geographical area – continuing operations:

Before exceptional items
and remeasurements

After exceptional items
and remeasurements

2018
£m

1,041

487

1,698

231

3,457

1,840

1,617

3,457

2017
£m

1,372

511

1,713

177

3,773

2,118

1,655

3,773

2016
£m

1,173

486

1,185

370

3,214

2,007

1,207

3,214

2018
£m

1,041

487

1,734

231

3,493

1,840

1,653

3,493

2017
£m

1,361

507

1,278

3,208

1,988

1,220

3,208

2016
£m

1,173

486

1,196

370

3,225

2,007

1,218

3,225

Below we reconcile total operating profit from continuing operations to profit before tax from continuing operations. We have shown the share of post-tax results
of joint ventures and associates disaggregated between those held within NGV and Other and our retained 39% interest in the UK Gas Distribution business (Cadent2).
Operating exceptional items and remeasurements of £nil (2017: £11 million cost; 2016: £nil) detailed in note 4 are attributable to UK Electricity Transmission; £nil
(2017: £4 million cost; 2016: £nil) to UK Gas Transmission; £36 million gain (2017: £435 million cost; 2016: £11 million gain) to US Regulated; and £nil (2017: £115 million
cost; 2016: £nil) to NGV and Other.

Reconciliation to profit before tax:

Operating profit from continuing operations

Finance income

Finance costs

Share of post-tax results of joint ventures and associates:

Cadent2

NGV and Other

3,457

154

(1,128)

123

3,773

(1,082)

–

3,214

(878)

–

3,493

154

(899)

(89)

3,208

(1,140)

–

3,225

(977)

–

Profit before tax from continuing operations

2,650

2,807

2,417

2,708

2,184

2,329

1. Included within NGV and Other is £234 million (2017: £239 million; 2016: £394 million) of operating profit (both before and after exceptional items and remeasurements) relating to NGV.
2. Investment held through Quadgas HoldCo Limited.

109

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements2. Segmental analysis continued

Operating segments:

UK Electricity Transmission

UK Gas Transmission

US Regulated

NGV and Other2

Total from continuing operations

Split by geographical area
– continuing operations:

Asset type:

Property, plant and equipment

Non-current intangible assets

Total from continuing operations

Net book value of property, plant and
equipment and other intangible assets

Capital expenditure1

Depreciation and amortisation

2018
£m

2017
£m

2016
£m

2018
£m

13,028

4,280

20,953

2,491

40,752

18,772

21,980

40,752

39,853

899

40,752

12,515

4,165

21,638

2,430

40,748

18,102

22,646

40,748

39,825

923

40,748

11,907

4,140

17,490

2,291

35,828

17,491

18,337

35,828

35,074

754

35,828

999

310

2,424

341

4,074

1,527

2,547

4,074

3,901

173

4,074

2017
£m

1,027

214

2,247

247

3,735

1,357

2,378

3,735

3,507

228

3,735

2016
£m

1,084

186

1,856

201

3,327

1,386

1,941

3,327

3,130

197

3,327

2018
£m

(475)

(194)

(635)

(226)

2017
£m

(421)

(186)

(642)

(232)

2016
£m

(390)

(178)

(535)

(208)

(1,530)

(1,481)

(1,311)

(804)

(726)

(753)

(728)

(1,530)

(1,481)

(1,392)

(138)

(1,530)

(1,348)

(133)

(1,481)

(715)

(596)

(1,311)

(1,207)

(104)

(1,311)

1. Represents additions to property, plant and equipment and non-current intangibles but excludes additional investments in and loans to joint ventures and associates.
2. Included within NGV and Other are assets with a net book value of £1,454 million (2017: £1,432 million; 2016: £1,482 million), capital expenditure of £186 million (2017: £98 million;

2016: £93 million) and depreciation and amortisation of £143 million (2017: £143 million; 2016: £144 million) relating to NGV.

Total non-current assets other than financial instruments and pension assets located in the UK and US were £20,816 million and £27,663 million
respectively as at 31 March 2018 (31 March 2017: UK £20,045 million, US £28,951 million; 31 March 2016: UK £26,261 million, US £23,774 million).

110

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsNotes 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

Commentary on segmental adjusted operating profit results

Below we summarise the results of our operating segments.
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 2018, revenue in the UK Electricity
Transmission segment decreased by £285 million to £4,154 million and
adjusted operating profit decreased by £331 million to £1,041 million.

The revenue reduction of £285 million included a reduction in
pass-through costs such as system balancing costs charged
on to customers. Excluding pass-through costs, net revenue was
£235 million lower, reflecting the absence of last year’s recovery of
outstanding timing balances along with higher adjustments this year
to return the benefits of efficiencies and lower required outputs to
customers. Regulated controllable costs were £35 million higher
reflecting inflation, increased headcount and workload and initiative
spend. Depreciation and amortisation was £54 million higher, reflecting
the continued capital investment programme. Other costs were in line
with the prior year.

Capital expenditure decreased by £28 million compared with last year
to £999 million.

UK Gas Transmission
Revenue in the UK Gas Transmission segment increased by £11 million
to £1,091 million and adjusted operating profit decreased by £24 million
to £487 million.

After deducting pass-through costs, net revenue was £23 million lower
than prior year. Increases in allowed revenues this year were more than
offset by the end of certain legacy revenue allowances and the refund
of prior year over-recoveries to customers. Regulated controllable costs
were £9 million higher than last year, mainly as a result of higher
employee numbers to deliver additional outputs. Depreciation and
amortisation costs were £8 million higher, reflecting ongoing investment.
Other operating costs were £16 million lower than last year, including
the release of unused provisions relating to LNG plant closures.

Capital expenditure increased to £310 million, £96 million higher than
last year, with increases in asset health spend and higher investment
on compressor projects.

US Regulated
Revenue in our US Regulated business increased by £341 million to
£9,272 million and adjusted operating profit decreased by £15 million
to £1,698 million.

The weaker US dollar decreased revenue and operating profit in
the year by £534 million and £102 million respectively. Excluding the
impact of foreign exchange rate movements, revenue increased by
£875 million. Of this increase, £597 million was due to increases in
pass-through costs charged on to customers. Excluding pass-through
costs, net revenue increased by £278 million at constant currency,
reflecting increased revenue allowances under new rate plans in
downstate New York and Massachusetts Electric, and the benefit
of capital trackers.

We have incurred £142 million of major storm costs in 2017/18 including
a sequence of heavy storms this winter causing substantial damage
to our electricity networks. Separate from these costs, regulated
controllable costs were broadly in line with last year at constant
currency, and bad debt costs were £13 million lower. Depreciation
and amortisation was £31 million higher this year at constant currency
as a result of ongoing investment in our networks. Other operating
costs were £34 million higher at constant currency, reflecting higher
property taxes.

Capital expenditure in the US Regulated business increased to
£2,424 million this year, £177 million more than in 2016/17. At constant
currency, this represented a £311 million increase in investment driven
by higher investment in new and replacement gas mains.

NGV and Other
Revenue in NGV and Other increased by £63 million to £776 million
and adjusted operating profit increased by £54 million to £231 million.
This reflects higher revenues and profit on disposal of property sites
in the UK and lower levels of business change costs incurred, partially
offset by lower auction revenues in the French Interconnector.

Capital expenditure in NGV and Other was £94 million higher than
last year at £341 million, including the start of construction of a second
French Interconnector and increases in smart meter installations in
the UK.

111

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements3. 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.

Depreciation and amortisation

Payroll costs

Purchases of electricity

Purchases of gas

Rates and property taxes

Balancing Services Incentive Scheme

Payments to other UK network owners

Other

Operating costs include:

Inventory consumed

Operating leases

Research and development expenditure

(a) Payroll costs

Wages and salaries1

Social security costs

Defined contribution scheme costs

Defined benefit pension costs (see note 23)

Share-based payments

Severance costs (excluding pension costs)

Less: payroll costs capitalised

Total payroll costs

Before exceptional items
and remeasurements

Exceptional items
and remeasurements

2018
£m

1,530

1,648

1,299

1,539

1,057

1,012

1,043

2,665

2017
£m

1,481

1,578

1,143

1,241

1,042

1,120

1,008

2,649

11,793

11,262

2016
£m

1,311

1,337

1,304

986

899

907

971

2,283

9,998

2018
£m

–

(14)

–

(26)

(36)

2017
£m

–

(46)

(22)

–

633

565

2016
£m

–

(19)

–

2018
£m

1,530

1,648

1,285

1,543

1,057

1,012

1,043

2,639

Total

2017
£m

1,481

1,578

1,097

1,219

1,042

1,120

1,008

3,282

(11)

11,757

11,827

367

102

2018
£m

1,998

157

156

2,399

(751)

1,648

296

2017
£m

1,852

145

151

2,243

(665)

1,578

2016
£m

1,311

1,337

1,312

967

899

907

971

2,283

9,987

274

2016
£m

1,553

120

154

1,899

(562)

1,337

1. Included within wages and salaries are US other post-retirement benefit costs of £46 million (2017: £53 million; 2016: £52 million). For further information refer to note 23.

(b) Number of employees

Total number of employees

31 March
2018

6,517

16,506

23,023

Monthly
average
2018

6,431

16,274

22,705

31 March
2017

6,265

15,867

22,132

Monthly
average
2017

6,291

15,752

22,043

31 March
2016

6,224

14,830

21,054

Monthly
average
2016

6,067

14,775

20,842

112

Short-term employee benefits

Post-employment benefits

Share-based payments

Total key management compensation

2018
£m

2017
£m

2016
£m

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 Remuneration Report on page 70 and those of Non-executive Directors on page 75.

(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 auditors1 and their associates in respect of:

Audit of the parent Company’s individual and consolidated financial statements2

The auditing of accounts of any associate of the Company

Other services supplied3

Total other services4

Tax fees:

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

2018
£m

2.7

7.5

3.9

14.1

0.3

–

0.7

–

0.9

1.9

16.0

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

1. Deloitte LLP became the Group’s principal auditor for the year ended 31 March 2018. PricewaterhouseCoopers LLP (PwC) was the principal auditor for the years ended 31 March 2017

and 31 March 2016.

2. 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 2018, 2017 and 2016.
3. 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), audit reports on regulatory returns and the review
of interim financial statements for the six-month periods ended 30 September 2017, 2016 and 2015 respectively.

4. There were no audit related fees as described in Item 16C(b) of Form 20-F.
5. Principally amounts relating to assurance services provided in relation to comfort letters for debt issuances. In 2016/17, amounts represented assurance services undertaken by PwC 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 – projects including services provided to the UK Property business, relating to evaluating possible options for the use of property assets. In 2016/17,

services related principally to PwC assisting the Company with separation activities in relation to the sale of UK Gas Distribution.

For the year ended 31 March 2017, PwC contracted with Ofgem to assess the UK gas industry’s readiness for the introduction of new settlement
processes and systems. Fees for these services were paid by Xoserve Limited, a subsidiary of National Grid (until 31 March 2017), on behalf of the
industry, under instruction from Ofgem. As PwC had no contract with or duty of care to Xoserve Limited, these amounts were not included above.

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 2018 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 55 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.

113

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements4. 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 sub-totals 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 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 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, and the related tax as well as deferred tax arising on changes to corporation tax rates.

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 contract derivatives
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

Included within operating profit

Exceptional items:

Environmental charges

Gas holder demolition costs

Final settlement of LIPA MSA Transition

Remeasurements – commodity contract derivatives

Included within finance costs

Remeasurements – net gains/(losses) on derivative financial instruments

Included within share of post-tax results of joint ventures and associates

Remeasurements – net gains on financial instruments

Exceptional items:

Deferred tax arising on the reduction in US corporation tax rate

Impairment of investment in Quadgas HoldCo Limited

Total included within profit before tax

Included within tax

Exceptional items – credits arising on items not included in profit before tax:

Deferred tax arising on the reduction in the UK corporation tax rate

Deferred tax arising on the reduction in the US 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

114

2018
£m

2017
£m

2016
£m

–

(526)

(107)

–

(633)

(565)

–

229

(58)

(99)

(213)

(207)

–

1,510

(9)

(28)

1,473

1,531

1,319

212

1,531

–

(623)

(88)

–

227

(29)

292

(331)

(312)

(19)

(331)

162

–

177

162

(73)

Operating exceptional items
2017/18
During the year, the Group reached an agreement with LIPA on an amount in final settlement of receivables and payables that arose following the
cessation of the Management Services Agreement with LIPA in December 2013. The settlement has resulted in a gain of £26 million, which has been
recorded as exceptional, consistent with the treatment of gains and losses on the original transaction.

In assessing the value of the Group’s interests in Quadgas HoldCo Limited (the holding company for Cadent Gas) at 31 March 2018, the Company
has considered the fair market value of its interests as implied by the agreement relating to the potential sale of a 25% interest in Quadgas HoldCo
Limited (equity and shareholder loans), announced on 1 May 2018 and described in note 15.

The associated accounting implications are the recognition of a £110 million fair value gain on the Further Acquisition Agreement (FAA) which is
detailed in the remeasurements section below and a £213 million impairment against the equity carrying value of investment in Quadgas HoldCo
Limited. We have assessed the carrying value of all our interests in Quadgas HoldCo Limited (including the FAA derivative asset noted above) against
the cash flows we expect to receive under the agreement for the 25% (comprising future dividends, shareholder loan interest income and the
proceeds on exercise of the option arrangement plus a cost of carry), discounted to present value using an estimate of Quadgas Investments BidCo
Limited’s marginal cost of borrowing. Following the recognition of this charge, the total carrying value of our interests in Quadgas HoldCo Limited is
£2.1 billion. Neither of these two accounting entries are taxable.

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 Group. 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.

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.

A provision of £107 million was 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.

Remeasurements
As described further in note 30(f), the FAA signed on 31 March 2017 relating to a 14% interest in the equity and shareholder loans of Quadgas HoldCo
Limited is treated as a derivative at fair value through profit and loss. In assessing the fair value of this derivative at 31 March 2018, we have compared
the pricing mechanism within the FAA against that of the agreement concerning our remaining 25% interest. The £110 million gain reflects the pricing
differential between the two contracts. At 31 March 2017, being the date on which the FAA was signed, the fair value was taken to be zero.

Commodity contract derivatives 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. Therefore, these are always excluded from business performance.

Net gains on financial instruments comprise the gains on financial instruments of Quadgas HoldCo Limited reported through their income statement.

Items included within tax
The Tax Cuts and Jobs Act (Tax Reform) which was enacted on 22 December 2017 reduced the US corporate rate from 35% to 21% with effect from
1 January 2018. Deferred taxes at the reporting date have been measured using these enacted tax rates. Since we are in a net deferred tax liability
position in the US, this results in a deferred tax credit in the year. As described further in note 10, however, we expect the overall impact of Tax Reform
to be economically neutral for the Group.

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 for the years ended 31 March 2017 and 31 March 2018.

The Finance Act 2015 (No. 2) was enacted on 18 November 2015 which reduced the main rate of UK corporation tax to 19% with effect from 1 April
2017 and 18% from 1 April 2020. Deferred tax balances were calculated at 18% for the year ended 31 March 2016.

115

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements5. 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
net interest on our pensions and other post-retirement assets. 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 (see note 4).

Finance income

Interest income on financial instruments:

Bank deposits and other financial assets

Gains on disposal of available-for-sale investments

Finance costs

Notes

2018
£m

2017
£m

2016
£m

154

–

Net interest on pensions and other post-retirement benefit obligations

(65)

(107)

(111)

Interest expense on financial liabilities held at amortised cost:

Bank loans and overdrafts

Other borrowings

Derivatives

Unwinding of discount on provisions

Other interest

Less: interest capitalised1

Remeasurements

Net gains/(losses) on derivative financial instruments included in remeasurements2:

Ineffectiveness on derivatives designated as:

Fair value hedges3

Cash flow hedges

Net investment hedges – undesignated forward rate risk

Derivatives not designated as hedges or ineligible for hedge accounting4

(87)

(1,030)

(75)

(11)

128

(59)

(927)

(8)

(73)

(17)

109

(1,128)

(1,082)

180

229

(899)

(12)

(139)

(58)

(1,140)

(28)

(792)

(69)

(27)

112

(878)

(15)

(34)

(89)

(99)

(977)

Net finance costs from continuing operations

(745)

(1,087)

(955)

1. Interest on funding attributable to assets in the course of construction in the current year was capitalised at a rate of 4.1% (2017: 3.4%; 2016: 3.3%). In the UK, capitalised interest qualifies for a
current year tax deduction with tax relief claimed of £20 million (2017: £18 million; 2016: £19 million). In the US, capitalised interest is added to the cost of plant and qualifies for tax depreciation
allowances.

2. Includes a net foreign exchange loss on financing activities of £314 million (2017: £264 million loss; 2016: £407 million loss) offset by foreign exchange gains and losses on derivative financial

instruments measured at fair value.

3. Includes a net loss on instruments designated as fair value hedges of £90 million (2017: £27 million loss; 2016: £34 million gain) and a net gain of £124 million (2017: £60 million gain; 2016:

£5 million gain) arising from fair value adjustments to the carrying value of debt.

4. Includes £110 million gain on the Further Acquisition Agreement (FAA) derivative financial instrument relating to the put/call option over a 14% interest in Quadgas HoldCo Limited. Further details

can be found in note 15.

116

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.

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 Group operates internationally in territories with different and complex tax codes. Management exercises judgement in relation to the level
of provision required for uncertain tax outcomes. There are a number of tax positions not yet agreed with the tax authorities where different
interpretations of legislation could lead to a range of outcomes. Judgements are made for each position having regard to particular circumstances
and advice obtained.

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.

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 joint arrangements 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 offset 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 (credited)/charged to the income statement – continuing operations

Tax before exceptional items and remeasurements

Exceptional tax on items not included in profit before tax (see note 4)

Tax on other exceptional items and remeasurements

Tax on total exceptional items and remeasurements

Total tax (credit)/charge from continuing operations

Tax as a percentage of profit before tax

Before exceptional items and remeasurements – continuing operations

After exceptional items and remeasurements – continuing operations

2018
£m

589

(1,510)

(1,473)

(884)

2018
%

22.2

(32.6)

2017
£m

666

(94)

(198)

(292)

374

2017
%

23.7

17.1

2016
£m

604

(162)

(15)

(177)

427

2016
%

25.0

18.3

117

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements6. Tax continued

The tax credit for the year can be analysed as follows:

Current tax:

UK corporation tax at 19% (2017: 20%; 2016: 20%)

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

2018
£m

205

(18)

187

(4)

198

(2)

(1,155)

(1,145)

(1,082)

2017
£m

225

(47)

178

–

179

(9)

(18)

(27)

224

(2)

222

195

Total tax (credit)/charge from continuing operations

(884)

374

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 gains of pension assets and post-retirement benefit obligations1

Total tax recognised in the statements of comprehensive income from continuing operations

Total tax recognised in the statements 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

2018
£m

(3)

(11)

(18)

(4)

530

495

497

–

(2)

–

495

2017
£m

(4)

277

308

311

(3)

–

318

1. Remeasurements of gains of pension assets and post-retirement benefit obligations includes a deferred tax charge of £281 million arising on the reduction in the US corporation tax rate.

2016
£m

239

(5)

234

(19)

253

(80)

(56)

229

230

174

427

2016
£m

(1)

–

133

134

(1)

155

118

The tax credit for the year after exceptional items and remeasurements, for the continuing business, is lower (2017: lower tax charge; 2016: lower tax
charge) than the standard rate of corporation tax in the UK of 19% (2017: 20%; 2016: 20%):

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 19%
(2017: 20%; 2016: 20%)

Effect of:

Adjustments in respect of prior years1

Expenses not deductible for tax purposes2

Non-taxable income2

Adjustment in respect of foreign tax rates

Deferred tax impact of change in UK tax rate

Deferred tax impact of change in US tax rate
due to Tax Reform

Other3

Total tax charge/(credit) from
continuing operations

Effective tax rate – continuing operations

Before
exceptional
items and
remeasurements
2018
£m

After
exceptional
items and
remeasurements
2018
£m

Before
exceptional
items and
remeasurements
2017
£m

After
exceptional
items and
remeasurements
2017
£m

Before
exceptional
items and
remeasurements
2016
£m

After
exceptional
items and
remeasurements
2016
£m

2,650

–

2,650

503

(22)

(16)

153

(7)

–

(42)

589

22.2

2,650

2,708

515

(14)

(47)

157

(7)

(1,510)

(884)

(32.6)

2,807

–

2,807

561

(67)

(24)

180

–

(19)

666

23.7

2,807

(623)

2,184

437

(67)

442

(425)

104

(94)

–

(23)

374

17.1

2,417

–

2,417

483

(25)

124

–

(5)

604

25.0

2,417

(88)

2,329

465

114

(112)

129

(162)

–

(8)

427

18.3

1. Prior year adjustment is primarily due to agreement of prior period tax returns.
2. For the years ended 31 March 2017 and prior, the adjustments after exceptional items and remeasurements primarily represent the impact of the Group’s net investment hedging following

significant US dollar currency fluctuations.

3. Other primarily comprises 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.

We will continue to monitor the developments driven by Brexit, the OECD’s Base Erosion and Profit Shifting (BEPS) project and European Commission
initiatives including fiscal state aid investigations. At this time we do not expect this to cause any material impact on our future tax charges.

On 22 December 2017, the Tax Cuts and Jobs Act (Tax Reform) was signed into law in the US. The Tax Reform includes significant changes to
various federal tax provisions applicable to National Grid. The most significant changes include the reduction in the corporate federal income tax rate
from 35% to 21% effective 1 January 2018 and the elimination of bonus depreciation deduction on utility property, plant and equipment acquired after
27 September 2017 but the allowance for 100% expensing of non-utility property, plant and equipment. The reduction in the US corporate tax rate
is the only item we would expect to materially impact our future effective tax rate.

119

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements6. Tax continued

Tax included within the statement of financial position
The following are the major deferred tax assets and liabilities recognised, and the movements thereon, during the current and prior reporting periods:

Deferred tax liabilities/(assets)

At 1 April 2016

Exchange adjustments and other2

Charged/(credited) to income statement

Charged to other comprehensive income and equity

Disposal of UK Gas Distribution

At 1 April 2017

Exchange adjustments and other2

(Credited)/charged to income statement

Charged/(credited) to other comprehensive income and equity

At 31 March 2018

Accelerated
tax
depreciation
£m

Share-
based
payments
£m

Pensions
and other
post-
retirement
benefits
£m

Financial
instruments
£m

Other net
temporary
differences1
£m

Total
£m

7,063

681

402

–

(1,072)

7,074

(559)

(1,641)

–

4,874

(14)

(1,038)

–

(12)

–

(9)

(144)

177

264

(6)

(747)

(55)

530

(203)

(53)

(7)

–

(1)

(1,324)

4,634

(50)

(481)

(1,845)

221

598

(21)

(1,047)

481

121

316

(1,073)

4,479

(268)

(1,084)

509

3,636

1. The deferred tax asset of £1,047 million as at 31 March 2018 in respect of other net temporary differences primarily relates to US net operating losses (£390 million) and environmental provisions

(£378 million).

2. Exchange adjustments and other comprises of foreign exchange arising on translation of the US dollar deferred tax balances together with a reclassification of £43 million (2017: £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 £3,636 million
(2017: £4,479 million). This balance is after offset of a deferred tax asset of £390 million (2017: £798 million) which has been recognised in respect of
net operating losses. The deferred tax credited to the income statement of £1,084 million is after offset of a £293 million deferred tax charge 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

2018
£m

510

2017
£m

362

The capital losses arise in the UK and are available to carry forward indefinitely. However, the capital losses can only be offset against future capital
gains. The UK non-trade deficits arose prior to 1 April 2017 and therefore can only be offset against future non-trade profits.

At 31 March 2018 there was no recognised deferred tax liability for taxes that would be payable on the unremitted earnings of the Group’s subsidiaries
or its associates as there are no significant corporation tax consequences of the Group’s UK, US or overseas subsidiaries or associates paying
dividends to their parent companies. There are also no significant income tax consequences for the Group attaching to the payment of dividends
by the Group to its shareholders.

120

Tax strategy
National Grid is a responsible tax payer. Our approach to tax is
consistent with the Group’s broader commitments to doing business
responsibly and upholding the highest ethical standards. This includes
managing our tax affairs, as we recognise that our tax contribution
supports public services and the wider economy. We endeavour to
manage our tax affairs so that we pay and collect the right amount
of tax, at the right time, in accordance with the tax laws in all the
territories in which we operate. We will claim valid tax reliefs and
incentives where these are applicable to our business operations, but
only where they are widely accepted through the relevant tax legislation
such as those established by government to promote investment,
employment and economic growth.

We have a strong governance framework and our internal control and
risk management framework helps us manage risks, including tax risk,
appropriately. We take a conservative approach to tax risk. However,
there is no prescriptive level or pre-defined limit to the amount of
acceptable tax risk.

For 2017/18 our total tax contribution to the UK Exchequer was
£0.9 billion (2016/17: £1.5 billion), taxes borne in 2017/18 were
£336 million (2016/17: £644 million) and taxes collected were
£603 million (2016/17: £887 million). The fall in our total tax contribution
against prior year is primarily due to the sale of the UK Gas Distribution
business in the previous year, which reduced the overall size of the
UK business. This reduction was expected and as such forecasted
in the total UK tax contribution commentary included in our prior
year accounts.

Our 2016/17 total tax contribution of £1.5 billion meant that National
Grid was the 15th highest contributor of UK taxes (2015/16: 15th) based
on the results of the 100 Group’s 2017 Total Tax Contribution Survey
(being the most recent available), a position commensurate with the
size of our business and capitalisation during that year relative to other
contributors to the survey. In 2016/17 we ranked 9th in respect of
taxes borne (2015/16: 9th). Due to the sale of the UK Gas Distribution
business on 31 March 2017, our ranking in future 100 Group surveys is
expected to fall, commensurate with the ongoing size of the business.

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
100 Group’s 2017 Total Tax Contribution Survey ranks National Grid
in 3rd place in respect of UK capital expenditure on fixed assets,
retaining 3rd place from 2016. National Grid’s economic contribution
also supports a significant number of UK jobs in our supply chain.

We act with openness and honesty when engaging with relevant tax
authorities and seek to work with tax authorities on a real time basis.
We engage proactively in developments on external tax policy and
engage with relevant bodies where appropriate.

Ultimate responsibility and oversight of our tax strategy and
governance rests with the Finance Committee, with executive
management delegated to our Finance Director.

For more detailed information, please refer to our published global
tax strategy on our website.

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 2017/18 total tax
contribution are shown in the charts below:

UK total tax contribution 2017/18 (taxes paid/collected)
Taxes borne

Taxes collected

1. VAT
2. PAYE and NIC
3. UK corporation tax
4. Business rates
5. Other
Total

£m
2
52
37
222
23
336

1. VAT
2. PAYE and NIC
Total

£m
478
125
603

121

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial StatementsUnaudited 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. To aid transparency we have included
a reconciliation below of the tax charge per the income statement to
the UK corporation tax paid in 2017/18.

The tax credit for the Group from continuing operations as reported
in the income statement is £884 million (2016/17: £374 million charge).
The UK tax charge is £250 million (2016/17: £151 million) and UK
corporation tax paid was £37 million (2016/17: £129 million), with the
principal differences between these two measures as follows:

Tax losses
We have total unrecognised deferred tax assets in respect of losses
of £518 million (2016/17: £375 million) of which £510 million (2016/17:
£362 million) are capital losses in the UK as set out on page 120.
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.

Reconciliation on continuing operations of
UK total tax charge to UK corporation tax paid

Total UK tax charge (current tax £187m
(2017: £178m) and deferred tax charge £63m
(2017: credit £27m))

Adjustment for non-cash deferred tax
(charge)/credit

Adjustments for current tax credit in respect
of prior years

UK current tax charge

Year ended 31 March

2018
£m

250

(63)

205

2017
£m

151

225

UK corporation tax instalment payments not
payable until the following year

UK corporation tax instalment (refunds)/payments
in respect of prior years paid in current year

UK corporation tax paid

(101)

(216)

(67)

120

129

We continue to contribute to research into the structure of business tax
and its economic impact by contributing to the funding of the Oxford
University Centre for Business Tax at the Saïd Business School.

We are a member of a number of industry groups which participate
in the development of future tax policy, including the 100 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 100 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.

122

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. The earnings per share
calculations are based on profit after tax attributable to equity shareholders of the Company which excludes non-controlling interests.

Adjusted earnings and EPS, which exclude exceptional items and remeasurements, are provided to reflect the business performance sub-totals 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.

Following the sale of the UK Gas Distribution business on 31 March 2017, National Grid plc returned approximately £3,170 million of proceeds to
shareholders through a special dividend, paid on 2 June 2017. In order to maintain the comparability of the Company’s share price before and after
the special dividend, this was preceded by a share consolidation undertaken on 22 May 2017, replacing every 12 existing ordinary shares with 11 new
ordinary shares. The weighted average number of ordinary shares outstanding for the period includes the effect of both the share consolidation and
the special dividend from the date that the special dividend was paid. The associated share buyback programme which commenced on 2 June 2017
is now complete. Purchased shares are held as treasury shares.

(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 and remeasurements after tax from discontinued operations

Earnings from discontinued operations

Total adjusted earnings

Total exceptional items and remeasurements after tax
(including discontinued operations)

Total earnings

Weighted average number of ordinary shares – basic

(b) Diluted 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 and remeasurements after tax from discontinued operations

Earnings from discontinued operations

Total adjusted earnings

Total exceptional items and remeasurements after tax
(including discontinued operations)

Total earnings

Weighted average number of ordinary shares – diluted

Weighted average number of ordinary shares – basic

Effect of dilutive potential ordinary shares – employee share plans

Weighted average number of ordinary shares – diluted

Earnings
2018
£m

2,060

1,319

212

3,591

–

(41)

2,060

1,490

3,550

Earnings
2018
£m

2,060

1,319

212

3,591

–

(41)

2,060

1,490

3,550

Earnings
per share
2018
pence

Earnings
2017
£m

Earnings
per share
2017
pence

59.5

38.1

6.2

103.8

–

(1.2)

59.5

43.1

102.6

2018
millions

3,461

2,141

(312)

(19)

1,810

607

5,378

5,985

2,748

5,047

7,795

56.9

(8.3)

(0.5)

48.1

16.1

142.9

159.0

73.0

134.1

207.1

2017
millions

3,763

Earnings
per share
2018
pence

Earnings
2017
£m

Earnings
per share
2017
pence

59.3

37.9

6.1

103.3

–

(1.2)

59.3

42.8

102.1

2018
millions

3,476

2,141

(312)

(19)

1,810

607

5,378

5,985

2,748

5,047

7,795

56.7

(8.3)

(0.5)

47.9

16.0

142.3

158.3

72.7

133.5

206.2

2017
millions

3,780

Earnings
2016
£m

1,812

162

(73)

1,901

574

116

690

2,386

205

2,591

Earnings
2016
£m

1,812

162

(73)

1,901

574

116

690

2,386

205

2,591

2018
millions

3,461

3,476

2017
millions

3,763

3,780

Earnings
per share
2016
pence

48.0

4.3

(1.9)

50.4

15.2

3.1

18.3

63.2

5.5

68.7

2016
millions

3,774

Earnings
per share
2016
pence

47.8

4.3

(1.9)

50.2

15.1

3.1

18.2

62.9

5.5

68.4

2016
millions

3,790

2016
millions

3,774

3,790

123

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements8. 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

Special dividend

Final dividend in respect of the prior year

2018

Cash
dividend
paid
£m

346

3,171

970

4,487

Pence
per share

15.49

84.375

29.10

128.965

Scrip
dividend
£m

Pence
per share

176

–

209

15.17

–

28.34

43.51

2017

Cash
dividend
paid
£m

540

–

923

1,463

Scrip
dividend
£m

Pence
per share

–

151

183

15.00

–

28.16

43.16

2016

Cash
dividend
paid
£m

532

–

805

1,337

Scrip
dividend
£m

–

248

279

The Directors are proposing a final dividend for the year ended 31 March 2018 of 30.44p per share that will absorb approximately £1.0 billion of
shareholders’ equity (assuming all amounts are settled in cash). It will be paid on 15 August 2018 to shareholders who are on the register of members
at 1 June 2018 (subject to shareholders’ approval at the AGM). A scrip dividend will be offered as an alternative.

Following completion of the sale of the majority interest in UK Gas Distribution, the Company paid a special dividend on 2 June 2017 of 84.375p
per existing ordinary share ($5.4224 per existing American Depositary Share). This returned approximately £3,170 million to shareholders. No scrip
dividend was 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. At this stage we do not expect to buyback scrip issuances in 2019 and 2020, unless we have
higher than anticipated balance sheet capacity.

124

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.

As a result of the sale of a 61% controlling interest in UK Gas Distribution on 31 March 2017, 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. Any
adjustments arising as part of the completion adjustments finalised within the measurement period would result in a further gain or loss on
disposal to be reported within discontinued operations in the current period.

Disposal of UK Gas Distribution
On 31 March 2017 the Group completed the disposal 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). Further details are included in the Annual Report and Accounts 2016/17.

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, loan proceeds of £1,775 million and recognised a shareholder loan receivable of £429 million and a 39% equity
interest in Quadgas HoldCo Limited.

The UK Gas Distribution business met the criteria to be classified as held for sale at 8 December 2016, the date that the Group initially entered into
the sale agreement, 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 provisional purchase price allocation reported in the Annual Report
and Accounts 2016/17 has been finalised and there were no significant adjustments arising on finalisation of this exercise in the current year.

The business represented a reportable segment and a separate major line of business and accordingly was presented as a discontinued operation
in the consolidated income statement, consolidated statement of comprehensive income and the consolidated cash flow statement in 2016/17.

In 2017/18 a loss of £41 million is reported in discontinued operations, with £33 million relating to the completion accounts settlement in November
2017. In addition, this reflects a net charge of £8 million representing further transaction costs and gains principally relating to the reversal of provisions.

In addition, there was a cash outflow from operating activities of £207 million related to the utilisation of provisions, principally relating to payments
of professional fees in respect of the disposal of the UK Gas Distribution business. Net cash flows used in financing activities were £231 million for
the settlement of RPI swaps relating to the final stages of the Group-wide liability management programme executed as part of the sale process
(2017: cash flows comprising £4.8 billion of debt issued and term debt raised, offset by £3.2 billion in respect of bond buybacks).

On 1 May 2018, the Group announced that it had entered into an agreement with Quadgas Investments BidCo Limited regarding the potential
sale of its remaining 25% interest in Quadgas HoldCo Limited. Further details are given in notes 4, 15 and 35.

125

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements9. Discontinued operations continued

Summary income statement – discontinued operations
The summary income statement for discontinued operations for the years ended 31 March 2017 and 2016 are as follows:

Revenue

Operating costs

Operating profit1

Finance costs

Profit before tax from discontinued operations

Tax from discontinued operations

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

1,887

(993)

894

(152)

742

(79)

663

5,009

312

5,321

5,984

2016
£m

1,903

(1,043)

860

(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. 2017 costs have been included as part of transaction costs in determining the

gain on disposal.

The total gain on the disposal after tax of £5,321 million was comprised of total consideration of £7,494 million before transaction costs of £1,837 million
and a tax credit of £312 million compared to net assets on disposal of £648 million.

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

Notes

2017
£m

5,984

(75)

(62)

(106)

233

(23)

104

6,026

2016
£m

692

129

(30)

(38)

(28)

763

126

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.

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.

Impairment is recognised where there is a difference between the carrying value of the cash-generating unit and the estimated recoverable amount
of the cash-generating unit to which that goodwill has been allocated. Any impairment loss is first allocated to the carrying value of the goodwill and
then to the other assets within the cash-generating unit. 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 2016

Exchange adjustments

Net book value at 31 March 2017

Exchange adjustments

Net book value at 31 March 2018

Total
£m

5,315

781

6,096

(652)

5,444

The cost of goodwill at 31 March 2018 was £5,458 million (2017: £6,112 million) with an accumulated impairment charge of £14 million (2017: £16 million).

The amounts disclosed above as at 31 March 2018 include balances relating to the following cash-generating units: New York £3,137 million (2017:
£3,512 million); Massachusetts £1,173 million (2017: £1,313 million); Rhode Island £436 million (2017: £488 million); and Federal £699 million (2017:
£783 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 is 2.3% (2017: 2.0%). 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 post-tax discount rate of 5.3% (2017:
5.4%). The equivalent pre-tax discount rate is 5.3% (2017: 5.4%) as no cash tax is payable in our five-year plan projections. The discount rate
represents the estimated weighted average cost of capital of these operations.

In reaching this conclusion, the Directors have considered the potential future consequences regarding the manner in which Tax Reform will impact
the Group and its future cash flows. The full implications of the new legislation on earnings and cash flows are still being reviewed, and will depend
on the outcome of discussions with regulators.

In our US business, we are subject to federal and state taxes, however our regulatory arrangements require us to pass this cost back to our
customers. The reduction in the corporation tax rate from 35% to 21% will be reflected through lower bills to customers, reducing our revenues
(and tax costs) in future periods. For the purposes of the goodwill impairment exercise, we have reflected the lower billing levels through lower
revenue forecasts as well as lower tax charges.

Historically, as a result of tax losses arising from claiming accelerated depreciation allowances, we have not paid substantial amounts of tax in the
US. Accordingly, for IFRS purposes, we have recognised significant deferred tax liabilities in respect of these accelerated allowances. In accounting
terms, Tax Reform triggers the remeasurement of our deferred tax liabilities from 35% to 21% which has resulted in the exceptional gain under IFRS
(as disclosed in notes 4 and 6). However, the impact for our US business is that the amounts we have previously received from customers assuming
a 35% federal tax rate must now be returned to customers. The precise manner and timing over which this occurs remains subject to agreement with
our regulators. We are currently in discussions with regulators as to how best to adjust the customer bills for this purpose, and over what time period.

Offsetting this change will be the additional income we earn, since the rate base will grow faster. (Our rate base is net of deferred tax liabilities, which,
as a result of Tax Reform, will now be smaller.) In overall terms we expect the outcome to be economically neutral.

In assessing the carrying value of goodwill, we have sensitised our forecasts to factor in a reduction in revenues and lower tax costs into our cash
flow forecasts, but not reflected the impact of additional rate base growth on future earnings. 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 value-in-use exceeds the carrying amount.

127

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements11. 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 2016

Exchange adjustments

Additions

Disposals

Disposal of UK Gas Distribution

Reclassifications1

Cost at 31 March 2017

Exchange adjustments

Additions

Disposals

Reclassifications1

Cost at 31 March 2018

Accumulated amortisation at 1 April 2016

Exchange adjustments

Amortisation charge for the year

Accumulated amortisation of disposals

Disposal of UK Gas Distribution

Accumulated amortisation at 31 March 2017

Exchange adjustments

Amortisation charge for the year

Accumulated amortisation of disposals

Accumulated amortisation at 31 March 2018

Net book value at 31 March 20182

Net book value at 31 March 2017

1. Reclassifications includes amounts transferred (to)/from property, plant and equipment (see note 12).
2. Included in software is £160 million relating to the US ERP system, which still has a remaining amortisation period of six years.

Years

3 to 10

Software
£m

1,744

105

234

(43)

(304)

(4)

1,732

(98)

173

(18)

1,797

(857)

(43)

(164)

215

(809)

(138)

(898)

899

923

128

The following note shows the physical assets controlled by us. The cost of these assets primarily represents the amount initially paid for them.
This includes both their purchase price and the construction and other costs associated with getting them ready for operation. 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 Group’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. All costs associated with projects or activities which have not been fully commissioned at
the period end are classified within assets in the course of construction.

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 and wires

Electricity distribution plant

Electricity generation plant

Interconnector plant and other

Gas plant – mains, services and regulating equipment

Gas plant – storage

Gas plant – meters

Motor vehicles and office equipment

Years

up to 101

15 to 100

29 to 75

20 to 93

5 to 60

10 to 95

5 to 65

7 to 65

up to 29

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 immaterial are included within depreciation charge for the year.

Any assets which suffered impairment in a previous period are reviewed for possible reversal of the impairment at each reporting date.

129

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements12. Property, plant and equipment continued

Cost at 1 April 2016

Exchange adjustments

Additions

Disposals1

Disposal of UK Gas Distribution

Reclassifications2

Cost at 31 March 2017

Exchange adjustments

Additions

Disposals1

Reclassifications2

Cost at 31 March 2018

Accumulated depreciation at 1 April 2016

Exchange adjustments

Depreciation charge for the year

Disposals1

Disposal of UK Gas Distribution

Reclassifications2

Accumulated depreciation at 31 March 2017

Exchange adjustments

Depreciation charge for the year

Disposals1

Reclassifications2

Accumulated depreciation at 31 March 2018

Net book value at 31 March 2018

Net book value at 31 March 2017

Assets
in the
course of
construction
£m

Motor
vehicles
and office
equipment
£m

Plant and
machinery
£m

Total
£m

Land and
buildings
£m

2,758

196

(22)

(112)

104

2,979

(169)

(16)

2,930

(640)

(29)

(84)

(2)

54,772

3,157

822

(572)

(11,861)

2,913

49,231

(2,862)

430

(216)

2,791

49,374

(17,828)

(780)

(1,338)

545

3,425

(20)

(684)

(15,996)

(28)

–

695

(1,276)

199

(20)

(674)

(16,398)

2,256

2,295

32,976

33,235

3,874

3,080

(70)

(88)

(2,938)

3,951

(89)

3,358

(21)

(2,926)

4,273

–

4,273

3,951

1,171

62,575

132

(204)

(300)

(41)

834

(67)

(34)

857

(743)

(44)

(113)

203

207

–

(490)

(88)

–

(509)

348

344

3,522

4,089

(868)

(12,361)

56,995

(3,187)

3,901

(287)

57,434

(19,211)

(853)

(1,535)

790

3,661

(22)

(17,170)

759

(1,392)

242

(20)

(17,581)

39,853

39,825

1. Includes the reversal of assets with cost of £51 million (2017: £107 million) and accumulated depreciation of £51 million (2017: £107 million) disposed in previous years that remain in use in the
Group. It also includes £334 million of adjustments from accumulated depreciation to cost for historical disposals relating to assets acquired as part of the KeySpan acquisition in 2008 which
were disposed of in subsequent periods. Both of these adjustments have a nil net book value impact.

2. Represents amounts transferred between categories, (to)/from other intangible assets (see note 11), reclassifications from inventories and reclassifications between cost and accumulated

depreciation.

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

2018
£m

1,861

253

844

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) where the benefit to be received from the asset is not due to be received until after 31 March 2019.

Other receivables

Non-current tax assets

Prepayments and accrued income

1. Comparative amounts have been represented to reflect the reclassification of commodity derivative contracts from other non-current assets to derivatives (see note 16).

2018
£m

115

2017
£m

1,749

289

839

20171
£m

–

130

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 against derivative holdings.

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 plus transaction costs 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 joint ventures and associates1

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

Loans to joint ventures and associates

Restricted balances:

Collateral4

Other

2018
£m

417

482

899

2,304

390

2,694

3,593

2017
£m

605

495

1,100

7,432

1,309

8,741

9,841

1,999

6,899

530

198

482

335

3,593

939

202

495

1,262

9,841

1. Comprises £352 million (2017: £434 million) relating to a shareholder loan to Quadgas HoldCo Limited, and the remainder is a loan to a joint venture.
2. Includes £69 million (2017: £14 million) held by insurance captives and therefore restricted.
3. Includes restricted amounts of £301 million (2017: £434 million) held by insurance captives and £214 million (2017: £225 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 current loans and receivables is approximate to their fair values, due to
short-dated maturities. The carrying value of the non-current loans to joint ventures and associates approximates their fair values as at 31 March 2018
and 31 March 2017. The 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 impaired.

Unaudited commentary on financial and other investments

Current available-for-sale investments at 31 March 2018 were £5,128 million lower than the prior year. The balance at 31 March 2017 included
the proceeds received from the sale of the UK Gas Distribution business. £4,010 million of these proceeds were distributed in the current year
through the special dividend and share buyback.

131

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements15. 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 Group 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 Group has significant
influence.

Share of net assets at 1 April

Exchange adjustments

Additions

Acquisition of stake in Quadgas HoldCo Limited

Capitalisation of shareholder loan to Quadgas HoldCo Limited

Impairment charge against investment in Quadgas HoldCo Limited

Share of post-tax results for the year

Share of other comprehensive income of associates, net of tax

Dividends received

Other movements

Share of net assets at 31 March

2018

Joint
ventures
£m

Associates
£m

1,776

(19)

–

(213)

147

(170)

1,807

307

–

(43)

–

361

2017

Joint
ventures
£m

Associates
£m

Total
£m

2,083

(12)

129

–

(213)

173

147

(213)

1,611

–

(24)

–

2,168

1,776

Total
£m

397

137

1,611

–

(99)

(61)

2,083

313

–

(75)

(61)

307

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 an associate interest in Quadgas HoldCo Limited is provided in note 9 and opposite.

On 1 May 2018, the Group announced that it had entered into the Remaining Acquisition Agreement (RAA) with Quadgas Investments BidCo
Limited (the Consortium) regarding the potential sale of its remaining 25% interest in Quadgas HoldCo Limited, the holding company for Cadent
Gas Limited. The RAA contains both 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 (subject to giving six months’ notice) for cash proceeds of approximately £1.2 billion.

The nature of the contractual arrangements in the RAA are substantially the same as those within the Further Acquisition Agreement (FAA),
which also contains put and call options that can be exercised by either party during the same time-frame.

The carrying value of the Group’s equity interest in Quadgas HoldCo Limited at 31 March 2017 was £1.6 billion, reflecting our best estimate
of the fair value of that stake, as it was treated as an asset acquired at fair value following the disposal of a controlling interest in the UK Gas
Distribution business.

As set out in note 16, at 31 March 2018 we recognised a derivative financial asset of £110 million relating to the FAA agreement. In addition,
an impairment review of the Group’s interests in Quadgas HoldCo Limited, (comprising the FAA derivative, a 39% equity interest and £352 million
in shareholder loans), was undertaken, comparing the aggregated carrying value of these interests against the future dividend income and proceeds
we would expect to receive under the FAA and RAA. This resulted in a charge of £213 million, recorded as impairment against the carrying value of
the equity. The impairment largely offsets pension accounting gains, and the recognition of the FAA derivative asset.

Following recognition of the FAA derivative asset and the impairment charge, the aggregate carrying value of Group’s interests associated with
Quadgas HoldCo Limited is £2.1 billion, which is close to our original assessment of fair market value as determined at 31 March 2017. Of this,
£1.6 billion relates to our equity interest.

In 2017 the Group first 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 2018, the Group invested £38 million (2017: £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 fair value gain on this investment of £7 million has been reflected within the share of post-tax results for the year.

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 interests in the joint ventures and associates. The Group has capital commitments of £120 million (2017: £235 million) in
relation to joint ventures.

Outstanding balances with joint ventures and associates are shown in note 29.

At 31 March 2018, the Group had one material joint venture, being its 50% equity stake in BritNed Development Limited, and one material associate
being its 39% equity stake in Quadgas HoldCo Limited.

132

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsNotes to the consolidated financial statements–analysis of items in the primary statements continued15. Investments in joint ventures and associates continued

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%)

Income statement – BritNed Development Limited

Revenue

Depreciation and amortisation

Other costs

Operating profit

Income tax expense

Profit for the year

Group’s share of profit (National Grid ownership 50%)

2018
£m

390

(10)

(28)

406

203

2018
£m

429

(13)

(324)

(20)

2017
£m

392

(10)

(20)

408

204

2017
£m

399

(13)

(257)

129

(23)

106

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 retained 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 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 initially recognised its 39% interest in Quadgas HoldCo Limited at fair value, being the market price of the investment as at 31 March 2017.
The FAA was signed concerning a 14% interest in Quadgas HoldCo Limited, which 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 accounted for as a derivative financial
instrument (see notes 16 and 30(f)).

Quadgas HoldCo Limited is an unlisted entity, and so no quoted price exists. The fair value on initial recognition was 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 valued 14% of its 39% interest based on the price implied by the FAA.
The deduction for control premium was applied to the residual 25% interest.

133

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements15. Investments in joint ventures and associates continued

The Group has completed a purchase price allocation exercise for its interest in Quadgas HoldCo Limited. There were adjustments arising from the
finalisation of the purchase price allocation. A £33 million loss was recognised relating to the completion accounts settlement, resulting in a £20 million
payment being made to Quadgas BidCo Limited.

The fair values of the assets and liabilities of Quadgas HoldCo Limited as at 31 March 2017, as previously reported, are set out below, along with
the reconciliation to the carrying value of the investment in the associate at that date:

Statement of financial position – Quadgas HoldCo Limited (as previously reported)

Non-current assets

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

Summarised financial information of this associate (incorporating the purchase price allocation completion adjustments), as at 31 March, 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

Current assets

Non-current liabilities

Current liabilities

Equity

Proportion of the Group’s ownership interest in associate

Discount for non-controlling interest (arising on initial acquisition)

Impairment charge against investment

Carrying amount of the Group’s interest in associate (National Grid ownership 39%)

2018
£m

2017
£m

16,735

16,047

427

299

(11,195)

(10,864)

(534)

5,433

2,119

(312)

(213)

1,594

(551)

4,931

1,923

(312)

–

1,611

The sale of the previously owned subsidiary and subsequent acquisition of the 39% equity interest occurred (see note 9) on 31 March 2017. All profit
or loss impact for the year ended 31 March 2017 is disclosed as discontinued operations. The summarised income statement for the year ended
31 March 2018 is set out below:

Income statement – Quadgas HoldCo Limited

Revenue

Depreciation and amortisation

Other costs

Operating profit

Net interest payable

Income tax expense

Profit for the year

Group’s share of profit (National Grid ownership 39%)

2018
£m

1,468

(378)

(423)

667

(272)

(76)

319

124

134

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 generally to manage
our exposure to fluctuations in interest rate, foreign exchange and our operational market risks from our commodity activities. Our derivatives are
split into the broad categories analysed below:

• derivatives managing risks to interest rate and foreign exchange rate. Specifically we use these derivatives to manage risks from the financing

portfolio, to optimise the overall cost of accessing the debt capital markets, managing the exposure to holdings in foreign operations and other
contractual operational cash flows; and

• derivatives managing our price and supply risks from our commodity activity.

Derivative financial instruments are initially recognised at fair value and subsequently remeasured to 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 as required by IAS 39. Where the gains or
losses recorded in the income statement arise from changes in the fair value of commodity contract derivatives and of derivative financial instruments
to the extent that hedge accounting is not achieved or is not effective, these are recorded as remeasurements, detailed in notes 4 and 5. Where the
fair value of a derivative is positive it is carried as a derivative asset, and where negative as a derivative liability.

The total fair value of derivatives split by category is as follows:

Financing derivatives

Commodity derivatives1

Further Acquisition Agreement derivative2

Assets
£m

1,545

110

2018

Liabilities
£m

(945)

(116)

–

1,724

(1,061)

Total
£m

600

(47)

110

663

Assets
£m

1,707

106

–

1,813

2017

Liabilities
£m

(2,223)

(170)

–

(2,393)

Total
£m

(516)

(64)

–

(580)

1. Comparative amounts have been re-presented to reflect the reclassification of commodity derivative contracts from trade and other receivables (31 March 2017: £54 million), trade and other

payables (31 March 2017: £93 million), other non-current assets (31 March 2017: £52 million) and other non-current liabilities (31 March 2017: £77 million), to current and non-current derivative
financial assets and derivative financial liabilities.

2. This year a further derivative category has been added for the Further Acquisition Agreement (FAA) derivative. This relates to the put/call option over a 14% interest in Quadgas HoldCo Limited.

Refer to note 15 for further details.

(a) Financing derivatives
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 financing derivative instrument type the fair value amounts are as follows:

Interest rate swaps

Cross-currency interest rate swaps

Foreign exchange forward contracts1

Inflation linked swaps

Equity options

2018

Assets
£m

Liabilities
£m

678

687

174

1,545

(457)

(207)

(2)

(278)

(1)

(945)

Total
£m

221

480

172

(273)

–

600

Assets
£m

849

676

160

2017

Liabilities
£m

(657)

(909)

(113)

(529)

(15)

1,707

(2,223)

1. Included within the foreign exchange forward contracts balance is £67 million (2017: £69 million) of derivatives in relation to hedging of capital expenditure.

The maturity profile of financing derivative 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

2018

Assets
£m

Liabilities
£m

Total
£m

Assets
£m

375

418

632

1,170

1,545

(325)

(88)

(27)

(5)

–

(500)

(620)

(945)

(5)

(2)

413

132

550

600

192

199

122

419

736

1,515

1,707

2017

Liabilities
£m

(1,054)

(305)

(160)

(83)

(36)

(585)

(1,169)

(2,223)

Total
£m

192

(233)

(522)

–

(516)

Total
£m

(862)

(106)

(38)

(44)

383

151

346

(516)

135

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements16. Derivative financial instruments continued

(a) Financing derivatives continued
For each class of financing 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

2018
£m

(8,390)

(6,925)

(5,793)

(1,191)

(800)

2017
£m

(9,469)

(8,631)

(8,253)

(1,423)

(800)

(23,099)

(28,576)

1. The notional contract amounts of derivatives indicate the gross nominal value of transactions outstanding at the reporting date.

(b) 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 Group uses itself, meet the expected purchase or usage requirements 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.

US states have introduced a variety of legislative requirements with the aim of increasing the proportion of our electricity that is derived from renewable
or other forms of clean energy. Annual compliance filings regarding the level of Renewable Energy Certificates (and other similar environmental
certificates) are required by the relevant department of utilities. In response to the legislative requirements, National Grid has entered into long-term,
typically fixed-price, energy supply contracts to purchase both renewable energy and environmental certificates. We are entitled to recover all costs
incurred under these contracts through customer billing.

Under IFRS, where these supply contracts are not accounted for as finance leases, they are considered to comprise two components, being a
forward purchase of power at spot prices, and a forward purchase of environmental certificates at a variable price (being the contract price less
the spot power price). With respect to our current contracts, neither of these components meets the requirement to be accounted for as a derivative.
The environmental certificates are currently required for compliance purposes, and at present there are no liquid markets for these attributes.
Accordingly, this component meets the expected purchase or usage requirements of IAS 39. We expect to enter into an increasing number of these
contracts, in order to meet our compliance requirements in the short to medium term. It is possible that in future, if and when liquid markets develop,
and to the extent that we are in receipt of environmental certificates in excess of our required levels, this exemption may cease to apply and we may
be required to account for forward purchase commitments for environmental certificates as derivatives at fair value through profit and loss.

Some forward contracts for the purchase of commodities do not meet the 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 option 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 remeasurements.

For each class of commodity contract derivative type, the fair value amounts are as follows:

2018

Assets
£m

Liabilities
£m

Total
£m

Assets
£m

2017

Liabilities
£m

Total
£m

(10)

(15)

(50)

–

(10)

(97)

–

(61)

–

(2)

–

106

(170)

(64)

–

(64)

–

(46)

(1)

(4)

(1)

(116)

–

(4)

(39)

(1)

(3)

(1)

(47)

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

Gas options

136

(b) Commodity risk continued
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

2018

Assets
£m

Liabilities
£m

Total
£m

Assets
£m

2017

Liabilities
£m

(76)

(17)

(11)

(3)

(2)

(7)

(40)

(116)

(46)

(11)

(5)

(1)

(47)

106

(93)

(36)

(9)

(7)

(5)

(20)

(77)

(170)

Total
£m

(39)

(28)

(2)

(1)

(25)

(64)

For each class of commodity contract derivative, our exposure based on the notional quantities is as follows:

Forward purchases of electricity1

Forward purchases of gas2

Electricity swaps

Electricity options

Electricity capacity

Gas swaps

Gas options

NYMEX gas futures3

2018

2017

0 GWh

159 GWh

54m Dth

12,839 GWh 12,776 GWh

13,897 GWh 17,793 GWh

0.6 GWm

0.7 GWm

100m Dth

83m Dth

7m Dth

0 Dth

9m Dth

3m Dth

1. Forward electricity purchases expired on 30 September 2017. The contractual obligations under these contracts are £nil (2017: £15 million).
2. Forward gas purchases have terms up to three years. The contractual obligations under these contracts are £96 million (2017: £131 million).
3. NYMEX gas futures have been offset with related margin accounts (see note 30(a)).

(c) Further Acquisition Agreement derivative
The Group signed a Further Acquisition Agreement (FAA) concerning a 14% interest in Quadgas HoldCo Limited, which contains put and call options.
The fair value of these derivatives is £110 million asset at 31 March 2018 (2017: £nil). The derivative notional was £739 million (2017: £690 million). The
options can be exercised in the period between 1 March 2019 and 31 October 2019. The fair value of the option has been disclosed as a non-current
derivative asset.

(d) Hedge accounting
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 and foreign exchange 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

2018
£m

496

2017
£m

548

137

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements16. Derivative financial instruments continued

(d) Hedge accounting continued
Cash flow hedges
Exposure arises from the variability in future interest and currency cash flows on assets and liabilities which bear interest at variable rates or are in
a foreign currency. Interest rate and cross-currency swaps are maintained, and designated as cash flow hedges, where they qualify, to manage this
exposure. Fair value changes on designated cash flow hedges are initially recognised in other comprehensive income as gains or losses recognised
in equity and transferred to the cash flow hedge reserve, 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

2018
£m

138

204

2017
£m

(180)

(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/interest rate swaps

Foreign exchange forward contracts

2018
£m

(104)

(17)

2017
£m

(544)

(56)

(600)

The cross-currency swaps and forward foreign currency contracts are hedge accounted using the spot to spot method. The foreign exchange gain or
loss on retranslation of the borrowings and the spot to spot movements on the cross-currency swaps and forward currency contracts are transferred
to equity to offset gains or losses on translation of the net investment in the non-sterling denominated subsidiaries, with any ineffective portion
recognised immediately in the income statement.

Derivatives not in a formal hedge relationship
Our policy is not to use derivatives for trading purposes. However, due to the complex nature of hedge accounting under IAS 39 some derivatives
may not qualify for hedge accounting, or are specifically not designated as a hedge where natural offset is more appropriate. Changes in the fair
value of any derivative instruments that do not qualify for hedge accounting are recognised in remeasurements within the income statement.

Cross-currency interest rate/interest rate swaps

Foreign exchange forward contracts

Inflation linked swaps

Equity options

Commodity derivatives (all categories)

Further Acquisition Agreement derivative

2018
£m

171

(273)

–

(47)

110

(20)

2017
£m

135

(522)

–

(64)

–

(417)

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 host 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 that are not closely related, the embedded derivative is separately accounted for as a
derivative financial instrument.

138

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. A liability
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

2018
£m

190

–

341

2017
£m

101

191

103

403

There is a provision for obsolescence of £18 million against inventories as at 31 March 2018 (2017: £26 million).

18. Trade and other receivables

Trade and other receivables are amounts which are due from our customers for services we have provided. Other receivables also include
prepayments made by us, for example, property lease rentals paid in advance.

Trade and other receivables are initially recognised at fair value and subsequently measured at amortised cost, less any appropriate allowances for
estimated irrecoverable amounts. A provision is established for irrecoverable amounts when there is objective evidence that amounts due under the
original payment terms will not be collected.

Trade receivables

Accrued income

Prepayments

Other receivables

2018
£m

1,674

817

229

20171
£m

1,591

811

228

2,798

2,728

1. Comparative amounts have been represented to reflect the reclassification of commodity contract derivatives from trade and other receivables to derivatives (see note 16).

Trade receivables are non-interest-bearing and generally have a 30 to 90 days 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

For further information on our wholesale and retail credit risk, refer to note 30(a).

2018
£m

424

(42)

(109)

–

309

2018
£m

271

131

475

2017
£m

349

147

(121)

(2)

424

2017
£m

238

143

448

139

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements19. 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

20. Borrowings

2018
£m

275

329

2017
£m

199

940

1,139

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. Further details
on our net debt can be found in note 27.

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 values which normally reflect
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.

2018
£m

2,020

2,156

206

2017
£m

1,339

2,209

1,881

4,447

5,496

2,384

19,418

207

169

22,178

26,625

2,343

20,368

242

189

23,142

28,638

Current

Bank loans

Bonds

Commercial paper

Finance leases

Other loans

Non-current

Bank loans

Bonds

Finance leases

Other loans

Total borrowings

140

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

2018
£m

4,447

1,694

2,347

1,873

1,469

1,010

13,785

26,625

2017
£m

5,496

1,941

1,821

2,453

1,921

1,043

13,963

28,638

The fair value of borrowings at 31 March 2018 was £30,164 million (2017: £32,239 million). Where market values were available, fair value of borrowings
(Level 1) was £13,018 million (2017: £12,547 million). Where market values were not available, fair value of borrowings (Level 2) was £17,146 million
(2017: £19,692 million), calculated by discounting cash flows at prevailing interest rates. The notional amount outstanding of the debt portfolio at
31 March 2018 was £26,363 million (2017: £28,310 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 £392 million at 31 March 2018
(2017: £440 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 £878 million
(2017: £709 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. Unless included herein, the information on our website is unaudited.

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

2018
£m

177

313

(42)

271

144

271

2017
£m

213

368

(60)

308

174

308

As at 31 March 2018, total borrowings of £26,625 million (2017: £28,638 million) including bonds, bank loans, commercial paper, collateral, finance
leases and other debt had decreased by £2,013 million. We expect to repay £4,447 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 (2017: 11 years). Further information on our bonds can be found in the debt investor section of
our website. Unless included herein, the information on our website is unaudited.

141

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements21. 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 and other payables are initially recognised at fair value and subsequently measured at amortised cost.

Trade payables

Deferred income2

Social security and other taxes

Other payables

2018
£m

1,977

440

173

863

20171
£m

2,135

298

136

776

3,453

3,345

1. Comparative amounts have been represented to reflect the reclassification of commodity derivative contracts from trade and other payables to derivatives (see note 16).
2. Included within deferred income is £85 million (2017: £89 million) relating to customer contributions.

Due to their short maturities, the fair value of trade payables approximates their book value.

22. Other non-current liabilities

Other non-current liabilities include deferred income which will not be recognised as income until after 31 March 2019. It also includes payables
that are not due until after that date.

Non-current liabilities are initially recognised at fair value and subsequently measured at amortised cost.

Deferred income2

Other payables

2018
£m

958

359

1,317

20171
£m

1,032

338

1,370

1. Comparative amounts have been represented to reflect the reclassification of commodity derivative contracts from other non-current liabilities to derivatives (see note 16).
2. Included within deferred income is £844 million (2017: £839 million) relating to customer contributions.

There is no material difference between the fair value and the carrying value of other payables.

23. Pensions and other post-retirement benefits

The majority of employees are either members of a DB (defined benefit) or a DC (defined contribution) pension scheme. In the US we also provide
healthcare and life insurance benefits to eligible retired US employees.

The fair value of associated scheme assets and present value of DB obligations are updated annually in accordance with IAS 19 (revised).

We separately present our UK and US pension schemes 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 DB obligations.

Defined contribution plans
Most new hires are able to join DC plans in the UK or US. These plans are designed to provide members with a pension pot for their retirement.
The risks associated with these plans are assumed by the member.

Payments to these DC plans are charged as an expense as they fall due. There is no legal or constructive obligation on National Grid to pay additional
contributions into a DC plan if the fund has insufficient assets to pay all employees’ benefits relating to employee service in the current and prior periods.

Defined benefit schemes
The principal UK schemes are the National Grid UK Pension Scheme (NGUKPS) and the National Grid Electricity Group of the Electricity Supply
Pension Scheme (NGEG of the ESPS). In the US, we have four plans and a number of healthcare and life insurance plans.

For DB pension schemes, 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 scheme.

National Grid’s obligation in respect of DB pension schemes is calculated separately for each DB scheme 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. Current service cost and any unrecognised past service cost are recognised
immediately. The discount rate used is the yield at the valuation date on high-quality corporate bonds.

Advice is taken from independent actuaries relating to the appropriateness of the key assumptions applied, including life expectancy, 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, the statement of other comprehensive income and the net liability recognised in the statement of financial position.

Remeasurements of pension assets and post-retirement benefit obligations are recognised in full in the period in which they occur in the statement
of other comprehensive income.

142

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsNotes to the consolidated financial statements–analysis of items in the primary statements continued23. Pensions and other post-retirement benefits continued

UK pension plans

Defined Contribution
The National Grid YouPlan
National Grid pays contributions into YouPlan to provide DC benefits on behalf of employees. National Grid provides a double match of member
contributions, up to a maximum of 6% of member salary.

YouPlan was established in 2013 and is the qualifying scheme used for automatic enrolment of new hires. Prior to its establishment, DC benefits
were provided through the NGUKPS, which transferred all historical DC benefits to YouPlan in 2013.

Defined Benefit
National Grid’s DB pension arrangements are held in separate trustee administered funds. The arrangements are managed by trustee companies
with boards consisting of company and member appointed directors.

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’ contributions, 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. See page 145 for the assumptions used for IAS 19 purposes.

Latest full actuarial valuation

Actuary

Market value of scheme assets at latest valuation

Actuarial value of benefits due to members

Market value as percentage of benefits

Funding surplus/(deficit)

Funding surplus/(deficit) net of tax

Section A of NGUKPS

Section B of NGUKPS

31 March 2017

NGEG of ESPS

31 March 2016

Willis Towers Watson

£6,716m

£6,627m

101%

£89m

£74m

£5,849m

£6,057m

97%

(£208m)

(£173m)

Aon Hewitt

£2,553m

£3,053m

84%

(£500m)

(£415m)

National Grid UK Pension Scheme
With effect from 1 January 2017 the scheme was split into three sections, each of which is legally and actuarially separate. Sections A and B are
supported by companies within the National Grid Group, and National Grid makes payments to Sections A and B to cover administration costs and
the Pension Protection Fund levy. The scheme closed to new hires on 1 April 2002.

Section C is supported by Cadent Gas Limited which is no longer part of the National Grid Group following the disposal of UK Gas Distribution which
completed on 31 March 2017. The disclosures for the current year do not include Section C data. However, the actuarial assumptions adopted will
influence our equity accounting for Quadgas HoldCo Limited (the ultimate parent of Cadent Gas Limited).

Section A
Following the actuarial valuation at 31 March 2017, Section A was in surplus. As such, no deficit funding contributions are being made to the section.
National Grid and the Trustees have agreed a schedule of contributions whereby the employers will contribute 51.8% of pensionable salary, less
member contributions, in respect of ongoing service cost. This rate is deemed to be sufficient to meet the statutory funding objective during the
period for which it is in force.

The next actuarial valuation will be performed at 31 March 2019.

Section B
The actuarial valuation as at 31 March 2017 determined that Section B was in deficit. National Grid and the Trustee agreed on a schedule of
contributions, whereby deficit funding contributions of approximately £32 million payable by 30 September each year from 2017 onwards until
30 September 2022, with an additional £8 million payable by 30 September 2023. All deficit funding amounts due will be adjusted for the change
in the Retail Price Index (RPI) from 31 December 2016 up to three months prior to the date of payment. As a result, the funding shortfall is expected
to be eliminated by 30 September 2023.

The employers will also contribute 51.4% of pensionable salary, less member contributions, in respect of ongoing service cost.

The next actuarial valuation will be performed as at 31 March 2019.

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National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements23. Pensions and other post-retirement benefits continued

National Grid Electricity Group of the Electricity Supply Pension Scheme
The scheme closed to new hires from 1 April 2006.

The last full actuarial valuation for the NGEG of the ESPS was carried out at 31 March 2016 and determined that the scheme was in deficit. National
Grid and the Trustee agreed on a schedule of contribution, whereby deficit funding contributions of £48 million are payable each year from 2016
onwards until 31 March 2027. All deficit funding amounts due will be adjusted for the change in the Retail Price Index (RPI). The funding shortfall
is expected to be eliminated by 31 March 2027.

The employer will also contribute 40.7% of pensionable earnings (less member contributions).

The next actuarial valuation is required with an effective date of no later than 31 March 2019.

Security arrangements
National Grid has also established security arrangements with charges in favour of the Trustees. As at 31 March 2018 the required value of these
arrangements and principal supporting employers were:
• Section A of NGUKPS: £315 million, National Grid plc and National Grid UK Limited;
• Section B of NGUKPS: £179 million, National Grid Gas plc (NGG); and
• NGEG of ESPS: £250 million, National Grid Electricity Transmission plc (NGET).

The majority of the security is provided in the form of letters of credit with the remainder in surety bonds. The assets held in security will be paid to
the respective section or scheme in the event that the relevant supporting employer is subject to an insolvency event or fails to make the required
contributions. In addition, counter indemnities have also been taken out to ensure the obligations will be fulfilled.

The following specific conditions apply to the security arrangements:
• Section B of NGUKPS: The assets will be paid to Section B if NGG is given notice of less than 12 months that Ofgem intends to revoke its licence

under the Gas Act 1986, or if NGG grants any charges over its assets other than where agreed with the Trustee.

• NGEG of ESPS: The asset and an amount in respect of the deficit (to a maximum of £500 million) will be paid to the scheme if NGET ceases to

hold a licence granted under the Electricity Act 1989.

In addition to the above, if the credit rating of the supporting employer, as determined by two out of three specified agencies, falls below certain
agreed levels for 40 days, the following amounts will be payable:
• Section A of NGUKPS: £72 million (increased in line with RPI).
• Section B of NGUKPS: £65 million (increased in line with RPI).
• NGEG of ESPS: A maximum of £500 million in respect of the deficit.

US pension plans
National Grid 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.

National Grid also 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.

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.

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National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsNotes to the consolidated financial statements–analysis of items in the primary statements continued23. Pensions and other post-retirement benefits continued

Risks
National Grid underwrites the financial and demographic risks associated with DB plans, the most significant of which are:

• Asset volatility: The schemes invest 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, impacting on the net balance sheet asset or liability. Each
scheme seeks to balance the level of investment return sought with the aim of reducing volatility and risk by means of liability matching asset
strategies, diversification of asset portfolios, interest rate hedging and management of foreign exchange exposure. In taking this approach,
reference is made to both the maturity of liabilities and the funding level of that scheme.

• Changes in bond yields: 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.

• Inflation risk: Changes in inflation will affect current and future pensions, but are partially mitigated though investing in inflation matching assets

and hedging instruments.

• Member longevity: Longevity is a key driver of liabilities and changes in expected mortality will have a direct impact on liabilities. In aggregate,
the liabilities are relatively mature which mitigates the risk to a certain extent. The NGEG of ESPS holds a longevity insurance contract which
covers exposure to improvements in longevity, providing long-term protection and income to the scheme in the event that members live longer
than currently expected.

Actuarial assumptions
The Company has applied the following financial assumptions in assessing DB liabilities.

Discount rate1 – past service2

Discount rate1 – future service2

Rate of increase in salaries3

Rate of increase in RPI – past service4

Rate of increase in RPI – future service4

UK pensions

2017
%

2.40

2.65

3.50

3.20

3.15

2018
%

2.60

2.65

3.40

3.15

3.10

2016
%

3.30

3.20

2.90

1. The discount rates for pension liabilities have been determined by reference to appropriate yields on high-quality corporate bonds prevailing in the UK debt markets at the reporting date.
2. In the UK for 2018, National Grid has adopted a different discount rate assumption by increasing the duration of the scheme liabilities to 25 years for future service obligations. This has led

to a future service discount rate in the UK of 2.65% for both the 2017 and 2018 year-ends. The 2017 discount rate was 2.40% based on an expected duration of scheme liabilities of 17 years.

3. A promotional scale has also been used where appropriate. The UK assumption stated is that relating to service prior to 1 April 2013. The UK assumption for the rate of increase in salaries

for past service after this date is 2.20% (2017: 2.20%; 2016: 2.10%) and for future service 2.15% (2017: 2.20%; 2016: 2.10%). The rates of increase stated are not indicative of historical increases
awarded or a guarantee of future increases, but merely an appropriate assumption utilised in assessing DB liabilities.

4. This is the key assumption that determines assumed increases in pensions in payment and deferment in the UK only. Consistent with the derivation of the discount rate, the RPI assumption
reflects the duration of the active liabilities to be adopted in the calculation of the future service obligations. This approach leads to a RPI assumption for the future service rate of 3.10% p.a.
at reporting date (2017: 3.15%; 2016: 2.90%), as compared to the 2017 published assumption of 3.20% for both past service and future service.

Discount rate1

Rate of increase in salaries

Initial healthcare cost trend rate

Ultimate healthcare cost trend rate2

US pensions

US other post-retirement benefits

2018
%

4.00

3.50

n/a

2017
%

4.25

3.50

n/a

2016
%

4.25

3.50

n/a

2018
%

4.00

3.50

7.50

4.50

2017
%

4.25

3.50

7.00

4.50

2016
%

4.25

3.50

7.50

4.50

1. The discount rates for pension liabilities have been determined by reference to appropriate yields on high-quality corporate bonds prevailing in the US debt markets at the reporting date with

an expected duration of plan liabilities of 17 years.

2. The ultimate healthcare cost trend rate will reach the ultimate trend in 2026/28 (2017 and 2016: 2024/25).

For sensitivity analysis see note 33.

Assumed life expectations for a retiree age 65

Males

Females

In 20 years:

Males

Females

2018

2017

2016

UK
years

US
years

22.3

23.9

23.7

25.5

22.0

24.2

23.6

25.8

UK
years

22.9

24.7

25.1

27.1

US
years

21.9

24.1

23.6

25.7

UK
years

22.8

25.2

25.1

27.6

US
years

21.8

24.0

23.5

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.

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National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements23. Pensions and other post-retirement benefits continued

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

2018
£m

(14,152)

15,330

1,178

(74)

–

Net defined benefit asset/(liability)

1,104

Represented by:

Liabilities

Assets

(74)

1,178

1,104

UK Pensions

US Pensions

US other post-retirement benefits

2017
£m

(15,565)

15,489

2016
£m

(19,341)

19,401

(76)

(80)

–

(156)

(536)

380

(156)

(75)

–

(15)

(300)

285

(15)

2018
£m

(6,349)

6,030

(319)

(233)

–

(552)

(783)

231

(552)

2017
£m

(6,790)

6,322

(468)

(260)

–

(728)

(951)

223

(728)

2016
£m

(5,916)

5,136

(780)

(229)

–

(1,009)

(1,134)

125

(1,009)

2018
£m

(3,246)

2,498

(748)

–

(67)

(815)

–

(815)

2017
£m

(3,535)

2,564

(971)

–

(78)

2016
£m

(3,391)

1,897

(1,494)

–

(67)

(1,049)

(1,561)

(1,049)

(1,561)

–

(1,049)

(1,561)

1. Present value of funded obligations split approximately as follows:

• UK pensions at 31 March 2018: 10% active members (2017: 12%; 2016: 12%); 18% deferred members (2017: 19%; 2016: 18%); 72% pensioner members (2017: 69%; 2016: 70%)
• US pensions at 31 March 2018: 38% active members (2017: 38%; 2016: 39%); 8% deferred members (2017: 9%; 2016: 9%); 54% pensioner members (2017: 53%; 2016: 52%)
• US other post-retirement benefits at 31 March 2018: 38% active members (2017: 39%; 2016: 41%); 0% deferred members (2017: 0%; 2016: 0%); 62% pensioner members (2017: 61%; 2016: 59%)

The recognition of the pension assets in both the UK in relation to the National Grid UK Pension Scheme (NGUKPS) and the Niagara Mohawk Plan
in the US reflect legal and actuarial advice that we have taken regarding recognition of surpluses under IFRIC 14. In both cases we have concluded
that the Group has an unconditional right to a refund from the individual plans, including from each Section of the NGUKPS, in the event of a winding
up. In the UK, the Trustees must seek the agreement of the Company to any benefit augmentation beyond the provisions set out in the Scheme
Rules. In the US, the surplus assets may be used to pay benefits under other Plans, thereby allowing the Company to settle other liabilities under
other Plans.

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National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsNotes to the consolidated financial statements–analysis of items in the primary statements continued23. 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 benefit scheme costs:

Current service cost

Past service cost – augmentations

Past service credit – redundancies

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, 2

Remeasurement gains of pension assets and post-retirement benefit obligations

Exchange adjustments

Total included in the statement of other comprehensive income2

2018
£m

2017
£m

193

232

(1)

202

–

283

1,313

175

1,488

(1)

239

105

399

348

(345)

2016
£m

221

(1)

234

112

–

364

539

(81)

458

1. Amounts recognised in the income statement include operating costs of £nil (2017: £1 million; 2016: £1 million); payroll costs of £nil (2017: £35 million; 2016: £28 million); and net interest of £nil

(2017: £2 million income; 2016: £1 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 £nil (2017: £75 million loss; 2016:

£129 million gain) 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:

UK Pensions

US Pensions

US other post-retirement benefits

2016
£m

2018
£m

2017
£m

2016
£m

Included within operating costs

Administration costs

Included within payroll costs

Defined benefit scheme costs:

Current service cost

Past service cost – augmentations

Past service credit – redundancies

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

2018
£m

(1)

–

Total included in income statement

Remeasurement gains/(losses) of
pension assets and post retirement
benefit obligations

Exchange adjustments

Total included in the statement
of other comprehensive income

1,177

–

1,177

2017
£m

(1)

–

128

(541)

–

(541)

2016
£m

(1)

–

2018
£m

–

2017
£m

103

–

103

–

116

134

155

137

534

–

534

102

319

(140)

179

(67)

(33)

(100)

–

109

100

209

–

116

111

570

(205)

365

(48)

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National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial 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

2018
£m

(1,933)

(283)

1,488

475

(10)

(263)

2017
£m

(2,585)

(399)

1,073

(25)

(1,933)

2016
£m

(3,258)

(364)

458

587

(8)

(2,585)

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
asset/(liability)

UK pensions

US pensions

US other post-retirement benefits

2018
£m

(156)

(67)

1,177

150

–

1,104

2017
£m

(15)

(128)

(541)

528

–

(156)

2016
£m

(672)

(116)

534

239

–

2018
£m

(728)

2017
£m

2016
£m

2018
£m

2017
£m

2016
£m

(1,009)

(1,003)

(1,049)

(1,561)

(1,583)

(134)

(155)

(137)

(82)

(116)

(111)

102

208

–

179

257

–

(100)

231

–

209

117

(10)

365

288

(25)

117

(8)

(15)

(552)

(728)

(1,009)

(815)

(1,049)

(1,561)

Changes in the present value of defined benefit obligations (including unfunded obligations)

Opening defined benefit obligations

Current service cost

Interest cost

Actuarial (losses)/gains – experience

Actuarial gains – demographic assumptions

Actuarial gains/(losses) – financial assumptions

Past service credit – redundancies

Special termination benefit cost – redundancies

Past service cost – augmentations

Medicare subsidy received

Obligations transferred on disposal of UK Gas Distribution

Employee contributions

Benefits paid

Exchange adjustments

2018
£m

2017
£m

2016
£m

(26,230)

(28,952)

(29,592)

(193)

(775)

(100)

671

174

(9)

(1)

(21)

–

(1)

1,285

1,145

(232)

(1,057)

166

225

(3,377)

(7)

(1)

(14)

6,970

(1)

1,443

(1,394)

(221)

(1,026)

659

–

218

(11)

(3)

(15)

–

(2)

1,348

(308)

Closing defined benefit obligations

(24,054)

(26,230)

(28,952)

The geographical split of pensions and other post-retirement benefits is as shown below:

UK pensions

US pensions

US other post-retirement benefits

2018
£m

2017
£m

2016
£m

2018
£m

2017
£m

2016
£m

2018
£m

2017
£m

2016
£m

Opening defined benefit obligations

(15,645)

(19,416)

(20,125)

(7,050)

(6,145)

(6,055)

(3,535)

(3,391)

(3,412)

Current service cost

Interest cost

Actuarial (losses)/gains – experience

Actuarial gains – demographic
assumptions

Actuarial gains/(losses) – financial
assumptions

Past service credit – redundancies

Special termination benefit cost –
redundancies

Past service cost – augmentations

Medicare subsidy received

Obligations transferred on disposal of
UK Gas Distribution

Employee contributions

Benefits paid

Exchange adjustments

(49)

(366)

(95)

565

604

(9)

(1)

–

(1)

770

–

(76)

(615)

106

214

(3,751)

(7)

(1)

–

6,970

(1)

931

–

(74)

(649)

552

–

(11)

(3)

–

(2)

895

–

(98)

(273)

(38)

(279)

–

(103)

(285)

(2)

–

(95)

(242)

–

120

–

362

764

349

(903)

310

(198)

(46)

(136)

(151)

–

(53)

(157)

337

–

(21)

(14)

–

153

381

–

163

(491)

(52)

(135)

–

(15)

–

143

(110)

Closing defined benefit obligations

(14,226)

(15,645)

(19,416)

(6,582)

(7,050)

(6,145)

(3,246)

(3,535)

(3,391)

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National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsNotes to the consolidated financial statements–analysis of items in the primary statements continued23. Pensions and other post-retirement benefits continued

Changes in the value of plan assets

Opening fair value of plan assets

Interest income

Return on plan assets in excess of/(less than) interest

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

2018
£m

2017
£m

2016
£m

24,375

26,434

26,408

710

568

(16)

475

(1,285)

(970)

–

23,858

1,278

363

952

3,334

(21)

1,073

(1,443)

1,049

(7,004)

24,375

4,286

491

914

(338)

(18)

587

(1,348)

227

–

26,434

576

686

The geographical split of pensions and other post-retirement benefits is as shown below:

UK pensions

US pensions

US other post-retirement benefits

Opening fair value of plan assets

15,489

19,401

19,453

2018
£m

2017
£m

2016
£m

Interest income

363

615

Return on plan assets in excess
of/(less than) interest

Administration costs

Employer contributions

Employee contributions

Benefits paid

Exchange adjustments

Assets transferred on disposal
of UK Gas Distribution

103

(6)

150

(770)

–

Closing fair value of plan assets

15,330

Actual return on plan assets

Expected contributions to plans
in the following year

466

140

2,890

(11)

528

(931)

–

(7,004)

15,489

3,505

128

631

(18)

(11)

239

(895)

–

19,401

613

228

2018
£m

6,322

246

314

(9)

208

–

(362)

(689)

–

6,030

560

2017
£m

5,136

242

282

(9)

257

–

(349)

763

–

6,322

524

2016
£m

5,052

206

(202)

(6)

231

–

(310)

165

–

5,136

2018
£m

2,564

101

151

(1)

117

–

(153)

(281)

–

2,498

252

2017
£m

1,897

162

(1)

288

–

(163)

286

–

2,564

257

2016
£m

1,903

(118)

(1)

117

–

(143)

–

1,897

(41)

221

229

220

134

238

Investment strategy
Each plan’s investment strategy is formulated specifically in order to target specific asset allocations, asset returns and to manage risk. The asset
allocation of the plans as at 31 March 2018 is as follows:

Equities

Corporate bonds

Government securities

Property

Diversified alternatives

Liability matching assets

Other

UK pensions1
%

US pensions2
%

14.6

25.8

36.7

6.3

5.1

7.7

3.8

100.0

42.0

24.8

16.2

4.6

10.3

–

2.1

100.0

US other
post-retirement
benefits3
%

60.9

1.0

20.4

–

12.2

–

5.5

100.0

1. Of total assets at year-end date, 57.8% is invested in the UK, 18.4% in the US and 23.7% in other countries, including the EU.
2. Of total assets at year-end date, 88.5% is invested in the US, 1.2% in the UK and 10.3% in other countries.
3. Of total assets at year-end date, 91.8% is invested within the US, 0.2% in the UK and 8.0% in other countries.

149

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements23. Pensions and other post-retirement benefits continued

Investment strategy continued
In the UK, the Trustees as governing body of each scheme are solely responsible for setting the investment strategy and managing risk. The Trustees’
responsibilities are set out in the Trust Deeds and Rules. In the US, the fiduciary committee for each respective retirement plan is the Retirement Plan
Committee (RPC). The RPC is solely responsible for setting the investment strategy and managing the risk of each plan. The RPC is structured in
accordance with US laws governing retirement plans under the Employee Retirement Income Security Act (ERISA).

The Trustees or the RPC where applicable, will perform the following duties:

• After taking advice from professional investment advisers and consultation with the sponsoring employers, set the key principles, including
expected returns, risk and liquidity requirements, after taking into account expected contributions, maturity of the pension liabilities and in
the UK, the strength of the covenant.

• Formulate an investment strategy to manage risk through diversification, including the use of liability matching assets, which move in line with

long-term liabilities of the scheme, return seeking assets, some of which are designed to mitigate downside risk and exposure. Where appropriate,
the strategies may include interest rate and inflation hedging instruments, and currency hedging to hedge foreign holdings.

• Review the investment strategies’ performance and risk regularly and amend the portfolios if required.
• Appoint investment managers with the necessary skills, expertise and credit worthiness to manage the investments. On a regular basis,

the performance of the asset managers and their adherence to the investment strategies will be reviewed.

Investments are made predominantly in regulated markets and investments outside of these markets are kept to prudent levels and subject to agreed
control ranges.

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

2018

Quoted
£m

Unquoted
£m

1,420

3,949

5,629

129

1,174

211

813

–

834

690

–

382

Total
£m

2,233

3,949

5,629

963

789

1,174

593

Quoted
£m

2,624

3,526

5,406

250

1,162

2017

Unquoted
£m

596

–

708

628

–

436

Total
£m

3,220

3,526

5,406

798

878

1,162

499

Quoted
£m

3,272

5,601

6,059

159

1,020

649

2016

Unquoted
£m

962

–

1,081

505

–

Total
£m

4,234

5,601

6,059

1,171

664

1,020

652

12,611

2,719

15,330

13,121

2,368

15,489

16,850

2,551

19,401

1. Included within equities at 31 March 2018 were ordinary shares of National Grid plc with a value of £nil (2017: £2 million; 2016: £7 million).
2. Included within corporate bonds at 31 March 2018 was an investment in a number of bonds issued by subsidiary undertakings with a value of £nil (2017: £nil; 2016: £70 million).
3. Includes return seeking non-conventional asset classes which include hedge funds, private debt, mezzanine debt, infrastructure debt and fixed income debt instruments.
4. Includes liability-driven investment vehicles.
5. Includes cash and cash type instruments.

US pensions

Equities

Corporate bonds

Government securities

Property

Diversified alternatives1

Other2

Quoted
£m

577

1,085

414

–

198

2018

Unquoted
£m

1,954

413

565

279

421

104

Total
£m

2,531

1,498

979

279

619

124

Quoted
£m

698

1,130

872

–

209

2017

Unquoted
£m

1,915

537

335

433

Total
£m

2,613

1,667

943

335

642

122

Quoted
£m

625

954

711

–

163

–

2016

Unquoted
£m

1,508

483

–

276

334

Total
£m

2,133

1,437

711

276

497

2,294

3,736

6,030

2,940

3,382

6,322

2,453

2,683

5,136

1. Includes return seeking non-conventional asset classes which include hedge funds, real estate debt and limited partnerships.
2. Includes collateral, liquid investments and cash deposits, debtors and creditors.

US other post-retirement benefits

Equities

Corporate bonds

Government securities

Diversified alternatives1

Other2

2018

Quoted
£m

Unquoted
£m

412

508

161

–

1,110

–

144

137

Total
£m

1,522

510

305

137

Quoted
£m

405

520

166

–

2017

Unquoted
£m

1,162

–

149

142

Total
£m

1,567

521

315

142

1,105

1,393

2,498

1,110

1,454

2,564

Quoted
£m

281

390

122

–

830

2016

Unquoted
£m

853

–

104

109

1,067

Total
£m

1,134

390

226

109

1,897

150

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 finance costs.

Environmental
£m

Decommissioning
£m

Restructuring
£m

Emissions
£m

1,169

137

572

(75)

(110)

(32)

1,721

(158)

(45)

(75)

–

1,531

141

107

–

(19)

(21)

221

(9)

(19)

(6)

–

194

–

(5)

(25)

–

(6)

(7)

(12)

–

(2)

–

(34)

–

At 1 April 2016

Exchange adjustments

Additions

Unused amounts reversed

Unwinding of discount

Utilised

Disposal of UK Gas Distribution

At 31 March 2017

Exchange adjustments

Additions

Unused amounts reversed1

Unwinding of discount

Utilised2

Transfers3

At 31 March 2018

Current

Non-current

1. Unused amounts reversed from other provisions include £16 million in relation to discontinued operations.
2. Utilised amounts for other provisions include £77 million in relation to discontinued operations.
3. Represents net amounts transferred to trade and other payables (see note 21) of £115 million (2017: £nil).

Other
£m

361

308

(6)

(73)

(41)

597

(26)

(37)

(146)

(103)

316

2018
£m

273

1,779

2,052

Total
provisions
£m

1,719

188

1,015

(86)

(227)

(94)

2,588

(195)

(107)

(268)

(115)

2,052

2017
£m

416

2,172

2,588

151

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements24. 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

2018

2017

Discounted
£m

Undiscounted
£m

213

1,318

1,531

235

1,410

1,645

Real
discount
rate

Discounted
£m

Undiscounted
£m

242

1,479

1,721

270

1,619

1,889

Real
discount
rate

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 until 2075 although the weighted average duration of the cash flows is 11 years. 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 until 2069. The weighted average duration of the cash flows is nine years. The
increase in the US provision last year principally related 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. 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 £71 million (2017: £78 million) of expenditure relating to asset retirement obligations estimated to be
incurred until 2115, and £104 million (2017: £107 million) of expenditure relating to the demolition of gas holders estimated to be incurred until 2023.
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.

Other provisions
Included within other provisions at 31 March 2018 are the following amounts in respect of the disposal of UK Gas Distribution:
• £50 million (2017: £143 million) in respect of business restructuring costs following the sale of UK Gas Distribution. We expect the majority of this

provision to be utilised within one year; and

• Last year, other provisions included £150 million voluntary distribution to be made for the benefit of energy customers on the successful sale

of UK Gas Distribution. During the year, this was transferred to trade and other payables and has a closing balance of £117 million.

Other provisions also include:
• Amounts provided in respect of onerous lease commitments and rates payable on surplus properties of £48 million (2017: £84 million) with

expenditure expected to be incurred until 2043;

• £152 million (2017: £166 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 (2017: £13 million) in respect of obligations associated with investments in joint ventures and associates.

152

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, predominately to actively manage scrip issuances and employee share
option plan liabilities.

Share capital is accounted for as an equity instrument. An equity instrument is any contract that includes a residual interest in the consolidated
assets of the Company after deducting all its liabilities and is recorded at the proceeds received, net of direct issue costs, with an amount equal
to the nominal amount of the shares issued included in the share capital account and the balance recorded in the share premium account.

At 1 April 2016

Issued during the year in lieu of dividends1

At 31 March 2017

Effect of share consolidation2

Issued during the year in lieu of dividends1

At 31 March 2018

Allotted, called up and fully paid

million

3,924

3,943

(328)

3,638

£m

447

449

–

452

1. The issue of shares under the scrip dividend programme is considered to be a bonus issue under the terms of the Companies Act 2006 and the nominal value of the shares is charged to the

share premium account.

2. On 22 May 2017 the ordinary share capital was consolidated with 11 new ordinary shares of 12204⁄ 473 pence nominal value issued for every 12 existing ordinary shares of 1117⁄ 43 pence nominal

value. This consolidation was completed to maintain the comparability of the Company’s share price before and after the special dividend.

The share capital of the Company consists of ordinary shares of 12204⁄473 pence nominal value each including ADSs. The ordinary shares and ADSs
allow holders to receive dividends and vote at general meetings of the Company. The Company holds treasury shares but may not exercise any
rights over these shares including the entitlement to vote or receive dividends. There are no restrictions on the transfer or sale of ordinary shares.

In line with the provisions of the Companies Act 2006, the Company has amended its Articles of Association and ceased to have authorised
share capital.

Treasury shares
At 31 March 2018, the Company held 283 million (2017: 193 million) of its own shares. The market value of these shares as at 31 March 2018
was £2,270 million (2017: £1,958 million).

The Company made the following transactions in respect of its own shares during the year ended 31 March 2018:

1. During the year, the Company completed a share repurchase programme as part of the return of cash to shareholders following the sale of
UK Gas Distribution in addition to the management of the dilutive effect of share issuances under the scrip dividend programme. As a result
the Company repurchased 114 million (2017: 20 million) ordinary shares for aggregate consideration of £1,017 million (2017: £189 million),
including transaction costs. The shares repurchased had a nominal value of £14 million (2017: £2 million) and represented approximately
3.1% (2017: 0.5%) of the ordinary shares in issue as at 31 March 2018.

2. During the year, 3 million (2017: 3 million) treasury shares were gifted to National Grid Employee Share Trusts and 5 million (2017: 3 million)

treasury shares were re-issued in relation to employee share schemes, in total representing approximately 0.2% (2017: 0.2%) of the ordinary
shares in issue as at 31 March 2018. The nominal value of these shares was £1 million (2017: £1 million) and the total proceeds received
were £33 million (2017: £18 million).

3. During the year, the Company made payments totalling £5 million (2017: £6 million) to National Grid Employee Share Trusts, outside 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 ordinary shares held in treasury during the year was 283 million (2017: 194 million) representing approximately 7.8%
(2017: 4.9%) of the ordinary shares in issue as at 31 March 2018 and having a nominal value of £35 million (2017: £22 million).

153

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements26. 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.

Translation
£m

Cash flow
hedge
£m

Available-
for-sale
£m

Capital
redemption
£m

At 1 April 2015

Exchange adjustments1

Net gains taken to equity

Transferred to profit or loss

Tax

At 31 March 2016

Exchange adjustments1

Net (losses)/gains taken to equity

Transferred to/(from) profit or loss

Tax

At 31 March 2017

Exchange adjustments1

Net gains/(losses) taken to equity

Share of net gains taken to equity of associates

Transferred from profit or loss

Tax

At 31 March 2018

479

–

548

346

–

894

(504)

–

(109)

–

(15)

(45)

–

(36)

227

(43)

103

–

(3)

390

128

–

(17)

120

–

(25)

(14)

162

–

(30)

–

(73)

Merger
£m

(5,165)

–

Total
£m

(4,682)

(32)

–

(5,165)

(4,523)

–

(5,165)

–

346

202

(57)

(3,987)

(504)

(11)

(76)

(5,165)

(4,540)

1. The exchange adjustments recorded in the translation reserve comprise a loss of £1,304 million (2017: gain of £1,364 million; 2016: gain of £275 million) relating to the translation of foreign

operations offset by a gain of £800 million (2017: loss of £1,018 million; 2016: loss of £206 million) relating to borrowings, cross-currency swaps and foreign exchange forward contracts used
to hedge the net investment in the non-sterling denominated subsidiaries.

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 amortise as the committed future cash flows from borrowings are paid or capitalised in fixed assets (as described
in note 16). The amount due to be released from reserves next year is a gain of £23 million (pre-tax) of which £20 million relates to capital expenditure.
The majority of the remaining reserve will be released over the next four years as forecast capital expenditure is incurred and over a similar maturity
profile as the hedged borrowings.

154

Net debt represents the amount of borrowings and overdrafts less cash, financial investments and related financing 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 193 and in note 30 to the consolidated
financial statements on pages 158 to 164.

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.

(a) Reconciliation of net cash flow to movement in net debt

(Decrease)/increase in cash and cash equivalents

(Decrease)/increase in financial investments

Decrease/(increase) in borrowings and related derivatives1

Net interest paid on the components of net debt2

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 debt

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

Financing derivatives1

2018
£m

(807)

(5,953)

1,209

808

(4,743)

2,098

(1,017)

–

(66)

(3,728)

(19,274)

(23,002)

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

391

(1,100)

810

105

(515)

(913)

–

(87)

(1,410)

(23,915)

(25,325)

2018
£m

3,023

2017
£m

9,880

2016
£m

3,125

(26,625)

(28,638)

(28,344)

600

(516)

(106)

(23,002)

(19,274)

(25,325)

1. The financing derivatives balance included in net debt excludes the commodity derivatives and the Further Acquisition Agreement (FAA) derivative (see note 16). Included within the financing
derivatives balance is £12 million (2017: £18 million; 2016: £(16) million) of derivative cash flows in relation to capital expenditure. This is included within investing activities and not financing
activities in the cash flow statement.

2. Excludes £27 million (2017: £nil; 2016: £nil) cash interest from the Quadgas HoldCo Limited shareholder loan included within interest received in the cash flow statement.

155

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements27. Net debt continued

(b) Analysis of changes in net debt

At 1 April 2016

Cash flow

Fair value gains and losses and exchange movements

Interest income/(charges)2

Other non-cash movements

Disposal

At 31 March 2017

Cash flow2

Fair value gains and losses and exchange movements

Interest income/(charges)2

Other non-cash movements

At 31 March 2018

Balances at 31 March 2018 comprise:

Non-current assets

Current assets

Current liabilities

Non-current liabilities

Cash
and cash
equivalents
£m

127

1,001

–

(5)

1,139

(807)

(3)

–

329

–

329

–

329

Bank
overdrafts
£m

Net cash
and cash
equivalents
£m

Financial
investments
£m

Borrowings
£m

(28,341)

(2,196)

(1,527)

(2,221)

(294)

5,941

(28,638)

2,108

1,088

(1,117)

(66)

Financing
derivatives
£m

(106)

487

(903)

(233)

230

(516)

(61)

1,162

–

Total1
£m

(25,325)

4,899

(2,273)

(2,401)

(64)

5,890

(19,274)

(4,743)

2,098

(1,017)

(66)

124

984

–

1,139

(807)

(3)

–

2,998

5,624

141

–

(75)

8,741

(5,983)

(149)

–

329

2,694

(26,625)

600

(23,002)

–

329

–

2,694

–

(4,447)

(22,178)

329

2,694

(26,625)

1,170

375

(620)

(325)

600

1,170

3,398

(5,067)

(22,503)

(23,002)

(3)

(17)

–

1. Includes accrued interest at 31 March 2018 of £197 million (2017: £210 million; 2016: £243 million).
2. An exceptional income of £3 million (2017: £1,313 million expense; 2016: £nil) is included in net interest charge on the components of net debt and an exceptional cash outflow of £231 million

(2017: £1,052 million; 2016: £nil) is included in cash flow on the components of net debt.

156

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsNotes to the consolidated financial statements–analysis of items in the primary statements continuedNotes 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 purchase of 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 provided1

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 commitments2

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

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 (expires 2018)

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)3

Guarantees of certain obligations of St William Homes LLP (various expiry dates)4

Guarantees of certain obligations for construction of IFA 2 SAS (expected expiry 2021)3

Other guarantees and letters of credit (various expiry dates)

2018
£m

2017
£m

1,843

1,913

219

443

274

619

1,237

1,325

700

563

449

410

1,969

5,328

178

213

744

587

507

436

2,100

5,699

225

100

281

140

1,009

1,059

729

333

147

354

474

2,669

2,780

1. Following a review in the year, the basis on which we disclose capital commitments has been refined.
2. 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 contract derivatives that do not meet the normal purchase, sale
or usage criteria, and hence are accounted for as derivative contracts, are shown in note 16(b).

3. Included within total guarantees are guarantees to both joint ventures and EPC contractors regarding the construction of interconnectors of £739 million (2017: £555 million).
4. Includes guarantees to related parties.

The total of future minimum sublease payments expected to be received under non-cancellable subleases is £42 million (2017: £15 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.

157

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements29. 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 associates2

Purchases: Goods and services received from joint ventures3

Purchases: Goods and services received from associates3

Receivable from joint ventures4

Receivable from associates4

Payable to joint ventures5

Payable to associates

Interest income from joint ventures

Interest income from associates

Dividends received from joint ventures6

Dividends received from associates7

2018
£m

220

135

160

376

–

170

2017
£m

–

168

169

457

–

2016
£m

183

–

1. In 2018 £5 million (2017: £68 million) of property sites were sold to joint venture St William Homes LLP.
2. Sales in the year relate to transactions with Quadgas HoldCo Limited. Within this is other income of £54 million relating to a Transitional Service Agreement following the sale of the UK Gas

Distribution business to Quadgas HoldCo Limited.

3. During the year the Group 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.

4. Amounts receivable from associates includes a loan receivable balance from Quadgas HoldCo Limited of £352 million (2017: £434 million) and a loan receivable balance of £130 million

(2017: £61 million) from Nemo Link Limited (a joint venture).

5. In previous years the amounts payable to joint ventures include deposits received for National Grid property sites from St William Homes LLP which have been settled during the year.
6. Dividends in respect of joint ventures were received from BritNed Development Limited.
7. Within dividends received from associates in 2018, £144 million (2017: £nil) was from Quadgas HoldCo 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 Remuneration Report and note 3(c).

As a result of an overpayment due to a payroll processing error in September 2017, the Company was owed $70,767 by Dean Seavers (Executive
Director, US and a Director of National Grid plc), which was repaid in full in early October 2017.

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:

• credit risk;
• liquidity risk;
• interest rate risk;
• currency risk; and
• capital risk.

158

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsNotes to the consolidated financial statements–supplementary information continued30. 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 2018, the following
limits were in place for investments held with banks and financial institutions:

Triple ‘A’ G7 sovereign entities (AAA)

Triple ‘A’ vehicles (AAA)

Triple ‘A’ range institutions and non G7 sovereign entities (AAA)

Double ‘A+’ G7 sovereign entities (AA+)

Double ‘A’ range institutions (AA)

Single ‘A’ range institutions (A)

Maximum limit
£m

Long-term limit
£m

1,853

500

1,011

1,685

674 to 843

236 to 337

927

–

506

843

337 to 421

118 to 169

The maximum limit applies to all transactions, including long-term transactions. The long-term limit applies to transactions which mature in more than
12 months’ time.

As at 31 March 2017 and 2018, 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.

159

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements30. 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 currently enforceable
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 contract derivatives 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 2018

Assets

Financing derivatives

Commodity contract derivatives

Further Acquisition Agreement derivative1

Liabilities

Financing derivatives

Commodity contract derivatives

1. The Group held a put/call option as at 31 March 2017. The fair value was £nil.

Related amounts
available to be offset but
not offset in statement of
financial position

Gross
carrying
amounts
£m

Gross
amounts
offset
£m

Net amount
presented in
statement of
financial
position
£m

Financial
instruments
£m

Cash
collateral
received/
pledged
£m

Net amount
£m

1,545

110

1,724

(945)

(116)

(1,061)

663

–

1,545

110

1,724

(945)

(116)

(1,061)

(523)

(16)

–

(539)

523

539

(772)

–

(772)

326

333

250

110

413

(96)

(93)

(189)

663

–

(439)

224

Related amounts
available to be offset but
not offset in statement
of financial position

Gross
carrying
amounts
£m

Gross
amounts
offset
£m

Net amount
presented in
statement of
financial
position
£m

Financial
instruments
£m

1,707

106

1,813

(2,223)

(170)

(2,393)

(580)

–

1,707

106

1,813

(2,223)

(170)

(2,393)

(718)

(25)

(743)

718

743

Cash
collateral
received/
pledged
£m

(692)

–

(692)

1,230

1,248

Net amount
£m

297

378

(275)

(127)

(402)

(580)

–

556

(24)

At 31 March 2017

Assets

Financing derivatives

Commodity contract derivatives

Liabilities

Financing derivatives

Commodity contract derivatives

160

(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 2018

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 contract derivatives

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 contract derivatives

Less than
1 year
£m

1 to 2
years
£m

2 to 3
years
£m

More than
3 years
£m

(4,099)

(1,642)

(2,325)

(730)

(60)

(2,840)

1,069

(890)

(80)

(692)

(60)

(359)

601

(263)

(33)

(629)

(45)

–

130

(188)

(26)

(18,023)

(12,897)

(148)

–

250

(529)

Total
£m

(26,089)

(14,948)

(313)

(3,199)

2,050

(1,870)

(138)

(7,630)

(2,448)

(3,083)

(31,346)

(44,507)

Less than
1 year
£m

1 to 2
years
£m

2 to 3
years
£m

More than
3 years
£m

(5,142)

(1,864)

(1,750)

(707)

(58)

(260)

961

(959)

(18)

(670)

(61)

–

572

(304)

(8)

(19,245)

(12,975)

(183)

–

234

(610)

–

(767)

(66)

(2,989)

571

(1,551)

(15)

(9,959)

Total
£m

(28,001)

(15,119)

(368)

(3,249)

2,338

(3,424)

(41)

(2,905)

(2,221)

(32,779)

(47,864)

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.

161

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements30. Financial risk management continued

(c) Interest rate risk continued
During 2018 and 2017, net debt was managed using derivative financial instruments to hedge interest rate risk as follows:

Cash and cash equivalents

Financial investments

Borrowings

Pre-derivative position

Derivative effect

Net debt position

Fixed rate
£m

–

(16,144)

(16,113)

1,735

(14,378)

Floating
rate
£m

302

2,625

(3,191)

(264)

(1,237)

(1,501)

2018

Inflation
linked
£m

–

(7,290)

102

(7,188)

Other1
£m

–

Total
£m

329

2,694

Fixed rate
£m

940

(26,625)

(17,681)

(23,602)

(16,697)

600

1,424

(23,002)

(15,273)

Floating
rate
£m

199

8,691

(3,917)

4,973

(1,785)

3,188

2017

Inflation
linked
£m

–

(7,040)

(155)

(7,195)

Other1
£m

–

Total
£m

1,139

8,741

(28,638)

(18,758)

(516)

(19,274)

1. Represents financial instruments which are not directly affected by interest rate risk, such as investments in equity or other similar financial instruments.

(d) Currency risk
National Grid operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the
US 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. 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 cross-currency swaps 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 joint venture investments.

During 2018 and 2017, derivative financial instruments were used to manage foreign currency risk as follows:

Cash and cash equivalents

Financial investments

Borrowings

Pre-derivative position

Derivative effect

Net debt position

Sterling
£m

294

1,471

(10,912)

(9,147)

3,748

(5,399)

Euro
£m

(3,794)

(3,723)

3,793

2018

Dollar
£m

1,125

(11,068)

(9,910)

(7,992)

Other
£m

–

(851)

(822)

1,051

Total
£m

329

2,694

Sterling
£m

1,110

6,824

(26,625)

(11,099)

(23,602)

600

(3,165)

2,310

(855)

Euro
£m

–

(5,373)

(5,275)

6,241

966

2017

Dollar
£m

1,753

(10,729)

(8,947)

(10,708)

(19,655)

Other
£m

–

(1,437)

(1,371)

1,641

Total
£m

1,139

8,741

(28,638)

(18,758)

(516)

270

(19,274)

(17,902)

229

(23,002)

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 liabilities

Sterling
£m

253

(1,124)

(144)

2018

Dollar
£m

1,528

(1,793)

(254)

Euro
£m

–

Other
£m

–

Total
£m

1,781

(2,917)

(398)

Sterling
£m

(1,209)

(100)

2017

Dollar
£m

1,660

(1,795)

(315)

Euro
£m

–

Other
£m

–

Total
£m

1,743

(3,004)

(415)

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.

162

(e) 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 operating and holding companies is an important aspect of our capital risk management strategy
and balance sheet efficiency. As noted on page 24, we monitor our balance sheet efficiency using several metrics including retained cash flow/net
debt (RCF), interest cover and gearing. Retained cash flow/net debt and interest cover for the Group for the year ended 31 March 2018 were 9.7%
(2017: 14.9%) and 4.4 (2017: 5.0) respectively. We believe these are consistent with the current credit ratings for National Grid plc and the main
operating companies within the Group, based on guidance from the rating agencies.

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 62.5%. We also monitor net debt as a percentage of rate base for
our US operating companies, comparing this with the allowed rate base gearing inherent within each of our agreed rate plans.

The majority of our regulated operating companies in the US and the UK 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:

• dividends must be approved in advance by the relevant US state regulatory commission;
• the subsidiary must have at least two recognised rating agency credit ratings of at least investment grade;
• dividends must be limited to cumulative retained earnings, including pre-acquisition retained earnings;
• National Grid plc must maintain an investment grade credit rating and if that rating is the lowest investment grade bond rating it cannot

have a negative watch/review 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 2018 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 Group has complied with
all externally imposed capital requirements to which it is subject.

(f) 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.

2018

Level 1
£m

Level 2
£m

Level 3
£m

Assets

Investments – available-for-sale

2,406

Investments – joint ventures and associates

Financing derivatives

Commodity contract derivatives

Further Acquisition Agreement derivative

–

310

–

1,544

–

Liabilities

Financing derivatives

Commodity contract derivatives

2,406

1,862

–

(725)

(54)

(779)

2,406

1,083

110

256

(220)

(62)

(282)

(26)

Total
£m

2,721

1,545

110

Level 1
£m

7,717

–

2017

Level 2
£m

Level 3
£m

315

–

1,692

–

4,524

7,717

2,029

145

(945)

(116)

(1,061)

3,463

–

7,717

(1,743)

(70)

(1,813)

216

(480)

(100)

(580)

(435)

Total
£m

8,037

1,707

106

–

9,891

(2,223)

(170)

(2,393)

7,498

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.

163

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements30. Financial risk management continued

(f) 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 we use in-house valuation models and obtain external valuations to support each reported fair value.

Our level 3 commodity contract derivatives 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. We consider forward
curves to be unobservable if observed market transactions differ from the curve by more than 5%.

Our level 3 investments include investments in associates relating to Sunrun Neptune Investor 2016 LLC, accounted at fair value (see note 15), and
£5 million Series B preferred stocks in Enbala Holdings, Inc., accounted for as an available-for-sale investment. The Group is also party to the Further
Acquisition Agreement (FAA) which contains a put/call option over 14% of the loan and equity it holds in Cadent (through its investment in Quadgas
HoldCo Limited). The FAA is a derivative, which is accounted for at fair value, and the assumptions which are used to determine fair value are specific
to the contract and not readily observable in active markets. The fair value of the option is £110 million (2017: £nil).

The changes in value of our level 3 derivative financial instruments are as follows:

At 1 April

Net gains/(losses) for the year1,2

Purchases

Settlements

Reclassification into level 3

At 31 March

Financing derivatives/
Further Acquisition
Agreement derivative

Commodity contract
derivatives

Investments in associates
and available-for-sale
investments

2018
£m

(465)

125

–

231

–

(109)

2017
£m

(196)

(35)

–

(234)

(465)

2018
£m

(16)

(20)

–

(1)

2017
£m

(27)

(2)

–

(16)

2018
£m

–

(3)

–

2017
£m

–

Total

2018
£m

(435)

133

208

–

(26)

2017
£m

(223)

(37)

(2)

(234)

(435)

1. Gain of £125 million (2017: £35 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. Gain of £35 million (2017: £21 million loss) is attributable to commodity contract derivative financial instruments held at the end of the reporting period.

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

Financing derivatives

Commodity contract
derivatives

2018
£m

2017
£m

2018
£m

–

(84)

–

(93)

(1)

–

(6)

–

2017
£m

–

(1)

(13)

–

1. Level 3 commodity price sensitivity is included within the sensitivity analysis disclosed in note 33.
2. Volumes were flexed using maximum and minimum historical averages, or by >10% where historical averages were not available.
3. A reasonably possible change in assumption of other level 3 derivative financial instruments is unlikely to result in a material change in fair values.

The impacts disclosed above were considered on a contract by contract basis with the most significant unobservable inputs identified. The level 3
investments were acquired in the period on market terms and sensitivity is considered insignificant at 31 March 2018. A 50 basis point change in the
discount rate is used to determine the sensitivity of the fair value of our investment in Sunrun Neptune 2016 LLC. A 50 basis point increase/(decrease)
would (decrease)/increase the fair value by £(5) million/£6 million (2017: £(8) million/£8 million) respectively.

A 5 percentage point decrease in the offer price received from Quadgas Investments BidCo Limited on 30 April 2018 applied in valuing the FAA would
increase the fair value by approximately £39 million.

164

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 2018, we had bilateral committed credit facilities of £5,438 million (2017: £4,938 million). In addition, we had committed credit facilities
from syndicates of banks of £245 million at 31 March 2018 (2017: £338 million). All committed credit facilities were undrawn in 2018 and 2017.
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

2018
£m

–

3,910

–

1,773

–

5,683

2017
£m

–

1,115

2,388

–

1,773

–

5,276

Of the unused facilities at 31 March 2018, £5,438 million (2017: £4,938 million) is available for liquidity purposes, while £245 million (2017: £338 million)
is available as backup to specific US borrowings.

In addition to the above, the Group has Export Credit Agreements (ECAs) totalling £797 million (2017: £600 million), of which £704 million (2017:
£562 million) is undrawn. During the year, two new ECAs totalling £261 million were made available, of which £239 million is undrawn. Of the £3,910
million of undrawn committed borrowing facilities due to expire within 1 to 2 years, £1,255 million was renegotiated before 31 March 2018, with effect
from 1 June 2018. This amount has increased to £1,380 million with the expiry extended to more than 5 years.

Further information on our bonds can be found on the debt investor section of our website. Unless included in these financial statements the
information on our website is unaudited.

165

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements32. 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 2018 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 System Operator 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: Shire Hall, PO Box 9, Warwick CV34 4RL, UK
* Change of name effective from 2 May 2017

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
NG Shetland Link 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
Warwick Technology Park Management Company (No 2) Limited (60.56%)1

166

Incorporated in the US
Registered office: Corporation Service Company, 251 Little Falls Drive, Wilmington, DE 19808, New Castle County, USA (unless stated otherwise in footnotes).

Boston Gas Company1
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.
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.
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.3
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.1
Valley Appliance and Merchandising Company4
Vermont Green Line Devco, LLC (90%)
Wayfinder Group, Inc.1

Incorporated in Australia
Registered office: Level 7, 330 Collins Street, Melbourne, VIC 3000, Australia

Incorporated in Jersey
Registered office: 44 Esplanade, St Helier, Jersey JE4 9WG, UK

National Grid Australia Pty Limited

Incorporated in Canada
Registered office: 1959 Upper Water Street, Suite 800, Halifax NS, B3J 2X2,
Canada

KeySpan Energy Development Co.

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

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
Registered office: Westblaak 89, 3012 KG Rotterdam, PO Box 21153,
3001 AD, Rotterdam, Netherlands
British Transco International Finance B.V.

Registered office: Prins Bernhardplein 200, 1097 JB, Amsterdam, Netherlands
National Grid Holdings B.V.

Incorporated in the Republic of Ireland
Registered office: Third Floor, The Metropolitan Building, James Joyce Street,
Dublin 1, Ireland

National Grid Insurance Company (Ireland) Designated Activity Company

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.

167

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements32. Subsidiary undertakings, joint ventures and associates continued

Joint ventures
A list of the Group’s joint ventures as at
31 March 2018 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
2018 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 2018 is given below.

Incorporated in England and Wales
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).

Incorporated in England and Wales
Registered office: Ashbrook Court, Prologis Park,
Central Boulevard, Coventry CV7 8PE, UK

Energis plc (33.06%)‡

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,
251 Little Falls Drive, Wilmington, DE 19808,
New Castle County, USA (unless stated otherwise
in footnotes).

Clean Energy Generation, LLC (50%)
Island Park Energy Center, LLC (50%)
Islander East Pipeline Company, LLC (50%)3
LI Energy Storage System, LLC (50%)
LI Solar Generation, LLC (50%)
Swan Lake North Holdings LLC (50%)

Incorporated in France
Registered office: 1 Terrasse Bellini, Tour Initiale,
TSA 41000 – 9291, Paris La Defense, CEDEX, France

IFA2 SAS (50%)

Quadgas HoldCo Limited (39%)

Incorporated in the US
Registered office: Corporation Service Company,
251 Little Falls Drive, 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 (9.7%)6
KHB Venture LLC (33%)7
Maine Yankee Atomic Power Company (24%)8
Millennium Pipeline Company, LLC (26.25%)3
New York Transco LLC (28.3%)9
Nysearch RMLD, LLC (22.63%)
Sunrun Neptune Investor 2016 LLC3***
Yankee Atomic Electric Company (34.5%)10

Incorporated in Belgium
Registered office: Avenue de Cortenbergh 71,
1000 Brussels, Belgium

Coreso SA (15.84%)

1. Registered office: Friars House, Manor House Drive, Coventry CV1 2TE, 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: Carla Pizzella, 362 Injun Hollow Road, East Hampton CT 06424, USA.
5. Registered office: 507 Plum Street, PO Box 5001, Syracuse NY 13250, USA.
6. Registered office: Harvard Business Services, Inc., 16192 Coastal Highway, Lewes DE 19958, Sussex County, USA.
7. Registered office: De Maximus Inc., 135 Beaver Street, 4th Floor, Waltham MA 02452, USA.
8. Registered office: Joseph D Fay, 321 Old Ferry Road, Wiscasset ME 04578, USA.
9. Registered office: Corporation Service Company, 80 State Street, Albany NY 12207, USA.
10. Registered office: Brian Smith, 49 Yankee Road, Rowe MA 01367, 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.

168

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 reasonably
possible 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.

The sensitivities included in the tables below broadly have an equal and opposite effect if the sensitivity increases or decreases by the same amount
unless otherwise stated.

(a) Sensitivities on areas of estimation uncertainty
The table below sets out the sensitivity analysis for each of the areas of estimation uncertainty set out in note 1E. These estimates are those that have
a significant risk of resulting in a material adjustment to the carrying values of assets and liabilities in the next year.

Pensions and other post-retirement benefits1 (pre-tax):

UK discount rate change of 0.5%2

US discount rate change of 0.5%2

UK RPI rate change of 0.5%3

UK long-term rate of increase in salaries change of 0.5%4

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%

Environmental provision:

10% change in estimated future cash flows

0.5% change in discount rate

2018

2017

Income
statement
£m

Net
assets
£m

Income
statement
£m

–

154

1,075

623

965

588

359

448

154

175

Net
assets
£m

1,305

669

1,114

673

365

510

175

1. The changes shown are a change in the annual pension or other post-retirement benefit service charge and change in the defined benefit obligations.
2. 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.

3. 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.
4. This change has been applied to both the pre 1 April 2014 and post 1 April 2014 rate of increase in salary assumption.

Pensions and other post-retirement benefits assumptions
Sensitivities have been prepared to show how the defined benefit obligations and annual service costs could potentially be impacted by changes
in the relevant actuarial assumption that were reasonably possible as at 31 March 2018. 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.

169

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements33. Sensitivities continued

(b) Sensitivities on financial instruments
We are further required to show additional sensitivity analysis under IFRS 7 and these are shown separately in the subsequent table due to the
additional assumptions that are made in order to produce meaningful sensitivity disclosures.

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 contract
derivatives. The analysis illustrates the sensitivity of our financial instruments to reasonably possible 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 2018 and 2017 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.

Financial risk (post-tax)1:

UK RPI change of 0.5%2

UK interest rates change of 0.5%

US interest rates change of 0.5%

US dollar exchange rate change of 10%3

2018

2017

Income
statement
£m

Other equity
reserves
£m

Income
statement
£m

Other equity
reserves
£m

–

479

–

604

1. Excludes sensitivities to the Further Acquisition Agreement derivative. Further details on sensitivities are provided in note 30(f).
2. Excludes sensitivities to LPI curve. Further details on sensitivities are provided in note 30(f).
3. The other equity reserves impact does not reflect the exchange translation in our US subsidiaries’ net assets. It is estimated this would change by £1,040 million (2017: £988 million) in the

opposite direction if the dollar exchange rate changed by 10%.

Additional sensitivities in respect to commodity price risk and to our derivative fair values are as follows:

Commodity risk1 (post-tax):

10% increase in commodity prices

10% decrease in commodity prices

Assets and liabilities carried at fair value (pre-tax)2:

10% fair value change in derivative financial instruments3

10% fair value change in commodity contract derivative liabilities

1. Represents potential impact on fair values of commodity contract derivatives only.
2. Excludes sensitivities to the Further Acquisition Agreement derivative. Further details on sensitivities are provided in note 30(f).
3. The effect of a 10% change in fair value assumes no hedge accounting.

2018

2017

Income
statement
£m

Net
assets
£m

Income
statement
£m

Net
assets
£m

(23)

(5)

(23)

(5)

(29)

(52)

(6)

(29)

(52)

(6)

170

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). These Guaranteed Notes will be repaid on 1 June 2018.

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 2018. 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.

171

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial Statements34. Additional disclosures in respect of guaranteed securities continued

Summary statements of comprehensive income for the year ended 31 March 2018 – 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

Total comprehensive income for the year

Attributable to:

Equity shareholders

Non-controlling interests

Parent
guarantor

Issuer of notes

Subsidiary
guarantor

Niagara
Mohawk
Power
Corporation
£m

National
Grid plc
£m

British
Transco
Finance Inc.
£m

National
Grid Gas
plc
£m

Other
subsidiaries
£m

Consolidation
adjustments
£m

National
Grid
consolidated
£m

–

889

950

1,672

3,511

–

3,551

371

3,922

–

3,922

2,416

(190)

(318)

(537)

(166)

(183)

–

(397)

(1,791)

625

(100)

–

525

321

–

846

847

–

847

–

–1

–

1,430

11,495

(91)

15,250

(245)

(122)

–

(94)

–

(331)

(792)

638

(174)

–

472

(103)

386

272

658

–

658

(1,095)

(1,208)

(748)

(1,377)

(780)

(1,012)

(1,043)

(2,002)

(9,265)

2,230

(1,360)

–

(40)

830

626

(58)

–

(950)

(1,680)

(2,630)

–

(1,530)

(1,648)

(1,285)

(1,543)

(1,057)

(1,012)

(1,043)

(2,639)

(11,757)

3,493

(745)

–

(40)

2,708

884

(41)

1,398

(2,630)

3,551

604

2,002

(877)

(3,507)

371

3,922

2,002

(3,507)

3,922

–

2,002

(3,507)

3,922

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.

172

Summary statements of comprehensive income for the year ended 31 March 2017 – IFRS

Parent
guarantor

Issuer of notes

Subsidiary
guarantor

Niagara
Mohawk
Power
Corporation
£m

National
Grid plc
£m

British
Transco
Finance Inc.
£m

National
Grid Gas
plc
£m

Other
subsidiaries
£m

Consolidation
adjustments
£m

National
Grid
consolidated
£m

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

–

8,177

–

(401)

7,776

–

7,795

578

8,415

–

8,415

2,388

(193)

(326)

(511)

(140)

(188)

–

(435)

(1,793)

595

(101)

–

494

(181)

–

313

–

313

–

313

–

–1

–

1,376

11,435

(164)

15,035

(256)

(114)

–

(67)

(101)

–

(394)

(932)

444

(253)

–

191

4,633

4,840

114

(1,032)

(1,138)

(586)

(1,012)

(753)

(1,120)

(1,008)

(2,617)

(9,266)

2,169

(8,910)

8,100

1,422

(228)

1,351

2,545

177

(62)

–

164

–

(8,100)

401

(7,699)

–

(7,699)

(1,481)

(1,578)

(1,097)

(1,219)

(1,042)

(1,120)

(1,008)

(3,282)

(11,827)

3,208

(1,087)

–

2,184

(374)

5,984

7,794

(291)

578

8,414

8,415

(1)

5,005

2,660

(7,979)

5,005

–

2,661

(7,979)

(1)

–

5,005

2,660

(7,979)

8,414

173

Summary statements of comprehensive income for the year ended 31 March 2016 – IFRS

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

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 operations3

Amounts recognised in other comprehensive income

from discontinued operations3

Total comprehensive income for the year

Attributable to:

Equity shareholders

Non-controlling interests

–

701

–

1,843

2,544

–

2,591

502

3,164

–

3,164

2,027

(162)

(260)

(484)

(86)

(155)

–

(433)

(1,580)

447

(87)

–

360

(141)

–

219

(1)

–

218

–

218

–

1,244

10,069

(128)

13,212

(255)

(115)

–

(75)

(101)

–

(173)

(719)

525

(132)

–

426

(56)

735

(894)

(962)

(828)

(806)

(643)

(907)

(971)

(1,805)

(7,816)

2,253

(1,437)

620

1,495

(277)

(43)

1,175

–

128

–

(620)

(1,876)

(2,496)

–

(1,311)

(1,337)

(1,312)

(967)

(899)

(907)

(971)

(2,283)

(9,987)

3,225

(955)

–

2,329

(427)

692

(2,496)

2,594

–2

1,105

–

426

(433)

502

(13)

1,100

–

1,100

153

1,754

1,751

1,754

(140)

(3,069)

–

(3,069)

3,167

3,164

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.

174

Statements of financial position as at 31 March 2018 – IFRS

Parent
guarantor

Issuer of notes

Subsidiary
guarantor

Niagara
Mohawk
Power
Corporation
£m

National
Grid plc
£m

British
Transco
Finance Inc.
£m

National
Grid Gas
plc
£m

Other
subsidiaries
£m

Consolidation
adjustments
£m

National
Grid
consolidated
£m

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

Current tax assets

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

–

350

–

21,708

22,076

–

11,254

938

308

–

12,501

34,577

(781)

(187)

(62)

(11,809)

–

(12,839)

(773)

(41)

–

(2,091)

(1)

–

(2,906)

(15,745)

18,832

452

1,321

21,599

(4,540)

18,832

–

18,832

691

6,148

–

231

7,108

515

–

130

707

7,815

(51)

(36)

(318)

–

(202)

(23)

(630)

(2,087)

(18)

(281)

–

(626)

(765)

(248)

(4,025)

(4,655)

3,160

133

2,194

830

3,160

–

3,160

–

220

–

220

(218)

–

107

4,433

3,426

412

101

591

4,753

789

29,272

2,593

766

12,340

708

–

(6,369)

–

(31,112)

–

5,444

899

39,853

115

–

1,409

3,067

1,319

9,164

51,239

(37,481)

52,106

276

–

708

863

271

283

2,006

307

–

(193)

11,253

(23,565)

878

–

341

2,798

114

–

2,694

405

329

2,186

11,350

14,781

66,020

(23,714)

(61,195)

6,681

58,787

(675)

(68)

(347)

(624)

(26)

(66)

(2,722)

(66)

(2,726)

(11,132)

(88)

(184)

–

(44)

–

23,565

193

–

(4,447)

(401)

(3,453)

–

(123)

(273)

(218)

(1,806)

(16,918)

23,714

(8,697)

–

(3,635)

(15,683)

(157)

(181)

(500)

(441)

–

(129)

(444)

(855)

(3,778)

(2,568)

(907)

(1,402)

(5,043)

(25,637)

(218)

(6,849)

(42,555)

4,501

23,465

–

6,369

–

6,369

30,083

(31,112)

(360)

(11,430)

(17,978)

(1,344)

(22,178)

(660)

(1,317)

–

(3,636)

(1,672)

(1,779)

(31,242)

(39,939)

18,848

452

1,321

21,599

(4,540)

204

2,929

1,323

4,501

182

9,032

14,217

23,449

(31,112)

18,832

–

4,501

23,465

(31,112)

18,848

175

Statements of financial position as at 31 March 2017 – IFRS

Parent
guarantor

Issuer of notes

Subsidiary
guarantor

Niagara
Mohawk
Power
Corporation1
£m

National
Grid plc
£m

British
Transco
Finance Inc.
£m

National
Grid Gas
plc
£m

Other
subsidiaries1
£m

Consolidation
adjustments
£m

National
Grid
consolidated1
£m

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

Current tax assets

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

–

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

763

–

6,553

–

223

–

239

–

125

4,358

3,426

813

5,333

798

28,914

2,576

335

12,429

603

–

(6,583)

–

(27,061)

–

6,096

923

39,825

–

603

3,183

1,567

7,577

239

8,871

51,043

(33,644)

52,266

494

–

505

1,083

8,660

(55)

(42)

(311)

–

(156)

–

(564)

–

245

(5)

–

360

–

1,965

1,835

(9)

4,222

13,093

(833)

(185)

(342)

(2,151)

(9)

(184)

345

1,874

317

12,083

1,406

174

16,253

67,296

(3,483)

(581)

(2,646)

(13,130)

(232)

–

(27,293)

–

(194)

–

403

2,728

317

–

8,741

246

1,139

(27,487)

(61,131)

13,574

65,840

–

194

–

27,293

–

(5,496)

(1,147)

(3,345)

–

(107)

(416)

(5)

(3,704)

(20,011)

27,487

(10,511)

(2,345)

(239)

(3,879)

(15,417)

(26)

(324)

–

(1,178)

(889)

(298)

(5,060)

(5,624)

3,036

149

2,431

456

–

3,036

–

(239)

(244)

–

(234)

(204)

(756)

(369)

–

(104)

(714)

(842)

(3,769)

(2,929)

(1,647)

(1,770)

–

6,583

–

(23,142)

(1,246)

(1,370)

–

(4,479)

(2,536)

(2,172)

(5,546)

(9,250)

3,843

(27,088)

(47,099)

6,583

34,070

(34,945)

(45,456)

20,197

(27,061)

20,384

204

2,268

1,326

3,843

182

8,033

11,914

(376)

(10,668)

(14,639)

(1,378)

449

1,324

22,582

(3,987)

20,181

(27,061)

20,368

–

3,843

20,197

(27,061)

20,384

–

20,368

3,036

1. Consistent with the presentation of the Group balance sheet we have re-presented commodity derivatives from current and non-current receivables and payables to derivative financial assets

and liabilities.

176

Cash flow statements

Parent
guarantor

Issuer of notes

Subsidiary
guarantor

Year ended 31 March 2018

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

National
Grid plc
£m

–

4,660

–

(5,785)

–

Net increase/(decrease) in cash and cash equivalents in the year

(1,090)

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 (decrease)/increase in cash and cash equivalents in the year

–

4,181

–

(3,146)

–

1,088

–

502

–

(555)

–

Niagara
Mohawk
Power
Corporation
£m

British
Transco
Finance Inc.
£m

National
Grid Gas
plc
£m

Other
subsidiaries
£m

Consolidation
adjustments
£m

National
Grid
consolidated
£m

662

–

(473)

–

(189)

–

757

–

(469)

–

(288)

–

580

–

(440)

–

(148)

–

(8)

–

(15)

–

(15)

–

(13)

–

888

(98)

656

–

(1,041)

(125)

280

918

450

215

5,618

(8,322)

1,120

(1)

599

1,144

(562)

(1,185)

(63)

(11)

3,125

(109)

(1,759)

–

(1,148)

(106)

2,592

459

(1,118)

(6,298)

3,771

491

(103)

3,056

(68)

(1,721)

(15)

(1,173)

(60)

–

(862)

–

862

–

(6,458)

–

6,458

–

(1,869)

–

1,869

–

4,710

(207)

2,237

–

(7,316)

(231)

(807)

4,320

909

(3,634)

(680)

(1,542)

1,611

984

4,292

1,076

(3,459)

(577)

(1,205)

(123)

Cash dividends were received by National Grid plc from subsidiary undertakings amounting to £950 million during the year ended 31 March 2018
(2017: £6,006 million; 2016: £930 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

35. Post balance sheet events

2018
£m

781

438

–

335

–

2017
£m

1,120

515

425

–

322

–

1,554

2,382

As set out in note 15, on 1 May 2018, the Group announced that it had entered into an agreement with Quadgas Investments BidCo Limited regarding
the potential sale of its remaining 25% equity interest in Quadgas HoldCo Limited, the holding company for Cadent Gas Limited. Refer to notes 4 and
15 for details on the accounting implications on the results for the year ended 31 March 2018 in relation to this agreement.

177

National Grid Annual Report and Accounts 2017/18Financial Statements | Notes to the consolidated financial statementsFinancial 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 2018 were approved by the Board of Directors on 16 May
2018. 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 2017 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.

In accordance with the exemption permitted by section 408 of the
Companies Act 2006, the Company has not presented its own profit
and loss account or statement of comprehensive income.

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.

The exemption from disclosing key management personnel compensation
has not been taken as there are no costs borne by the Company in
respect of employees, and no related costs are recharged to the
Company.

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.

178

Financial Statements | Company accounting policies

National Grid Annual Report and Accounts 2017/18D. 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. Such guarantees are
accounted for by the Company as insurance contracts. In the event of
default or non performance by the subsidiary, a liability is recorded in
accordance with IAS 37 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 63 to 79.

Financial Statements | Company accounting policies

179

National Grid Annual Report and Accounts 2017/18Financial 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

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

2018
£m

2017
£m

9,896

8,880

11,563

12,936

368

938

–

491

5,471

1,090

12,869

19,988

(12,839)

(13,714)

9,926

(2,906)

7,020

452

1,321

353

4,892

7,020

6,274

15,154

(3,595)

11,559

449

1,324

337

9,438

11,559

The Company’s profit after tax for the year was £930 million (2017: £8,197 million). The financial statements of the Company on pages 180 to 183 were
approved by the Board of Directors on 16 May 2018 and were signed on its behalf by:

Sir Peter Gershon Chairman
Andrew Bonfield Finance Director

National Grid plc
Registered number: 4031152

180

Financial Statements | Company balance sheet

National Grid Annual Report and Accounts 2017/18Company statement of changes in equity
for the years ended 31 March

At 1 April 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

Equity dividends

At 31 March 2017

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

Equity dividends

At 31 March 2018

1. Included within the share premium account are costs associated with scrip dividends.

Share
capital
£m

447

Share
premium
account
£m

1,326

–

(2)

–

449

1,324

–

(3)

–

452

1,321

Cash flow
hedge
reserve
£m

–

(6)

–

(9)

–

Other
equity
reserves
£m

302

–

337

–

353

Profit
and loss
account
£m

Total
shareholders’
equity
£m

2,880

8,197

–

8,197

–

(189)

(5)

–

(1,463)

9,438

930

–

930

–

4,972

8,197

(6)

8,191

–

(189)

(5)

(1,463)

11,559

930

(9)

921

–

(1,017)

(5)

–

(4,487)

4,892

(5)

(4,487)

7,020

Financial Statements | Company statement of changes in equity

181

National Grid Annual Report and Accounts 2017/18Financial StatementsNotes to the Company financial statements

1. Fixed asset investments

At 1 April 2016

Additions

At 31 March 2017

Additions

At 31 March 2018

Shares in
subsidiary
undertakings
£m

8,845

8,880

1,016

9,896

During the year there was a capital contribution of £16 million (2017: £35 million) which represents the fair value of equity instruments granted to
subsidiaries’ employees arising from equity-settled employee share schemes. In addition on 12 July 2017, the Company acquired a further 180,868
ordinary shares of £1 each in National Grid (US) Holdings Limited for a total consideration of £1,000 million.

The Company’s direct subsidiary undertakings as at 31 March 2018 were as follows: National Grid Holdings One plc; National Grid (US) Holdings
Limited; and 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 (see note 4)

Amounts owed by subsidiary undertakings

Prepayments and accrued income

Amounts falling due after more than one year

Derivative financial instruments (see 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 (see note 6)

Derivative financial instruments (see note 4)

Amounts owed to subsidiary undertakings

Corporation tax payable

Other creditors

Amounts falling due after more than one year

Borrowings (see note 6)

Derivative financial instruments (see note 4)

Amounts owed to subsidiary undertakings

Deferred tax

Amounts owed to subsidiary undertakings falling due after more than one year are repayable as follows:

In 2 to 3 years

In 3 to 4 years

More than 5 years

2018
£m

2017
£m

308

11,254

202

12,734

–

11,563

12,936

350

368

2018
£m

781

187

149

342

491

2017
£m

1,120

533

11,809

12,012

–

12,839

13,714

773

2,091

2,906

1,095

–

996

2,091

1,262

272

2,058

3,595

–

1,062

996

2,058

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 2016

Credited to equity

At 31 March 2017

Credited to equity

At 31 March 2018

Deferred tax
£m

(1)

(2)

182

Financial Statements | Notes to the Company financial statements

National Grid Annual Report and Accounts 2017/184. 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

2018

Assets
£m

Liabilities
£m

308

326

(187)

(41)

(228)

Total
£m

121

(23)

Assets
£m

202

149

351

1. The notional contract amounts of derivatives indicate the gross nominal value of transactions outstanding at the balance sheet date.

5. 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

2017

Liabilities
£m

(533)

(272)

(805)

2018
£m

(2,501)

(3,613)

(13,929)

(20,043)

2018
£m

919

938

2018
£m

–

230

551

–

781

773

1,554

Total
£m

(331)

(123)

(454)

2017
£m

(2,801)

(3,995)

(17,134)

(23,930)

2017
£m

4,981

100

390

5,471

2017
£m

–

1,097

1,120

1,262

2,382

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 2018 was £1,531 million (2017: £2,357 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 £452 million (2017: £449 million) consists of 3,637,747,827 ordinary shares of 12204∕473 pence each (2017:
3,942,983,447 ordinary shares of 1117∕43 pence each). For further information on share capital, refer to note 25 to the consolidated financial statements.

8. Shareholders’ equity and reserves
At 31 March 2018 the profit and loss account reserve stood at £4,892 million (2017: £9,438 million) of which £86 million (2017: £86 million) related
to gains on intra-group transactions which was not distributable to shareholders. The Company bore no employee costs in either the current or
prior year.

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 2018, the sterling equivalent amounted to £2,398 million (2017: £2,404 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 on 1 January 2017, 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). Refer to note 23 of the consolidated financial statements.

10. Audit fees
The audit fee in respect of the parent Company was £25,000 (2017: £29,230). Fees payable to Deloitte 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.

Financial Statements | Notes to the Company financial statements

183

National Grid Annual Report and Accounts 2017/18Financial StatementsAdditional information

Contents

184 The business in detail
184 Key milestones
185 Where we operate
186 UK regulation
188 US regulation

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.

192 Task force on Climate-related Financial Disclosures

1986
British Gas (BG) privatisation

Internal control and risk factors

193
193 Disclosure controls
193
193 Risk factors

Internal control over financial reporting

197 Shareholder information
197 Articles of Association
198 Depositary payments to the Company
198

Description of securities other than equity
securities: depositary fees and charges

198 Documents on display
198 Events after the reporting period
198 Exchange controls
199 Exchange rates
199 Material interests in shares
199 Share capital
200 Share price
200 Shareholder analysis
200 Taxation

203 Other disclosures
203 All-employee share plans
203 Change of control provisions
203 Code of Ethics
203 Conflicts of interest
203

Corporate governance practices: differences
from New York Stock Exchange (NYSE)
listing standards

203 Directors’ indemnity
203 Employees
204 Human Rights
204 Listing Rule 9.8.4 R cross reference table
204 Material contracts
204 Political donations and expenditure
204 Property, plant and equipment
204 Research and development and innovation activity
205 Unresolved SEC staff comments

206 Other unaudited financial information

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

215 Commentary on consolidated financial information

KeySpan Corporation acquired

218 Definitions and glossary of terms

223 Want more information or help?

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

184

Additional Information | Contents

National Grid Annual Report and Accounts 2017/18Where we operate
Our UK network

Our US 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

Canada

Vermont

Maine

New Hampshire

New York

Massachusetts

UK Transmission1

Scottish electricity transmission system

English and Welsh electricity
transmission system

Approximately 7,200 kilometres (4,474 miles)
of overhead line, 1,560 kilometres (969 miles)
of underground cable and 346 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

Principal ofﬁces

Owned office space:
Warwick and Wokingham

Leased office space:
Solihull and London

Leased office space totalling 9,022 square
metres (97,114 square feet) with remaining
terms of 5 to 8 years.

US Regulated1

Electricity transmission network

Gas distribution operating area

Electricity distribution area

Gas and electricity distribution
area overlap

An electricity transmission network of approximately
14,293 kilometres (8,881 miles) of overhead line,
168 kilometres (104 miles) of underground cable
and 387 transmission substations.

An electricity distribution network of approximately
117,082 circuit kilometres (72,751 miles) and
740 distribution substations in New England
and upstate New York.

A network of approximately 57,001 kilometres
(35,419 miles) of gas pipeline serving an area
of approximately 25,659 square kilometres
(9,907 square miles). Our network also consists
of approximately 787 kilometres (489 miles)
of gas transmission pipe, as defined by the
US Department of Transportation.

Generation

Connecticut

Pennsylvania

New Jersey

Rhode Island

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 assets on property owned by others is controlled through various agreements.

Leased office space totalling approximately
58,993 square metres (635,000 square feet)
with remaining terms of 7 to 11 years.

Additional Information | The business in detail

185

National Grid Annual Report and Accounts 2017/18Additional Information

The business in detail continued

UK Regulation
Our licences to participate in transmission and interconnection activities
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, including 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 a statutory duty
under the Acts to protect the interests of consumers. As part of our
licences, Ofgem established price controls that limit the amount of
revenue our regulated businesses can earn. This gives us a specified
level of revenue for the duration of the price control that is sufficient
to meet our statutory duties and licence obligations, and make a
reasonable return on our investments.

The price controls include a number of mechanisms designed to
help achieve its objectives. These include financial incentives that
encourage us to:
• efficiently deliver by investment and maintenance the network outputs
that customers and stakeholders require, including reliable supplies,
new connections and infrastructure capacity;

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
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 and may be sought by project developers who do not
qualify or do not wish to apply for exemptions from European legislation
which would facilitate a merchant development.

RIIO price controls
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 explicitly articulated and our
allowed revenues are linked to their delivery. These outputs have been
determined through an extensive consultation process, which has given
stakeholders a greater opportunity to influence the decisions.

• innovate in order to continuously improve the services we give

There are five output categories for transmission:

our customers, stakeholders and communities; and

• efficiently balance the transmission networks to support the

Safety: ensuring the provision of a safe energy network.

wholesale markets.

The main price controls for electricity and gas transmission networks
came into effect on 1 April 2013 for the eight-year period until 31 March
2021. They follow the RIIO (revenue = incentives + innovation + outputs)
framework established by Ofgem.

Following the sale of a majority interest in the National Grid UK Gas
Distribution business (now known as Cadent) on 31 March 2017,
Cadent now has responsibility for operating within the price controls
relating to its four gas distribution networks.

Our UK Electricity Transmission (UK ET) and UK Gas Transmission
(UK GT) businesses operate under four separate price controls. 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); and two for our UK GT operations, again one as TO and one as SO.
In addition to the four regulated network price controls, there is also a
tariff cap price control applied to certain elements of domestic sized
metering 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.
Under European legislation, these capacity sales are classified as
congestion revenues because the market price differences result from
congestion on the established 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. Under UK legislation, interconnection businesses
must be separate from transmission businesses.

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.

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 broadly the sum of what was
defined in previous price controls as operating expenditure (opex)
and capital expenditure (capex).

A number of assumptions are necessary in setting allowances for these
outputs, including the volumes of work that will be needed and the price
of the various external inputs to achieve them. Consequently, there are a
number of uncertainty mechanisms within the RIIO framework that can
result in adjustments to totex allowances if actual input prices or work
volumes differ from the assumptions. These mechanisms protect us
and our customers from windfall gains and losses.

186

Additional Information | The business in detail

National Grid Annual Report and Accounts 2017/18Where 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.

The extended length of the price control to eight years is one of the ways
that RIIO has given innovation more prominence. Innovation refers to all
the new ways of working that deliver outputs more efficiently. This broad
challenge has an impact on everyone in our business.

Allowed revenue to fund totex costs is split between RIIO fast and slow
money categories using specified ratios that are fixed for the duration of
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. Regulatory depreciation in electricity and gas
transmission permits recovery of RAV consistent with each addition
bringing equal real benefit to consumers for a period of up to 45 years.
We are also allowed to collect additional revenues related to non-
controllable costs and incentives. In addition to totex sharing, RIIO
incentive mechanisms can increase or decrease our allowed revenue
to reflect our performance against various other measures related to
our outputs. For example, performance against our customer and
stakeholder satisfaction targets can have a positive or negative effect
of up to 1% of allowed annual revenues. Many of our incentives affect
our revenues two years after the year of performance.

Simplified illustration of RIIO regulatory building blocks

Totex

(capital invested
+ controllable
operating costs,
after sharing
factor adjustment)

RAV
(slow money)

Allowed return

Depreciation
of RAV

Fast money

Other costs and
income adjustments,
e.g. non-controllable
opex and tax

Performance
against incentives

R
e
v
e
n
u
e

Allowed returns
The cost of capital allowed under our current RIIO price controls is
as follows:

Cost of equity (post-tax real)

Cost of debt (pre-tax real)

Notional gearing

Vanilla WACC1

Transmission

Gas

6.8%

Electricity

7.0%

iBoxx 10-year simple trailing
average index (2.22% for 2017/18)

62.5%

3.94%

60.0%

4.13%

During the eight-year period of the price control our regulator included
a provision for a mid-period review, with scope driven by:
• 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.

1. Vanilla WACC = cost of debt x gearing + cost of equity x (1-gearing).

The sharing factor means that any over- and under-spend is shared
between the businesses and customers. The shared figures displayed
in the table below are the sharing factors that apply to UK ET and UK GT.

Sharing factors under our current RIIO price controls are as follows:

Gas Transmission

Electricity Transmission

Transmission
Operator

System
Operator

Transmission
Operator

System
Operator

Fast1

Slow2

Sharing

Baseline3 35.6%
Uncertainty 10%

Baseline3 64.4%
Uncertainty 90%

62.60%

15.00%

72.10%

37.40%

85.00%

27.90%

44.36%

46.89%

1. Fast money allows network companies to recover a percentage of totex within a

one-year period.

2. Slow money is where costs are added to RAV and, therefore, revenues are recovered

slowly (e.g. over 45 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 where the level of outputs delivered differ
from the baseline level, or if triggered by an event.

The mid-period review of the electricity and gas transmission controls
focused on three specific areas, as follows:
1)

a revised need for certain electricity transmission asset renewal
outputs with associated reduction of allowances of £38.1 million
(in 2009/2010 prices);
a removal of the need for the Avonmouth pipeline and associated
reduction in allowances of £168.8 million (in 2009/2010 prices); and
a need for extra Electricity System Operator activities to meet the
demands of consumers and network users with an associated
increase in allowances of £21.5 million (in 2009/2010 prices).

Ofgem also separately reviewed the obligation to provide additional gas
entry capacity at Fleetwood. It concluded that this additional capacity was
not required, so no incremental revenues would be payable. National Grid
had incurred no incremental costs in anticipation of this obligation.

Further to the mid-period review, National Grid volunteered that £480
million (in 2009/2010 prices) of allowances for electricity transmission
investments should be deferred and in August 2017 Ofgem determined
how the RIIO allowances would be correspondingly adjusted.

Competition in onshore transmission
Ofgem stated in its final decision on the RIIO control for electricity
transmission that it would consider holding a competition to appoint the
constructor and owner of suitably large and separable new transmission
projects, rather than including these new outputs and allowances in
existing transmission licensee price controls. On 23 January 2018,
Ofgem proposed that, in the absence of required legislation to support
a competition, it would set allowances for National Grid to undertake
the transmission works associated with connecting the Hinkley
Point C power station but with reduced allowances reflecting prices
it has observed in other competitions. The consultation closed on
20 March 2018 and said that Ofgem expected to make a decision
on this treatment in the spring of 2018.

Additional Information | The business in detail

187

National Grid Annual Report and Accounts 2017/18Additional InformationThe 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 forecast capital investments and operating costs.

US regulatory revenue requirement

Capex and RoE

Cost of service

X allowed
RoE

RoE

Interest

X cost
of debt

A Rate base
B Debt
C Equity
D Return
E Controllable costs

F Non-controllable costs
G Depreciation
H Taxes
I Lagged recoveries
J Allowed revenue

Our rate plans
Each operating company has a set of rates for service. We have three
electric distribution operations (upstate New York, Massachusetts and
Rhode Island) and six gas distribution networks (upstate New York,
New York City, Long Island, Massachusetts (two) and Rhode Island).

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, which means 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.

US regulatory filings
The objectives of our rate case filings are to make sure we have the right
cost of service, with the ability to earn a fair and reasonable rate of return,
while providing safe, reliable and economical service to our customers.
In order to achieve these objectives and to reduce regulatory lag, we
have been requesting structural changes, such as revenue decoupling
mechanisms, capital trackers, commodity-related bad debt true-ups,
and pension and other post-employment benefit true-ups, separately
from base rates. These terms are explained below the table on page 191.

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

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

188

Additional Information | The business in detail

National Grid Annual Report and Accounts 2017/18first 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. In fiscal year 2017/18, we made a second round of full rate case
filings with Niagara Mohawk (electric and gas) in April 2017, Boston Gas
and Colonial Gas in November 2017, and Narragansett Electric also in
November 2017. A Joint Proposal, setting forth a three-year rate plan for
Niagara Mohawk was approved by the New York State Public Service
Commission (NYPSC) in March 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.

Impact of US Tax Reform
Tax is a pass through for utilities in the US. The reduction in the
corporation tax rate from 35% to 21% will therefore be significantly
beneficial to customers as the lower tax rate will be reflected in
collection of a lower tax allowance from customers.

Our upstate New York, Massachusetts Gas and Rhode Island utilities were
all undergoing rate negotiations at the time the legislation was enacted.
We have updated our revenue requests for the prospective portion of the
tax collection in each of these businesses. These companies represent
48% of the rate base with a total revenue impact of approximately
$130 million. Our FERC businesses operate under formula rates, and
we expect an approximately $50 million reduction in the year related
to these companies, with the full impact being felt in 2018/19.

There are open generic proceedings in New York and Massachusetts
currently underway that will address the treatment of any tax savings
for our Massachusetts Electric, KEDNY and KEDLI customers until
base rates are reset through rate case filings. We are working with
the regulators to develop case by case solutions for these Operating
Companies. Solutions could include refunds in full prospectively of the
tax savings starting as early as this fall, retention of all or a portion of
the savings to address rate stability concerns, and use of funds to
net against current regulatory assets. We expect the New York and
Massachusetts Commission decisions by late summer or early fall this
year. The lower collections in revenue offset the lower tax charge, so
there is no material impact to earnings under IFRS or under US GAAP.
Our cash flows will reduce as we are currently in a net operating loss
position for the purposes of calculating taxable profits in our US Group.
This means that there is no offsetting reduction in cash tax payments.

Massachusetts
Boston and Colonial rate cases
The Company filed a rate case for Boston Gas and Colonial Gas
with MADPU on 15 November 2017 with new rates to be effective on
1 October 2018. The Massachusetts gas rate case, the first rate case for
Boston Gas and Colonial Gas since 2010, updates the gas companies’
rates to more closely align revenues with the cost of service and bring
their earned RoEs closer to the allowed RoE. The Company’s filing was
made prior to the passage of the Tax Cuts and Jobs Act of 2017 (Tax
Reform), which lowered the US corporate income tax rate from 35% to
21%. The Company’s proposed revenue increase prior to the Tax Reform
was $178 million for Boston Gas and $36 million for Colonial Gas. The
change in the corporate income tax rate will reduce these amounts by
approximately $29 million and $7 million for Boston Gas and Colonial
Gas, respectively. In addition, significant tax liabilities to National Grid’s
US Treasury organisation that have been recorded at the 35% tax rate
will now be paid at the lower 21% tax rate creating a significant benefit
that will be returned to customers. The Company will be proposing
to return this benefit to customers over a similar time period that the
actual benefits are to be earned, however this time period and resulting
additional rate reductions will not be determined until late spring or
early summer 2018.

Gas system enhancement programmes (GSEP)
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 an accelerated pipe replacement program,
through rates effective from May 2016 to April 2018. However, due to
the application of the GSEP revenue cap, we are required to defer
recovery of an additional $5.5 million of the 2017 revenue requirement,
until 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, we filed a Massachusetts
electricity grid modernisation plan on 19 August 2015 that proposed
multiple investment options. These options would further MADPU’s
goals of reducing the effect of outages, optimising demand, integrating
distributed resources, and improving workforce and asset management.
We 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 our plan in April
2016 and hearings were held in May 2017. An order from MADPU
approving some of the proposed investment was received on 10 May
2018. We have also 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 we have received approval to continue operating the pilot until
31 December 2018.

New York
Upstate New York 2017 rate cases
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.

On 19 January 2018, we filed a joint proposal setting out a comprehensive
three-year rate plan (fiscal years 2019-2021) for our electric and gas
businesses. The rate plan includes: a 9.0% RoE and 48% equity ratio;
cumulative combined electric and gas revenue increases of $206 million,
$242 million, and $302 million in fiscal year 2019, 2020 and 2021
respectively; funding for a three-year capital plan of approximately
$2.4 billion; annual reconciliation mechanisms for certain non-controllable
costs (e.g. property taxes, pension/OPEBs, and site investigation
remediation costs); a gas safety and reliability surcharge to recover the
costs of incremental leak-prone pipe replacement and leak repairs;
and a number of incentive mechanisms, including earning adjustment
mechanisms (EAMs), which provide a potential incentive of approximately
$20 million annually. The revenue increases reflect an estimate of
the impact of changes to the federal corporate tax rate and bonus
depreciation that is subject to true-up at the end of fiscal year 2019.
The New York State Public Service Commission (NYPSC) approved
the terms of the joint proposal in March 2018.

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 rate-making and
utility revenue model policy framework issues under REV, including:
rate-making 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
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, with
the next update to be filed by 30 June 2018. The joint proposal approved
by the NYPSC in March 2018 includes investments related to grid
modernisation, cyber security, and new electricity and gas products
and services. It also sets out a process to progress advanced metering
infrastructure (AMI) in Upstate New York. The joint proposal also includes
outcome-based EAMs to target energy and system efficiency, carbon
reductions, and customer engagement.

Additional Information | The business in detail

189

National Grid Annual Report and Accounts 2017/18Additional InformationPower Sector Transformation Initiative
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. Following months of stakeholder meetings, the Phase One
Report was delivered to Governor Raimondo in November 2017 with
recommendations to modernise the utility business model, deploy
advance meters to build a connected distribution grid, leverage
distribution system information to increase system efficiency, and
advance electrification beneficial to system efficiency and greenhouse
gas emissions.

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.

Formula Rate 206 Proceeding
On 28 December 2015, FERC initiated a proceeding under Section 206
of the Federal Power Act. The Commission found that ISO-New England
Transmission, Markets, and Services Tariff is unjust, unreasonable,
and unduly discriminatory or preferential. The Commission found that
ISO-NE’s Tariff lacks adequate transparency and challenge procedures
with regard to the formula rates for ISO-NE Participating Transmission
Owners (‘NETOs’). In addition, the Commission found that the ISO-NE
PTOs’ current RNS (‘Regional Network Service’) and LNS (‘Local
Network Service’) formula rates appear to be unjust, unreasonable,
unduly discriminatory or preferential, or otherwise unlawful. The
Commission explained that the formula rates appear to lack sufficient
detail in order to determine how certain costs are derived and recovered
in the formula rates. Accordingly, the Commission established hearing
and settlement judge procedures. Several parties are active in the
proceeding including FERC staff, various consumer interested consumer
parties, NESCOE (‘New England States Committee on Electricity’),
and several municipal light departments. The parties have negotiated
a set of formula rate protocols and are currently engaged in settlement
negotiations and have conducted several settlement conferences
at FERC relative to RNS and LNS rates.

The business in detail continued

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 that 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 began 1 January 2017 and 1 April 2017, respectively.
On 16 March 2018, the NYPSC approved the New York State Energy
Research and Development Authority’s (NYSERDA) 2018 compliance
period programme budgets and authorised reallocation of previously
approved, but unspent, funds from the 2017 compliance period and
the further reallocation of funds from uncommitted System Benefits
Charge, Energy Efficiency Portfolio Standard, and/or Renewable
Portfolio Standard funds to pay for 2018 CES administrative costs with
all unspent compliance funds to be reallocated rather than returned
to LSEs during the annual reconciliation process as proposed by
NYSERDA. As a result of this reallocation, there is no need to collect
additional funds for the 2018 compliance period.

Rhode Island
Rhode Island electric and gas infrastructure, safety and
reliability (ISR) plans
State law provides our Rhode Island electric and gas operating
divisions with rate mechanisms that allow us to recover capital
investment, including a return, and certain expenses outside
base rate proceedings through the submission of annual electric
and gas ISR plans.

RIPUC approved the fiscal year 2019 gas and electric ISR plans on
7 March 2018 and 20 March 2018, respectively. The electric ISR plan
encompasses a $106.86 million spending programme for capital
investment and $10.9 million for operating and maintenance expenses
for vegetation management and inspection and maintenance. The
gas ISR plan encompasses $106.7 million for capital investment
and incremental operation and maintenance expense.

Rhode Island combined gas and electric rate case
On 27 November 2017, we filed a rate plan for our Rhode Island electric
distribution and gas businesses to take effect from 1 September 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.

Our rate plan included forecast data for the two twelve-month periods
ending 31 August 2020 and 2021 for informational purposes, providing
the RIPUC with an option for a multi-year rate plan. The rate plan was
filed prior to the passage of the Tax Cuts and Jobs Act of 2017 (Tax
Act), which lowered the federal income tax rate from 35% to 21%. The
revenue request prior to the Tax Act was increases of $41.3 million for
electric and $30.3 million for gas. The change in the corporate income
tax rate on revenues to be collected during the rate year will reduce
these amounts by approximately $9.7 million and $9.6 million for
electric and gas, respectively.

In addition, significant tax liabilities to the US Treasury that have been
recorded at the 35% tax rate will now be paid at the lower 21% tax rate,
creating a significant benefit that will be returned to customers. We will
be proposing to return this benefit to customers over a similar period
that the actual benefits are to be earned. However, this period and
resulting additional rate reductions will not be determined until late spring
or early summer. The filing includes increases for IT investment and other
cost increases, as well as staffing level increases of 68 and 71 electric
and gas employees to meet our work plans over the next three years.
The electric request includes funding for projects and programmes
to support the Rhode Island Power Sector Transformation Initiative,
including investments in advanced metering, grid modernisation, electric
vehicle infrastructure, and a solar and storage demonstration project.
The gas request includes funding to modernise the IT infrastructure
that supports our core gas distribution operating capabilities. The filing
is based on an RoE of 10.1% and a capital structure of 51% equity
and 49% debt.

190

Additional Information | The business in detail

National Grid Annual Report and Accounts 2017/18Summary of US price controls and rate plans

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$30m 100:0 13.0% 13.0% 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).

Rate filing made

Feature in place

New rates effective

P Feature partially in place

Rate plan ends

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.

Additional Information | The business in detail

191

National Grid Annual Report and Accounts 2017/18Additional Information

Task force on Climate-related Financial Disclosures

In June 2017, the Financial Stability Board released its final report on
the recommendations of the Task force on Climate-related Financial
Disclosures (TCFD). The voluntary framework for disclosure of climate-
related information in financial filings is structured around four themes:
governance, strategy, risk management, and metrics and targets. There
are eleven specific recommended disclosures across these areas that
are applicable to companies in all sectors, and further supplemental
guidance for energy utilities in particular, relating to strategy, and
metrics and targets.

TCFD Recommendations

1. Governance
Our stakeholders fully expect National Grid to operate sustainably. We are also
committed to minimising our environmental impact, both now and in the longer
term. We constantly balance this with the need to provide secure and affordable
energy for our customers and consumers both, and to help society to decarbonise
its energy requirements.

Our principal businesses build and invest for the long term. Ensuring that we
develop networks that are robust to withstand extreme weather events is a critical
part of our investment strategy. Our customers and our regulators expect this
to be the case.

Responsibility for asset investment and maintenance planning is delegated
under the Group’s Delegation of Authority statement to the businesses.

For the Group as a whole, the Safety, Environmental and Health Committee
(SEH Committee) operates as a sub-committee of the Board. Under its terms
of reference, it is responsible for assessing how the Company adapts its business
in light of climate change, which includes:
i) At least twice a year, consideration of reports on the Company’s environmental

performance, including carbon emissions; and

ii) At least once a year, a review of the Company’s environmental strategy. The

SEH Committee does not have a remit to consider the financial implications of
climate change on the Company.

In terms of applying TCFD to the Company, in 2017/18, summary papers setting
out the implications of the recommendations on the Company were presented
to the Audit Committee in September 2017 and March 2018. Management
is currently formally evaluating the governance processes and the role and
responsibilities of the Audit and SEH Committees in this area.

2. Strategy
The sustainability and climate change landscape is fundamentally changing
our industry and the way we operate. As part of our regular portfolio evaluation
activity, we consider the attractiveness of each of our key businesses under
a range of future environmental scenarios.

The Principal Operations section of the Annual Report on pages 28-33 include
examples of opportunities and plans to respond to the risk of climate change,
such as the move towards low carbon and the deployment of the charging
infrastructure for electric vehicles.

Our updated global environmental sustainability strategy (Our Contribution)
was launched in June 2017 and is available on our website. It sets out our
ambition to transform the way we do business and provide a sustainable
legacy from our operations.

The strategy sets out our targets to reduce greenhouse gas emissions by 45%
by 2020, 70% by 2030 and 80% by 2050. We have been awarded a position
on the Climate A List by CDP in recognition of our work to mitigate climate
change, an accolade given to the top 5% of companies worldwide. Further
details about Our Contribution are set out on page 35.

Transition risks and opportunities are similar for both the UK and the north-
eastern United States as both regions have set targets to reduce greenhouse
gas emissions economy-wide 80% by 2050. In the UK our regulated business
has incentives related to carbon emission reductions. There are technical and
commercial risks and opportunities arising from the increased connection of
low carbon generation to our networks, and from the delivery of infrastructure
to deliver low carbon energy.

Below we include our first disclosures in response, across the four
themes. We have embarked on a longer term process to determine how
we most clearly articulate our assessment of financial impacts of climate
change and climate-related scenarios, including a 2°C scenario. This is
a scenario that limits the global average temperature increase to 2°C
above the pre-industrial average, against the specific recommendations.

Our long-term investment plans are determined with reference to forecasts
consistent with the outputs from our Future Energy Scenarios publication
(available on our website), which provide credible pathways for the future
of energy supply in Great Britain out to 2050.

The scenarios are used as a basis for a range of further National Grid activities,
and are the starting point for our regulated long-term investment. They are also
a reference point for other National Grid reports, such as the Gas Ten Year
Statement, the Electricity Ten Year Statement, and the System Operability
Framework. Reports concerning our UK operations under the 2008 Climate
Change Act were released in 2010 and updated in 2016.

In the US, our long-term investment decisions are informed by internal views
on the impact of changing environmental conditions. In addition to our views
on changing environmental conditions, we also consider the range of possible
regulatory and policy responses. Our regulators in New York are encouraging
new incentive opportunities as part of their Reforming the Energy Vision (REV)
proceedings and prepared an Electric and Gas Grid Resiliency Plan in 2016.

The existence of significant transition opportunities is one of the primary reasons
why we established National Grid Ventures. Our partnership with Sunrun in 2017
serves as an example of an opportunity of which we have taken advantage to
respond to these opportunities.

3. Risk management
Our approach to identifying and managing the risks in our business is set
out on page 18, with our principal risks set out on page 19.

The most significant climate-related exposure we face in the short term is
in relation to winter storms in the US, see page 31 for more information on
our storm response.

In the long term, the risk of flooding is of primary concern and we have learned a
great deal over the last 10 years as flooding events have become more frequent
and intense.

In addition, and as described further on pages 193-196 in our disclosures around
risk factors, we are increasingly subject to regulation in relation to climate change
and there are requirements for us to reduce our own carbon emissions, as well
as enabling reduction in energy use by our customers.

4. Metrics and targets
We have included a number of relevant metrics from Our Contribution in the
Responsible Business section (see page 35).

We include disclosure of our Scope 1, Scope 2, and Scope 3 greenhouse gas
(GHG) emissions on page 16.

The Company continues to evaluate the most appropriate metrics and targets to
benchmark, measure and report, in order to facilitate compliance with the TCFD
recommendations. We are speaking to our peers, investors, credit rating agencies
and advisors in these areas and will take their feedback into consideration as we
further develop our metrics as well as subsequent discussions.

192

National Grid Annual Report and Accounts 2017/18

Additional Information | Task Force on Climate-related Financial Disclosures

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 2018. 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’s 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 2018.

Deloitte LLP, which has audited our consolidated financial statements
for the year ended 31 March 2018, has also audited the effectiveness
of our internal control over financial reporting. Their attestation report
can be found on page 92.

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 18-21. 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.

Additional Information | Internal control and risk factors

193

National Grid Annual Report and Accounts 2017/18Additional InformationInternal control and risk factors continued

Infrastructure and IT systems

We may suffer a major network failure or interruption,
or may not be able to carry out critical operations due to the
failure of infrastructure, data or technology or a lack of supply.

Operational performance could be materially adversely affected by
a failure to maintain the health of our assets or networks, inadequate
forecasting of demand, inadequate record keeping or control of data
or failure of information systems and supporting technology. This in turn
could cause us to fail to meet agreed standards of service, incentive
and reliability targets, or be in breach of a licence, approval, regulatory
requirement or contractual obligation. Even incidents that do not amount
to a breach could result in adverse regulatory and financial consequences,
as well as harming our reputation.

Where demand for electricity or gas exceeds supply, including where
we do not adequately forecast and respond to disruptions in energy
supplies, 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, regulation and political and economic uncertainty

Changes in law or regulation or decisions by governmental
bodies or regulators and increased political and economic
uncertainty 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. We may fail to deliver
any one of our customer, investor and wider stakeholder propositions
due to increased political and economic uncertainty.

If we fail to engage in the energy policy debate, we may not be able
to influence future energy policy and deliver our strategy.

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.

Decisions or rulings concerning, for example:
• 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,
the impact of US tax reform, implications of climate change
and of advancing energy 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.

For further information see pages 186-191, which explain our
regulatory environment in detail.

Business performance

Current and future business performance may not meet our
expectations or those of our regulators and shareholders.

Earnings maintenance and growth from our regulated gas and
electricity businesses will be affected by our ability to meet or exceed
efficiency targets and service quality standards set by, or agreed with,
our regulators.

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.

194

Additional Information | Internal control and risk factors

National Grid Annual Report and Accounts 2017/18Growth 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 or
innovation (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 of potential

Exchange rates, interest rates and commodity price indices

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.

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.

In addition, our results of operations and net debt position may
be affected because a significant proportion of our borrowings,
derivative financial instruments and commodity contracts are affected
by changes in interest rates, commodity price indices and exchange
rates, in particular the dollar to sterling exchange rate.

Furthermore, our cash flow may be materially affected as a result of
settling hedging arrangements entered into to manage our exchange
rate, interest rate and commodity price exposure, or by cash
collateral movements relating to derivative market values, which also
depend on the sterling exchange rate into euro and other currencies.

Post-retirement benefits

We may be required to make significant contributions to fund
pension and other post-retirement benefits.

Actual performance of scheme assets may be affected by volatility
in debt and equity markets.

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.

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.

Additional Information | Internal control and risk factors

195

National Grid Annual Report and Accounts 2017/18Additional InformationInternal control and risk factors continued

Financing and liquidity

An inability to access capital markets at commercially
acceptable interest rates could affect how we maintain
and grow our businesses.

Our businesses are financed through cash generated from our ongoing
operations, bank lending facilities and the capital markets, particularly
the long-term debt capital markets.

Some of the debt we issue is rated by credit rating agencies and
changes to these ratings may affect both our borrowing capacity and
borrowing costs. In addition, restrictions imposed by regulators may also
limit how we service the financial requirements of our current businesses
or the financing of newly acquired or developing businesses.

Financial markets can be subject to periods of volatility and shortages
of liquidity, 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 commercially acceptable 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, 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.

including a limit requiring 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
financial control weaknesses 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 194.

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.

196

Additional Information | Internal control and risk factors

National Grid Annual Report and Accounts 2017/18Shareholder 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 44.

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.

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.

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.

(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.

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 63-79).

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.

(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.

Additional Information | Shareholder information

197

National Grid Annual Report and Accounts 2017/18Additional InformationShareholder information continued

General meetings
AGMs must be convened each year within six months of the Company’s
accounting reference date upon 21 clear days’ advance written notice.
Under the Articles, any other general meeting may be convened provided
at least 14 clear days’ written notice is given, subject to annual approval
of shareholders. In certain limited circumstances, the Company can
convene a general meeting by shorter notice. The notice must specify,
among other things, the nature of the business to be transacted, the
place, the date and the time of the meeting.

Description of securities other than equity securities:
depositary fees and charges
The Bank of New York Mellon, as the Depositary, collects fees,
by deducting those fees from the amounts distributed or by selling
a portion of distributable property, for:
• delivery and surrender of ADSs directly from investors depositing
shares or surrendering ADSs for the purpose of withdrawal or
from intermediaries acting for them; and

• making distributions to investors (including, it is expected,

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.

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:

For

$5.00 per 100 ADSs (or portion of 100
ADSs)

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.

Registration or transfer fees

Expenses of the Depositary

Issuance of ADSs, including issuances
resulting from a distribution of shares
or rights or other property; cancellation
of ADSs for the purpose of withdrawal,
including if the Deposit Agreement
terminates; and distribution of securities
distributed to holders of deposited
securities that are distributed by the
Depositary to ADS holders.

Transfer and registration of shares on
our share register to or from the name
of the Depositary or its agent when they
deposit or withdraw shares.

Cable, telex and facsimile transmissions
(when expressly provided in the Deposit
Agreement); and converting foreign
currency to dollars.

As necessary.

The UK City Code on Takeovers and Mergers imposes strict disclosure
requirements with regard to dealings in the securities of an offeror or
offeree company, and also on their respective associates, during the
course of an offer period. Other regulators in the UK, US and elsewhere
may have, or assert, notification or approval rights over acquisitions
or transfers of shares.

Depositary payments to the Company
The Depositary reimburses the Company for certain expenses it incurs
in relation to the ADS programme. The Depositary also pays the
standard out-of-pocket maintenance costs for the ADSs, which consist
of the expenses for the mailing of annual and interim financial reports,
printing and distributing dividend cheques, electronic filing of US federal
tax information, mailing required tax forms, stationery, postage, facsimile
and telephone calls. It also reimburses the Company for certain investor
relationship programmes or special investor relations promotional
activities. There are limits on the amount of expenses for which
the Depositary will reimburse the Company, but the amount of
reimbursement is not necessarily tied to the amount of fees the
Depositary collects from investors.

For the period 17 May 2017 to 16 May 2018, the Company received
a total of $3,193,221.42 in reimbursements from the Depositary
consisting of $1,232,993.66, $1,319,388.99 and $640,838.77 received
in September 2017, December 2017 and January 2018 respectively.
Fees that are charged on cash dividends will be apportioned between
the Depositary and the Company.

Any questions from ADS holders should be directed to The Bank of
New York Mellon at the contact details on page 223.

Taxes and other governmental charges
the Depositary or the Custodian has to
pay on any ADS or share underlying an
ADS, for example, stock transfer taxes,
stamp duty or withholding taxes

The Company’s Deposit Agreement under which the ADSs are issued
allows a fee of up to $0.05 per ADS to be charged for any cash
distribution made to ADS holders, including cash dividends. ADS holders
who receive cash in relation to the 2017/18 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
As set out in note 15 and note 35 of the financial statements on page
132 and 177 respectively, on 1 May 2018, the Group announced that
it had entered into an agreement with Quadgas Investments BidCo
Limited regarding the potential sale of its remaining 25% equity interest in
Quadgas HoldCo Limited, the holding company for Cadent Gas Limited.
Refer to notes 4 and 15 for details on the accounting implications on the
results for the year ended 31 March 2018 in relation to this agreement.

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 pages 200-202 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).

198

Additional Information | Shareholder information

National Grid Annual Report and Accounts 2017/18Exchange rates
The following table shows the history of the exchange rates of one pound
sterling to US dollars for the periods indicated.

April 2018

March 2018

February 2018

January 2018

December 2017

November 2017

2017/18

2016/17

2015/16

2014/15

2013/14

Dollar equivalent of
£1 sterling

High

1.43

1.42

1.35

Low

1.38

1.37

1.39

1.35

1.33

1.31

Average1

1.33

1.31

1.51

1.61

1.60

1. The average for each period is calculated by using the average of the exchange rates on the
last day of each month during the period. See weighted average exchange rate on page 96.

Material interests in shares
As at 31 March 2018, National Grid had been notified of the following
holdings in voting rights of 3% or more in the issued share capital
of the Company:

BlackRock, Inc.

The Capital Group Companies, Inc.

Competrol International Investments Limited

Number of
ordinary shares

% of voting
rights1

226,370,780

145,094,617

125,733,926

6.47

3.88

3.72

1. This number is calculated in relation to the issued share capital at the time the holding

was disclosed.

As at 16 May 2018, no further notifications have been received.

The rights attached to ordinary shares are detailed on page 197.
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 16 May 2018, the share capital of the Company consists of
ordinary shares of 12 204/473 pence nominal value each and ADSs,
which represent five ordinary shares each.

Authority to purchase shares
Shareholder approval was given at the 2017 AGM to purchase up to
10% of the Company’s share capital (being 344,116,240 ordinary shares).
The Directors intend to seek shareholder approval to renew this authority
at the 2018 AGM.

In some circumstances, the Company may find it advantageous to
have the authority to purchase its own shares in the market, where the
Directors believe this would be in the interests of shareholders generally.
The Directors believe that it is an important part of the financial
management of the Company to have the flexibility to repurchase issued
shares in order to manage its capital base, including actively managing
share issuances from the operation of the scrip dividend scheme. It is
expected that repurchases to manage share issuances under the scrip
dividend scheme will not exceed 2.5% of the issued share capital
(excluding treasury shares) per annum.

When purchasing shares, the Company has, and will continue to,
take into account market conditions prevailing at the time, other
investment and financing opportunities and the overall financial
position of the Company.

At the 2017 General Meeting and Annual General Meeting the Company
sought authority to purchase shares to return part of the proceeds from
the sale of a majority interest in the Company’s UK Gas Distribution
business, at approximately £835 million, to shareholders by way of
on-market purchases of the Company’s ordinary shares. This has now
been completed. During the year the Company also purchased ordinary
shares in the capital of the Company as part of the management of the
dilutive effect of share issuances under the scrip dividend scheme.

Shares held in Treasury purchased
in prior years1

Shares purchased and held in
Treasury during the year4,5

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
capital

193,119,878

£22,006,683.751

4.90%1

113,871,660

£14,155,715.872

3.13%3

8,282,409

£1,029,610.252

0.23%3

282,960,111

£35,175,590.972

7.78%3

1. As at 31 March 2017 (Nominal value: 11 17/43 p; Called up share capital: 3,942,983,447)

prior to share consolidation effective on 22 May 2017.

2. Nominal value: 12 204/473p.
3. Called up share capital of 3,637,747,827 ordinary shares as at the date of this report.
4. From 02 June 2017 to 26 March 2018.
5. Shares purchased for a total cost of £1,016,862,703.

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 (£)

–

7,793,766

10.054

7,793,766

11,609,079

9,331,917

15,295,727

7,858,778

11,089,402

9,605,998

17,940,649

10,213,586

13,132,758

9.377

11,609,079

9.558

9,331,917

9.470

15,295,727

9.228

7,858,778

8.893

11,089,402

8.721

9,605,998

8.519

17,940,649

7.477

10,213,586

7.622

13,132,758

113,871,660

8.830 113,871,660

–

April

May

June1

July1

August1

September1

October1,2

November1,2

December1,2

January2

February2,3

March2,3

Total

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 2 June 2017 and Expired: 27 December 2017 (Authority for no. shares:

343,910,318 ordinary shares up to $578 million).

2. Announced: 9 October 2017 and Expired: 15 May 2018 (Authority for no. shares: 344,116,240

ordinary shares up to $557.60 million ).

3. Announced: 14 February 2018 and Expired: 3 April 2018 (Authority for no. shares: 23,346,344

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 281,396,774 ordinary
shares as treasury shares, representing 7.74% of the Company’s called
up share capital.

Additional Information | Shareholder information

199

National Grid Annual Report and Accounts 2017/18Additional InformationShareholder information continued

Authority to allot shares
Shareholder approval was given at the 2017 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 and 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 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

Apr 2017
NG/LN Equity (pence)

Aug 2017

Source: Bloomberg

Dec 2017

Mar 2018

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.

2017/18

2016/17

2015/16

2014/15

2013/14

2017/18 Q4

2016/17 Q4

April 2018

March 2018

February 2018

January 2018

December 2017

Ordinary share (pence)

ADS ($)

High

Low

High

1,174.36

1,148.00

998.20

965.00

849.50

879.70

981.77

1,174.36

1,022.50

1,114.50

733.00

888.90

806.40

806.22

711.00

733.00

859.30

914.60

950.60

906.80

888.90

1,148.00

1,035.50

1,096.00

850.40

810.30

816.10

879.70

889.40

945.00

789.50

735.50

733.00

793.70

860.70

75.29

74.97

72.53

77.21

70.07

59.07

63.36

65.60

75.29

64.22

71.43

74.97

74.67

59.33

56.99

57.61

59.07

60.62

Low

51.44

56.50

63.75

62.25

55.16

51.44

57.65

60.08

62.59

56.54

56.50

69.05

66.52

55.46

51.44

51.51

56.63

57.65

Shareholder analysis
The following table includes a brief analysis of shareholder numbers
and shareholdings as at 31 March 2018.

Size of shareholding

Number of
shareholders

% of
shareholders

Number of
shares

% of
shares

1-50

51-100

101-500

501-1,000

1,001-10,000

10,001-50,000

50,001-100,000

100,001-500,000

pence
1,150

1,050

500,001-1,000,000

1,000,001+

181,008

222,451

356,339

48,391

45,090

1,829

234

441

118

290

21.1411

5,548,121

25.9815

15,693,078

41.6191

74,091,129

5.6519

33,694,975

5.2663 110,446,732

0.2136

33,248,050

0.0273

16,832,870

0.0515 104,097,557

0.0138

83,235,041

0.1525

0.4314

2.0367

0.9263

3.0361

0.9140

0.4627

2.8616

2.2881

0.0339 3,160,860,274

86.8906

950

Total

856,191

100 3,637,747,827

100

850

750

650

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 the
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 or the District of
Columbia, (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.

200

Additional Information | Shareholder information

National Grid Annual Report and Accounts 2017/18This 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:
• financial institutions;
• insurance companies;
• dealers in securities or currencies;
• investors who elect mark-to-market treatment;
• entities treated as partnerships or other pass-through entities

and their partners;

• individual retirement accounts and other tax-deferred accounts;
• tax-exempt organisations;
• investors who own (directly or indirectly) 10% or more of our

shares (by vote or value);

• 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

• US Holders 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
for US federal income tax purposes. 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 2018. 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 for US federal income tax purposes 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.

Additional Information | Shareholder information

201

National Grid Annual Report and Accounts 2017/18Additional InformationShareholder information continued

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.

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 the investor section of our website.
Share prices on specific dates are also available on our website.

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.

202

Additional Information | Shareholder information

National Grid Annual Report and Accounts 2017/18Other 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.

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 2018, 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.

SIP
Employees resident in the UK are eligible to participate in the SIP.
Contributions up to £150 per month are deducted from participants’
gross salary and used to purchase ordinary shares in National Grid
each month. The shares are placed in trust.

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.

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 2017 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 $54,000.
For calendar year 2018, participants may invest up to the applicable
federal salary limits: for pre-tax contributions, a maximum of 50% of
salary limited to $18,500 for those under the age of 50 and $24,500 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 $55,000.

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 2018, the Company
had undrawn borrowing facilities of £4.3 billion available to it with a
number of banks and a further £1.07 billion of drawn bank loans which,
on a change of control of the Company following a takeover bid, may
alter or terminate. All the Company’s share plans contain provisions
relating to a change of control. Outstanding awards and options would
normally vest and become exercisable on a change of control, subject to
the satisfaction of any performance conditions at that time. In the event
of a change of control of the Company, a number of governmental and
regulatory consents or approvals are likely to be required, arising from
laws or regulations of the UK, US or the EU. Such consents or approvals
may also be required for acquisitions of equity securities that do not
amount to a change of control.

No other agreements that take effect, alter or terminate upon a change
of control of the Company following a takeover bid are considered to be
significant in terms of their potential impact on the business as a whole.

Code of Ethics
In accordance with US legal requirements, the Board has adopted a
Code of Ethics for senior financial professionals. This code is available
on our website: www.nationalgrid.com (where any amendments or
waivers will also be posted). There were no amendments to, or waivers
of, our Code of Ethics during the year.

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.

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.

Additional Information | Other disclosures

203

National Grid Annual Report and Accounts 2017/18Additional InformationOther disclosures continued

Human rights
Respect for human rights is incorporated into our employment practices
and our values, which are integral to our Code of ethical business
conduct – the way in which we conduct ourselves allows us to build
trust with the people we work with. We earn this trust by doing things
in the right way, building our reputation as an ethical company that our
stakeholders want to do business with, and that our employees want
to work for. Although we do not have specific policies relating to human
rights, slavery 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

Page 116

Not applicable

Item (7) in relation to major subsidiary undertakings

Not applicable

Parent participation in a placing by a listed subsidiary

Not applicable

Contracts of significance

Not applicable

Provision of services by a controlling shareholder

Not applicable

Shareholder waivers of dividends

Shareholder waivers of future dividends

Page 200

Agreements with controlling shareholders

Not applicable

Material contracts
On 31 March 2017 we sold a 61% interest in our UK Gas Distribution
business (now known as Cadent) to the Consortium and at the same
time entered into an agreement with the Consortium for the potential
future sale and purchase of an additional 14% equity interest in Cadent.
On 30 April 2018 we entered into a further agreement with the
Consortium for the potential future sale and purchase of the
remaining 25% equity interest in Cadent.

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 $62,100 (£44,321) 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 129-130, note 20 Borrowings on
pages 140-141 and where we operate on page 185.

Research and development and innovation activity
Investment in research and development during the year for the Group
was £13 million (2016/17: £14 million; 2015/16: £19 million). Delivering
value to our stakeholders has continued to be a focus throughout
2017/18, with sustained innovation investment across our UK
Regulated business areas: UK Electricity Transmission (ET) and UK
Gas Transmission (GT). Collaboration remains crucial in search of new
technologies and techniques to challenge the way we work. A focus
has been on articulation of our innovation strategies through a joint
Electricity and joint Gas Innovation strategy working alongside the
Distribution Network Operators (DNOs) and the Gas Distribution
Networks (GDNs) respectively. 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 advance our strategic
ambitions to reduce the cost of delivering a secure, reliable and
sustainable electricity transmission system. This year we have signed a
£40 million Innovation Partnership with Siemens to research and develop
the use of Gas Insulated Lines (GIL) on the electricity transmission
network. Within this partnership we also plan to develop an alternative
SF6 free insulating gas mixture that has less than 0.05% of the global
warming impact of SF6. We have made progress on our portfolio of
50 innovation projects. At Deeside the overhead line test area is now
in the construction phase and tender designs for the substation are
under development. Design work for the refurbishment on converting
the control room into the Innovation Centre has now commenced.
This year we have completed a research programme to extend the life
of our overhead line fittings. The research helped us to develop a greater
understanding of how the environment affects our overhead line spans.
This included an in-depth understanding of how the energy input
from wind-induced motion and corrosive compounds increases the
deterioration rate of conductors and fittings. The insight from these
projects has enhanced our ability to target spending on those assets
at highest risk of developing defects and failures, optimising our
replacement plans. So far, we have analysed 265km of line, reducing
our RIIO-T1 spending by £49 million from last year.

Scouting for the use of advanced materials has outlined 35 potential
opportunities to apply improved materials on the electricity transmission
network along with the benefits they will provide to the system.

The System Operator (SO) published its first ever Innovation Strategy in
February 2018, sparking dialogue and collaboration across the industry
and driving collaborative innovation across both gas and electricity
transmission networks. The control room and forecasting teams have
been able to use the initial outputs from our solar PV monitoring and
forecasting projects, to help balance the system at times of high demand
uncertainty. The SO Open Innovation Day brought in suppliers and
potential innovation partners from around the industry to develop
new proposals for solving SO challenges, the best ideas are now being
developed into full Network Innovation Allowance projects. We are also
a partner in two Vehicle to Grid (V2G) projects being funded through
the £20 million BEIS competition announced last year, including a
£9.8 million large-scale demonstrator project with Nissan.

204

Additional Information | Other disclosures

National Grid Annual Report and Accounts 2017/18Power Potential is a £9.5 million SO project in collaboration with UK
Power Networks; £8 million of the project is funded through the 2016
Network Innovation Competition (NIC). The project aims to create a
regional reactive power market for distributed energy resources and
generate additional capacity on the network. This is a regional power
market trial that will improve coordination between the SO, UK Power
Networks (as a regional electricity distributor) and renewable energy
generators connected to the distribution network in the South East of
England. The market will help renewable energy generators offer their
services to the SO, via a Distributed Energy Resource Management
System located in UK Power Networks’ distribution system. This will
improve communication and coordination to maximise network capacity
by better managing system constraints, giving the SO better access to
previously unexploited power. New commercial frameworks will also
create 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.

The SO has teamed up with industry and academics to find better
ways of operating the electricity network with the £9.3 million Enhanced
Frequency Control Capability (EFCC) project; £6.9 million of funding for
this was awarded in the 2014 NIC. EFCC has developed a wide-area
monitoring and control system to coordinate and maximise the
contribution of rapid frequency response from a diverse range of
providers. This will assist with frequency management in a future
energy system, where increased volumes of renewable generation
and interconnectors, coupled with a reduction of thermal generation
have, and will continue to, reduce system inertia levels.

The SO is also working in partnership with Scottish Power Electricity
Networks on their £19 million Phoenix project (£15.6 million awarded
through 2016 NIC). In light of diminishing synchronous generation on the
network, this project will design, deploy and operate a Hybrid-Synchronous
compensator (H-SC), which will aim to maximise attributes of both a
synchronous and static compensator. This project is another example of
network operators exploring the use of innovative solutions to enhance
the stability and security of our electricity system.

Throughout this past year, GT innovation has focused on the
demonstration of value delivered by innovation to our customers, whilst
seeking new opportunities to add further value. April 2017 saw the
publication of the Innovation Value Mid-Term Report, which focused on
10 case study projects and demonstrated a 4:1 return on investment
to date. Our portfolio has continued to grow with a core set of projects
driven by safety, reliability, maintenance and asset health. Examples of
projects on safety include the collaborative Gas Quality IGEM project,
looking at the impact a change in gas quality specifications and the
LiDAR project which uses light detection and ranging to carry out aerial
inspections of our pipeline to highlight any potential safety issues. The
Compressor Data Analytics project is an example of reliability focused
projects, seeking to maximise the reliability of our compressors and allow
for effective scheduling of maintenance. The advanced manufacturing
(3D printing) project addresses a key maintenance issue of obsolete
parts, using 3D printing to allow an asset to be repaired rather than
replaced. An example of asset health management is the Artificial
Intelligence (AI) for Pipeline Coating project, which uses AI to more
efficiently identify and mitigate corrosion issues across the network.

Research & Development (R&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 R&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 Modernisation in Massachusetts and
‘Reforming the Energy Vision’ in New York). We continue to focus our gas
R&D on increasing public safety, protecting our workforce and reducing
the cost of the work we perform.

In 2017/18, we continued to invest and participate 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 R&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 distributed energy resources on the distribution system.
We are also pre-approved to construct up to 14 MW of 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, asset management, system operations,
information and communication technology and system planning.
• We are progressing four New York Reforming the Energy Vision 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 US 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, the Volt VAR Optimisation
and Conservation Voltage Reduction pilot in Rhode Island have
helped shape larger scale grid modernisation proposals in each
of our jurisdictions.

• 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.

• While partnering with industry organisations and other utilities, we

have developed a robot that enters our large diameter gas system and
renews the pipeline without interrupting service to our gas customers.
We have brought the robot from an idea, to prototype, to commercial
tool and have now included its use into the rate structure as a viable
method of renewing and extending the life of our large diameter gas
distribution infrastructure. This technology is now being deployed
throughout the US and UK.

• We have developed and are deploying new equipment to stop the

flow of gas in our distribution mains. This equipment is much smaller
than previous equipment and operates at higher pressure allowing
our work force to perform work quicker and more safely in smaller
excavations with less customer impact.

• To reinforce our commitment to the global environment, we are
evaluating best practices for reducing the release of methane
during maintenance activities. Technologies include the use of
draw down compressors to move and reinject the gas after the
work has been completed.

• We are currently field testing the use of drones to perform required
regulatory patrols on our gas infrastructure rather than mobilising
employees. This would allow a drone to fly an autonomous,
pre-programmed flight plan in our remote service territory, while
transmitting video back for inspection.

Unresolved SEC staff comments
There are no unresolved SEC staff comments required to be reported.

Additional Information | Other disclosures

205

National Grid Annual Report and Accounts 2017/18Additional InformationOther unaudited financial information

Alternative performance measures/non-IFRS reconciliations

Within the Annual Report, a number of financial measures are presented.
These measures have been categorised as alternative performance
measures (APMs), as per the European Securities and Markets Authority
(ESMA) guidelines and the Securities and Exchange Commission (SEC)
conditions for use of non-GAAP Financial Measures.

An APM is a financial measure of historical or future financial
performance, financial position, or cash flows, other than a financial
measure defined under IFRS. The Group uses a range of these
measures to provide a better understanding of its underlying
performance. APMs are reconciled to the most directly comparable
IFRS financial measure where practicable.

The Group has defined the following financial measures as APMs derived
from IFRS: net revenue, the various adjusted operating profit, earnings
and earnings per share metrics detailed in the ‘adjusted profit measures’
section below, net debt, capital investment, funds from operations (FFO),
FFO/interest cover and retained cash flow (RCF)/adjusted net debt.
For each of these we present a reconciliation to the most directly
comparable IFRS measure.

In addition to these APMs, we also have APMs derived from regulatory
measures which have no basis under IFRS; we call these Regulatory
Performance Measures. They comprise: Group return on equity (RoE),
UK and US regulatory RoE, regulated asset base, regulated financial

performance, regulatory gearing, annual asset growth and Value Added
including Value Added per share. These measures reflect the inputs
used by utility regulators to set the allowed revenues for many of our
businesses. As such, we believe that they provide close correlation to
the economic value we generate for our shareholders and are therefore
important supplemental measures for our shareholders to understand
the performance of the business.

We use regulatory performance measures to monitor progress
against our regulatory agreements and certain aspects of our strategic
objectives. Further, targets for certain of these performance measures
are included in the Company’s Annual Performance Plan (APP) and
Long Term Performance Plan (LTPP) and contribute to how we reward
our employees. We consider that such regulatory measures are
important supplemental measures to our IFRS reporting to ensure
a complete understanding of Group performance.

As the starting point for our Regulatory Performance Measures is not
IFRS, and these measures are not governed by IFRS, we are unable
to provide meaningful reconciliations to any directly comparable IFRS
measures, as differences between IFRS and the regulatory recognition
rules applied have built up over many years. Instead, for each of these
we present an explanation of how the measure has been determined
and why it is important, and an overview as to why it would not be
meaningful to provide a reconciliation to IFRS.

Alternative performance measures
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.

Year ended 31 March

UK Electricity Transmission

UK Gas Transmission

US Regulated

National Grid Ventures and Other

Sales between segments

Total

2018

Pass-
through
costs
£m

Net
revenue
£m

(2,243)

1,911

(257)

834

(3,804)

5,468

–

776

(43)

Gross
revenue
£m

4,154

1,091

9,272

776

(43)

2017

Pass-
through
costs
£m

(2,293)

(223)

(3,411)

–

Gross
revenue
£m

4,439

1,080

8,931

713

(128)

Net
revenue
£m

2,146

857

5,520

713

(128)

Gross
revenue
£m

3,977

1,047

7,493

824

(129)

2016

Pass-
through
costs
£m

(2,030)

(221)

Net
revenue
£m

1,947

826

(3,154)

4,339

–

824

(129)

15,250

(6,304)

8,946

15,035

(5,927)

9,108

13,212

(5,405)

7,807

Adjusted profit measures:
In considering the financial performance of our business and segments, we use various adjusted profit measures in order to aid comparability
of results year on year.

The various measures are presented on pages 23-25 and reconciled below.

Adjusted results, also referred to as Headline results – These exclude the impact of exceptional items and remeasurements that are treated as discrete
transactions under IFRS and can accordingly be classified as such. This is a measure used by management that forms part of the incentive target set
annually for remunerating certain Executive Directors and further details of these items are included in Note 4 to the financial statements.

Underlying results – Further adapts our adjusted results to take account of volumetric and other revenue timing differences arising due to the in-
year difference between allowed and collected revenues, including revenue incentives, as governed by our rate plans in the US or regulatory price
controls in the UK (but excluding totex-related allowances and adjustments). For 2017/18, as highlighted on page 209, our underlying results exclude
£104 million of timing differences, as well as £142 million of storm costs (which are significant in aggregate this year) where we expect to recover
the bulk of the costs incurred through regulatory mechanisms in the US.

Prior period pro forma including Cadent overlay – To aid comparability with prior years, we show an estimate of adjusted and underlying results and
earnings for the continuing business in 2017 and 2016, including an estimated contribution from our 39% interest in UK Gas Distribution (now Cadent).

Constant currency – The adjusted profit measures are also shown on a constant currency basis to show the year on year comparisons excluding
any impact of foreign currency movements.

206

Additional Information | Other unaudited financial information

National Grid Annual Report and Accounts 2017/18Reconciliation of Statutory, Adjusted, Underlying and Underlying (pro forma) Profits and Earnings – At actual exchange rates –
Continuing operations

Year ended 31 March 2018

UK Electricity Transmission

UK Gas Transmission

US Regulated

NGV and Other

Total operating profit

Net finance costs

Share of post-tax results of JVs
and associates

Profit before tax

Tax

Profit after tax

Year ended 31 March 2017

UK Electricity Transmission

UK Gas Transmission

US Regulated

NGV and Other

Total operating profit

Net finance costs

Share of post-tax results of JVs
and associates

Profit before tax

Tax

Profit after tax

Year ended 31 March 2016

UK Electricity Transmission

UK Gas Transmission

US Regulated

NGV and Other

Total operating profit

Net finance costs

Share of post-tax results of JVs
and associates

Profit before tax

Tax

Profit after tax

Statutory
£m

Exceptionals and
remeasurements
£m

Adjusted
£m

Timing
£m

Major
Storms
£m

Underlying
£m

Cadent
overlay1,2

£m

Underlying
(pro forma)
£m

1,041

487

1,734

231

3,493

(745)

(40)

2,708

884

3,592

–

(36)

–

(36)

(229)

207

(58)

(1,473)

(1,531)

1,041

487

1,698

231

3,457

(974)

167

2,650

(589)

2,061

(136)

–

(104)

–

(104)

(62)

–

142

–

142

–

142

(51)

1,055

505

1,704

231

3,495

(974)

167

2,688

(598)

2,090

–

1,055

505

1,704

231

3,495

(974)

167

2,688

(598)

2,090

Statutory
£m

Exceptionals and
remeasurements
£m

Adjusted
£m

Timing
£m

Major
Storms
£m

Underlying
£m

Cadent
overlay1,2
£m

Underlying
(pro forma)
£m

1,361

507

1,278

3,208

(1,087)

2,184

(374)

1,810

435

115

565

–

623

(292)

331

1,372

511

1,713

177

3,773

(1,029)

2,807

(666)

2,141

(137)

(62)

(199)

–

(398)

–

(398)

119

(279)

–

1,235

449

1,514

177

3,375

(1,029)

2,409

(547)

1,862

–

144

173

(6)

167

1,235

449

1,514

177

3,375

(1,000)

207

2,582

(553)

2,029

Statutory
£m

Exceptionals and
remeasurements
£m

Adjusted
£m

Timing
£m

Major
Storms
£m

Underlying
£m

Cadent
overlay1,2
£m

Underlying
(pro forma)
£m

1,173

486

1,196

370

3,225

(955)

2,329

(427)

1,902

–

(11)

–

(11)

–

(177)

(89)

1,173

486

1,185

370

3,214

(856)

2,417

(604)

1,813

(5)

(67)

–

(15)

(14)

–

1,168

419

1,258

370

3,215

(856)

2,418

(619)

1,799

–

164

193

(6)

187

1,168

419

1,258

370

3,215

(827)

223

2,611

(625)

1,986

Additional Information | Other unaudited financial information

207

National Grid Annual Report and Accounts 2017/18Additional InformationOther unaudited financial information continued

Reconciliation of Adjusted, Underlying and Underlying (pro forma) Profits – At constant currency

Year ended 31 March 2017

UK Electricity Transmission

UK Gas Transmission

US Regulated

National Grid Ventures and Other

Total operating profit

Net finance costs

Share of post-tax results of JVs and associates

Profit before tax

Year ended 31 March 2016

UK Electricity Transmission

UK Gas Transmission

US Regulated

National Grid Ventures and Other

Total operating profit

Net finance costs

Share of post-tax results of JVs and associates

Profit before tax

At constant currency

Adjusted
at actual
exchange
£m

Constant
currency
adjustment
£m

Adjusted
£m

Timing
£m

Major
Storms
£m

Underlying
£m

Cadent
overlay1,2
£m

Underlying
(pro forma)
£m

1,372

511

1,713

177

3,773

(1,029)

2,807

–

(102)

(98)

(1)

(54)

1,372

511

1,611

181

3,675

(984)

2,753

(137)

(62)

(187)

–

(386)

–

(386)

–

1,235

449

1,424

181

3,289

(984)

2,367

–

144

173

1,235

449

1,424

181

3,289

(955)

206

2,540

At constant currency

Adjusted
at actual
exchange
£m

Constant
currency
adjustment
£m

Adjusted
£m

Timing
£m

Major
Storms
£m

Underlying
£m

Cadent
overlay1,2
£m

Underlying
(pro forma)
£m

1,173

486

1,185

370

3,214

(856)

2,417

–

102

104

(55)

1,173

486

1,287

372

3,318

(911)

2,467

(5)

(67)

–

1,168

419

1,366

372

3,325

(911)

2,474

–

164

193

1,168

419

1,366

372

3,325

(882)

224

2,667

Note 1: 2017 and 2016 estimates including 39% interest in UK Gas Distribution for the years ended 31 March 2017 and 31 March 2016

The 2017 and 2016 estimates include a Cadent overlay approximating a 39% stake in UK Gas Distribution (see note 9 of the annual report
and accounts for further detail), we have imputed additional net income as follows:
• Reduction to net finance cost of £29m in each year reflecting additional interest receivable on the shareholder loan;
• Increase in share of post-tax results of joint ventures and associates based on actual underlying operating profit excluding timing reported

by UK Gas Distribution in 2017 and 2016, less the effect of provisional purchase price adjustments, finance costs reflecting the cost charged to
discontinued operations in the comparative periods, estimated additional financing costs at holding company level and the tax effects thereon.

Note 2: Weighted average number of shares

Weighted average number of shares used for basic EPS

Reduction to reflect implied return of capital

Weighted average number of shares used for pro forma

2018
Millions

3,461

–

3,461

2017
Millions

3,763

(300)

3,463

2016
Millions

3,774

(300)

3,474

The reduction in the weighted average number of shares is an approximation of the impact of the share consolidation and share buyback had these
events taken place during the comparative periods.

208

Additional Information | Other unaudited financial information

National Grid Annual Report and Accounts 2017/18Earnings per share calculations from continuing operations – at actual exchange rates
The table below reconciles the profit before tax from continuing operations per the previous tables back to the earnings per share from continuing
operations for each of the adjusted profit measures. Earnings per share is only presented for those adjusted profit measures that are at actual
exchange rates, and not for those at constant currency.

Year ended 31 March 2018

Statutory

Adjusted (also referred to as headline)

Underlying

Year ended 31 March 2017

Statutory

Adjusted (also referred to as headline)

Underlying

Underlying (pro forma)

Year ended 31 March 2016

Statutory

Adjusted (also referred to as headline)

Underlying

Underlying (pro forma)

Profit
after tax
£m

Non-controlling
interest
£m

Profit after tax
attributable to
shareholders
£m

3,592

2,061

2,090

(1)

3,591

2,060

2,089

Profit
after tax
£m

Non-controlling
interest
£m

Profit after tax
attributable to
shareholders
£m

1,810

2,141

1,862

2,029

–

1,810

2,141

1,862

2,029

Profit
after tax
£m

Non-controlling
interest
£m

Profit after tax
attributable to
shareholders
£m

1,902

1,813

1,799

1,986

(1)

1,901

1,812

1,798

1,985

Weighted
average
number of
shares
millions

3,461

Weighted
average
number of
shares
millions

3,763

3,463

Weighted
average
number of
shares
millions

3,774

3,474

Earnings
per share
pence

103.8

59.5

60.4

Earnings
per share
pence

48.1

56.9

49.5

58.6

Earnings
per share
pence

50.4

48.0

47.6

57.1

Timing impacts
Under the Group’s regulatory frameworks, the majority of the revenues that National Grid is allowed to collect each year are governed by a regulatory
price control or rate plan. If a company collects more than this allowed level of revenue, the balance must be returned to customers in subsequent
years, and if it collects less than this level of revenue it may recover the balance from customers in subsequent years. These variances between
allowed and collected revenues give rise to ‘over and under recoveries’. Opening balances of over and under recoveries have been restated where
appropriate to correspond with regulatory filings and calculations.

31 March 2017 closing balance1

Opening balance adjustments

Restated 1 April 2017 opening balance

Over/(under) recovery

31 March 2018 closing balance to (recover)/return

Year on year timing variance

31 March 2016 closing balance1

Opening balance adjustments

Restated 1 April 2016 opening balance

Over/(under) recovery2

31 March 2017 closing balance to (recover)/return

Year on year timing variance

1. Opening US Regulated balances restated using the average rate for the year to 31 March 2018.
2. Over/under recovery restated using the average rate for the year to 31 March 2018.

UK Electricity
Transmission
£m

UK Gas
Transmission
£m

US Regulated
£m

(30)

–

(30)

(14)

(44)

(151)

112

(1)

111

(18)

(80)

312

(218)

136

230

(51)

UK Electricity
Transmission
£m

UK Gas
Transmission
£m

US Regulated
£m

(171)

(167)

137

(30)

132

112

(5)

147

(22)

125

187

312

283

Total
£m

394

(219)

175

104

279

(282)

Total
£m

(6)

386

394

410

Additional Information | Other unaudited financial information

209

National Grid Annual Report and Accounts 2017/18Additional InformationOther unaudited financial information continued

31 March 2015 closing balance

Opening balance adjustments

Restated 1 April 2015 opening balance

Over/(under) recovery2

31 March 2016 closing balance to (recover)/return1

1. Over/(under) recovery restated using the average rate for the year to 31 March 2017.
2. Closing US Regulated balances restated using the spot exchange rate as at 31 March 2017.

UK Electricity
Transmission
£m

UK Gas
Transmission
£m

US Regulated
£m

(164)

(12)

(176)

(171)

(29)

–

(29)

184

240

(84)

156

Total
£m

(9)

(12)

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 Homes LLP joint venture during the period. St William Homes LLP is excluded based on the nature of this joint
venture arrangement.

Year ended 31 March

UK Electricity Transmission

UK Gas Transmission

US Regulated

NGV and Other

Group capex

Equity investment, funding contributions and loans to joint
ventures and associates1

Group capital investment

At actual exchange rates

At constant currency

2018
£m

999

310

2,424

341

4,074

177

4,251

2017
£m

1,027

214

2,247

247

3,735

127

3,862

%
change

(3)

2018
£m

999

310

2,424

341

4,074

177

4,251

2017
£m

1,027

214

2,113

239

3,593

124

3,717

%
change

(3)

1. Excludes £19m (2017: £10m) equity contribution to the St William Homes LLP joint venture.

Net debt
See note 27 on page 155 for reconciliation of net debt.

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.

Year ended 31 March

Interest expense (P&L)

Hybrid interest reclassified as dividend

Capitalised interest

Pensions interest adjustment

Interest on lease rentals adjustment

Unwinding of discount on provisions

Other interest adjustments

Interest paid (discontinued operations)

Adjusted interest expense

Net cash inflow from operating activities

Interest received 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)

Funds from operations (FFO)

Interest cover ((FFO + adjusted interest expense)/adjusted interest expense)

2018
£m

1,128

(51)

128

(49)

(75)

–

1,109

4,710

(853)

213

(118)

211

(178)

(206)

(22)

(207)

–

3,744

4.4x

20171
£m

1,082

(51)

109

(60)

(73)

146

1,172

4,320

(839)

(151)

606

(170)

(47)

(46)

909

(146)

4,723

5.0x

20161
£m

1,035

(49)

112

(60)

(73)

–

983

5,368

(834)

(456)

301

(129)

(42)

(26)

–

4,403

5.5x

1. Numbers for 2017 and 2016 reflect the calculations for the total Group as based on the published accounts for the respective years and have not been restated.

210

Additional Information | Other unaudited financial information

National Grid Annual Report and Accounts 2017/18Retained cash flow (RCF)/adjusted net debt

Year ended 31 March

Funds from operations (FFO)

Hybrid interest reclassified as dividend

Ordinary dividends paid to shareholders

RCF (excluding share buybacks)

Repurchase of scrip treasury shares

RCF (net of share buybacks)

Bank overdrafts

Borrowings

Less:

50% hybrid debt

Cash and cash equivalents

Restricted cash

Available-for-sale investments

Underfunded pension obligations

Operating leases adjustment1

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

Adjusted net debt (includes pension deficit)

FFO/adjusted net debt

RCF (excluding share buybacks)/adjusted net debt

RCF (net of share buybacks)/adjusted net debt

2018
£m

3,744

(51)

(1,316)

2,377

(178)

2,199

–

2017
£m

4,723

(51)

(1,463)

3,209

(189)

3,020

–

2016
£m

4,403

(49)

(1,337)

3,017

(267)

2,750

26,625

28,638

28,341

(1,050)

(329)

–

(2,304)

857

408

(479)

117

(878)

(195)

22,777

16.4%

10.4%

9.7%

(1,033)

(1,139)

(7,432)

1,487

526

(709)

(210)

20,290

23.3%

15.8%

14.9%

(995)

(127)

(1,951)

1,434

544

(183)

(610)

(243)

26,308

16.7%

11.5%

10.5%

1. Adjustment to reclassify operating lease commitments as debt. For March 2018 this was calculated as four times the 2017/18 operating lease rental charge.

Regulatory Performance Measures

Regulated financial performance
Regulatory financial performance is a pre interest and tax measure, starting at segmental operating profit and making adjustments (such as the
elimination of all pass-through items included in revenue allowances and timing) to approximate regulatory profit for the UK regulated activities.
This measure provides a bridge for investors between a well understood and comparable IFRS starting point through the key adjustments required
to approximate regulatory profit. This measure also provides the foundation to calculate profit driven regulatory returns i.e. Return on Capital
Employed (RoCE) and Group Return on Equity (RoE).

For the reasons noted above, the table below shows the principal differences between the IFRS operating profit and the regulated financial
performance, but is not a formal reconciliation to an equivalent IFRS measure.

UK Electricity Transmission

Year ended 31 March

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

UK Gas Transmission

Year ended 31 March

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

Additional Information | Other unaudited financial information

2018
£m

1,041

374

(377)

(49)

2017
£m

1,372

(288)

356

(379)

(47)

2016
£m

1,173

(147)

339

(368)

(54)

1,262

1,184

1,195

2018
£m

487

(91)

173

(29)

(11)

(32)

(16)

499

2017
£m

511

(120)

168

(21)

(14)

(53)

(11)

499

2016
£m

486

(80)

166

(18)

(77)

(5)

535

211

National Grid Annual Report and Accounts 2017/18Additional InformationOther unaudited financial information continued

Regulated asset base
The regulated asset base is a regulatory construct, based on pre-determined principles not based on IFRS. It effectively represents the invested
capital on which we are authorised to earn a cash return. By investing efficiently in our networks, we add to our regulated asset base over the
long-term and this in turn contributes to delivering shareholder value. Our regulated asset base is comprised of our regulatory asset value in the
UK, plus our rate base in the US.

Maintaining efficient investment in our regulated asset base 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% growth in regulated asset base each year through continued investment in our networks in both the UK and US.

In the UK, the way in which our transactions impact RAV is driven by principles set out by Ofgem. In a number of key areas these principles differ
from the requirements of IFRS, including areas such as additions and the basis for depreciation. Further, our UK RAV is adjusted annually for inflation.
RAV in each of our retained UK businesses has evolved over the period since privatisation in 1990 and as a result, historical differences between
the initial determination of RAV and balances reported under UK GAAP at that time still persist. Due to the above, substantial differences exist in
the measurement bases between RAV and an IFRS balance metric and, therefore, it is not possible to provide a meaningful reconciliation between
the two.

In the US, rate base is a regulatory measure determined for each of our main US operating companies. It represents the value of property and other
assets or liabilities on which we are permitted to earn a rate of return, as set out by the regulatory authorities for each jurisdiction. The calculations
are based on the applicable regulatory agreements for each jurisdiction and include the allowable elements of assets and liabilities from our US
companies. For this reason, it is not practical to provide a meaningful reconciliation from the US rate base to an equivalent IFRS measure. However,
we include the calculation below.

Years ended 31 March
(£m at constant currency)

UK Electricity Transmission

UK Gas Transmission

US Regulated

Total Regulated

Other assets/invested capital

Total Group Regulated and other assets

RAV, rate base or
other business assets

Total Regulated
and other assets

2018

13,045

6,014

14,762

33,821

2,167

35,988

20171

12,479

5,755

13,751

31,985

1,984

33,969

2018

12,651

5,889

16,683

35,223

1,824

37,047

20171

12,034

5,721

15,238

32,993

1,724

34,717

1. Represented to include opening balance adjustments following the completion of the regulatory reporting pack process in 2017.

US rate base and total regulated assets for 31 March 2017 have been restated in the table above at constant currency. At actual currency the values
were £15,398 million and £17,063 million respectively.

Other business assets and other assets/invested capital for 31 March 2017 have been restated in the table above at constant currency. At actual
currency the values were £2,055 million and £1,814 million respectively.

Group return on equity (RoE)
Group RoE provides investors with a view of the performance of the Group as a whole compared with the amounts invested by the Group in assets
attributable to equity shareholders. It is the ratio of our regulatory financial performance to our measure of equity investment in assets. It therefore
reflects the regulated activities as well as the contribution from our non-regulated businesses together with joint ventures and non-controlling interests.

We use Group RoE to measure our performance in generating value for our shareholders and a target for Group RoE is included in the incentive
mechanisms for executive remuneration within both the APP and LTPP schemes.

Group RoE is underpinned by our regulated asset base. For the reasons noted above, no reconciliation to IFRS has been presented as we do not
believe it would be practical. However, we do include the calculations below.

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 National Grid Ventures and 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.

212

Additional Information | Other unaudited financial information

National Grid Annual Report and Accounts 2017/18Year ended 31 March

Regulated financial performance

Operating profit of other activities

Group financial performance

Share of post-tax results of joint ventures and associates

Non-controlling interests

Adjusted Group interest charge

Group tax charge

Tax on adjustments

Group financial performance after interest and tax

Opening rate base/RAV

Share of Cadent RAV

Opening NBV of non-regulated businesses

Joint ventures and associates

Opening goodwill

Opening capital employed

Opening net debt

Opening equity

Return on Equity

2018
£m

3,392

255

3,647

238

(1)

(980)

(639)

2,292

32,446

512

1,328

459

5,626

40,371

(21,770)

18,601

12.3%

2017
£m

3,906

204

4,110

(1,075)

(808)

166

2,457

40,435

–

1,579

408

5,984

48,406

(27,346)

21,060

11.7%

2016
£m

3,663

374

4,037

(3)

(922)

(753)

2,422

36,998

–

1,213

319

5,182

43,712

(24,024)

19,688

12.3%

UK regulated Return on Equity (RoE)
UK regulated RoEs are a measure of how the businesses are performing against the assumptions used by our 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%. They are calculated by dividing elements of out- or under-performance
versus the regulatory contract by the average equity RAV in line with the regulatory assumed capital structure and adding to the base allowed RoE.

This is an important measure of UK regulated business performance and our operational strategy continues to focus on this metric. This measure can
be used to determine how we are performing under the RIIO framework and also helps investors to compare our performance with similarly regulated
UK entities. Reflecting the importance of this metric, it is also a key component of both the APP and LTPP schemes.

The UK RoE is underpinned by the UK RAV. For the reasons noted above, no reconciliation to IFRS has been presented as we do not believe it would
be practical.

US regulated Return on Equity
US regulated RoE is a measure of how a business is performing 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. The returns are divided
by the average rate base (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 adjudicated capital structure.

This is an important measure of our US regulated business performance and our operational strategy continues to focus on this metric. This measure
can be used to determine how we are performing and also helps investors compare our performance with similarly regulated US entities. Reflecting
the importance of this metric, it is also a key component of both the APP and LTPP schemes.

The US return is based on a calculation which gives proportionately more weighting to those jurisdictions which have a greater rate base. For
the reasons noted above, no reconciliation to IFRS has been presented as we do not believe it would be practical. However we do include the
calculations below.

Years ended 31 March %

UK Electricity Transmission

UK Gas Transmission

US Regulated

Regulatory
Debt: Equity
assumption

60/40

62.5/37.5

Avg. 50/50

Achieved Return on Equity

Base or Allowed Return on Equity

2018

13.1

10.0

8.9

2017

13.6

10.8

8.2

2018

10.2

10.0

9.4

2017

10.2

10.0

9.5

Additional Information | Other unaudited financial information

213

National Grid Annual Report and Accounts 2017/18Additional InformationOther unaudited financial information continued

Value Added and Value Added per share
Value Added is a measure that reflects the value to shareholders of our dividend and the growth in National Grid’s regulated and non-regulated
assets (as measured in our rate base, for regulated entities), net of the growth in overall debt. It is a key metric used to measure our performance
and underpins our approach to sustainable decision-making and long-term management incentive arrangements.

Value Added is derived using our regulated asset base and, as such, it is not practical to provide a meaningful reconciliation from this measure
to an equivalent IFRS measure due to the reasons set out for our regulated asset base. However, the calculation is set out in the Financial Review
on page 24.

Value Added per share is calculated by dividing Value Added by the weighted average number of shares set out in note 7 on page 123.

Regulatory gearing
Regulatory gearing is a measure of how much of our investment in RAV and rate base and other elements of our invested capital (including our
investments in National Grid Ventures, UK property and other assets and US other assets) is funded through debt.

Year ended 31 March

UK RAV

US rate base

Other invested capital included in gearing calculation

Total assets included in gearing calculation

Net debt (including 100% of hybrid debt)

Group gearing (based on 100% of net debt)

Group gearing (excluding 50% of hybrid debt from net debt)

2018
£m

19,059

14,762

2,167

35,988

23,002

64%

61%

20171
£m

18,219

15,398

2,055

35,672

23,284

65%

62%

% change

(4)

(1)

(2)

1. Net debt for 2017 adjusted to include impact of future £4.01 billion return of capital relating to the sale of a stake in UK Gas Distribution.

Regulatory financial performance
Timing and regulated revenue adjustments
As described on pages 186-191, 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 £104 million (2016/17: £398 million over-collection).
Our closing balance at 31 March 2018 was £279 million over-recovered. In the UK, there was cumulative over-recovery of £49 million at
31 March 2018 (2017: over-recovery of £82 million for continuing operations). In the US, cumulative timing over-recoveries at 31 March 2018
were £230 million (2017: £332 million over-recovery). A sizeable part of that balance is expected to be returned to customers next year.

The total estimated in-year over-or under-collection excludes opening balance adjustments related to estimates or finalisation of balances as part
of regulatory submissions.

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

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

For our UK Regulated businesses as a whole (excluding the UK Gas Distribution business), timing and regulated revenue adjustments totalled
£40 million in the year (2016/17: £408 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 2018, these extend until 2069.

214

Additional Information | Other unaudited financial information

National Grid Annual Report and Accounts 2017/18Commentary on consolidated financial statements
for the year ended 31 March 2017

In compliance with SEC rules, we present a summarised analysis of movements in the income statement and an analysis of movements in
adjusted operating profit (for the continuing group) by operating segment. This should be read in conjunction with the 31 March 2018 unaudited
commentary included on pages 96 and 111.

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 209 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%).

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)

1.28

1.25

1.47

1.44

(13)%

2016/2017

2015/2016

% change

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.

Analysis of the income statement for the year ended
31 March 2017
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 2015/16. 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 2015/16, 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. 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 Statements | Commentary on consolidated financial statements

215

National Grid Annual Report and Accounts 2017/18Additional InformationCommentary on consolidated financial statements
for the year ended 31 March 2017 continued

Analysis of the adjusted operating profit by segment for the year
ended 31 March 2017
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 2015/16 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 2015/16, 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 2015/16, 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 2015/16.

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 2016/17
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 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 2016/17, £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 2015/16
at £247 million.

216

Financial Statements | Commentary on consolidated financial statements

National Grid Annual Report and Accounts 2017/18Summary 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 2018. 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 2014, 2015, 2016, 2017 and 2018 has been prepared under IFRS as issued
by the IASB and as adopted by the EU1.

Summary income statement (£m)

Continuing operations

Revenue

Operating profit

Before exceptional items, remeasurements

Exceptional items, remeasurements

Profit before tax

Before exceptional items, remeasurements

Exceptional items, remeasurements

Profit after tax from continuing operations

Before exceptional items, remeasurements

Exceptional items, remeasurements

Profit after tax from discontinued operations

Before exceptional items, remeasurements

Exceptional items, remeasurements

Gain/(loss) on disposal of UK Gas Distribution after tax

Total profit for the year

Profit for the year attributable to equity shareholders

Before exceptional items, remeasurements

Exceptional items, remeasurements

Gain on disposal of UK Gas Distribution after tax

Total

Earnings per share

Basic – continuing operations (pence)

Diluted – continuing operations (pence)

Basic – total (pence)

Diluted – total (pence)

Weighted average number of shares – basic (millions)

Weighted average number of shares – diluted (millions)

Dividends per ordinary share

Paid during the year (pence)

Approved or proposed during the year (pence)3

Paid during the year ($)

Approved or proposed during the year ($)

2018

2017

20161

20151

20141,2

15,250

15,035

13,212

13,357

12,941

3,457

2,650

(589)

2,061

1,531

–

(41)

–

3,551

2,060

1,490

–

3,550

103.8

103.3

102.6

102.1

3,461

3,476

3,773

(565)

2,807

(623)

2,141

(331)

606

5,321

7,794

2,748

(274)

5,321

7,795

48.1

47.9

207.1

206.2

3,763

3,780

128.965

30.44

1.751

0.413

43.51

128.65

0.555

1.642

3,214

2,417

(88)

1,813

576

116

–

3,034

(83)

2,208

(248)

1,665

(172)

516

–

2,777

116

1,867

209

1,450

324

553

137

–

2,594

2,011

2,464

2,386

205

–

2,591

50.4

50.2

68.7

68.4

3,774

3,790

43.16

43.34

0.664

0.635

2,189

(170)

–

2,019

39.4

39.2

52.9

52.7

3,817

3,834

42.25

42.87

0.697

0.672

2,015

461

–

2,476

46.9

46.6

64.9

64.5

3,817

3,836

40.85

42.03

0.636

0.696

1. Items previously reported for 2014–2016 have been represented to reflect UK Gas Distribution being presented as a discontinued operation.
2. For the years ended 31 March 2018, 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.

3. Following the disposal of UK Gas Distribution, 2017 includes a special interim dividend of 84.375 pence per share that was paid on 2 June 2017.

Summary statement of net assets (£m)

Non-current assets

Current assets

Total assets

Current liabilities

Non-current liabilities

Total liabilities

Net assets

Total shareholders’ equity

2018

2017

2016

2015

20141

52,106

6,681

58,787

(8,697)

(31,242)

(39,939)

18,848

18,832

52,266

13,574

65,840

(10,511)

(34,945)

(45,456)

20,384

20,368

52,622

6,312

58,934

(7,721)

(37,648)

(45,369)

13,565

13,555

49,058

6,031

55,089

(7,374)

(35,741)

(43,115)

11,974

11,962

44,895

7,489

52,384

(7,331)

(33,134)

(40,465)

11,919

11,911

1. For the years ended 31 March 2018, 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.

Additional Information | Summary consolidated financial information

217

National Grid Annual Report and Accounts 2017/18Additional 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
Adjusted interest
A measure used by the credit rating agencies of the interest charge of
the Group, calculated by making adjustments to the group reported
interest charge

Adjusted net debt
A measure used by the credit rating agencies of the indebtedness
of the Group calculated by making adjustments to the group reported
borrowings including adjustments to include elements of pension
deficits and exclude elements of hybrid debt financing.

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
BAME
Black, Asian, and minority ethnic (being the UK term used to refer
to members of non-white communities).

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 42-43).

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
Cadent
Cadent Gas Limited (new name given to UK Gas Distribution business).

called up share capital
Shares (common stock) that have been issued and have been
fully paid for.

carrying value
The amount at which an asset or a liability is recorded in the Group’s
statement of financial position and the Company’s balance sheet.

the Company, the Group, National Grid, we, our or us
We use the terms ‘the Company’, ‘the Group’, ‘National Grid’, ‘we’, ‘our’
or ‘us’ to refer to either National Grid plc itself or to National Grid plc and/
or all or certain of its subsidiaries, depending on context.

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 (now renamed as Cadent) 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 $1.36 to £1.00. The average rate for the year ended 31 March 2016,
was $1.28 to £1.00. Assets and liabilities as at 31 March 2016 have
been retranslated at the closing rate at 31 March 2017 of $1.40 to £1.00.
The closing rate for the balance sheet date 31 March 2016 was $1.25
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.

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.

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.

Capital tracker
In the context of our US rate plans, 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.

Deposit Agreement
Deposit Agreement means the amended and restated deposit
agreement entered into between National Grid plc, the Depositary and
all the registered holders from time to time of ADRs, pursuant to which
ADSs have been issued, dated 23 May 2013, and any related agreement.

218

Additional Information | Definitions and glossary of terms

National Grid Annual Report and Accounts 2017/18Depositary
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 42-43 of this document.

G
Grain LNG
National Grid Grain LNG Limited.

Great Britain
England, Wales and Scotland.

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 is 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 178-183, which are prepared in
accordance with FRS 101.

Funds from Operations (FFO)
A measure used by the credit rating agencies of the operating cash
flows of the Group after interest and tax but before capital investment.

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.

GWm
Gigawatt month, being an amount of energy equivalent to delivering
1 billion watts (109 watts) of power for a period of one month.

H
Hinkley-Seabank (HSB)
A project to connect the new Hinkley Point C nuclear power station
to the electricity transmission network.

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.

interest cover
A measure used by the credit rating agencies, calculated as FFO plus
adjusted interest divided by adjusted interest.

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.

KPI
Key performance indicator

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.

Additional Information | Definitions and glossary of terms

219

National Grid Annual Report and Accounts 2017/18Additional 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.

National Grid Ventures or NGV
The Company’s new unit, operating outside its core UK and US
regulated businesses comprising a broad range of activities in the UK
and US including electricity interconnectors, the Grain LNG terminal and
energy metering as well as being tasked with investment in adjacent
businesses, distributed energy opportunities and the development
of new and evolving technologies.

Net Promoter Score (NPS)
A commonly used tool to measure customer experience to gauge the
loyalty of a company’s customer relationships. It is an index ranging
from -100 to +100.

Net revenue
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 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 12204∕473 pence following the share consolidation approved at the
General Meeting of the Company held on 19 May 2017.

P
Paris Agreement
Means the agreement, also known as the Paris climate accord, within the
United Nations Framework Convention on Climate Change dealing with
greenhouse gas emissions mitigation, adaptation and finance starting in
the year 2020, and adopted by consensus on 12 December 2015.

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.

retained cash flow (RCF)
A measure used by the credit rating agencies of the cash flows of the
Group, calculated as funds from operations less dividends paid and
costs of repurchasing scrip shares.

return on capital employed (RoCE)
The return on capital employed metric is designed to give an alternative
comparison between the UK and US businesses showing the overall
return on capital provided by both debt and equity. The calculation
reflects regulatory treatments of costs.

return on equity (RoE)
A performance metric measuring returns from the investment of
shareholders’ funds. It is a financial ratio of a measure of earnings
divided by an equity base.

220

Additional Information | Definitions and glossary of terms

National Grid Annual Report and Accounts 2017/18revenue 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.

T
taxes borne
Those taxes that represent a cost to the Company and which are
reflected in our results.

RIIO
The revised regulatory framework issued by Ofgem which was
implemented in the eight-year price controls which started on
1 April 2013.

RIIO-T2
The regulatory framework expected to be issued by Ofgem to start
on 1 April 2021.

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 electricity 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.

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.

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 2016, on how
companies should be governed, applicable to UK listed companies,
including National Grid.

share premium
The difference between the amount shares are issued for and the
nominal value of those shares.

UK GAAP
Generally accepted accounting principles in the UK. These differ
from IFRS and from US GAAP.

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.

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.

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.

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.

Additional Information | Definitions and glossary of terms

221

National Grid Annual Report and Accounts 2017/18Additional InformationDefinitions and glossary of terms continued

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 and 2017/18, 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 growth in net debt, as a percentage.

222

Additional Information | Definitions and glossary of terms

National Grid Annual Report and Accounts 2017/18Want more information or help?

Link 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@linkgroup.co.uk

National Grid Share Register
Link Asset Services
The Registry
34 Beckenham Road
Beckenham, Kent BR3 4TU

1-800-466-7215
If calling from outside the US:
+1-201-680-6825

www.mybnymdr.com
Email: shrrelations@
cpushareownerservices.com

BNY Mellon – ADR
PO Box 505000
Louisville, KY 40233-5000

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 2018

1 June 2018

7 June 2018

Ordinary shares and ADRs go
ex-dividend for 2017/18 final dividend

Record date for 2017/18 final dividend

Scrip reference price announced

28 June 2018
(5pm London time)

Scrip election date

30 July 2018

2018 AGM

15 August 2018

2017/18 final dividend paid to qualifying
shareholders

8 November 2018

2018/19 half-year results

21 November 2018 ADRs go ex-dividend for 2018/19 interim dividend

22 November 2018 Ordinary shares go ex-dividend for 2017/18

interim dividend

23 November 2018 Record date for 2018/19 interim dividend

29 November 2018 Scrip reference price announced

7 December 2018
(5pm London time)

9 January 2019

Scrip election date for 2018/19 interim dividend

2018/19 interim dividend paid to qualifying
shareholders

Dividends
The Directors are recommending a final dividend of 30.44 pence
per ordinary share ($2.0606 per ADS) to be paid on 15 August 2018
to shareholders on the register as at 1 June 2018. Further details in
respect of dividend payments can be found on page 25. 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
2017/18 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
• It is more secure – cheques do sometimes get lost in the post
• No more trips to the bank

Elect to receive your dividends as additional shares:
• Join our scrip dividend scheme; no stamp duty or commission to pay

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
Link 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 – 0.43% of the trade value (minimum
£21.90, maximum £70.78) until 28 September 2018. 0.50% of the trade
(minimum £19.00, maximum £76.50) after 28 September 2018.

Postal Dealing Commission – 12 pence per share (maximum £12.00)
when selling 101–150 shares, flat fee of £18.00 when selling 151 shares
or more. No commission will be chargeable for shareholders holding
up to 100 shares until 28 September 2018.

Telephone Dealing Commission – 0.75% of the trade (minimum
£29.50, maximum £119.50).

Visit www.linksharedeal.com/nationalgrid or call Link 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 Link Asset Services.

Individual Savings Accounts (ISAs): Corporate ISAs for National
Grid shares are available from Stocktrade. For more information, call
Stocktrade on 0131 240 0180, email fit@stocktrade.co.uk or write
to Alliance Trust Savings, PO Box 164, 8 West Marketgait, Dundee
DD1 9YP.

Additional Information | Want more information or help?

223

National Grid Annual Report and Accounts 2017/18Additional InformationCautionary statement
This document comprises the Annual Report and Accounts for the
year ended 31 March 2018 for National Grid and its subsidiaries.

It contains the Directors’ Report and Financial Statements, together with
the independent auditor’s report thereon, as required by the Companies
Act 2006. The Directors’ Report, comprising pages 2-79 and 184-217
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 ‘aims’, ‘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 UK electricity system operator as well as
increased political and economic uncertainty; 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;
failure to adequately forecast and respond to disruptions in energy

supply; 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 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 include
fluctuations in exchange rates, interest rates and commodity price
indices; restrictions and conditions (including filing requirements) in our
borrowing and debt arrangements, funding costs and access to
financing; regulatory requirements for us to maintain financial resources
in certain parts of our business and restrictions on some subsidiaries’
transactions such as paying dividends, lending or levying charges; 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
acquisitions and disposals) 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 193-196 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.

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